<PAGE>
As filed with the Securities and Exchange Commission on June 8, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------
Form S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------
TELESPECTRUM WORLDWIDE INC.
(Exact name of registrant as specified in its charter)
Delaware 7389 23-2845501
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification No.)
organization)
443 S. Gulph Road
King of Prussia, PA 19406
610/878-7400
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
--------------
Keith E. Alessi
President and Chief Executive Officer
TeleSpectrum Worldwide Inc.
443 S. Gulph Road
King of Prussia, PA 19406
610/878-7400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copy to:
Stephen M. Goodman Lance W. Bridges
Morgan, Lewis & Bockius LLP Cooley Godward LLP
1701 Market Street 4365 Executive Drive
Philadelphia, PA 19103 Suite 100
215/963-5086 San Diego, CA 92121-2128
619/550-6000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effectiveness of this Registration Statement and the
satisfaction or waiver of all other conditions to the merger between the
Registrant and CRW Financial Inc., and a merger among the Registrant and
International Data Response Corporation and certain stockholders of
International Data Response Corporation, described in the enclosed Joint Proxy
Statement/Prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
of the same offering. [_]
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Title of each class of Amount to be Proposed maximum aggregate Proposed Maximum Amount of
securities to be registered Registered(1) offering price per share(2) Aggregate Offering Price(2) registration fee(3)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock of
TeleSpectrum Worldwide
Inc., par value
$.01................. 17,693,855 $2.09 $36,990,466 $10,283
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</TABLE>
(1) Represents the maximum number of shares of Common Stock, par value $.01 per
share, of TeleSpectrum Worldwide Inc. issuable in connection with two
mergers.
(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(f)(1). The proposed maximum aggregate offering
price is based upon the sum of (a) the product of (i) $4.375 (the average
of the high and low prices of the common stock of CRW Financial, Inc. on
June 2, 1999) times (ii) 8,453,957 (the sum of the number of shares of CRW
common stock outstanding plus the number of shares of CRW common stock
issuable prior to the effective time of the mergers upon the exercise of
options and warrants to purchase CRW common stock) plus (b) the product of
(i) $.0033 (one-third of the par value per share of the IDRC common stock)
times (ii) 1,334,687 (the sum of the number of shares of IDRC common stock
outstanding plus the number of shares of IDRC common stock issuable prior
to the effective time of the mergers upon the exercise of options and
warrants to purchase IDRC common stock). The proposed maximum offering
price per share is based upon the proposed maximum aggregate offering price
divided by the amount to be registered.
(3) The registration fee for the securities registered hereby has been
calculated pursuant to Section 6(b) of the Securities Act, as 0.0278% of
the proposed maximum aggregate offering price. A fee of $33,803 was paid on
November 4, 1998 and March 3, 1999 pursuant to Rules 14a-6 and 0-11
promulgated under the Exchange Act, in respect of the mergers upon filing
by TeleSpectrum, CRW and IDRC of a preliminary joint proxy statement
relating thereto. Pursuant to Rule 457(b) promulgated under the Securities
Act and Section 14(g)(2) of the Exchange Act and Rule 0-11 promulgated
thereunder, the amount of such previously paid fee has been credited
against the registration fee payable in connection with this filing.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.
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<PAGE>
[LOGO APPEARS HERE]
Notice of Annual Meeting of Stockholders
To Be Held On June 30, 1999
June 9, 1999
TeleSpectrum Worldwide Inc. will hold its annual meeting of its stockholders
on June 30, 1999 at 9:00 a.m. local time at the Philadelphia Marriott Hotel,
1201 Market Street, Philadelphia, Pennsylvania, for the following purposes:
1. To consider and vote on a proposal to approve an Agreement and Plan of
Merger, dated as of January 14, 1999, as amended on February 26, 1999 and
May 13, 1999, among TeleSpectrum, International Data Response Corporation,
and the majority stockholders of IDRC. This merger agreement provides for
the merger of IDRC with TeleSpectrum. Holders of IDRC common stock and
options exercisable for IDRC common stock will be entitled to receive
shares of TeleSpectrum common stock and warrants exercisable for
TeleSpectrum common stock in exchange for all of these IDRC securities.
Each share of IDRC preferred stock that is outstanding at the time of the
IDRC merger will be redeemed for cash. The IDRC merger will result in the
stockholders of IDRC becoming stockholders of TeleSpectrum. The business of
IDRC will be operated by TeleSpectrum and the separate existence of IDRC
will cease.
2. To elect seven directors.
3. To approve an amendment and restatement of our 1996 Equity
Compensation Plan.
4. To transact such other business as may properly come before the
TeleSpectrum annual meeting.
The close of business on May 28, 1999 is the date of record. Only our
stockholders of record on this date will be entitled to vote at the annual
meeting or at any adjournment of the annual meeting. A list of stockholders
will be available for inspection by our stockholders during business hours at
443 S. Gulph Road, King of Prussia, Pennsylvania for ten days prior to the date
of the annual meeting.
Approval of the IDRC merger agreement requires that a majority of our
outstanding shares of common stock vote in favor of the agreement. Approval of
the plan amendment requires that a majority of our shares of common stock
represented in person or by proxy vote in favor of the amendment. Directors
will be elected by plurality vote. This means that the seven persons that
receive the most votes will be elected directors.
Our board of directors unanimously recommends that you vote to approve the
IDRC merger agreement and the plan amendment, which are described in detail in
the accompanying joint proxy statement/prospectus.
Please sign and promptly return the proxy card in the enclosed envelope,
whether or not you expect to attend our 1999 annual meeting. You will be
admitted to the meeting upon presentation of proof of ownership. For
stockholders who own stock held by banks, brokers, or investment plans,
examples of proof of ownership would include a 1998 brokerage statement or a
letter from the bank or broker.
By Order of the Board of Directors,
Keith E. Alessi
Chairman, President and Chief Executive
Officer
<PAGE>
PRELIMINARY COPY CONFIDENTIAL FOR USE OF THE COMMISSION ONLY
[CRW LOGO APPEARS HERE]
200 Four Falls Corporate Center
West Conshohocken, PA 19428
Notice of Annual Meeting of Stockholders
To Be Held On June 30, 1999
June 9, 1999
CRW Financial, Inc. will hold an annual meeting of its stockholders on June
30, 1999 at 9:00 a.m. local time at the Philadelphia Marriott Hotel, 1201
Market Street, Philadelphia, Pennsylvania, for the following purposes:
1. To consider and vote on a proposal to approve an Agreement and Plan of
Merger, dated as of September 3, 1998, as amended on December 30, 1998,
among CRW, TeleSpectrum Worldwide Inc. and CRW Acquisition Corp. This
merger agreement provides for the merger of CRW and CRW Acquisition, a
subsidiary of TeleSpectrum. In the merger, our stockholders will receive
.709 shares of TeleSpectrum common stock in exchange for each share of CRW
common stock that they own. CRW will become a subsidiary of TeleSpectrum.
Immediately prior to the completion of the merger, we intend to make a
special cash distribution to our stockholders and to the holders of our
outstanding warrants. This special cash distribution is expected to be in
an aggregate amount equal to our cash on hand after reserving an amount to
pay all of our remaining liabilities.
2. To elect three directors comprising two classes of the CRW board.
3. To transact such other business as may properly come before the CRW
annual meeting.
The close of business on May 28, 1999 is the date of record. Only our
stockholders of record on this date will be entitled to vote at the annual
meeting or at any adjournment of the annual meeting. In addition, only our
stockholders and warrant holders of record on June 29, 1999 will be entitled to
receive the special cash distribution. A list of these stockholders will be
available for inspection by stockholders of record during business hours at 200
Four Falls Corporate Center, West Conshohocken, Pennsylvania for ten days prior
to the date of the annual meeting.
Approval of the CRW merger agreement requires that a majority of our
outstanding shares of common stock vote in favor of the agreement. Directors
will be elected by plurality vote. This means that the persons that receive the
most votes will be elected directors in each class.
Our board of directors unanimously recommends that you vote to approve the
CRW merger agreement, which is described in detail in the accompanying joint
proxy statement/prospectus.
Please sign and promptly return the proxy card in the enclosed envelope,
whether or not you expect to attend our 1999 annual meeting. You will be
admitted to the meeting upon presentation of proof of ownership. For
stockholders who own stock held by banks, brokers, or investment plans,
examples of proof of ownership would include a 1998 brokerage statement or a
letter from the bank or broker.
By Order of the Board of Directors,
/s/ Jonathan P. Robinson
Jonathan P. Robinson
Secretary
<PAGE>
PRELIMINARY COPY: CONFIDENTIAL FOR USE OF THE COMMISSION ONLY
[IDRC LOGO APPEARS HERE]
Notice of Special Meeting of Stockholders
To Be Held On June 30, 1999
June 9, 1999
International Data Response Corporation will hold a special meeting of its
stockholders on June 30, 1999 at 7:00 a.m. local time at the offices of Cooley
Godward LLP, counsel to IDRC, located at 4365 Executive Drive, Suite 1100, San
Diego, California, for the following purposes:
1. To consider and vote on a proposal to approve an Agreement and Plan of
Merger, dated as of January 14, 1999, as amended on February 26, 1999 and
May 13, 1999, among TeleSpectrum Worldwide Inc., IDRC and certain
stockholders of IDRC. This merger agreement provides for the merger of IDRC
with TeleSpectrum. Holders of IDRC common stock will be entitled to receive
shares of TeleSpectrum common stock and warrants exercisable for
TeleSpectrum common stock in exchange for all of their outstanding IDRC
securities. Holders of IDRC preferred stock will receive cash in redemption
of their preferred stock. Holders of IDRC stock options will have two
choices as to how they will be treated in the merger. They can elect to
have their options assumed by TeleSpectrum, in which case they will receive
TeleSpectrum options to purchase TeleSpectrum common stock and warrants
exercisable for TeleSpectrum common stock. Or, if they do not elect to have
their options assumed by TeleSpectrum, their options will terminate unless
they are exercised prior to the completion of the merger.
2. To transact such other business as may properly come before the IDRC
special meeting.
The close of business on June 4, 1999 is the date of record. Only holders of
IDRC common stock and preferred stock of record on this date will be entitled
to vote at the special meeting or at any adjournment of the special meeting. A
list of stockholders will be available for inspection by stockholders of record
during business hours at 6041 La Flecha--Suite B, Rancho Santa Fe, California
for ten days prior to the date of the special meeting.
Approval of the IDRC merger agreement requires that a majority of the
outstanding shares of IDRC common stock and preferred stock, voting as a single
class, vote in favor of the agreement. On the record date, there were 476,100
shares of IDRC common stock and 600,000 shares of IDRC preferred stock
outstanding.
The IDRC board of directors unanimously recommends that stockholders vote to
approve the IDRC merger agreement which is described in detail in the
accompanying joint proxy statement/prospectus.
Please sign and promptly return the proxy card in the enclosed envelope,
whether or not you expect to attend the IDRC special meeting. Stockholders will
be admitted to the meeting upon presentation of proof of ownership.
By Order of the Board of Directors,
/s/ Paul J. Grinberg
Paul J. Grinberg
Assistant Secretary
<PAGE>
[Logos appears here]
Mergers Proposed--Your Vote Is Important
The boards of directors of TeleSpectrum Worldwide Inc. and International Data
Response Corporation have agreed on a merger. The common stockholders of IDRC
will become stockholders of TeleSpectrum.
The boards of directors of TeleSpectrum and CRW Financial, Inc., have also
agreed on a merger. Stockholders of CRW will become stockholders of
TeleSpectrum.
TeleSpectrum common stock is listed on the Nasdaq National Market under the
symbol TLSP. CRW common stock is listed on the Nasdaq SmallCap Market under the
symbol CRWF. IDRC's common stock is not publicly traded.
If the IDRC merger is completed, holders of IDRC common stock and options
exercisable for IDRC common stock will have the right to receive an aggregate
of 9,200,000 shares of TeleSpectrum common stock and warrants exercisable for
an aggregate of 2,500,000 shares of TeleSpectrum common stock. Each outstanding
share of IDRC common stock would become approximately 6.893 shares of
TeleSpectrum common stock and a warrant exercisable for 1.873 shares of
TeleSpectrum common stock. Each share of IDRC common stock underlying an IDRC
option will also become such number of TeleSpectrum securities upon exercise of
the option. However, a portion of the 9,200,000 shares will be placed in escrow
for at least 15 months to secure any indemnification obligations under the IDRC
merger agreement. As of June 2, 1999, 1,767,956 shares of TeleSpectrum common
stock would be subject to this escrow.
Each share of IDRC preferred stock that is outstanding at the time of the
IDRC merger will be redeemed for cash.
If the CRW merger is completed, CRW stockholders will receive .709 of a share
of TeleSpectrum common stock for each share of CRW common stock that they own.
It is expected that 4,904,522 shares of TeleSpectrum common stock will be
issued to the CRW stockholders in the CRW merger. In addition, 1,767,743 shares
of TeleSpectrum common stock will be reserved for future issuance to the
holders of CRW options and warrants. CRW's only significant asset is its
ownership of 6,946,583 shares of TeleSpectrum common stock. Of these shares,
678,410 shares may be purchased by others upon the exercise of warrants issued
by CRW in 1996.
This joint proxy statement/prospectus provides you with detailed information
about the proposed mergers and any other items to be voted on at your company's
annual or special meeting. In addition, you may obtain information about
TeleSpectrum and CRW from documents that have been filed with the Securities
and Exchange Commission. We encourage you to read this entire document
carefully.
Please see "Risk Factors" beginning on page 33 of the joint proxy
statement/prospectus for a description of certain risks associated with the
mergers and the business of TeleSpectrum.
Whether or not you plan to attend your meeting, please take the time to vote
by completing the enclosed proxy card and mailing it as soon as possible. If
you sign, date and mail your proxy card without indicating how you want to
vote, your proxy will be voted by the proxy agents as recommended by your board
of directors.
Very truly yours,
/s/ Keith E. Alessi /s/ Jeffrey E. Stiefler /s/ J. Brian O'Neill
- -------------- -------------- --------------
Keith E. Alessi Jeffrey E. Stiefler J. Brian O'Neill
Chairman, Chief Chairman and Chief Executive Officer
Executive Officer and Chairman and Chief
President Executive Officer
International Data Response Corporation
CRW Financial, Inc.
TeleSpectrum Worldwide Inc.
Neither the SEC nor any state securities regulators have approved the
securities to be issued in the mergers or determined if this joint proxy
statement/prospectus is accurate or adequate. Any representation to the
contrary is a criminal offense.
Joint proxy statement/prospectus dated June 8, 1999. This joint proxy
statement/prospectus is first being mailed to stockholders of TeleSpectrum,
IDRC and CRW on June 10, 1999.
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Summary................................................................... 1
Telespectrum Worldwide Inc. and Subsidiaries Unaudited Pro Forma Combined
Financial Information Basis of Presentation.............................. 19
Risk Factors.............................................................. 33
Forward-Looking Statements May Prove Inaccurate........................... 42
The Mergers............................................................... 43
Action at Meetings...................................................... 43
Federal Securities Laws Consequences; Stock Transfer Restriction
Agreements............................................................. 43
Accounting Treatment of Mergers......................................... 43
The IDRC Merger........................................................... 45
Background of the IDRC Merger........................................... 46
TeleSpectrum's Reasons for the IDRC Merger; Recommendation of the
TeleSpectrum Board..................................................... 49
IDRC's Reasons for the IDRC Merger; Recommendation of the IDRC Board.... 51
Federal Income Tax Consequences of the IDRC Merger...................... 52
The CRW Merger............................................................ 56
Background of the CRW Merger............................................ 56
TeleSpectrum's Reasons for the CRW Merger............................... 57
CRW's Reasons for the CRW Merger; Recommendation of the CRW Board....... 57
Federal Income Tax Consequences of the CRW Merger....................... 58
Rights of Stockholders to Appraisals...................................... 62
Appraisal Rights Procedures............................................. 62
TeleSpectrum Stockholders' Rights....................................... 64
The Meetings.............................................................. 65
Times and Places; Purposes.............................................. 65
Voting Rights; Votes Required for Approval.............................. 65
Proxies................................................................. 66
Management of TeleSpectrum Following the Mergers.......................... 68
Directors............................................................... 68
Committees of the Board of Directors.................................... 69
Executive Officers of TeleSpectrum...................................... 69
Interests of IDRC Management -- These Interests May Be in Addition to or
in Conflict with Your Interests.......................................... 71
Agreements with TeleSpectrum............................................ 71
Registration Rights..................................................... 72
Accelerated Vesting of Options.......................................... 73
</TABLE>
<TABLE>
<S> <C>
Indemnification and Insurance........................................... 73
Interests of CRW Management--These Interests May Be in Addition to or in
Conflict with Your Interests............................................. 74
Ownership of CRW and TeleSpectrum securities............................ 74
Indemnification and Insurance........................................... 74
The IDRC Merger Agreement................................................. 75
The IDRC Merger......................................................... 75
Conversion of Securities................................................ 75
Exchange of Certificates................................................ 75
Representations and Warranties.......................................... 76
Covenants............................................................... 77
Conditions to Obligations to Effect the IDRC Merger..................... 79
Termination; Termination Fees and Expenses.............................. 80
Amendment and Waiver.................................................... 81
Description of TLSP Warrants............................................ 81
Description of Indemnity Escrow Agreement............................... 82
Other Agreements Relating to the IDRC Merger............................ 84
The CRW Merger Agreement.................................................. 86
The CRW Merger.......................................................... 86
Conversion and Cancellation of Shares................................... 86
Exchange of Certificates................................................ 86
Representations and Warranties.......................................... 87
Covenants............................................................... 88
Conditions to Obligations to Effect the CRW Merger...................... 90
Termination; Termination Fees and Expenses.............................. 91
Amendment and Waiver.................................................... 93
Opinions of Financial Advisors............................................ 94
Opinion of TeleSpectrum's Financial Advisor............................. 94
Opinion of IDRC's Financial Advisor..................................... 100
Opinion of CRW's Financial Advisor...................................... 104
Ownership of TeleSpectrum, IDRC and CRW................................... 109
Shares of Common Stock Subject to Outstanding Options and Warrants as of
June 2, 1999........................................................... 112
Comparison of the Rights of Holders of TeleSpectrum, CRW and IDRC Capital
Stock.................................................................... 113
General................................................................. 113
Capital Stock........................................................... 113
</TABLE>
Table of Contents
<PAGE>
<TABLE>
<S> <C>
Dividends................................................................ 113
Voting Rights............................................................ 113
Directors................................................................ 114
Call of Special Meetings................................................. 114
Action of Stockholders Without a Meeting................................. 115
Amendment to Certificate of Incorporation................................ 115
Amendment to Bylaws...................................................... 115
Indemnification of Directors and Officers................................ 115
Liquidation.............................................................. 115
Miscellaneous............................................................ 116
Description of TeleSpectrum Stock.......................................... 117
Authorized Capital Stock................................................. 117
Common Stock............................................................. 117
Preferred Stock.......................................................... 118
Certain Provisions of Delaware Law and TeleSpectrum's Certificate of
Incorporation and Bylaws................................................ 118
Transfer Agent and Registrar............................................. 119
IDRC Business.............................................................. 120
General.................................................................. 120
Industry Overview........................................................ 120
Services................................................................. 120
Sales and Marketing...................................................... 121
Information Technology................................................... 121
Reporting Systems........................................................ 122
Quality Assurance........................................................ 122
Government Regulation.................................................... 122
Personnel and Training................................................... 123
Employees................................................................ 123
Facilities............................................................... 123
Litigation............................................................... 124
IDRC Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 125
Overview................................................................. 125
Results of Operations.................................................... 128
Liquidity and Capital Resources.......................................... 131
Year 2000 Issue.......................................................... 134
Market Risk.............................................................. 135
IDRC Executive Compensation................................................ 137
Compensation of Executive Officers....................................... 137
Stock Option Grants and Exercises........................................ 138
Aggregated Option Exercises In Fiscal Year 1998 and Fiscal Year-End
Option Values........................................................... 139
Option Repricing......................................................... 139
</TABLE>
<TABLE>
<S> <C>
1996 Stock Option Plan.................................................... 139
Other Options............................................................. 140
Certain Transactions...................................................... 140
Election of TeleSpectrum Directors.......................................... 142
Election of Directors..................................................... 142
Compensation Interlocks and Insider Participation......................... 143
Director Compensation Arrangements........................................ 143
Executive Compensation.................................................... 144
Employment Agreements..................................................... 144
Severance Arrangements.................................................... 145
Consulting Agreement...................................................... 145
Report of the Compensation Committees..................................... 146
Performance Graph......................................................... 147
10-Year Option Repricing.................................................. 147
Certain Transactions........................................................ 148
Headquarters Lease........................................................ 148
Purchase of Common Stock by Keith E. Alessi............................... 148
Transactions with Mr. O'Neill............................................. 148
Compliance with Section 16(a) of the Securities Exchange Act of 1934...... 148
Election of CRW Directors................................................... 149
General................................................................... 149
Nominee/Director Biographical Information................................. 149
Compensation Committee Interlocks and Insider Participation............... 150
Directors' Meetings and Committees........................................ 150
Compensation of Directors................................................. 150
Executive Officers and Directors.......................................... 151
Board Compensation Committee Report on Executive Compensation............. 151
Executive Compensation.................................................... 153
Employment Agreements..................................................... 153
Stock Options Granted to Certain Executive Officers in 1998............... 153
Option Exercises in 1998 and Year End Option Values....................... 153
Stock Price Performance................................................... 154
Amendment and Restatement of the 1996 Equity Compensation Plan.............. 155
Proposal.................................................................. 155
Vote Required for Approval................................................ 155
Description of the Plan................................................... 155
Legal Matters............................................................... 163
Experts..................................................................... 163
Where You Can Find More Information......................................... 164
</TABLE>
Table of Contents
<PAGE>
Appendix I:IDRC Agreement and Plan of Merger
Appendix II:CRW Agreement and Plan of Merger
Appendix III:Section 262 of the Delaware General Corporation Law -- Appraisal
Rights
Appendix IV:Opinion of J.P. Morgan Securities, Inc., financial advisor to the
TeleSpectrum board
Appendix V: Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.,
financial advisor to the IDRC board
Appendix VI:Opinion of Janney Montgomery Scott Inc., financial advisor to the
CRW board
Appendix VII:Amendment to TeleSpectrum's 1996 Equity Compensation Plan
Appendix VIII:Indemnity Escrow Agreement
Annex I: Annual Report on Form 10-K of TeleSpectrum Worldwide Inc. for the
year ended December 31, 1998
Annex II: Quarterly Report on Form 10-Q of TeleSpectrum Worldwide Inc. for
the three months ended March 31, 1999
Annex III:Annual Report on Form 10-K of CRW Financial, Inc. for the year ended
December 31, 1998
Annex IV: Quarterly Report on Form 10-Q of CRW Financial, Inc. for the three
months ended March 31, 1999
<PAGE>
Summary
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To more fully
understand the mergers, matters relating to election of board members and the
plan amendment, you should carefully read this entire document. This joint
proxy statement/prospectus also includes (i) the annual report on Form 10-K of
TeleSpectrum for the year ended December 31, 1998, included as Annex I, (ii)
the quarterly report on Form 10-Q of TeleSpectrum for the three months ended
March 31, 1999, included as Annex II, (iii) the annual report on Form 10-K,
including Form 10-KA, of CRW for the year ended December 31, 1998, included as
Annex III, (iv) the quarterly report on Form 10-Q of CRW for the three months
ended March 31, 1999, included as Annex IV, (v) the consolidated financial
statements of IDRC, and (vi) the other documents to which we have referred you.
The Companies
TeleSpectrum Worldwide Inc.
443 S. Gulph Road
King of Prussia, Pennsylvania 19406
(610) 878-7400
TeleSpectrum is a teleservices firm that operates in two business segments,
telemarketing and customer care. TeleSpectrum provides inbound and outbound
telemarketing, inbound customer service, interactive voice response, customer
care consulting, and call center management services.
Teleservices are services that are provided through the use of the telephone
and other mediums, such as electronic connections. Telemarketing services, or
outbound telemarketing, involve the placing of telephone calls on behalf of
clients, normally as part of clients' efforts to sell their products or
services, or to obtain new customers. Customer care services, or inbound
telemarketing, are provided on behalf of clients' customer service activities.
Interactive voice response services involve responding to incoming customer
calls via automated systems. Consulting services involve conducting research
surveys that assess the effectiveness of a clients' customer service efforts.
Call center management services involve running most aspects of a clients' call
center, including recruiting and staffing customer service representatives,
managing the operations and providing reports that analyze the performance of
the client's call center.
TeleSpectrum primarily serves Fortune 500 companies in a wide range of
industries, including financial services, telecommunications, high tech,
insurance, utilities, consumer products, health care/pharmaceutical and
government. TeleSpectrum's common stock is traded on the Nasdaq National Market
under the symbol TLSP.
International Data Response Corporation
6041 La Flecha, Suite B
P. O. Box 7130
Rancho Santa Fe, California 92067-7130
(619) 759-3300
IDRC is a privately-held teleservices company operating in the United States
and Canada. IDRC's business is primarily conducted through its ProMark, IDRC
Teleservices and S&P Data subsidiaries. IDRC provides outbound and inbound
telemarketing services and inbound customer care services primarily for Fortune
1000 companies. IDRC was formed in 1996 through the recapitalization of a
private company and simultaneous acquisition of a privately-held entity. IDRC's
common stock is not publicly traded.
CRW Financial, Inc.
200 Four Falls Corporate Center
West Conshohocken, Pennsylvania 19428
(610) 878-7429
CRW does not have any business operations and its only significant asset is its
ownership of 6,946,583 shares of TeleSpectrum common stock. Of these shares,
678,410 shares may be purchased by others upon the exercise of warrants issued
by CRW in 1996. CRW formed TeleSpectrum and was instrumental in TeleSpectrum's
acquisition of its six initial operating companies and simultaneous initial
public offering in August 1996. CRW's common stock is traded on the Nasdaq
SmallCap Market under the symbol CRWF.
-1-
Summary
<PAGE>
The IDRC Merger
IDRC will merge with and into TeleSpectrum. This means that TeleSpectrum will
continue IDRC's business as the surviving corporation and the separate
existence of IDRC will cease.
What You Will Receive in the IDRC Merger (see page 45)
The stockholders of TeleSpectrum will not receive any securities as a result of
the IDRC merger.
Holders of IDRC common stock and options will be entitled to receive their pro
rata portion of an aggregate of 9,200,000 shares of TeleSpectrum common stock
and warrants exercisable for an aggregate of 2,500,000 shares of TeleSpectrum
common stock. To avoid confusion with other securities of the three companies,
we refer to these warrants throughout this joint proxy statement/prospectus as
the "TLSP warrants." Holders of IDRC options will not directly receive shares
or TLSP warrants in the IDRC merger. Rather, they will be entitled to have
TeleSpectrum assume their IDRC options. They would then have to exercise these
assumed options to receive shares and TLSP warrants.
TeleSpectrum is not required to complete the IDRC merger unless one-half of the
600,000 shares of outstanding IDRC preferred stock have been converted into
IDRC common stock. The remaining shares of IDRC preferred stock will each be
redeemed for $20 in cash, and all accrued and unpaid dividends payable on the
IDRC preferred stock will be paid in cash.
TeleSpectrum and IDRC held discussions for over six months before agreeing on
the terms of the IDRC merger. The number and type of the TeleSpectrum
securities to be issued in the IDRC merger were negotiated during these
discussions and were based on the due diligence analysis performed by each
company on the business of the other, the amount of each company's outstanding
debt and face-to-face negotiations between the parties.
IDRC stockholders should not send in their stock certificates until instructed
to do so after the IDRC merger is completed.
Indemnity Escrow Agreement (see page 82)
Not all of the shares of TeleSpectrum common stock will be immediately
available to the IDRC security holders. Shares having a "trading value" of
$12,000,000 will be subject to escrow. "Trading value" means the average
closing price of the TeleSpectrum common stock for the 25 trading days prior to
the day that the IDRC merger is completed. If the trading value was calculated
on June 2, 1999, 1,767,956 shares of TeleSpectrum common stock would be subject
to escrow.
This escrow will secure any indemnification obligations to TeleSpectrum under
the IDRC merger agreement for a period of at least 15 months from the
completion of the IDRC merger. The terms of this escrow are contained in an
indemnity escrow agreement.
Election to Have IDRC Options Assumed
If you are a holder of IDRC options, you have two choices if you wish to
receive TeleSpectrum securities. First, you can elect to have your options
assumed by TeleSpectrum. By making this election, your options will be
substituted for TeleSpectrum options to purchase shares of TeleSpectrum common
stock and TLSP warrants. In addition, you will have agreed to deposit a portion
of your TeleSpectrum options in escrow under the indemnity escrow agreement. By
making this election you will also have agreed to a one-year lockup. The lockup
means that you will not be able to sell or transfer your assumed options or any
securities received upon exercise of your assumed options until one year after
the day the IDRC merger is completed. Second, if you elect not to have your
options assumed by TeleSpectrum, then you must exercise your options prior to
the day the IDRC merger is completed or they will expire.
Terms of TLSP Warrants (see page 81)
TLSP warrants will be issued on a pro rata basis. They will be identical except
as to the number of shares of TeleSpectrum common stock issuable thereunder.
The TLSP warrants may not be exercised until one year after the day the IDRC
merger is completed. They must be exercised prior to the seventh anniversary of
the day the IDRC
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Summary
<PAGE>
merger is completed or they will expire. TLSP warrants are only transferable in
limited circumstances.
The exercise price will be $6.504 per share and may be paid in cash or through
a "cashless" election. A "cashless" election means that the holder instructs
TeleSpectrum to retain shares of TeleSpectrum common stock in payment of the
exercise price. The shares retained must have a fair market value equal to the
aggregate exercise price.
Ownership of TeleSpectrum Following the Mergers (see page 109)
Assuming that the IDRC and CRW mergers are completed, TeleSpectrum's
stockholders will own approximately 58%, IDRC stockholders will own
approximately 27% and CRW stockholders will own approximately 15% of the
outstanding common stock of TeleSpectrum. These percentages have been
calculated on a "fully-diluted basis." This means that we have assumed that all
TeleSpectrum options and warrants have been fully exercised. Please see page 8
for a chart that illustrates the ownership of TeleSpectrum.
Management of TeleSpectrum Will Change (see page 68)
If the IDRC merger is completed, Keith E. Alessi, the Chairman, Chief Executive
Officer and President of TeleSpectrum, will continue as the Chief Executive
Officer and President. Jeffrey E. Stiefler, the Chairman and Chief Executive
Officer of IDRC, will become Chairman of the Board. Paul J. Grinberg, Executive
Vice President and Chief Financial Officer of IDRC will become the Chief
Financial Officer of TeleSpectrum; David B. Parkes, President and Chief
Executive Officer of IDRC International will become President of TeleSpectrum's
Canadian operations; John D. Weil, President and Chief Executive Officer of
IDRC U.S. will become President of TeleSpectrum's outbound operations; and Jill
A. Ward, President of IDRC U.S. Inbound and Customer Care will become President
of TeleSpectrum's inbound and customer care operations.
The seven current members of the TeleSpectrum board of directors have been
nominated for
reelection at the TeleSpectrum annual meeting. However, TeleSpectrum is
required to increase the size of its board of directors by two as a condition
to the IDRC merger. Jeffrey E. Stiefler and Robert B. Hellman, Jr., a director
of IDRC, are expected to fill these seats. TeleSpectrum will not expand the
size of its board until after its annual meeting. As a result, those
individuals will not be nominees for election at the TeleSpectrum annual
meeting.
Accounting Treatment (see page 43)
We expect the IDRC merger will be accounted for using the purchase method of
accounting.
Federal Income Tax Consequences (see page 52)
We have structured the IDRC merger so that, for federal income tax purposes,
IDRC stockholders will generally not recognize a gain or a loss in the IDRC
merger, except with respect to cash received for preferred stock, dividends
paid on the IDRC preferred stock and cash received in place of fractional
shares of TeleSpectrum common stock. We have conditioned the IDRC merger on our
receipt of legal opinions regarding the tax consequences of the merger.
Appraisal Rights (see page 62)
Under Delaware law, IDRC stockholders will have appraisal rights and may be
entitled to receive cash equal to the fair value of their IDRC stock. To do so
they must follow the procedures set forth under Section 262 of the General
Corporation Law of the State of Delaware. Section 262 is attached as Appendix
III to this joint proxy statement/prospectus.
Under Delaware law, TeleSpectrum stockholders are not entitled to an appraisal
of the value of their shares.
Comparative Per Share Market Price Information (see page 31)
On January 14, 1999, the last full trading day on the Nasdaq National Market
prior to the public announcement of the proposed IDRC merger, TeleSpectrum
stock closed at $9.875 per share. On June 2, 1999, TeleSpectrum stock closed at
$6.750 per share.
-3-
Summary
<PAGE>
Listing of TeleSpectrum Common Stock
We will list the shares of TeleSpectrum common stock to be issued in connection
with the IDRC merger on the Nasdaq National Market.
Reasons for the IDRC Merger
By combining, we believe that we will be able to increase our revenues, reduce
our costs, and improve our service. We expect that the combined company will
have the management, technology, service focus and strategic competence to
provide both our stockholders and clients with added value.
Our goal is that our two companies will come together in an efficient and
expeditious manner. We will seek to maximize complementary strengths and
improve operating and financial results.
In reaching their recommendations in favor of the IDRC merger, each of our
boards of directors considered a number of uncertainties.
The TeleSpectrum board considered the following:
. the challenge of integrating the businesses of two corporations;
. IDRC's loss of several large clients;
. the significant amount of debt that TeleSpectrum will assume;
. prior operating losses incurred by IDRC;
. the risks of continuing on a stand-alone basis;
. the volatile nature of the teleservices industry; and
. goodwill that would be incurred.
The IDRC board considered the following:
. the risks that the combined company might not achieve anticipated
revenues or expected operating synergies;
. the potential loss of significant customers as a result of the merger;
. the adverse effects of one-time costs associated with the merger of the
two companies;
. the goodwill that would be incurred; and
. the risk of loss of key employees.
To review the reasons for the IDRC merger in greater detail, see pages 49
through 52.
Recommendations to Stockholders
To TeleSpectrum Stockholders:
The TeleSpectrum board believes that the IDRC merger is in your best interest
and unanimously recommends that you vote FOR the proposal to approve the IDRC
merger agreement.
To IDRC Stockholders:
The IDRC board believes that the IDRC merger is in your best interest and
unanimously recommends that you vote FOR the proposal to approve the IDRC
merger agreement.
Interests of IDRC's Officers and Directors in the IDRC Merger (see page 71)
In considering the boards' recommendations that you vote in favor of the IDRC
merger, you should be aware that the executive officers of IDRC have employment
arrangements and the vesting of their stock options will accelerate. In
particular, Mr. Stiefler's existing employment agreement with IDRC will be
terminated and he will receive a new agreement that will entitle him to receive
an annual salary and stock options. The existing agreements that Messrs.
Grinberg, Weil and Parkes and Ms. Ward have with IDRC that entitle them to
receive a salary, severance upon termination and other fringe benefits, will be
assumed by TeleSpectrum. All of these persons will be entitled to elect to have
their outstanding stock options assumed by TeleSpectrum and each of these
options will become fully vested as a result of the IDRC merger. As a result,
these persons have interests in the IDRC merger that may be different from, or
in addition to, yours.
Stockholder Support Agreements and Proxies (see page 84)
CRW, Mr. Alessi and two other directors of TeleSpectrum have entered into
stockholder support agreements with IDRC. These agreements require these
stockholders to vote their shares of TeleSpectrum common stock in favor of the
IDRC merger agreement. These stockholders have also
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Summary
<PAGE>
given proxies to Messrs. Stiefler and Hellman and IDRC to vote their shares in
favor of the IDRC merger agreement. These shares currently represent
approximately 37.4% of the outstanding TeleSpectrum common stock. You should
realize that these agreements and proxies make it likely that TeleSpectrum will
receive the necessary stockholder approval of the IDRC merger.
Messrs. Stiefler and Grinberg and McCown De Leeuw & Co. III L.P. and its
affiliates have entered into stockholder support agreements with TeleSpectrum.
These agreements require these stockholders to vote their shares of IDRC voting
stock in favor of the IDRC merger agreement. These stockholders have also given
proxies to Keith E. Alessi and TeleSpectrum to vote their shares in favor of
the IDRC merger agreement. These shares represent an aggregate of approximately
67.3% of the voting power of IDRC. These agreements also restrict these
stockholders from selling any of their TeleSpectrum securities until one year
after the completion of the IDRC merger. You should realize that these
agreements and proxies mean that IDRC will receive the necessary stockholder
approval of the IDRC merger.
Opinions of Financial Advisors (see page 94)
J.P. Morgan Securities, Inc. has delivered an opinion to the TeleSpectrum board
that the consideration to be paid by TeleSpectrum in the IDRC merger is fair,
from a financial point of view, to TeleSpectrum. This opinion is dated as of
January 11, 1999 and is subject to the limitations and qualifications stated in
the opinion. The full text of the written opinion of J.P. Morgan, which sets
forth the assumptions made, matters considered and limitations on the review
undertaken, is attached as Appendix IV to this joint proxy
statement/prospectus. TeleSpectrum stockholders are urged to read the opinion
carefully and in its entirety. J.P. Morgan's opinion is directed to the
TeleSpectrum board, addresses only the fairness of the consideration to be paid
by TeleSpectrum from a financial point of view, and does not constitute a
recommendation to any stockholder as to how such stockholder should vote at the
TeleSpectrum annual meeting.
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. has delivered an opinion
to the IDRC board that the consideration to be received by the IDRC
stockholders in the IDRC merger is fair to them from a financial point of view.
This opinion is dated as of January 14, 1999 and is subject to the limitations
and qualifications stated in the opinion. The full text of the written opinion
of Houlihan Lokey which sets forth the assumptions made, matters considered and
limitations on the review undertaken is attached as Appendix V to this joint
proxy statement/prospectus. IDRC stockholders are urged to read the opinion
carefully and in its entirety. Houlihan Lokey's opinion is directed to the IDRC
board, addresses only the fairness, from a financial point of view, of the
consideration to be received by the IDRC stockholders and does not constitute a
recommendation to any stockholder as to how such stockholder should vote at the
IDRC special meeting.
The fairness opinions that we have received from our respective financial
advisors only relate to fairness from a financial point of view on the date
that they were issued. The opinion of TeleSpectrum's financial advisor is dated
January 11, 1999 and the opinion of IDRC's financial advisor is dated January
14, 1999.
We have not requested or obtained updated fairness opinions from our financial
advisors. These opinions may be affected by events that have occurred since the
date that they were issued if redetermined as of the date of this joint proxy
statement/prospectus. We cannot predict whether these opinions would be
different if redetermined as of the date of this joint proxy
statement/prospectus. As a result, you should not rely on these opinions in
determining how to vote your shares at your shareholder meeting.
The CRW Merger
CRW Acquisition Corp., a subsidiary of TeleSpectrum, will be merged with and
into CRW. CRW will be the surviving corporation, and CRW will become a
subsidiary of TeleSpectrum.
What You Will Receive in the CRW Merger (see page 56)
As a result of the merger, CRW stockholders will receive .709 of a share of
TeleSpectrum common
Summary
-5-
<PAGE>
stock for each share of CRW common stock that they own. In addition,
outstanding CRW stock options and warrants will be converted into options and
warrants to purchase an aggregate of 1,767,743 shares of TeleSpectrum common
stock. CRW also intends to make a special cash distribution to its stockholders
and to the holders of its outstanding warrants. This distribution will be in an
aggregate amount equal to its cash on hand after the payment of all of its
liabilities. No fractional shares will be issued. Instead, CRW stockholders
will receive cash in payment for any fractional shares based on the market
value of the TeleSpectrum stock.
TeleSpectrum and CRW held discussions for nearly six months before agreeing on
the terms of the CRW merger. The number of shares of TeleSpectrum common stock
to be issued in the CRW merger were negotiated during these discussions and
were based on the due diligence analysis performed by TeleSpectrum regarding
CRW's outstanding liabilities, the number of shares of TeleSpectrum common
stock owned by CRW and negotiations between the special committees of each
company's board of directors.
CRW stockholders should not send in their stock certificates until instructed
to do so after the CRW merger is completed.
Federal Income Tax Consequences (see page 58)
We have structured the merger so that, for federal income tax purposes, the CRW
stockholders will generally not recognize a gain or a loss in the CRW merger,
except with respect to cash received by CRW stockholders in place of fractional
shares of TeleSpectrum common stock. We have conditioned the CRW merger on our
receipt of a tax opinion regarding tax consequences of the CRW merger.
Appraisal Rights (see page 62)
Under Delaware law, CRW stockholders will have appraisal rights and will be
entitled to receive from CRW cash equal to the fair value of their CRW common
stock. To do so, they must follow the procedures set forth under Section 262 of
the General Corporation Law of the State of Delaware. Section 262 is attached
as Appendix III to this joint proxy statement/prospectus.
Comparative Per Share Market Price Information (see page 31)
On September 2, 1998, the last trading day prior to the execution of the CRW
merger agreement, TeleSpectrum stock closed at $5.125 per share and CRW stock
closed at $2.750 per share. On June 2, 1999, TeleSpectrum stock closed at
$6.750 per share and CRW stock closed at $4.375 per share.
Listing of TeleSpectrum Common Stock
We will list the shares of TeleSpectrum common stock to be issued in connection
with the CRW merger on the Nasdaq National Market.
Accounting Treatment (see page 43)
We expect the CRW merger will be accounted for as a treasury stock transaction.
Reasons for the CRW Merger
For TeleSpectrum, the CRW merger presents an opportunity to reduce the number
of outstanding shares of TeleSpectrum and decrease the concentration of
ownership of its shares.
For stockholders of CRW, the CRW merger provides an opportunity to receive a
more liquid investment in a tax-free transaction by giving you a direct
interest in shares of TeleSpectrum common stock. TeleSpectrum common stock has
a higher trading volume, a higher market capitalization and a greater number of
holders, and is traded on a more visible market.
To review the reasons for the CRW merger in greater detail, see pages 57
through 58.
Recommendation to CRW Stockholders
The CRW board believes that the CRW merger is in your best interest and
unanimously recommends that you vote FOR the proposal to approve the CRW merger
agreement.
Interests of CRW Officers and Directors in the CRW Merger
All of CRW's officers and directors own shares of CRW common stock and options
to purchase shares of CRW common stock. The CRW stock options
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Summary
<PAGE>
will be assumed by TeleSpectrum as a result of the CRW merger. In addition, J.
Brian O'Neill, the Chairman and Chief Executive Officer of CRW, and Jonathan P.
Robinson, the Chief Financial Officer of CRW, each own shares of TeleSpectrum
common stock.
Voting Agreements
Directors of CRW or their affiliates who own, in the aggregate, approximately
31.4% of the shares of CRW common stock have entered into voting agreements.
These agreements require these persons to vote their shares to approve the CRW
merger.
You should realize that these agreements make it more likely that CRW will
receive the necessary stockholder approval of the CRW merger.
Opinion of Financial Advisor (see page 94)
Janney Montgomery Scott Inc. has delivered an opinion to the CRW board that the
CRW exchange ratio is fair, from a financial point of view, to the holders of
CRW common stock. This opinion is dated as of September 2, 1998 and is subject
to the limitations and qualifications stated in the opinion. The full text of
the written opinion of JMS which sets forth the assumptions made, matters
considered and limitations on the review undertaken, is attached as Appendix VI
to this joint proxy statement/prospectus. CRW stockholders are urged to read
the opinion carefully in its entirety. JMS's opinion is written and directed
only to the fairness, from a financial point of view, of the consideration to
be received by the holders of CRW common stock and does not constitute a
recommendation to any holder of CRW common stock concerning how such holder
should vote with respect to the merger.
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Summary
<PAGE>
Percentage Ownership of TeleSpectrum Common Stock
The following charts illustrate the ownership of the TeleSpectrum common
stock prior to the completion of the mergers and after the completion of the
mergers. The first chart shows the ownership of TeleSpectrum before the mergers
by CRW and all stockholders other than CRW. The second chart shows the post-
merger ownership of TeleSpectrum on the basis of the actual number of
TeleSpectrum shares that will be outstanding on the date the mergers are
completed. The third chart shows the post-merger ownership of TeleSpectrum
assuming that all outstanding options and warrants have been exercised.
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
Prior to the Mergers After the Mergers
[GRAPH APPEARS HERE]
After the Mergers On a Fully-Diluted Basis
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Summary
<PAGE>
TeleSpectrum and CRW Market Price Information
The following table sets forth for the periods indicated the range of the
high and low sale prices of TeleSpectrum common stock and CRW common stock as
reported on the Nasdaq National Market and Nasdaq SmallCap Market,
respectively.
<TABLE>
<CAPTION>
TeleSpectrum CRW
Common Stock Common Stock
--------------- -------------
High Low High Low
------- ------- ------ ------
<S> <C> <C> <C> <C>
1997
First Quarter............................... $17.875 $11.875 $9.500 $6.563
Second Quarter.............................. 16.750 6.781 9.183 4.375
Third Quarter............................... 9.000 4.250 5.818 3.000
Fourth Quarter.............................. 6.500 2.969 5.000 2.625
1998
First Quarter............................... $ 7.250 $ 2.750 $5.375 $2.375
Second Quarter.............................. 11.000 5.813 7.125 4.000
Third Quarter............................... 9.125 3.625 6.250 2.750
Fourth Quarter.............................. 10.688 7.250 6.875 4.375
1999
First Quarter............................... $11.813 $ 7.938 $8.063 $5.375
Second Quarter (through June 2, 1999)....... 8.563 6.063 5.750 3.938
</TABLE>
As of May 28, 1999, there were 150 holders of record of TeleSpectrum common
stock and 32 holders of record of CRW common stock. Set forth below are the
last reported sales prices of TeleSpectrum common stock and CRW common stock on
September 2, 1998 and on June 2, 1999. These were the last trading days prior
to the execution of the CRW merger agreement, and a recent date prior to the
date of this joint proxy statement/prospectus. Also set forth below are the
equivalent pro forma sales prices of CRW common stock on such dates, as
determined by multiplying the last reported sale price of TeleSpectrum common
stock by the exchange ratio of .709:
<TABLE>
<CAPTION>
September 2, 1998 June 2, 1999
----------------- ------------
<S> <C> <C>
TeleSpectrum common stock..................... $5.125 $6.750
CRW common stock.............................. 2.750 4.375
CRW pro forma equivalent...................... 3.634 4.786
</TABLE>
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Selected Historical Financial Information of TeleSpectrum
The following selected financial data was derived in part from TeleSpectrum's
consolidated financial statements and notes thereto, as well as the predecessor
financial information of TeleSpectrum's initial operating businesses. Because
TeleSpectrum was incorporated on April 26, 1996, there were no historical
results prior to that date. These financial statements and predecessor
information are included in TeleSpectrum's Form 10-K and Form 10-Q attached as
Annexes I and II to this joint proxy statement/prospectus.
In TeleSpectrum's opinion, the financial statements of its 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. However, classification of expenses between cost of services and
selling, general and administrative expenses of the initial operating
businesses may be inconsistent with TeleSpectrum's classification of such
expenses. Selected Financial Data of TeleSpectrum's initial operating
businesses should be read in conjunction with the financial statements and
notes to the financial statements that are included in TeleSpectrum's Form 10-K
and Form 10-Q. All initial operating businesses had fiscal years ending
December 31 with the exception of one business, which operated on a 52, 53 week
fiscal year ending on the last Friday of the calendar year.
<TABLE>
<CAPTION>
Three
Months ended Year ended Period from
March 31, December 31, April 26, 1996
---------------- ------------------- (Inception) to
1999 1998 1998 1997 December 31, 1996
------- ------- -------- --------- -----------------
(in thousands--except per share amounts)
<S> <C> <C> <C> <C> <C>
Statements Of Operations
Data:
Revenues................ $47,925 $39,634 $167,428 $ 178,922 $ 53,154
------- ------- -------- --------- --------
Operating Expenses:
Cost of services....... 38,787 42,764 154,316 177,565 37,942
Selling, general and
administrative........ 3,929 6,565 17,875 19,074 9,126
Amortization of
goodwill (includes
goodwill impairment
charge of $139,072 in
1997)................. 295 295 1,178 146,321 2,147
------- ------- -------- --------- --------
Total operating
expenses.............. 43,011 49,624 173,369 342,960 49,215
------- ------- -------- --------- --------
Operating income
(loss)................ 4,914 (9,990) (5,941) (164,038) 3,939
Interest income
(expense), net........ (172) (805) (1,246) (1,876) 433
Investment gain........ -- -- -- 1,760 --
------- ------- -------- --------- --------
Income (loss) from
continuing operations
before taxes.......... 4,742 (10,795) (7,187) (164,154) 4,372
Income tax benefit
(expense)............. -- 247 247 2,310 (1,693)
------- ------- -------- --------- --------
Income (loss) from
continuing
operations............ $ 4,742 (10,548) $ (6,940) $(161,844) $ 2,679
======= ======= ======== ========= ========
Basic earnings (loss)
per share from
continuing operations.. $ 0.18 (0.42) $ (0.27) $ (6.42) $ 0.15
======= ======= ======== ========= ========
Weighted average number
of common and common
equivalent shares
outstanding............ 25,820 25,249 25,528 25,213 17,898
======= ======= ======== ========= ========
Balance Sheet Data:
Cash and cash
equivalents............ $ 520 $ 855 $ 794 $ 774 $ 28,171
Working capital,
including net assets of
discontinued
operations............. 18,099 13,245 16,702 20,655 49,373
Total assets............ 118,351 127,472 103,689 144,721 296,539
Long-term debt,
including capital lease
obligations, less
current portion........ 2,824 3,585 2,876 3,800 4,199
Stockholders' equity.... 81,651 71,176 76,568 80,377 240,511
Other Data:
EBITDA................. 7,447 (7,714) 3,769 (7,774) 7,753
Statement of Cash Flows:
Net cash provided by
(used in) operating
activities............ (1,705) (5,981) (1,503) 4,769 (4,680)
Net cash provided by
(used in) investing
activities............ (7,382) 13,583 28,129 (60,129) (117,560)
Net cash provided by
(used in) financing
activities............ 8,813 (7,521) (26,606) 27,963 150,411
</TABLE>
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Summary
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EBITDA represents the sum of income or loss from continuing operations,
income taxes, net interest expense, depreciation and amortization. EBITDA is
presented because TeleSpectrum's management believes it provides useful
information regarding its ability to incur and/or service debt. EBITDA should
not be considered in isolation or as a substitute for income or loss from
continuing operations, cash flows, or other income or cash flow data prepared
in accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity.
The reconciliations of income (loss) from continuing operations to EBITDA,
are as follows:
<TABLE>
<CAPTION>
Three months ended Year ended
March 31, December 31, Period from April 26,
------------------- ------------------ 1996 (Inception) to
1999 1998 1998 1997 December 31, 1996
------------------- ------- --------- ---------------------
<S> <C> <C> <C> <C> <C>
Income (loss) from
continuing operations.. $ 4,742 $ (10,548) $(6,940) $(161,844) $2,679
Adjustments to income
(loss) from continuing
operations:
Interest income
(expense), net....... 172 805 1,246 1,876 (433)
Income tax benefit
(expense)............ -- (247) (247) (2,310) 1,693
Depreciation expense.. 2,238 1,981 8,532 8,183 1,667
Amortization expense.. 295 295 1,178 146,321 2,147
-------- ---------- ------- --------- ------
2,705 2,834 10,709 154,070 5,074
-------- ---------- ------- --------- ------
EBITDA.................. $ 7,447 $ (7,714) $ 3,769 $ (7,774) $7,753
======== ========== ======= ========= ======
</TABLE>
Projections of Future Operating Results
In connection with the review of TeleSpectrum by IDRC and in the course of
the negotiations between TeleSpectrum and IDRC as described in "The IDRC
Merger--Background of the IDRC Merger," TeleSpectrum provided IDRC and
TeleSpectrum's financial advisor, J.P. Morgan, with certain non-public business
and financial information. The non-public information provided by TeleSpectrum
included projections of TeleSpectrum's future operating performance.
TeleSpectrum's projections do not give effect to the IDRC merger or the
financing of the IDRC merger.
TeleSpectrum does not as a matter of course publicly disclose projections as
to future revenues or earnings. TeleSpectrum projections were not prepared with
a view to public disclosure and are included in this joint proxy
statement/prospectus only because such information was made available to IDRC
in connection with their due diligence investigation of TeleSpectrum.
Accordingly, it is expected that there will be differences
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Summary
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between actual and projected results, and actual results may be materially
different than those set forth below. The statements regarding TeleSpectrum's
financial projections constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. TeleSpectrum projections were not:
. prepared with a view to compliance with the published guidelines of the
SEC regarding projections;
. prepared in accordance with the guidelines established by the American
Institute of Certified Public Accountants for preparation and
presentation of financial projections; or
. reviewed by an independent public accounting firm.
The material assumptions underlying TeleSpectrum projections are as follows:
. increases in revenues in 1999 were based on available estimates of
business for the first three months of 1999 and thereafter, at
anticipated annual rates of approximately 2% in 2000 and approximately 6%
thereafter;
. no significant changes in gross margins;
. an increase in spending for selling, general and administrative expenses
proportionate year-over-year to revenues growth to support the expected
increase in revenues;
. neither the CRW merger nor the IDRC merger have been assumed to have been
completed;
. no significant adverse developments within the teleservices industry have
occurred; and
. general economic conditions have not significantly worsened.
In addition, factors such as industry performance, general business,
economic, regulatory, market and financial conditions, all of which are
difficult to predict, may cause the TeleSpectrum projections or the underlying
assumptions to be inaccurate. Accordingly, the TeleSpectrum projections may not
be realized, and actual results may be materially greater or less than those
contained in the TeleSpectrum projections. See "Forward-Looking Statements May
Prove Inaccurate."
The inclusion of the TeleSpectrum projections herein should not be regarded
as an indication that IDRC or TeleSpectrum or TeleSpectrum's financial advisor
considered or consider the TeleSpectrum projections to be a reliable prediction
of future events. TeleSpectrum projections should not be relied upon as such.
TeleSpectrum does not intend to update or otherwise revise the TeleSpectrum
projections to reflect circumstances existing after the date when made or to
reflect the occurrence of future events even if any or all of the assumptions
underlying the TeleSpectrum projections are shown to be in error.
TeleSpectrum provided to IDRC and TeleSpectrum's financial advisor the
following TeleSpectrum projections:
<TABLE>
<CAPTION>
Fiscal Year Ending,
------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C> <C>
Revenue................................................ $202 $206 $219 $232 $247
Operating Income....................................... $ 26 $ 27 $ 29 $ 32 $ 34
EBITDA................................................. $ 34 $ 38 $ 43 $ 48 $ 46
</TABLE>
-12-
Summary
<PAGE>
TeleSpectrum Predecessor Company Selected Financial Data
TeleSpectrum acquired the assets and businesses of each of its predecessor
companies on August 13, 1996. The predecessor companies of TeleSpectrum that
are presented below include:
.SOMAR--Somar, Inc.
.NBG--NBG Services, Inc.
.Reich--The Reich Group, Inc. and affiliates
.TeleSpectrum Maryland--TeleSpectrum, Inc. and TeleSpectrum Training
Services, Inc.
<TABLE>
<CAPTION>
Period from
January 1, 1996 Fiscal Year Ended
to August 12, -----------------
1996 1995 1994
--------------- -------- --------
(in thousands)
<S> <C> <C> <C>
Statements Of Operations:
SOMAR
Revenues................................... $26,421 $ 31,900 $ 20,785
Cost of services........................... 21,406 25,048 15,623
Selling, general and administrative........ 3,817 5,162 4,115
Operating income........................... 1,198 1,690 1,047
Net income................................. 637 979 627
NBG
Revenues................................... 11,311 12,829 5,778
Cost of services........................... 7,686 8,572 4,259
Selling, general and administrative........ 1,645 2,115 1,443
Operating income........................... 1,980 2,142 76
Net income................................. 1,868 2,106 33
Reich
Revenues................................... 14,558 12,253 5,424
Cost of services........................... 8,550 7,836 4,225
Selling, general and administrative........ 1,466 2,534 976
Operating income........................... 4,542 1,883 223
Net income................................. 4,511 1,840 199
TeleSpectrum Maryland
Revenues................................... 10,529 11,854 9,386
Cost of services........................... 6,974 8,338 6,754
Selling, general and administrative........ 2,929 3,072 2,636
Operating income (loss).................... 626 444 (4)
Net income (loss).......................... 497 278 (154)
</TABLE>
-13-
Summary
<PAGE>
TeleSpectrum Predecessor Company Selected Financial Data
<TABLE>
<CAPTION>
At Fiscal Year
End
----------------
1995 1994
------- -------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
SOMAR
Cash and cash equivalents................................... $ 25 $ 2
Working capital (deficit)................................... (1,990) (242)
Total assets................................................ 10,792 5,526
Long-term debt, including capital lease obligations, less
current portion............................................ 1,639 1,145
Stockholders' equity........................................ 771 478
NBG
Cash and cash equivalents................................... 700 --
Working capital (deficit)................................... 1,270 (238)
Total assets................................................ 4,234 1,483
Long-term debt, including capital lease obligations, less
current portion............................................ 454 277
Stockholders' equity........................................ 2,254 396
Reich
Cash and cash equivalents................................... 220 31
Working capital (deficit)................................... 821 (59)
Total assets................................................ 4,318 1,111
Long-term debt, including capital lease obligations, less
current portion............................................ 371 273
Stockholders' equity (deficit).............................. 1,668 (272)
TeleSpectrum Maryland
Cash and cash equivalents................................... 15 163
Working capital (deficit)................................... 37 (241)
Total assets................................................ 3,549 3,182
Long-term debt, including capital lease obligations, less
current portion............................................ 57 217
Stockholders' equity........................................ 687 409
</TABLE>
-14-
Summary
<PAGE>
Selected Historical Financial Information of IDRC
Prior to March 11, 1996, IDRC was named ProMark One Marketing Services, Inc.
On March 11, 1996, ProMark was recapitalized and changed its name to IDRC.
ProMark was a subchapter S-corporation through December 31, 1995, at which time
it became a C-corporation for tax purposes. Accordingly, income taxes were the
responsibility of the individual stockholders of ProMark through December 31,
1995. IDRC acquired Telnet Systems, Inc. and Intellisell Corporation in April
1997. The results of operations and balance sheet data for Telnet and
Intellisell are included in the 1997 and 1998 data. The selected historical
financial data set forth below with respect to IDRC's statement of operations
for 1996, 1997 and 1998 and balance sheet data as of December 31, 1997 and 1998
are derived from the consolidated financial statements of IDRC, which have been
audited by Deloitte & Touche LLP, independent auditors, included in this joint
proxy statement/prospectus. The selected historical financial data set forth
below with respect to IDRC's statement of operations for 1994 and 1995 and
balance sheet data as of December 31, 1994, 1995 and 1996 are derived from the
audited consolidated financial statements of IDRC which are not included in
this joint proxy statement/prospectus. For the year ended December 31, 1998,
IDRC provided a valuation allowance of $12.8 million, resulting from the 1998
operating loss and the uncertainty of realizing the net deferred tax asset. The
three-month data have been selected from the IDRC unaudited consolidated
financial statements which include all adjustments of a normal and recurring
nature which IDRC believes are necessary to present fairly the results of
operations, financial position and cash flows for the periods. The selected
historical consolidated financial data set forth below should be read in
conjunction with, and are qualified by reference to, "IDRC Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and the accompanying notes to the
financial statements that are included elsewhere in this joint proxy
statement/prospectus.
<TABLE>
<CAPTION>
Three
Months Ended
March 31, Year Ended December 31,
----------------- ----------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- ------- -------- -------- -------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of
Operations:
Revenues............... $ 36,689 $42,574 $160,078 $136,871 $ 66,651 $30,004 $19,982
-------- ------- -------- -------- -------- ------- -------
Cost of services....... 22,277 26,201 96,645 86,907 43,694 18,147 11,754
Selling, general and
administrative
expenses.............. 15,840 15,884 66,892 47,655 20,485 6,908 4,014
Amortization of
goodwill (includes
impairment charge of
$31,319 in 1997)...... 900 1,215 4,884 36,827 4,684 -- --
-------- ------- -------- -------- -------- ------- -------
Operating income
(loss)................ (2,328) (726) (8,343) (34,518) (2,212) 4,949 4,214
Interest expense, net.. 2,456 2,243 9,654 7,770 3,716 -- --
-------- ------- -------- -------- -------- ------- -------
Income (loss) before
taxes and
extraordinary item.... (4,784) (2,969) (17,997) (42,288) (5,928) 4,949 4,214
Income tax provision
(benefit)............. 52 (677) 9,123 (9,561) (2,287) -- --
-------- ------- -------- -------- -------- ------- -------
Income (loss) from
continuing
operations............ $(4,836) $(2,292) $(27,120) $(32,727) $ (3,641) $ 4,949 $ 4,214
======== ======= ======== ======== ======== ======= =======
Balance Sheet Data:
Cash and cash
equivalents........... $ 1,213 $ 5,845 $ 1,352 $ 5,874 $ 593 $ 291 $ 1,197
Working capital
(deficit)............. 13,582 14,987 14,571 6,330 (1,448) 640 797
Total assets........... 73,450 98,968 74,956 95,431 48,284 7,575 5,326
Long-term debt,
including capital
lease obligations, net
of current portion.... 87,346 89,503 86,390 80,151 34,432 1,798 1,156
Stockholders' equity
(deficit)............. (57,022) (27,984) (52,221) (26,029) (10,370) 3,147 2,045
Other Data:
EBITDA(1).............. 555 2,523 4,923 7,996 4,484 5,709 4,646
Statements of Cash
Flows:
Net cash provided by
(used in) operating
activities............ (875) (7,259) (18,619) (5,097) (667) 4,952 4,214
Net cash used in
investing activities.. (1,459) (1,559) (5,799) (36,442) (25,634) (2,676) (1,325)
Net cash provided by
(used in) financing
activities............ 2,195 8,789 19,896 46,820 26,603 (3,182) (2,914)
</TABLE>
(1) EBITDA represents the sum of income or loss from continuing operations,
income taxes, net interest expense, depreciation and amortization. EBITDA
is presented because IDRC's management believes it provides useful
information regarding its ability to incur and/or service debt. EBITDA
should not be considered in isolation or as a substitute for income or loss
from continuing operations, cash flows, or other income or cash flow data
prepared in accordance with generally accepted accounting principles or as
a measure of a company's profitability or liquidity.
-15-
Summary
<PAGE>
The following items reconcile income (loss) from continuing operations to
EBITDA.
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
----------------- ------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- ------- -------- -------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from
continuing
operations............ $ (4,836) $(2,292) $(27,120) $(32,727) $(3,641) $4,949 $4,214
Income tax provision
(benefit)............. 52 (677) 9,123 (9,561) (2,287) -- --
Interest expense, net.. 2,456 2,243 9,654 7,770 3,716 -- --
Depreciation and
amortization expense.. 1,983 2,034 8,382 5,687 2,012 760 432
Amortization of
intangibles........... 900 1,215 4,884 36,827 4,684 -- --
-------- ------- -------- -------- ------- ------ ------
EBITDA................. $ 555 $ 2,523 $ 4,923 $ 7,996 $ 4,484 $5,709 $4,646
======== ======= ======== ======== ======= ====== ======
</TABLE>
Certain Projections of Future Operating Results
In connection with the review of IDRC by TeleSpectrum and in the course of
the negotiations between IDRC and TeleSpectrum as described in "The IDRC
Merger--Background of the IDRC Merger," IDRC provided to its financial advisor,
Houlihan Lokey, and TeleSpectrum and its financial advisor, J.P. Morgan,
certain non-public business and financial information. The non-public
information provided by IDRC included certain projections of IDRC's future
operating performance prepared by IDRC's management. IDRC's projections do not
give effect to the IDRC merger or the financing of the IDRC merger.
IDRC does not as a matter of course publicly disclose projections as to
future revenues, earnings or other results. The IDRC projections were not
prepared with a view to public disclosure and are included in this joint proxy
statement/prospectus only because such information was made available to
TeleSpectrum in connection with its due diligence investigation of IDRC.
Accordingly, it is expected that there will be differences between actual and
projected results, and actual results may be materially different than those
set forth below. The statements regarding IDRC's financial projections
constitute "forward-looking" statements within the meaning of Section 27A of
the Securities Act and Section 21E to the Exchange Act. IDRC projections were
not:
. prepared with a view to compliance with the published guidelines of the
SEC regarding projections;
. prepared in accordance with the guidelines established by the American
Institute of Certified Public Accountants for preparation and
presentation of financial projections; or
. compiled or examined by IDRC's independent auditors, nor any other
independent accountants, nor have they performed any procedures with
respect to the prospective financial information contained herein, nor
have they expressed any opinion or any other form of assurance on such
information or its achievability, and assume no responsibility for, and
disclaim any association with, the prospective financial information.
The material assumptions underlying IDRC projections include:
. companies with call center operations will continue to outsource their
outbound telemarketing and inbound customer care work;
. growth in outsourcing will continue to expand;
. significant revenue growth anticipated for the customer care business as
more companies determine to outsource this function;
. access to capital necessary to fund operations;
-16-
Summary
<PAGE>
. spending for capital expenditures and selling, general and administrative
expenses will increase to support the expected increase in revenues;
. no significant adverse developments within the teleservices industry have
occurred;
. general economic conditions have not significantly worsened;
. IDRC will continue to have access to adequate labor;
. there will be no significant increase in wage rates;
. long distance telephone costs will continue to decline;
. the rates at which IDRC leases property will not significantly increase
over time;
. there will be no major losses in IDRC's client base; and
. the general competitive conditions will continue over time.
While IDRC believes that the assumptions underlying the financial projections
were reasonable at the time the projections were developed, any assumptions
could prove inaccurate; therefore, there can be no assurance that the forward-
looking financial information will prove to be accurate or that the projected
results could be realized. As a result, the financial projections should not be
relied upon as necessarily indicative of future results, and readers of this
joint proxy statement/prospectus are cautioned not to place undue reliance on
such prospective financial information.
In addition, factors such as industry performance, general business,
economic, regulatory, market and financial conditions as well as changes to
IDRC's business, financial condition or results of operations, all of which are
difficult to predict, may cause the IDRC projections or the underlying
assumptions to be inaccurate. Accordingly, the IDRC projections may not be
realized, and actual results may be materially greater or less than those
contained in the IDRC projections. See "Forward-Looking Statements May Prove
Inaccurate."
The inclusion of the IDRC projections herein should not be regarded as an
indication that TeleSpectrum or IDRC or their respective financial advisors
considered or consider the IDRC projections to be a reliable prediction of
future events. IDRC projections should not be relied upon as such. IDRC does
not intend to provide to its financial advisors or the financial advisors of
TeleSpectrum updated or otherwise revised projections to reflect circumstances
existing after the date when made or to reflect the occurrence of future
events, even if any or all of the assumptions underlying the IDRC projections
are shown to be in error.
IDRC provided to TeleSpectrum and their respective financial advisors the
following IDRC projections:
<TABLE>
<CAPTION>
Fiscal Year Ending,
------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C> <C>
Revenue................................................ $205 $282 $388 $524 $711
Operating Income....................................... $ 20 $ 33 $ 50 $ 67 $ 93
EBITDA................................................. $ 30 $ 45 $ 67 $ 91 $126
</TABLE>
-17-
Summary
<PAGE>
Selected Historical Financial Information of CRW
The historical consolidated financial statements of CRW prior to May 1995
have been deemed to be those of Casino & Credit Services, Inc., restated to
reflect the classification of the CRW collection division and CRW's Casino
Money Centers, Inc. and Central Credit, Inc. subsidiaries as discontinued
operations. These statements have been derived from the audited financial
statements of Casino & Credit Services for the year ended December 31, 1994 and
from the audited financial statements of CRW for the subsequent years. The
following information should be read in conjunction with and is qualified in
its entirety by reference to the historical consolidated financial statements
and accompanying notes of CRW included in CRW's Form 10-K and Form 10-Q
attached as Annexes III and IV to this joint proxy statement/prospectus.
<TABLE>
<CAPTION>
Three
Months Ended
March 31, Year Ended December 31,
------------- -------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------ ------ ------ -------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operating expenses,
excluding non-cash and
special charges........ 70 157 530 3,811 2,292 1,036 2,541
Special compensation
charge................. -- -- -- -- 1,319 -- --
Depreciation and
amortization........... 2 3 9 160 112 22 --
------ ------ ------ -------- ------- ------- -------
Operating loss from
continuing operations.. (72) (160) (539) (3,971) (3,723) (1,058) (2,541)
Other income............ -- 1,914 1,694 1,324 1,136 -- --
Equity in earnings
(loss) of TLSP......... 1,200 (2,475) (1,655) (39,389) 774 -- --
Interest (expense)
income................. 21 (9) 17 (421) (825) (655) (263)
------ ------ ------ -------- ------- ------- -------
Income (loss) from
continuing operations
before income tax
benefit................ 1,149 (730) (483) (42,457) (2,638) (1,713) (2,804)
Income tax benefit
(expense).............. (449) 291 (150) (16,803) (855) -- (622)
------ ------ ------ -------- ------- ------- -------
Income (loss) from
continuing operations.. $ 700 $ (439) $ (333) $(25,654) $(1,783) $(1,713) $(2,182)
====== ====== ====== ======== ======= ======= =======
Basic net income (loss)
per common share from
continuing operations.. $ 0.10 $(0.07) $(0.05) $ (4.20) $ (0.47) $ (0.49)
====== ====== ====== ======== ======= =======
Weighted average number
of common and common
equivalent shares
outstanding............ 6,918 6,447 6,549 6,099 3,794 3,527
====== ====== ====== ======== ======= =======
Balance Sheet Data:
Net assets of
discontinued
operations............. $ -- $ -- $ -- $ 1,738 $ 9,969 $10,929 $16,727
Total assets............ 18,573 18,295 18,425 21,631 67,945 11,332 16,727
Bank and subordinated
debt................... -- 143 -- 798 9,185 7,005 5,066
Stockholders' equity.... 12,678 11,065 12,034 12,601 34,873 3,186 11,345
</TABLE>
- --------
Per share information is not presented for 1994 as such information is not
meaningful due to the formation of CRW in May 1995. The net assets of
discontinued operations represent the assets and liabilities of the CRW
Collection Division sold in February 1997, the business of Casino & Credit
Services acquired in May 1995 and the sale of the Casino Money Centers, Inc.
subsidiary in October 1998.
-18-
Summary
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Unaudited Pro Forma Combined Financial Information
Basis of Presentation
On September 3, 1998, TeleSpectrum and CRW entered into a merger agreement
whereby each outstanding share of CRW common stock (6,917,521 shares as of
March 31, 1999) will be exchanged for .709 of a share of TeleSpectrum common
stock. In addition, each outstanding option (1,536,436 as of March 31, 1999) to
purchase shares of CRW common stock will be exchanged for an option to purchase
.709 of a share of TeleSpectrum common stock and the warrants issued by CRW
exercisable for 678,410 shares of TeleSpectrum common stock owned by CRW will
be exchanged for warrants issued by TeleSpectrum exercisable for 678,410 shares
of TeleSpectrum common stock. Immediately prior to the merger, CRW will not
have any continuing business operations and its only asset will be 6,946,583
shares of TeleSpectrum common stock. For financial reporting purposes,
TeleSpectrum will treat the exchange of shares of TeleSpectrum common stock for
shares of CRW common stock as a treasury stock transaction. The transaction
will not have an effect on TeleSpectrum's net income (loss) but will have an
effect on its pro forma net income (loss) per share. See "Comparative Per Share
Data of TeleSpectrum, IDRC and CRW."
On January 14, 1999, TeleSpectrum and IDRC entered into a merger agreement,
which was amended on February 26, 1999 and May 13, 1999, whereby each of the
holders of outstanding shares of IDRC common stock, options and warrants will
be entitled to receive their pro rata portion of an aggregate of 9,200,000
shares and warrants exercisable for 2,500,000 shares of TeleSpectrum common
stock. The total purchase price of IDRC is approximately $74,058,000 plus the
assumption of net tangible liabilities of approximately $52,882,000 resulting
in excess purchase price of approximately $126,940,000. In addition, one half
of the 600,000 outstanding shares of IDRC preferred stock will be converted
into IDRC common stock. Each of the remaining 300,000 shares of IDRC preferred
stock will be redeemed for $20 in cash, and all unpaid dividends on the IDRC
preferred stock will be paid in cash, for an aggregate of $7.1 million. McCown
De Leeuw & Co. III L.P. is required to reinvest all of the proceeds from this
redemption in a note issued by TeleSpectrum in the amount of $4,873,000. The
merger will be accounted for as a purchase by TeleSpectrum pursuant to
Accounting Principles Board Opinion No. 16 "Business Combinations" ("APB No.
16").
The following unaudited pro forma combined statement of operations combines
the historical statement of operations of TeleSpectrum with the historical
statement of operations of IDRC after giving effect to the merger, as if the
merger had occurred on January 1, 1998. The following unaudited pro forma
combined balance sheet combines the historical balance sheet of TeleSpectrum
with the historical balance sheet of CRW and the historical balance sheet of
IDRC as if the mergers had occurred on March 31, 1999. The pro forma loss per
share from continuing operations gives effect to the IDRC and CRW mergers as if
they had occurred on January 1, 1998.
The pro forma combined balance sheet and statements of operations do not
purport to represent what TeleSpectrum's actual financial position or results
of operations would have been had the mergers occurred as of such dates, or to
project TeleSpectrum's financial position or results of operations for any
period or date, nor does it give effect to any matters other than those
described in the notes thereto. The pro forma adjustments are based upon
currently available information and upon certain assumptions that TeleSpectrum,
CRW and IDRC management believe are reasonable. In addition, the allocations of
purchase price to the assets and liabilities of IDRC are preliminary and the
final allocations may differ from the amounts reflected herein. The unaudited
pro forma combined balance sheet and statements of operations should be read in
conjunction with TeleSpectrum's consolidated financial statements and notes
thereto and the historical financial statements of CRW and IDRC, all of which
are either incorporated herein by reference or included elsewhere in this proxy
statement/prospectus.
-19-
Pro Forma
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Unaudited Pro Forma Combined Balance Sheet
March 31, 1999
(In Thousands--Except Share Amounts)
<TABLE>
<CAPTION>
Historical (Note 1)
-------------------------------- Pro Forma Pro Forma
TeleSpectrum CRW IDRC Adjustments Combined
------------ -------- --------- ----------- ---------
(Note 3)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents.......... $ 520 $ 1,656 $ 1,213 $ (1,656) $ 1,733
Accounts receivable,
net.................. 47,949 -- 36,884 -- 84,833
Prepaid expenses and
other................ 2,760 200 2,539 (200) 5,299
--------- -------- --------- -------- ---------
Total current
assets............. 51,229 1,856 40,636 (1,856) 91,865
PROPERTY AND EQUIPMENT,
net.................... 36,255 38 24,780 (38) 61,035
GOODWILL AND OTHER
INTANGIBLES, net....... 26,491 -- 5,693 121,247 153,431
INVESTMENT IN
TELESPECTRUM........... -- 14,811 -- (14,811) --
DEFERRED INCOME TAXES... -- 1,868 300 (2,168) --
OTHER ASSETS............ 4,376 -- 2,041 2,313 8,730
--------- -------- --------- -------- ---------
Total assets........ $ 118,351 $ 18,573 $ 73,450 $104,687 $ 315,061
========= ======== ========= ======== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of
long-term debt....... $ 7,412 $ -- $ 10,039 $ (1,937) $ 15,514
Cash overdraft........ 3,581 -- -- -- 3,581
Accounts payable...... 6,653 -- 4,474 -- 11,127
Accrued expenses...... 5,016 100 8,199 (102) 13,213
Accrued compensation.. 6,184 -- 4,282 -- 10,466
Deferred revenue...... 2,299 -- -- -- 2,299
Other current
liabilities.......... 1,985 -- 60 -- 2,045
--------- -------- --------- -------- ---------
Total current
liabilities........ 33,130 100 27,054 (2,039) 58,245
--------- -------- --------- -------- ---------
LONG-TERM DEBT.......... 2,824 -- 87,346 19,245 109,415
--------- -------- --------- -------- ---------
NOTES PAYABLE TO SELLERS
OF BUSINESS............ -- -- 4,136 (4,136) --
--------- -------- --------- -------- ---------
DEFERRED INCOME TAXES... -- 5,795 756 (6,551) --
--------- -------- --------- -------- ---------
OTHER NONCURRENT
LIABILITIES............ 746 -- -- -- 746
--------- -------- --------- -------- ---------
REDEEMABLE PREFERRED
STOCK.................. -- -- 11,180 (11,180) --
--------- -------- --------- -------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock, $.01
par value, 5,000,000
shares authorized, no
shares issued and
outstanding.......... -- -- -- -- --
Common Stock, $.01 par
value, 200,000,000
shares authorized,
25,842,948
(historical) and
38,428,052 (pro
forma) shares issued,
25,842,948
(historical) and
31,481,469 (pro
forma) shares
outstanding.......... 259 69 1 56 385
Common Stock purchase
warrants............. -- -- 1,295 6,545 7,840
Additional paid-in
capital.............. 240,525 41,278 53,393 17,945 353,141
Accumulated deficit... (158,544) (28,669) (107,130) 135,695 (158,648)
Due from
stockholders......... -- -- (2,494) 2,494 --
Treasury stock,
6,946,583 (pro forma)
shares at cost....... -- -- -- (55,474) (55,474)
Deferred
compensation......... (316) -- -- -- (316)
Cumulative currency
translation
adjustment........... (273) -- (2,087) 2,087 (273)
--------- -------- --------- -------- ---------
Total stockholders'
equity............. 81,651 12,678 (57,022) 109,348 146,655
--------- -------- --------- -------- ---------
Total liabilities
and stockholders'
equity............. $ 118,351 $ 18,573 $ 73,450 $104,687 $ 315,061
========= ======== ========= ======== =========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
-20-
Pro Forma
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Unaudited Pro Forma Combined Statement of Operations
Year Ended December 31, 1998
(In Thousands--Except Per Share Amounts)
<TABLE>
<CAPTION>
Historical (Note 1)
--------------------- Pro Forma Pro Forma
TeleSpectrum IDRC Adjustments Combined
------------ -------- ----------- ---------
(Note 4)
<S> <C> <C> <C> <C>
REVENUES....................... $167,428 $160,078 $ -- $327,506
-------- -------- ------- --------
OPERATING EXPENSES:
Cost of services............. 154,316 96,645 (1,417) i. 249,544
Selling, general and
administrative.............. 17,875 66,892 (789) f. 83,978
Amortization of intangibles.. 1,178 4,884 463 g. 6,525
-------- -------- ------- --------
Total operating expenses... 173,369 168,421 (1,743) 340,047
-------- -------- ------- --------
Operating loss............. (5,941) (8,343) 1,743 (12,541)
INTEREST INCOME................ 71 200 -- 271
INTEREST EXPENSE............... (1,317) (9,854) (675) e. (11,846)
-------- -------- ------- --------
Loss from continuing
operations before
income taxes................ (7,187) (17,997) 1,068 (24,116)
INCOME TAX PROVISION
(BENEFIT)..................... (247) 9,123 247 h. 9,123
-------- -------- ------- --------
LOSS FROM CONTINUING
OPERATIONS.................... $ (6,940) $(27,120) $ 821 $(33,239)
======== ======== ======= ========
BASIC LOSS PER SHARE FROM
CONTINUING OPERATIONS (Note
2)............................ $ (0.27) $ (1.06)
======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING (Note 2).......... 25,528 31,224
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
-21-
Pro Forma
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Unaudited Pro Forma Combined Statement of Operations
Three Months Ended March 31, 1999
(In Thousands--Except Per Share Amounts)
<TABLE>
<CAPTION>
Historical (Note 1) Pro
-------------------- Pro Forma Forma
TeleSpectrum IDRC Adjustments Combined
------------ ------- ----------- --------
(Note 4)
<S> <C> <C> <C> <C>
REVENUES.......................... $47,925 $36,689 $ -- $84,614
OPERATING EXPENSES:
Cost of services................ 38,787 22,277 -- 61,064
Selling, general and
administrative................. 3,929 15,840 (159) f. 19,610
Amortization of intangibles..... 295 900 489 g. 1,684
------- ------- ----- -------
Total operating expenses...... 43,011 39,017 330 82,358
------- ------- ----- -------
Operating income (loss)....... 4,914 (2,328) (330) 2,256
INTEREST INCOME................... 7 38 -- 45
INTEREST EXPENSE.................. (179) (2,494) (136) e. (2,809)
------- ------- ----- -------
Income (loss) from continuing
operations before income
taxes.......................... 4,742 (4,784) (466) (508)
INCOME TAX PROVISION (BENEFIT).... -- 52 -- 52
------- ------- ----- -------
INCOME (LOSS) FROM CONTINUING
OPERATIONS....................... $ 4,742 $(4,836) $(466) $ (560)
======= ======= ===== =======
BASIC INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS (Note 2)... $ 0.18 $ (0.02)
======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING (Note 2)............. 25,820 31,459
======= =======
DILUTED INCOME (LOSS) PER SHARE
FROM CONTINUING OPERATIONS (Note
2)............................... $ 0.17 $ (0.02)
======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING (Note 2)............. 28,540 31,459
======= =======
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
-22-
Pro Forma
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Unaudited Pro Forma Combined Financial Information
1. General
There are currently no material differences in the TeleSpectrum and IDRC
significant accounting policies which impact the determination of operating
loss; therefore, no consideration has been given to conforming the significant
accounting policies in this pro forma presentation. For further information on
the significant accounting policies of TeleSpectrum and IDRC, see the notes to
the consolidated financial statements of TeleSpectrum and IDRC, either
incorporated herein by reference or included elsewhere in this proxy
statement/prospectus. CRW's 1998 loss from continuing operations of $333,000
and its income from continuing operations of $700,000, for the three months
ended March 31, 1999, is not reflected in the pro forma statements of
operations because CRW has no continuing business operations and the CRW merger
is being accounted for as a treasury stock transaction. For the year ended
December 31, 1998, IDRC provided a full valuation allowance against its net
deferred tax asset as a result of its 1998 operating loss and the uncertainty
of realizing its deferred tax asset.
2. Income (Loss) From Continuing Operations Per Common Share
TeleSpectrum has presented its income (loss) from continuing operations per
common share and the pro forma combined income (loss) from continuing
operations per common share for the year ended December 31, 1998 and the three
months ended March 31, 1999 pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 128 "Earnings Per Share."
Basic loss per common share was computed by dividing the income (loss) from
continuing operations by the weighted average number of shares of common stock
outstanding during 1998 and during the three months ended March 31, 1999. The
presentation of TeleSpectrum's diluted income per common share for the three
months ended March 31, 1999 includes the effect from the potential exercise or
conversion of securities, such as stock options, which would result in the
issuance of shares of common stock. Diluted loss per common share has not been
presented for the year ended December 31, 1998 and for the pro forma
presentation of loss per common share for the three months ended March 31,
1999, since the impact is anti-dilutive.
The weighted average number of shares of common stock outstanding for
purposes of calculating the pro forma combined income (loss) per share from
continuing operations, is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1998 March 31, 1999
------------------- ---------------------
Basic Diluted Basic Diluted
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
TeleSpectrum historical weighted
average shares outstanding......... 25,528 25,528 25,820 25,820
Issuance of TeleSpectrum common
stock in the CRW merger............ 4,905 4,905 4,905 4,905
Treasury stock from the CRW merger.. (6,947) (6,947) (6,947) (6,947)
Issuance of TeleSpectrum common
stock in the IDRC merger........... 7,738 7,738 7,681 7,681
-------- -------- --------- ---------
Pro forma combined weighted average
shares outstanding................. 31,224 31,224 31,459 31,459
======== =========
Dilutive shares issuable in
connection with common stock
equivalents........................ 4,228 6,146
-------- ---------
Pro forma combined weighted average
shares outstanding................. 35,452 37,605
======== =========
</TABLE>
The treasury stock method is used to calculate the dilutive shares issuable
in connection with common stock equivalents and reduces the gross number of
dilutive shares by the number of shares purchasable from the proceeds of the
options and warrants assumed to be exercised.
-23-
Pro Forma
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Unaudited Pro Forma Combined Financial Information--(Continued)
3. Adjustments to the Pro Forma Combined Balance Sheet
The following table summarizes the pro forma adjustments to the balance sheet
as of March 31, 1999:
<TABLE>
<CAPTION>
Debit (Credit)
-------------------------------------------------------------
Unaudited Pro Forma Combined Balance Sheet Adjustments
-------------------------------------------------------------
(in thousands)
(a) (b) (c) (d) Total
--------------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ (1,656) $ (1,656)
Prepaid expenses and
other.................. (200) (200)
Property and equipment.. (38) (38)
Goodwill................ 121,247 121,247
Investment in
TeleSpectrum........... (14,811) (14,811)
Deferred income taxes... (1,868) (300) (2,168)
Other assets............ 4,116 (1,803) 2,313
Current maturities of
long-term debt......... 1,937 1,937
Accrued expenses........ 100 (100) 1,852 (1,750) 102
Long-term debt.......... (12,145) (7,100) (19,245)
Notes payable to sellers
of businesses.......... 4,136 4,136
Deferred income taxes... 5,795 756 6,551
Redeemable preferred
stock.................. 11,180 11,180
Common stock............ 20 (76) (56)
Common stock purchase
warrants............... (6,545) (6,545)
Additional paid-in
capital................ (14,047) (3,898) (17,945)
Accumulated deficit..... 1,794 (30,463) 104 (107,130) (135,695)
Due from stockholders... (2,494) (2,494)
Treasury stock.......... 55,474 55,474
Currency translation
adjustment............. (2,087) (2,087)
--------- ---------- ---------- ----------- -----------
$ -- $ -- $ -- $ -- $ --
========= ========== ========== =========== ===========
</TABLE>
- --------
a. To reflect the payment of CRW's liabilities of $100,000 and the cash payment
of a Special Distribution of approximately $1,556,000 to the CRW
stockholders and to the holders of CRW's warrants.
b. To reflect: (i) the issuance of 4,904,522 shares of TeleSpectrum common
stock at $8.56 per share in exchange for 6,917,521 shares of CRW common
stock at the exchange ratio of .709; (ii) the issuance of 1,089,333 options
and 678,410 warrants to purchase shares of TeleSpectrum common stock, with
an average exercise price of $2.75, in exchange for 2,214,846 options and
warrants to purchase CRW common stock at the exchange ratio of .709; (iii)
transaction costs of approximately $100,000 consisting primarily of
professional fees; and (iv) the elimination of CRW's investment in
TeleSpectrum, net deferred tax liability and equity accounts.
-24-
Pro Forma
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Unaudited Pro Forma Combined Financial Information--(Continued)
Summary of the pro forma entries impacting treasury stock and additional
paid-in capital:
<TABLE>
<CAPTION>
<S> <C>
Issuance of 4,904,522 shares of TeleSpectrum common stock at
$8.5625 per share.......................................... $ 41,997,000
Issuance of 678,410 warrants to purchase TeleSpectrum common
stock, valued at $7.858 per share.......................... 5,331,000
Issuance of options to purchase 1,089,333 shares of
TeleSpectrum common stock, valued between $5.667 and $7.907
per share.................................................. 8,046,000
Estimated transaction costs................................. 100,000
------------
Pro forma cost of acquiring 6,946,583 shares of
TeleSpectrum common stock................................ 55,474,000
Par value of 4,904,522 shares of TeleSpectrum common stock
issued to CRW stockholders................................. (49,000)
Accrued expenses............................................ (100,000)
Elimination of CRW additional paid-in capital............... (41,278,000)
------------
Pro forma increase in additional paid-in capital........ $ 14,047,000
============
</TABLE>
c. To reflect the write-off of $104,000 of existing TeleSpectrum debt issuance
costs and borrowings of $106,208,000 under the $135,000,000 Senior Facility
to replace TeleSpectrum's line of credit and to repay $101,988,000 of IDRC
debt and pay debt issuance costs of $4,220,000, as follows:
<TABLE>
<CAPTION>
<S> <C>
Repayment of IDRC current maturities of long-term debt.... $ 9,500,000
Repayment of IDRC long-term debt.......................... 86,500,000
Repayment of IDRC note payable to sellers................. 4,136,000
Payment of IDRC accrued interest on long-term debt and
note
payable to sellers....................................... 1,852,000
Payment of debt issuance costs on $135,000,000 Senior
Facility................................................. 4,220,000
------------
106,208,000
Current maturities of $135,000,000 Senior Facility........ (7,563,000)
------------
Long-term debt............................................ 98,645,000
Elimination of IDRC long-term debt........................ (86,500,000)
------------
Pro forma increase in long-term debt.................. $ 12,145,000
============
</TABLE>
-25-
Pro Forma
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Unaudited Pro Forma Combined Financial Information--(Continued)
d. To reflect the merger of IDRC with and into TeleSpectrum as a purchase in
accordance with APB No. 16. Based on a preliminary allocation of the
purchase price, the application of the purchase method results in
approximately $126,940,000 in excess purchase price over the estimated fair
value of the net tangible liabilities acquired of $52,882,000. A preliminary
analysis completed by TeleSpectrum, resulted in the excess purchase price
being assigned to intangible assets which consist of $1,002,000 for
assembled workforce, $14,079,000 for customer relationships and $111,859,000
for goodwill. Intangible assets are amortized on a straight-line basis over
their estimated useful lives of 7 years for assembled workforce, 15 years
for customer relationships and 25 years for goodwill. A preliminary analysis
of the fair value of property and equipment did not result in an adjustment
to the net book value of property and equipment. The final allocation of the
purchase price is subject to change.
<TABLE>
<S> <C>
Issuance of 7,680,583 shares of TeleSpectrum common stock,
valued at $7.119 per share, with 6,095,028 shares
discounted 10% due to lock up and escrow restrictions of
twelve and fifteen months................................ $ 50,337,000
Issuance of options to purchase 1,519,418 shares of
TeleSpectrum common stock, valued at between $2.300 and
$5.320 per option, with an average value of $5.141 (all
options are discounted 10% due to lock up and escrow
restrictions of twelve and fifteen months)............... 7,031,000
Issuance of warrants to purchase 2,087,115 shares of
TeleSpectrum common stock valued at $3.136 per warrant... 6,545,000
Issuance of warrants to purchase 412,885 shares of
TeleSpectrum common stock, valued at $3.136 per warrant,
to IDRC option holders................................... 1,295,000
Issuance of a Term Note to McCowen DeLeeuw & Co. ......... 4,873,000
Cash payment to certain IDRC Preferred stockholders....... 2,227,000
Transaction costs......................................... 1,750,000
------------
Total purchase price...................................... 74,058,000
Net tangible liabilities acquired......................... 52,882,000
------------
Excess purchase price..................................... 126,940,000
Elimination of IDRC goodwill.............................. (5,693,000)
------------
Pro forma increase in intangible assets................... $121,247,000
============
</TABLE>
Summary of IDRC net tangible liabilities acquired:
<TABLE>
<S> <C>
IDRC stockholders' deficit................................. $ 57,022,000
Plus:
Goodwill................................................. 5,693,000
Deferred income taxes.................................... 300,000
Other assets............................................. 1,803,000
Less:
Deferred income taxes.................................... (756,000)
Redeemable preferred stock............................... (11,180,000)
------------
Net tangible liabilities acquired...................... $ 52,882,000
============
</TABLE>
-26-
Pro Forma
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Unaudited Pro Forma Combined Financial Information--(Continued)
Summary of pro forma entries impacting stockholders' equity:
<TABLE>
<CAPTION>
<S> <C>
Common Stock
Issuance of 7,680,583 shares at $0.01 par value.......... $ 77,000
Elimination of IDRC common stock......................... (1,000)
------------
Pro forma increase in common stock..................... $ 76,000
============
Common Stock Purchase Warrants
Issuance of warrants to purchase 2,500,000 shares of
TeleSpectrum common stock valued at $3.136 per warrant.. $ 7,840,000
Elimination of IDRC common stock purchase warrants....... (1,295,000)
------------
Pro forma increase in common stock purchase warrants... $ 6,545,000
============
Additional Paid-In Capital
Issuance of 7,680,583 shares of TeleSpectrum common
stock................................................... $ 50,337,000
Less: Par value of 7,680,583 shares at $0.01 per share... (77,000)
Issuance of options to purchase 1,519,418 shares of
TeleSpectrum common stock............................... 7,031,000
Elimination of IDRC additional paid-in capital........... (53,393,000)
------------
Pro forma increase in additional paid-in capital....... $ 3,898,000
============
</TABLE>
4. Adjustments to the Pro Forma Combined Statement of Operations
e. To reflect interest expense from borrowings under the new $135,000,000
Senior Facility and the net increase in amortization expense from $4,220,000
of new debt issuance costs. TeleSpectrum received a commitment from a lender
to provide senior secured debt facilities aggregating up to $135,000,000,
which consists of three Term Facilities totaling $86,000,000 and a
$49,000,000 Revolving Credit Facility. The facilities have varying maturity
dates and bear interest at varying rates, as defined, which range between
8.25% and 9.25%, depending upon the maturity dates of the underlying
facility.
Summary of the pro forma interest expense adjustment:
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended
1998 March 31, 1999
------------ --------------
<S> <C> <C>
Interest expense on borrowings under the
$135,000,000 Senior Facility.................... $ 9,326,000 $ 2,265,000
Amortization of debt issuance costs on Senior
Facility........................................ 1,293,000 325,000
Elimination of historical interest expense on
IDRC long-term debt
and seller notes................................ (9,110,000) (2,305,000)
Elimination of historical interest expense on
TeleSpectrum line of credit..................... (663,000) (90,000)
Elimination of historical amortization of debt
issuance costs for TeleSpectrum and IDRC........ (658,000) (181,000)
Interest expense on McCown De Leeuw term note.... 487,000 122,000
----------- -----------
Pro forma increase in interest expense......... $ 675,000 $ 136,000
=========== ===========
</TABLE>
-27-
Pro Forma
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Unaudited Pro Forma Combined Financial Information--(Continued)
An increase of 1/8% in the actual interest rate on the Senior Facility
would increase the pro forma interest expense adjustment to $805,000 and
$168,000 for the year ended December 31, 1998 and for the three months
ended March 31, 1999, respectively. A decrease of 1/8% in the actual
interest rate on the Senior Facility would decrease the pro forma interest
expense adjustment to $545,000 and $104,000 for the year ended December 31,
1998 and for the three months ended March 31, 1999, respectively.
f. To reflect a reduction in officer compensation expense based upon an
employment agreement entered into upon closing of the IDRC merger and to
reflect the elimination of consulting expense from the termination of an
Advisory Services Agreement between IDRC and its advisor pursuant to a
condition of the merger.
g. To reflect the amortization expense for the intangible assets and goodwill
recorded in connection with the acquisition of IDRC, net of goodwill
amortization recorded in the IDRC historical statement of operations. The
intangible assets and goodwill with a value of $126,940,000 are being
amortized on a straight-line basis over estimated useful lives of 7 to 25
years.
h. To reflect the elimination of the TeleSpectrum $247,000 income tax benefit
for the year ended December 31, 1998, which was recorded to offset the
income tax provision for TeleSpectrum discontinued operations.
i. To reflect the elimination of fixed operating costs of three IDRC call
centers for the year ended December 31, 1998, which will be closed as a
condition of the merger. Fixed operating costs primarily include rent,
utilities and call center management salaries and benefits.
-28-
Pro Forma
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Unaudited Pro Forma Combined Financial Information--(Continued)
5. Other Data
The following EBITDA and cash flow data is presented because TeleSpectrum
believes that it provides useful information regarding the Company's ability to
incur and/or service debt. EBITDA represents the sum of loss from continuing
operations, income taxes, interest income and expense, depreciation and
amortization. EBITDA should not be considered in isolation or as a substitute
for loss from continuing operations, cash flows or other data prepared in
accordance with generally accepted accounting principles or as a measure of
profitability or liquidity.
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------
Pro Forma Pro Forma
TeleSpectrum IDRC Adjustments Combined
------------ --------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations................... $ (6,940) $ (27,120) $ 821 $ (33,239)
-------- --------- ------- ---------
Adjustments to income (loss)
from continuing operations:
Interest income (expense),
net........................ 1,246 9,654 675 11,575
Income tax benefit
(expense).................. (247) 9,123 247 9,123
Depreciation expense........ 8,532 8,382 -- 16,914
Amortization expense........ 1,178 4,884 463 6,525
-------- --------- ------- ---------
10,709 32,043 1,385 44,137
-------- --------- ------- ---------
EBITDA........................ $ 3,769 $ 4,923 $ 2,206 $ 10,898
======== ========= ======= =========
CASH FLOW DATA:
Net cash used in operating
activities................... $ (1,503) $ (18,619) $ 2,206 $ (17,916)
Net cash provided by (used in)
investing activities......... 28,129 (5,799) -- 22,330
Net cash provided by (used in)
financing activities......... (26,606) 19,896 -- (6,710)
</TABLE>
-29-
Pro Forma
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Unaudited Pro Forma Combined Financial Information--(Continued)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
-------------------------------------------
Pro Forma Pro Forma
TeleSpectrum IDRC Adjustments Combined
------------ ------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations....................... $ 4,742 $(4,836) $(466) $ (560)
------- ------- ----- -------
Adjustments to income (loss) from
continuing operations:
Interest income (expense), net.. 172 2,456 136 2,764
Income tax benefit (expense).... -- 52 -- 52
Depreciation expense............ 2,238 1,983 -- 4,221
Amortization expense............ 295 900 489 1,684
------- ------- ----- -------
2,705 5,391 625 8,721
------- ------- ----- -------
EBITDA............................ $ 7,447 $ 555 $ 159 $ 8,161
======= ======= ===== =======
CASH FLOW DATA:
Net cash used in operating
activities....................... $(1,705) $ (875) $ 159 $(2,421)
Net cash provided by (used in)
investing activities............. (7,382) (1,459) -- (8,841)
Net cash provided by financing
activities....................... 8,813 2,195 -- 11,008
</TABLE>
-30-
Pro Forma
<PAGE>
Comparative Per Share Market Price Information
The following table sets forth selected per share data on a historical and
pro forma combined basis. The pro forma financial data assume that the mergers
were completed on January 1, 1998. Book value data for all pro forma
presentations are based upon the number of outstanding shares of TeleSpectrum
common stock adjusted to include the shares of TeleSpectrum common stock that
will be issued in the mergers. The information set forth below should be read
in conjunction with the selected historical consolidated financial data of
TeleSpectrum, IDRC and CRW.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
TeleSpectrum Historical:
Basic income (loss) per share from
continuing operations................ $ 0.18 $ (0.27)
======== ========
Book value (deficit) per share........ $ 3.16 $ 2.97
======== ========
IDRC Historical:
Basic loss per share from continuing
operations........................... $ (9.63) $ (54.03)
======== ========
Book value (deficit) per share........ $(113.60) $(104.04)
======== ========
CRW Historical:
Basic income (loss) per share from
continuing operations................ $ 0.10 $ (0.05)
======== ========
Book value per share.................. $ 1.83 $ 1.74
======== ========
TeleSpectrum Pro Forma Combined:
Basic loss per share from continuing
operations........................... $ (0.02) $ (1.06)
======== ========
Book value per share.................. $ 4.66 $ 5.09
======== ========
IDRC Pro Forma Equivalent:
Basic loss per share from continuing
operations........................... $ (0.14) $ (7.31)
======== ========
Book value per share.................. $ 32.13 $ 35.09
======== ========
CRW Pro Forma Equivalent:
Basic loss per share from continuing
operations........................... $ (0.01) $ (0.75)
======== ========
Book value per share.................. $ 3.30 $ 3.61
======== ========
</TABLE>
Book value per share is computed by dividing stockholders' equity or deficit
by the number of shares of common stock outstanding.
TeleSpectrum, IDRC and CRW have never paid any cash dividends on their common
stock. IDRC has not paid any dividends on its common stock since converting to
a C corporation effective January 1, 1996. Immediately prior to the completion
of the CRW merger, CRW intends to make a special cash distribution to its
stockholders and to the holders of its outstanding warrants. This special cash
distribution is expected to be in an aggregate amount equal to CRW's cash on
hand after reserving an amount to pay all of its remaining liabilities.
Pro forma basic income (loss) per share assumes the shares of TeleSpectrum
common stock issued in the IDRC and CRW mergers, and the TeleSpectrum common
stock obtained by TeleSpectrum in the CRW merger were issued and repurchased on
January 1, 1998. In making these calculations, common stock equivalents have
been disregarded as they would be anti-dilutive.
-31-
Pro Forma
<PAGE>
The following is a reconciliation of the numerator and denominator used in
calculating basic loss per share:
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
March 31, 1999 December 31, 1998
-------------- ---------------------
(in thousands, except
per share data)
<S> <C> <C>
Basic loss from continuing operations
(numerator)............................. $ (560) $(33,239)
====== ========
Pro forma weighted average number of
shares outstanding (denominator):
Weighted average number of shares
outstanding........................... 25,820 25,528
Issuance of TeleSpectrum common stock
in the IDRC merger.................... 7,681 7,738
Issuance of TeleSpectrum common stock
in the CRW merger..................... 4,905 4,905
Treasury stock as a result of the CRW
merger................................ (6,947) (6,947)
------ --------
31,459 31,224
====== ========
Pro forma basic loss per share from
continuing operations................... $(0.02) $ (1.06)
====== ========
</TABLE>
The table on this page shows pro forma loss per share information for
TeleSpectrum based upon assumptions regarding the number of shares of
TeleSpectrum common stock that will be outstanding upon the completion of the
merger. The table assumes that there will be 6.893 shares of TeleSpectrum
common stock issued in exchange for each outstanding share of IDRC common
stock. The table also assumes that there will be .709 of a share of
TeleSpectrum common stock issued in exchange for each outstanding share of CRW
common stock. In addition, the table assumes that CRW will own all of the
6,946,583 shares of TeleSpectrum common stock that it owns of record on the
date of this joint proxy statement/prospectus.
-32-
Pro Forma
<PAGE>
Risk Factors
You should carefully consider the following factors and other information in
this joint proxy statement/prospectus before deciding how to vote your shares.
Keep these risk factors in mind when you read "forward-looking" statements
elsewhere in this joint proxy statement/prospectus. These are statements that
relate to future events and time periods or our expectations. Generally, the
words "anticipates," "believes,""expects," "intends" and similar expressions
identify forward-looking statements. Forward-looking statements involve risks
and uncertainties, and future events and circumstances could differ
significantly from those anticipated in the forward-looking statements.
Risks Relating to the IDRC Merger
Integration of Operations--We may be unable to integrate our operations in a
prompt and effective manner.
The integration of TeleSpectrum and IDRC will present significant challenges.
TeleSpectrum intends to integrate all significant business functions of the two
companies, including:
. administration;
. operations;
. finance;
. sales and marketing; and
. information technology.
These integration activities will result in changes affecting most employees
of the two companies. TeleSpectrum must integrate the two companies in a prompt
and effective manner with minimal customer service interruption. If
TeleSpectrum is unable to successfully integrate the companies in this manner,
it will be materially adversely affected.
Increased Debt--We may be unable to meet our greater debt service requirements.
TeleSpectrum will assume approximately $104 million of senior debt as a
result of the IDRC merger under its new $135 million senior debt facility,
assuming the IDRC merger closed on December 31, 1998. As a result, TeleSpectrum
will have a significantly greater ratio of debt to equity and much higher debt
service requirements. On a pro forma basis, at March 31, 1999, TeleSpectrum's
total debt was approximately $125 million and the ratio of its total debt to
equity would increase from .13 to 1.00 to .88 to 1.00. TeleSpectrum will be
required to make minimum principal payments of $5.7 million in 1999, $7.7
million in 2000, $9.7 million in 2001, $24.7 million in 2002 and up to $38.4
million in 2003. TeleSpectrum's credit agreement with its lenders will also
impose numerous financial covenants that TeleSpectrum will need to meet in
order to avoid a default under this agreement. These covenants include:
. maintaining a minimum level of earnings as it relates to interest and
other charges;
. maintaining minimum EBITDA levels;
. not exceeding a ratio of debt to total assets;
. limiting capital expenditures; and
. limiting dividends.
If TeleSpectrum is unable to service its debt or meet its other contractual
obligations, its lenders may take certain actions that could limit
TeleSpectrum's operations and require immediate repayment. TeleSpectrum's
internally generated cash flow or available other financing might not be
sufficient to sustain operations if this were to occur. If this occurs,
TeleSpectrum will be materially adversely affected.
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Risk Factors
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Limitations on Other Business Objectives--Our increased debt may restrict our
ability to obtain financing or pursue other business objectives.
TeleSpectrum's increased debt may also restrict or impede its ability to
obtain other financing and pursue other business objectives. This will be
magnified if TeleSpectrum's general credit rating deteriorates. TeleSpectrum
may find it more difficult to:
. obtain additional financing in addition to its $135 million credit
facility;
. make acquisitions;
. enter into strategic relationships;
. make capital expenditures;
. respond to business opportunities;
. address competitive pressures or adverse industry developments; and
. withstand economic downturns.
TeleSpectrum will be materially adversely affected if it is unable to obtain
financing and pursue its business objectives.
New Business Strategy--We may not be able to develop or implement a successful
new business strategy.
TeleSpectrum must develop and implement a new business strategy that builds
on the combined strengths of the companies. If TeleSpectrum is unable to
successfully develop and implement a new business strategy, it will be
materially adversely affected.
New Senior Management--Our new senior management team may be ineffective.
The composition of the senior management team of TeleSpectrum will change
significantly as a result of the IDRC merger. While Keith E. Alessi will
continue as the Chief Executive Officer and President, the other members of the
senior management team will consist of four members of the IDRC management
team. TeleSpectrum's future success will be substantially dependent on the
ability of its management team to manage the combined company and implement its
business strategies. If the management team is unable to manage the combined
company on an effective basis or implement its business strategies,
TeleSpectrum will be materially adversely affected.
Fixed Merger Consideration--The value of the merger consideration will
fluctuate with the TeleSpectrum stock price.
The holders of IDRC common stock and options will be entitled to receive a
fixed aggregate amount of 9,200,000 shares of TeleSpectrum common stock and
warrants exercisable for 2,500,000 shares of TeleSpectrum common stock. Market
prices for the TeleSpectrum common stock have fluctuated since the IDRC merger
agreement was executed on January 14, 1999. We expect further fluctuation
through the closing of the IDRC merger. The market price of the TeleSpectrum
stock may be affected by many factors, including:
. developments related to TeleSpectrum and IDRC;
. perception of the proposed mergers; and
. general economic conditions and factors relating to the equity markets in
general.
The IDRC merger agreement does not provide for any adjustment to the number
of shares and warrants issuable in the IDRC merger on account of any increase
or decrease in the market prices of the TeleSpectrum common stock. As a result,
the actual value of the TeleSpectrum securities to be received by the IDRC
security holders and the actual cost of the IDRC merger to TeleSpectrum will
fluctuate between the date of this joint proxy statement/prospectus and the
completion of the IDRC merger. For example, the TeleSpectrum common stock had a
closing price of $9.875 on the day the IDRC merger was announced to the public
and a closing
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price of $6.750 on June 2, 1999. Based solely on these prices, the 9,200,000
shares of TeleSpectrum common stock and 2,500,000 shares of TeleSpectrum common
stock underlying TLSP warrants that are issuable to IDRC stockholders and
option holders had an aggregate market value of $115,538,000 and $78,975,000,
respectively at such dates. These examples are only included to show that
changes in the market value of the TeleSpectrum common stock affect the value
of the shares issuable by TeleSpectrum to acquire IDRC and the value that these
shares may have for the IDRC common stockholders. Because the TeleSpectrum
securities to be received by the IDRC security holders will be subject to
transfer restrictions, a portion of these securities will be subject to escrow,
and the exercise price must be paid before exercising a TLSP warrant, the
actual price paid and value received will be less than the amounts set forth in
these examples. Stockholders should obtain current market quotations for the
TeleSpectrum common stock before voting their shares.
Unknown Liabilities--We may be materially adversely affected by any unknown or
hidden liabilities of IDRC.
Because IDRC is being acquired by TeleSpectrum in a merger, TeleSpectrum will
become liable for all IDRC liabilities. This is true whether the liabilities
were known or unknown at the time of the IDRC merger. TeleSpectrum conducted a
due diligence review of IDRC prior to signing the IDRC merger agreement to
investigate matters relating to the IDRC business, including its liabilities.
TeleSpectrum would have the right to terminate the IDRC merger agreement prior
to completing the IDRC merger if it discovers an undisclosed liability that
would materially and adversely affect TeleSpectrum. After the IDRC merger is
completed, TeleSpectrum will have rights under an indemnity escrow agreement if
it discovers any undisclosed IDRC liability that would give rise to a claim
under the IDRC merger agreement. This indemnity escrow agreement will only
continue for unknown liabilities that are discovered within 15 months after the
IDRC merger is completed and may not be sufficient to offset all of the damages
incurred by TeleSpectrum as a result of any unknown liabilities. TeleSpectrum
may be materially adversely affected if any unknown material liabilities arise
after the IDRC merger is completed.
Benefits to Insiders--Executive officers and a director of IDRC who are asking
stockholders to approve the IDRC merger have potential conflicts of interest
because they will receive additional benefits in the IDRC merger.
As discussed below under "Interests of IDRC Management," a number of
executive officers and a director of IDRC have interests in the IDRC merger
that are different from, or in addition to, your interests as stockholders. In
particular, Mr. Stiefler's existing employment agreement with IDRC will be
terminated and he will receive a new agreement that will entitle him to receive
an annual salary and stock options. The existing agreements that Messrs.
Grinberg, Weil and Parkes and Ms. Ward have with IDRC that entitle them to
receive a salary, severance upon termination and other fringe benefits, will be
assumed by TeleSpectrum. All of these persons will be entitled to elect to have
their outstanding stock options assumed by TeleSpectrum and each of these
options will become fully vested as a result of the IDRC merger. IDRC
stockholders should be aware of these potential conflicts of interest and the
benefits available to such executive officers and director when considering the
IDRC board's recommendation to approve the IDRC merger agreement.
Financial Advisor Opinions--We have not requested or obtained updated fairness
opinions from our financial advisors. The opinion of TeleSpectrum's financial
advisor is dated January 11, 1999 and the opinion of IDRC's financial advisor
is dated January 14, 1999. These opinions may be affected by events that have
occurred since the date that they were issued if redetermined as of the date of
this joint proxy statement/prospectus.
The fairness opinions that we have received from our respective financial
advisors only relate to fairness from a financial point of view on the date
that they were issued. The opinion of TeleSpectrum's financial advisor is dated
January 11, 1999 and the opinion of IDRC's financial advisor is dated January
14, 1999. We have not requested or obtained updated fairness opinions from our
financial advisors. These opinions may be affected by events that have occurred
since the date that they were issued if redetermined as of the date of this
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joint proxy statement/prospectus. We cannot predict whether these opinions
would be different if redetermined as of the date of this joint proxy
statement/prospectus. As a result, you should not rely on these opinions in
determining how to vote your shares at your shareholder meeting.
Risks Relating to the CRW Merger
Unknown Liabilities--We may be materially adversely affected by any unknown or
hidden liabilities of CRW.
TeleSpectrum is not required to complete the CRW merger until all known CRW
liabilities have been paid or eliminated. CRW is being acquired by TeleSpectrum
in a merger, and will become a subsidiary of TeleSpectrum as a result of the
merger. CRW, as a subsidiary of TeleSpectrum, will remain liable for its
liabilities after the merger. TeleSpectrum may also become liable for
liabilities of CRW depending on the facts and circumstances surrounding a
liability. TeleSpectrum conducted a due diligence review of CRW prior to
signing the CRW merger agreement to investigate matters relating to the CRW
business, including its liabilities. TeleSpectrum may be materially adversely
affected if any unknown material liabilities arise after the CRW merger is
completed.
Benefits to Insiders--Executive officers and directors of CRW who are asking
stockholders to approve the CRW merger have potential conflicts of interest
because they will receive additional benefits in the CRW merger.
As discussed below under "Interests of CRW Management," all of CRW's officers
and directors own shares of CRW common stock and options to purchase shares of
CRW common stock. The CRW stock options will be assumed by TeleSpectrum as a
result of the CRW merger. In addition, Mr. O'Neill, the Chairman and Chief
Executive Officer of CRW, and Mr. Robinson, the Chief Financial Officer of CRW,
each own shares of TeleSpectrum common stock. The interests of the CRW
management is different or in addition to the interests of other CRW
stockholders that do not also have CRW stock options or own shares of
TeleSpectrum common stock.
Risks Relating to TeleSpectrum
Operating Losses--We have been unprofitable in 1997 and 1998.
While TeleSpectrum has been profitable since the third quarter of 1998, it
had a net loss of $6.9 million for the year ended December 31, 1998 and a net
loss of $12.7 million for the six months ended June 30, 1998. TeleSpectrum must
maintain a sufficient level of capacity utilization at acceptable rates to
continue its profitable trend. During the past two years, TeleSpectrum has
periodically not achieved consistent levels of profitability, particularly in
its telemarketing segment. Revenues from the telemarketing segment represented
73% of TeleSpectrum's total revenues for the three months ended March 31, 1999
and for the year ended December 31, 1998.
Telemarketing agreements generally do not assure specific levels of revenue
and are often terminable by clients on short notice. The amount of revenue
TeleSpectrum generates from a particular client is dependent upon a number of
factors, including, TeleSpectrum's ability to achieve marketing and sales
results required by the client and the results we achieve as compared to both
the clients' in-house operations and other telemarketing providers. In addition
to these factors, many client agreements are based on actual sales achieved.
Accordingly, TeleSpectrum's ability to achieve its desired results of
operations is dependent upon TeleSpectrum's representatives being able to
effectively and efficiently market the clients' products and the quality of the
lists of prospective customers provided by TeleSpectrum's clients.
TeleSpectrum's telemarketing segment is also affected by seasonal trends that
mirror its client's marketing plans. These trends include reduced activities
during the months of August and December. If TeleSpectrum is unable to maintain
a sufficient level of capacity utilization at acceptable rates, it will be
materially and adversely affected.
Reliance on Major Clients--Our profitability is sometimes dependent on one or
more significant clients.
Approximately 16% of TeleSpectrum revenues for the three months ended March
31, 1999 were generated from one client in the telecommunications industry.
Approximately 10% of TeleSpectrum's revenues in 1998
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Risk Factors
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were generated from one client in the telecommunications industry. In 1997,
approximately 19% of TeleSpectrum's revenues were generated from MBNA, Inc., a
financial services industry company. The significant reduction in the amount of
business provided by MBNA was a significant factor in TeleSpectrum's lower
capacity utilization and operating performance during the last two fiscal
quarters in 1997. TeleSpectrum 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,
TeleSpectrum may be materially adversely affected by any unexpected termination
or non-renewal of such a relationship.
Capacity Utilization--Our profitability will be adversely affected if we do not
maintain sufficient capacity utilization.
TeleSpectrum's profitability is substantially dependent upon its ability to
use its call center capacity at efficient levels. A call center is a facility
that is equipped with workstations from which TeleSpectrum's employees perform
services on behalf of its customers. As of December 31, 1998, TeleSpectrum and
IDRC operated or managed a total of 35 call centers that had between 20 and 516
workstations. Capacity utilization is a term that identifies how much of a call
center's workstations are being used to perform services. Low capacity
utilization at a call center reduces profitability. This occurs because costs
are being incurred for employees and other overhead costs at a time when
revenue is not being produced by these employees and workstations. TeleSpectrum
has in the past experienced periods of low capacity utilization and has
sometimes accepted less profitable client engagements to fill this capacity.
TeleSpectrum has also experienced, and may experience in the future, at least
short-term, excess capacity when it opens a new call center or terminates or
completes a large client program. If TeleSpectrum does not maintain sufficient
levels of capacity utilization at acceptable rates, it will be materially
adversely affected.
Future Growth--We may not be able to grow our business.
TeleSpectrum has experienced growth over the past several years, although
this growth did not continue in 1998. TeleSpectrum may not be able to achieve
future growth if it does not:
. initiate, develop and maintain new client relationships and expand its
existing client programs;
. recruit, motivate and retain qualified management and hourly personnel;
. identify, acquire and open call center facilities on an efficient basis;
and
. maintain high quality of the services and products to clients.
Reliance on Technology--We will be adversely affected if we do not obtain and
implement new or enhanced technology.
TeleSpectrum has made significant investments in technology and anticipates
that it will need to continue making significant additional technology
investments to remain competitive. TeleSpectrum relies on technology for most
aspects of its business. This includes operating its call centers, placing and
receiving telephone calls and electronically providing and sharing data with
clients and vendors. TeleSpectrum may not be successful in anticipating
continuing technological changes or in implementing new or enhanced technology.
If TeleSpectrum is unable to do so, it will become more difficult to compete
and maintain favorable client and vendor relationships. If this were to occur,
TeleSpectrum will be materially adversely affected.
Dependence on our Labor Force--Our profitability will be adversely affected if
we do not avoid high personnel turnover.
TeleSpectrum's industry is very labor intensive and has experienced high
personnel turnover. Many of TeleSpectrum's employees receive modest hourly
wages. A higher turnover rate among TeleSpectrum's employees would increase its
recruiting and training costs and decrease its productivity. TeleSpectrum's
insurance product sales and technology-based inbound customer service require
specifically trained employees. TeleSpectrum may not be able to continue to
hire, train and retain a sufficient labor force of qualified employees.
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<PAGE>
Additional Financing--We may not be able to obtain additional financing if our
cash resources are not sufficient.
If the merger with IDRC is completed, TeleSpectrum will have significant
outstanding borrowings under its new $135 million senior debt facility. On a
pro forma basis, at December 31, 1998, TeleSpectrum's total debt was
approximately $115 million. TeleSpectrum's existing cash and available
borrowings after the completion of the mergers, may not be sufficient to meet
TeleSpectrum's financing needs or satisfy its debt obligations. If these
sources are not sufficient, TeleSpectrum will be required to seek additional
debt or equity financing and this financing may not be available on acceptable
terms. If TeleSpectrum is unable to obtain needed financing, it will be
materially adversely affected.
Dependence on Telecommunications Providers--We rely heavily on
telecommunications companies and our business will be adversely affected if our
telecommunications costs increase or our service is interrupted.
TeleSpectrum's business is heavily dependent on service provided by various
local and long distance telephone companies. Telecommunications costs are
TeleSpectrum's most significant expense. As a result, TeleSpectrum would be
materially adversely affected by a significant increase in the cost of
telephone services that is not recoverable through an increase in the price of
its services, or any significant interruption in telephone services.
We May Be Affected by Year 2000 Problems
TeleSpectrum
The Year 2000 issue results from the writing of computer programs using two
digits rather than four to define the applicable year. Because of this
programming convention, computer software, hardware or firmware may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failures, miscalculations or errors causing disruptions of operations
or other business problems, including, among others, a temporary inability to
process transactions or engage in other normal business activities.
State of Readiness. TeleSpectrum has undertaken a comprehensive program,
including the hiring of an outside consulting firm, to address the Year 2000
issue with respect to the following:
. TeleSpectrum's information technology and operating systems, which
include call processing, network, server, security and application
systems;
. TeleSpectrum's non-information technology systems that may contain
embedded microchip technology, which include buildings, plant, equipment
and other infrastructure systems; and
. the systems of TeleSpectrum's major clients, vendors and
telecommunication service providers insofar as they relate to
TeleSpectrum's business.
TeleSpectrum's core business systems are in the process of receiving Year
2000 compliant upgrades furnished by its vendors, being replaced by its
TeleSpectrum Enterprise System Solution (TESS), or being rewritten to be Year
2000 compliant. TeleSpectrum is developing TESS to replace many of its current
data processing systems. TeleSpectrum believes that the TESS product will be
Year 2000 compliant by the fourth quarter of 1999 and that its core business
systems will be ready to successfully recognize years beginning with 2000.
Although TeleSpectrum has received compliance information from many suppliers,
TeleSpectrum is unable to predict the extent to which its suppliers will be
affected by the Year 2000 issue. TeleSpectrum is also unable to predict the
extent to which it may be vulnerable to a supplier's inability to remedy any
issues in a timely manner. This matter is most prevalent with its
telecommunications service suppliers.
Costs to Address the Year 2000 Issue. TeleSpectrum's current cost estimate to
become Year 2000 compliant is $1,500,000 in 1999, of which approximately 40%
will be for outside consultants and 60% will be
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Risk Factors
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for internal resources which have been or will be reallocated from other
projects. Many of TeleSpectrum's systems that require Year 2000 remediation or
replacement were also simultaneously receiving performance upgrades or feature
enhancements as the decision to upgrade or enhance these systems was not based
on Year 2000 compliance and the timing of these upgrades and enhancements has
not been accelerated as a result of becoming Year 2000 compliant.
TeleSpectrum's policy is to expense the costs incurred to become Year 2000
compliant in accordance with EITF 96-14. TeleSpectrum's current cost estimate
does not include costs related to these upgrades or enhancements. To date, the
financial impact of remediation expenses has not been material, and
TeleSpectrum does not expect future remediation costs to be material to its
consolidated financial position or results of operations.
Risks Presented by Year 2000 Problems. TeleSpectrum's reasonably anticipated
worst case scenario involves Year 2000 problems experienced by its suppliers.
If its telecommunications vendors do not appropriately address their Year 2000
issues and alternative telecommunications providers are not able to provide
TeleSpectrum with adequate telecommunications services, it will not be able to
provide its services to its clients. If there is widespread and continued
shortage in telecommunications services available from telecommunications
vendors, TeleSpectrum will be materially adversely affected. In addition, its
computer systems are linked to many of its clients' computer systems. Through
these links, clients furnish TeleSpectrum with information that is necessary
for TeleSpectrum to provide its services and TeleSpectrum provides its clients
with feedback regarding their services. While TeleSpectrum has made inquiries
regarding their state of readiness for the Year 2000, TeleSpectrum may not be
able to accurately predict whether its clients' systems will be Year 2000
compliant. TeleSpectrum will likely experience service disruptions and may be
materially adversely affected if its clients' systems are not Year 2000
compliant.
Contingency Plans. TeleSpectrum's Year 2000 plan calls for the development of
contingency plans for areas of its business that are susceptible to a
substantive risk of a disruption resulting from a Year 2000 related event. For
TeleSpectrum's internal systems, it is developing remediation plans for its
existing systems, including as a contingency to the timely implementation of
TESS. For vendor supplied services, TeleSpectrum is evaluating alternative
vendors for backup services. However, TeleSpectrum may not be able to obtain
backup services if there is a widespread and continued shortage in
telecommunications services available from telecommunications vendors. For
client computer links, TeleSpectrum will seek to exchange information on a
manual basis until such time as the necessary corrections have been made.
Consistent with TeleSpectrum's Year 2000 plan, it will develop specific Year
2000 contingency plans for any other areas of its business as the need is
identified.
IDRC
State of Readiness. During 1998, IDRC developed and began implementing a Year
2000 Plan which addresses the following areas:
. the major software vendors and telecommunication service providers used
by IDRC;
. the information technology and operating systems including call
processing, network, server, security, application systems and
proprietary software developed and maintained by IDRC; and
. non-information technology systems which include building, plant,
equipment and other infrastructure systems.
The IDRC Year 2000 Plan was divided into two regional plans, the U.S. and the
international plans. Both of these Year 2000 Plans include the following
phases:
. inventory phase--all relevant resources are inventoried to identify
software or hardware that might have a Year 2000 issue;
. assessment phase--all inventoried software and hardware is assessed to
confirm that a Year 2000-related issue is present and is prioritized;
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. strategy phase--for those software and hardware applications with a Year
2000 issue, a strategy is developed to upgrade, correct or replace the
problem; and
. implementation and testing phase--all steps necessary to correct the
problems are implemented and tested.
IDRC is using both internal and external resources to complete its Year 2000
Plans. The inventory phase has been completed under both the U.S. and the
international plans. The assessment phase has been completed under the
international plan and is 75% complete under the U.S. plan. The strategy phase
of the international plan is substantially complete. The strategy phase for the
U.S. plan is 25% complete. The international implementation and testing phases
are 35% complete with respect to critical third-party licensed software
applications, 60% complete with respect to other suppliers and 10% complete
with respect to proprietary software. The international plan will be
substantially complete by the end of July 1999. The U.S. implementation and
testing is approximately 20% complete. The U.S. plan will be substantially
complete by September 1999.
Cost. During 1998, many of IDRC's systems requiring modification have
simultaneously received performance upgrades or feature enhancements where
specific Year 2000 costs cannot be separated. During 1999 IDRC expects to
purchase additional performance upgrades and feature enhancements some of which
contain corrections for Year 2000 issues. IDRC does not believe that the cost
of such upgrades, done solely for the Year 2000 corrections, will be material.
Purchased hardware and software has been or will be capitalized in accordance
with normal policy. The majority of the direct costs associated with the Year
2000 Plans implemented by IDRC will be those associated with consultants and
the re-writing of proprietary code. IDRC expects these total costs will range
from $0.5 million to $1.0 million during 1999.
Risks. IDRC has a range of potential business risks associated with
processing errors due to the Year 2000 issue. Such risks include a high level
of dependency upon third-party service providers, particularly telephone
companies which provide local and long-distance telephone service to IDRC's
call centers. The widespread failure of telephone service or telephone dialing
software would cause IDRC to incur a material loss. While IDRC has made limited
inquiries and obtained vendor certifications, there can be no assurances that
IDRC's service vendors will not have Year 2000 failures and that such failures
would not have a material impact on the operations of IDRC.
Contingency Plans. IDRC has developed a limited contingency plan specific to
Year 2000 events in each area of business. IDRC maintains contingency plans,
outside of the direct scope of the Year 2000 issue, designed to address various
other business interruptions, like electrical power failure. While IDRC's
contingency plans may provide alternatives for isolated computer and business
system failures resulting from the Year 2000 issue at a limited number of
locations, such contingency plans would not prevent a material loss resulting
from the widespread failure of major telecommunications/utilities systems.
Fluctuation in Quarterly Operating Results--Our quarterly operating results
will fluctuate and this will cause our stock price to change.
TeleSpectrum expects that its quarterly operating results will fluctuate due
to many factors, a number of which are beyond its control. TeleSpectrum
believes that period-to-period comparisons of its historical results may not be
meaningful. You should not rely on these historical results as an indication of
TeleSpectrum's future results. TeleSpectrum's results of operations in future
periods may not meet the expectations of analysts and investors, in which case
the price of TeleSpectrum's common stock would likely be materially adversely
affected. Factors which may also have an impact on TeleSpectrum's operating
results include:
. TeleSpectrum's ability to retain existing clients and attract new
clients;
. the timing of TeleSpectrum's clients' marketing campaigns and customer
service programs;
. the timing of additional selling, general and administrative expenses
incurred to acquire and support such new business;
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. changes in TeleSpectrum's revenue mix among our various service
offerings;
. the introduction of new or enhanced services and products;
. price competition;
. TeleSpectrum's ability to upgrade and develop its information technology
systems;
. technical difficulties, system downtime or internet brownouts;
. government regulation;
. general economic conditions and economic conditions specific to the
teleservices industry; and
. seasonality in TeleSpectrum's business, particularly during the months of
August and December.
Volatility of Stock Prices--Events directly or indirectly relating to
TeleSpectrum will cause its stock price to be volatile.
The market prices of TeleSpectrum's common stock have been highly volatile.
This volatility may adversely affect the price of TeleSpectrum's common stock
in the future. Factors that could cause such volatility include:
. the volume of trading in TeleSpectrum's stock;
. TeleSpectrum's quarterly operating results;
. deviations in operating results of operations from analyst estimates;
. changes in general conditions in the economy;
. developments within the teleservices industry; and
. other developments affecting TeleSpectrum or its competitors.
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Forward-Looking Statements May Prove Inaccurate
We have made forward-looking statements in this document including the
information concerning possible or assumed future results of operations of
TeleSpectrum set forth in this joint proxy statement/prospectus and those
preceded by, followed by or that include the words "anticipates," "believes,"
"expects," "intends" or similar expressions. For those statements, we claim
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995. You should understand
that the following important factors, in addition to those discussed elsewhere
in this document, particularly under "Risk Factors," could affect the future
results of TeleSpectrum and could cause those results to differ materially
from those expressed in our forward-looking statements:
. competitive factors;
. projected capital expenditures;
. projections of future revenues, operating income or EBITDA;
. liquidity;
. possible business relationships;
. dependence on key personnel;
. exposure to Year 2000 issues; and
. cost savings, efficiencies and growth in future periods.
Actual future results may differ materially from those expressed in our
forward-looking statements set forth in this joint proxy statement/prospectus
for a number of reasons, including the inability to:
. integrate the operations of TeleSpectrum and IDRC in a prompt and
effective manner;
. meet greater debt service requirements following the assumption by
TeleSpectrum of the IDRC senior debt;
. obtain financing or pursue other business objectives due to the mentioned
assumed debt;
. develop or implement a successful new business strategy for the combined
company;
. manage the combined company effectively and implement its business
strategies;
. avoid unknown material CRW liabilities after the CRW merger agreement is
completed;
. avoid Year 2000 issues;
. avoid losing customers as a result of our mergers; and
. maintain sufficient call center utilization at favorable rates.
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Forward-Looking Statements May Prove Inaccurate
<PAGE>
The Mergers
We are furnishing this joint proxy statement/prospectus to holders of common
stock of TeleSpectrum, IDRC and CRW and the holders of preferred stock of IDRC.
The TeleSpectrum and CRW boards of directors are soliciting proxies for use at
the TeleSpectrum and CRW annual meetings of stockholders, and the IDRC board of
directors is soliciting proxies for use at the IDRC special meeting of
stockholders.
Action at Meetings
At the TeleSpectrum annual meeting, the TeleSpectrum stockholders will be
asked to:
. approve the IDRC merger agreement;
. elect its board of directors; and
. approve amendments to the equity compensation plan.
At the IDRC special meeting, the IDRC stockholders will be asked to approve
the IDRC merger agreement.
At the CRW annual meeting, the CRW stockholders will be asked to:
. approve the CRW merger agreement; and
. elect two classes of directors.
The IDRC merger agreement is attached to this joint proxy
statement/prospectus as Appendix I and the CRW merger agreement is attached to
this joint proxy statement/prospectus as Appendix II.
Federal Securities Laws Consequences; Stock Transfer Restriction Agreements
Unless you are an affiliate, the shares of TeleSpectrum common stock you
receive in the IDRC merger or the CRW merger will be freely transferable under
the federal securities law. Generally, an affiliate is someone who is
controlled by or controls TeleSpectrum, IDRC or CRW. Affiliates generally
include certain officers, directors and principal stockholders of TeleSpectrum,
IDRC or CRW. The Securities Act of 1933 and Rules 144 and 145 under that Act
restrict the ability of affiliates to resell their shares of TeleSpectrum
common stock.
You should note, however, that holders of IDRC common stock and options are
subject to contractual provisions that restrict their sale of TeleSpectrum
securities. These restrictions are contained in the IDRC stockholder support
agreements, option agreements evidencing TeleSpectrum options and the indemnity
escrow agreement.
This joint proxy statement/prospectus does not cover any resales of the
TeleSpectrum common stock to be received by the stockholders of IDRC or CRW
upon completion of either merger, and no person is authorized to make any use
of this joint proxy statement/prospectus in connection with any such resale.
However, TeleSpectrum is required to register the shares underlying the TLSP
warrants for resale. This registration will be effected by a separate
registration statement.
Accounting Treatment of Mergers
IDRC Merger. It is expected that the IDRC merger will be accounted for under
the purchase method of accounting. TeleSpectrum will be the acquiror of IDRC.
On the closing date, the purchase price, based on the value of stock, options,
warrants and cash issued to IDRC security holders, will be allocated to the
assets and liabilities of IDRC based on their fair market values. The excess of
purchase costs over the fair value of the identifiable net assets will be
assigned to intangible assets and goodwill. IDRC's results of operations will
be included in the combined company's financial statements from the date of
acquisition.
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<PAGE>
CRW Merger. CRW will have no continuing business operations immediately
before the completion of the CRW merger and its only asset will consist of its
ownership of shares of TeleSpectrum common stock. The exchange of .709 of a
share of TeleSpectrum common stock for each outstanding share of CRW common
stock and the exchange of each outstanding option and warrant to purchase
shares of CRW common stock for an option to purchase .709 of a share of
TeleSpectrum common stock will be accounted for as a treasury stock transaction
by TeleSpectrum.
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The IDRC Merger
The IDRC merger agreement provides for the merger of IDRC with TeleSpectrum.
TeleSpectrum will survive the IDRC merger and the separate existence of IDRC
will cease.
Holders of Common Stock. Holders of IDRC common stock, which includes class A
common stock of IDRC, will receive shares of TeleSpectrum common stock and TLSP
warrants as a result of the IDRC merger. These stockholders will, together with
holders of IDRC options, be entitled to receive an aggregate of 9,200,000
shares of TeleSpectrum common stock and the TLSP warrants exercisable for
2,500,000 shares of TeleSpectrum common stock.
If the IDRC merger closed on June 2, 1999, an IDRC stockholder would receive
6.893 shares of TeleSpectrum common stock and TLSP warrants to purchase 1.873
shares of TeleSpectrum common stock at an exercise price of $6.504 in exchange
for each share of IDRC common stock. This is based on the assumption that there
were 1,334,687 outstanding shares of IDRC common stock on June 2, 1999, after
giving effect to the exercise of all outstanding IDRC options.
Holders of Preferred Stock. TeleSpectrum is not required to complete the IDRC
merger unless one half of the 600,000 outstanding shares of IDRC preferred
stock have been converted into IDRC common stock. To convert a share of IDRC
preferred stock into IDRC common stock, a holder is required to deliver the
share of preferred stock to IDRC. This delivery will count as the payment of
the exercise price for two shares of common stock underlying an IDRC warrant.
These IDRC warrants were issued by IDRC at the same time as it sold its
preferred stock. These warrants will be fully exercised by the delivery of
300,000 shares of IDRC preferred stock. Each of the remaining 300,000 shares of
IDRC preferred stock will be redeemed for $20 in cash, and all unpaid dividends
on the IDRC preferred stock will also be paid in cash. Each of McCown De Leeuw
& Co. III L.P. and its affiliates is required to invest all of the proceeds
from the redemption of its IDRC preferred stock in a note issued by
TeleSpectrum. This amount is estimated at $4.9 million, and the note will bear
interest at ten percent. TeleSpectrum will not be permitted to repay this note
for one year.
Holders of IDRC Stock Options. Holders of IDRC options have two choices as to
how their options will be treated in the IDRC merger. First, holders may elect
to have their options assumed by TeleSpectrum. In this case, their IDRC options
would become new TeleSpectrum options that will contain substantially the same
terms and conditions as the original IDRC options, but will entitle the holder
to acquire TeleSpectrum common stock and TLSP warrants as follows:
. the number of shares of TeleSpectrum common stock to be issuable upon
exercise of each assumed option will be equal to the product of (i) the
number of shares of IDRC common stock subject to the corresponding
original option and (ii) 9,200,000 divided by the total number of shares
of IDRC common stock outstanding immediately prior to the closing,
assuming that all outstanding IDRC options have been exercised; and
. the number of shares underlying the TLSP warrants to be issued upon the
exercise of each assumed option will be equal to the product of (i) the
number of shares of IDRC common stock subject to the corresponding
original option and (ii) 2,500,000 divided by the total number of shares
of IDRC common stock outstanding immediately prior to the closing
assuming that all outstanding IDRC options have been exercised.
The exercise price per share of TeleSpectrum common stock under each assumed
option will be equal to (i) the exercise price per share of the IDRC common
stock under the corresponding original option divided by (ii) 9,200,000 divided
by the total number of shares of IDRC common stock outstanding immediately
prior to the completion of the IDRC merger, assuming that all outstanding IDRC
options have been exercised.
If an option holder elects to have his IDRC options assumed, he will be
required to place a portion of his assumed options in escrow in accordance with
the IDRC merger agreement and the indemnity escrow
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The IDRC Merger
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agreement. In addition, an option holder will not be permitted to sell or
transfer any assumed options or TeleSpectrum securities received upon exercise
of these options until one year after the completion of the IDRC merger. Escrow
options will only be exercisable for shares of TeleSpectrum common stock and
will not be exercisable for any TLSP warrants.
If, however, an option holder elects not to have his options assumed, all of
such holder's outstanding IDRC options will terminate at the closing of the
IDRC merger unless they are exercised before such time. Neither IDRC nor
TeleSpectrum will have any obligation to the extent such options are not
exercised prior to the completion of the IDRC merger.
Escrow. Of the 9,200,000 shares of TeleSpectrum common stock issuable to the
holders of IDRC common stock and options, shares having a "trading value" of
$12,000,000 will be placed in escrow. This escrow will secure any
indemnification obligations of the IDRC security holders to TeleSpectrum under
the IDRC merger agreement. This escrow will be governed by an indemnity escrow
agreement. The term of the escrow is for 15 months from the completion of the
IDRC merger. "Trading value" means the average closing price of the
TeleSpectrum common stock for the 25 trading days prior to the closing of the
IDRC merger. If the trading value was calculated as of June 2, 1999, 1,767,956
shares of TeleSpectrum common stock would be subject to escrow.
Because stockholders and option holders of IDRC are required to contribute
shares under the indemnity escrow agreement on a pro rata basis, the number of
shares of TeleSpectrum common stock to be deposited in escrow and the portion
of each assumed option that will be an escrow option depends on the total
number of shares of IDRC common stock outstanding immediately prior to the
closing assuming the exercise of all outstanding IDRC options.
Background of the IDRC Merger
In late July 1998, Keith E. Alessi telephoned John D. Weil. During this call,
they discussed industry conditions, their businesses, a common customer and the
challenges attendant to their operations. Messrs. Alessi and Weil broadly
discussed a possible joint venture or other collaborative relationship between
the companies.
In August 1998, Mr. Alessi spoke with Mr. Weil regarding arranging a meeting
with a representative of McCown De Leeuw & Co. III L.P., the largest
stockholder of IDRC. On August 31, 1998, Mr. Alessi met with Mr. Weil and
Jeffrey E. Stiefler in Phoenix, Arizona. The parties engaged in a broad
discussion which included a possible transaction between the two companies.
They agreed to continue their discussions at a future date.
Over the course of the next few weeks, Messrs. Alessi and Stiefler had
several discussions regarding their companies and perceived benefits of various
types of potential transactions, including a business combination.
In early September 1998, the parties executed a confidentiality agreement.
On September 10 and 11, 1998, Mr. Alessi met with Mr. Stiefler, Paul J.
Grinberg and Robert B. Hellman, Jr. to discuss possible transaction structures
and ways to value the companies. The parties exchanged background information
with each other.
On September 21, 1998, Messrs. Alessi and Stiefler met in St. Louis to
continue discussions regarding a transaction. On September 29, 1998, Mr. Alessi
had additional discussions with Messrs. Stiefler and Grinberg regarding the
IDRC business. On September 30, 1998, Messrs. Alessi and Hellman discussed
possible transactions between the two companies and discussed possible
valuation methodologies.
Between October 1 and 3, 1998, Mr. Alessi continued his discussions with
Messrs. Stiefler and Grinberg at IDRC's headquarters in San Diego.
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The IDRC Merger
<PAGE>
On October 6, 1998, members of IDRC's management team met at TeleSpectrum's
headquarters in King of Prussia, Pennsylvania with James Carroll, a consultant
to TeleSpectrum's outbound business. Mr. Alessi also met with Mr. Weil on this
date and discussed various matters relating to IDRC's outbound telemarketing
business.
On October 7, 1998, Mr. Stiefler met with Mr. Alessi in King of Prussia,
Pennsylvania to continue prior discussions.
During the course of the discussions, Mr. Alessi met with several IDRC
executive officers primarily responsible for IDRC's outbound, inbound and
customer care and international operations to discuss various aspects of these
businesses. On October 8, 1998, Mr. Alessi met with David B. Parkes in Chicago,
Illinois. On October 14, 1998, members of TeleSpectrum's management team met
with members of IDRC's inbound and customer care business and Mr. Alessi met
with Jill A. Ward.
On October 14, 1998, TeleSpectrum's board of directors held a regular meeting
at which Mr. Alessi discussed various aspects of IDRC's business with the
board. At this meeting, the board discussed the broad parameters of a possible
transaction among the companies and authorized Mr. Alessi to continue
discussions.
On November 10, 1998, TeleSpectrum's board of directors held a special
meeting to discuss various matters relating to the proposed transaction with
IDRC. At this meeting, Mr. Alessi provided an update regarding his discussions
and scheduled a special meeting of the board to be held on November 20, 1998 to
discuss the proposed transaction in more detail.
Messrs. Stiefler and Hellman attended by invitation a November 20, 1998
special meeting of the TeleSpectrum board. At this meeting, Messrs. Stiefler
and Hellman discussed IDRC's view of the benefits of a combination of the
businesses and answered questions from the TeleSpectrum board regarding IDRC's
business and management team.
During the next several weeks, each company held numerous discussions with
its respective financial advisors, outside legal counsel and accounting firms
regarding various matters relating to the proposed transaction. In addition,
members of each party's team of professionals held discussions regarding a
proposed timetable.
From November 21 through 30, Mr. Alessi held further discussions with Messrs.
Hellman, Stiefler and Grinberg regarding various aspects of a proposed
transaction, including the process of any transaction, organizational
structures and bank financing.
On November 24, 1998, Mr. Alessi consulted with representatives from Morgan,
Lewis & Bockius LLP and Arthur Andersen LLP regarding a proposed structure. Mr.
Alessi also contacted Mellon Bank, TeleSpectrum's commercial lending bank, to
inform the bank of TeleSpectrum's discussions with IDRC.
During the next week, the parties and their respective advisors began
negotiating definitive agreements.
TeleSpectrum retained J.P. Morgan as its financial advisor on November 30,
1998.
Members of IDRC management, representatives of its auditors and
representatives of Houlihan Lokey Howard & Zukin, Financial Advisors Inc. met
with TeleSpectrum management to continue their due diligence investigation of
TeleSpectrum, holding several meetings with members of TeleSpectrum management
during the months of October, November and December of 1998.
On December 4, 1998, IDRC held a meeting of its board of directors at which
the potential synergies of a business combination with TeleSpectrum were
reviewed. Members of IDRC management reported on their financial review of
TeleSpectrum.
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The IDRC Merger
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On December 8, 1998, Messrs. Alessi, Hellman, Grinberg and Stiefler met in
New York to discuss various financing issues, and met with two commercial banks
to discuss refinancing the current IDRC credit facility.
On December 16, 1998, Messrs. Alessi and Hellman negotiated various
outstanding business issues with respect to the proposed merger. On December
17, 1998, Messrs. Alessi and Hellman and their respective outside counsel
discussed open matters relating to the proposed transaction and a number of
provisions in the proposed merger agreement.
On December 18, 1998, Mr. Alessi met with J. Brian O'Neill, a TeleSpectrum
director who is also the Chief Executive Officer of CRW, and Jonathan P.
Robinson, the Chief Financial Officer of CRW, to advise them of the nature and
status of the proposed transaction with IDRC. They discussed amending the CRW
merger agreement to extend the expiration date to July 31, 1999.
On January 4, 1999, Messrs. Alessi and Hellman reached a tentative
understanding on the principal terms of the proposed merger.
On January 6, 1999, the TeleSpectrum board held a special meeting that was
also attended by representatives of its financial advisor, independent auditor
and outside legal counsel. At this meeting, the board considered a transaction
in which IDRC would merge with TeleSpectrum, with TeleSpectrum as the surviving
corporation. In this merger, TeleSpectrum would issue an aggregate of 9,200,000
shares of TeleSpectrum common stock and warrants exercisable for 3,000,000
shares of TeleSpectrum common stock to the holders of IDRC common stock and
options. The IDRC preferred stock would be redeemed. The board also considered
IDRC nominating two directors to the TeleSpectrum board. Representatives of
J.P. Morgan made a presentation regarding the financial terms of the proposed
transaction. Representatives of Morgan, Lewis & Bockius and Arthur Andersen
made presentations regarding various aspects of the proposed transaction. The
board authorized management to continue negotiations.
Also on January 6, 1999, IDRC held a meeting of its board of directors. At
the meeting, IDRC's legal counsel reviewed the terms of the proposed definitive
merger and related documents and final due diligence issues. Also at such
meeting, Houlihan Lokey indicated that it was prepared to render an opinion to
the effect that the merger consideration was fair, from a financial point of
view, to IDRC, and Houlihan Lokey reviewed the financial analyses it had
performed in connection with such opinion. After extensive discussion, the IDRC
board unanimously approved the IDRC merger, the IDRC merger agreement and the
related agreements and transactions contemplated thereby.
On January 11, 1999, TeleSpectrum's board held a meeting to consider the
approval of the merger agreement and the transactions contemplated thereby. At
the meeting, J.P. Morgan reviewed the financial terms of the IDRC merger and
rendered its oral opinion, subsequently confirmed by delivery of a written
opinion, to the effect that, as of January 11, 1999, the consideration to be
paid by TeleSpectrum in connection with the proposed IDRC merger was fair from
a financial point of view. Following general discussion and upon consideration
of the factors described under "--TeleSpectrum Reasons for the Merger;
Recommendations of the TeleSpectrum Board," the TeleSpectrum board concluded
that the merger was fair to, and in the best interests of, the stockholders of
TeleSpectrum and unanimously approved the merger agreement and the transactions
contemplated by the merger agreement.
On January 14, 1999, the parties executed the IDRC merger agreement and the
stockholder support agreements. TeleSpectrum then issued a press release
announcing the transaction.
On February 25, 1999, the TeleSpectrum board held a special meeting. At this
meeting, the board unanimously approved an amendment to the IDRC merger
agreement which included:
. the investment by McCown De Leeuw & Co. III L.P. of the amount it
receives from the redemption of its IDRC preferred stock in a
TeleSpectrum note;
. the requirement that holders of IDRC options agree to a one-year transfer
restriction;
. the allowance of IDRC to incur up to an additional $7.5 million of debt;
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. a change in the measurement period for determining the exercise price of
the TLSP warrants from the 25 trading days prior to the signing of the
IDRC merger agreement to the 10 trading days prior to the signing of the
amendment; and
. adding a closing condition that IDRC has closed three call centers.
On February 25, 1999, the IDRC board held a special meeting at which they
unanimously approved the amendment to the IDRC merger agreement.
The amendment to the IDRC merger agreement was signed by the parties on
February 26, 1999.
On May 12, 1999, the TeleSpectrum board held a special meeting. At this
meeting, the board unanimously approved an amendment to the IDRC merger
agreement that reduced the number of shares underlying the TLSP warrants from
3,000,000 to 2,500,000 and reduced the exercise price from $8.987 to $6.504.
The amendment to the IDRC merger agreement was signed by the parties effective
May 13, 1999.
On May 20, 1999, the IDRC board held a special meeting. At this meeting, the
board ratified the amendment to the IDRC merger agreement that reduced the
number of shares underlying the TLSP warrants from 3,000,000 to 2,500,000 and
reduced the exercise price from $8.987 to $6.504. The amendment to the IDRC
merger agreement was signed by the parties effective May 13, 1999. On June 4,
1999, the IDRC board ratified and approved the IDRC merger agreement, as
amended through such date, by unanimous written consent.
TeleSpectrum's Reasons for the IDRC Merger; Recommendation of the TeleSpectrum
Board
The TeleSpectrum board has determined that the terms of the IDRC merger are
fair to, and in the best interests of, TeleSpectrum and its stockholders and
accordingly the TeleSpectrum board unanimously recommends that the stockholders
of TeleSpectrum vote FOR approval of the IDRC merger agreement.
The TeleSpectrum board believes that the IDRC merger presents an opportunity
to further enhance TeleSpectrum's teleservices presence. The TeleSpectrum board
believes that a larger company will be better positioned to compete effectively
in the teleservices industry. The TeleSpectrum board believes that the
opportunities that the IDRC merger presents to TeleSpectrum and its
stockholders exceed those that would be available as a stand-alone company.
During the course of its deliberations concerning the IDRC merger, the
TeleSpectrum board consulted with TeleSpectrum's legal counsel and financial
advisors as well as TeleSpectrum's management, and reviewed a number of other
factors relevant to the IDRC merger, including:
. presentations from, and discussions with, senior management,
representatives of its outside legal counsel and its independent
accounting firm, and representatives of J.P. Morgan regarding the
business, financial, accounting and legal due diligence with respect to
IDRC, including existing litigation;
. the written opinion of J.P. Morgan to the effect that the consideration
to be paid by TeleSpectrum was fair from a financial point of view to
TeleSpectrum; and
. other strategic alternatives.
In reaching its determination to recommend approval of the IDRC merger, the
TeleSpectrum board considered a number of strategic factors associated with the
IDRC business and opportunities presented by combining the two companies,
including:
. the strength and depth of the combined management teams;
. a common vision of operating a larger teleservices company;
. that the combined company would be nearly double that of TeleSpectrum in
terms of revenues and provide a platform on which to accelerate growth,
particularly in its customer care business;
. the ability of TeleSpectrum to achieve cost savings and efficiencies and
to increase revenues on a stand-alone basis, particularly in its customer
care business;
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The IDRC Merger
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. the opportunity to better leverage technology, infrastructure investments
and corporate overhead on a combined basis;
. the opportunity to achieve more efficient utilization of assets,
management and personnel on a combined basis;
. IDRC's market presence in Canada;
. the complementary nature of the services provided by the companies and
the low degree of client overlap;
. current industry, economic and market conditions, including the increased
competition in the teleservices industry; and
. the competitive importance of market position, size and adequacy of
financial resources.
The TeleSpectrum board also considered a number of risks and potentially
negative factors in its deliberations concerning the IDRC merger, including:
. the challenge of integrating the businesses and operations of the two
companies;
. IDRC's loss of several large client relationships in 1998;
. the large amount of IDRC senior debt that would be assumed by
TeleSpectrum as a result of the IDRC merger;
. the risk of diverting management resources from other strategic
opportunities and operational matters for an extended period of time;
. recent operating losses and significant one-time charges taken by IDRC in
1998;
. the risks of continuing on a stand-alone basis; and
. the goodwill that would be incurred and the adverse effect the
amortization of this goodwill would have on future operating results.
As a result of these considerations, TeleSpectrum's board determined that the
potential advantages of the IDRC merger outweighed the benefits of remaining as
a stand-alone company. The TeleSpectrum board believes that the combined
company would have a greater opportunity than TeleSpectrum alone to compete in
the increasingly competitive teleservices industry.
The discussion of the information and factors considered and given weight by
the TeleSpectrum board is not intended to be exhaustive. The TeleSpectrum board
did not find it practicable to and did not quantify or otherwise assign
relative weights to the specific factors it considered in reaching its
determination. In addition, as many of the factors contain elements which may
affect the fairness of the IDRC merger in both a positive and negative way,
except as described above, the TeleSpectrum board did not attempt to analyze
each individual factor separately to determine how it affected the fairness of
the IDRC merger. Consequently, individual members of the TeleSpectrum board may
not have viewed each factor in the same way.
The TeleSpectrum board reaffirmed its support of the IDRC merger at its May
12, 1999 special meeting. The board's reaffirmation was based on its continuing
belief that the long-term advantages of the IDRC merger continued to outweigh
the benefits of remaining as a stand-alone company. In reaffirming its support
of the IDRC merger, the TeleSpectrum board did not seek to have its financial
advisor update or reaffirm the fairness opinion delivered to the board on
January 11, 1999. The receipt of an updated or reaffirmed opinion is not a
condition of TeleSpectrum or IDRC to the completion of the IDRC merger
agreement and TeleSpectrum would not have the contractual right to terminate
the IDRC merger agreement if an updated or reaffirmed fairness opinion was not
obtained. Given the time period that has elapsed since the date the fairness
opinion was issued and the date that this joint proxy statement/prospectus is
being mailed to shareholders, TeleSpectrum believes that a number of events
have occurred that could have affected the fairness opinion if it were
redetermined as of the date of this proxy statement/prospectus. These events
include the operating performance of IDRC for the
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first three months of 1999, the decrease in the market value of the
TeleSpectrum common stock and changes in the market value of public companies
in the teleservices industry. TeleSpectrum cannot be certain if or how the
fairness opinion would be affected as a result of these events. However, the
TeleSpectrum board still believes that the terms of the IDRC merger are fair
to, and in the best interests of, its stockholders.
IDRC's Reasons for the IDRC Merger; Recommendation of the IDRC Board
The IDRC board has determined that the terms of the IDRC merger are fair to,
and in the best interest of, IDRC and its stockholders and accordingly the IDRC
board unanimously recommends that the stockholders of IDRC vote FOR approval of
the IDRC merger agreement and the transactions contemplated thereby.
In reaching its determination, the IDRC board consulted with IDRC's
management, as well as its legal counsel, accountants and financial advisor,
and gave significant consideration to a number of factors bearing on its
decision, including:
. information concerning the business, assets, properties, management,
financial condition, operating results, competitive position and
prospects of IDRC and TeleSpectrum;
. reports from its legal counsel on specific terms of the IDRC merger
agreement and each of the ancillary agreements related thereto; and
. the opinion of Houlihan Lokey to the effect that, as of January 14, 1999,
and based upon and subject to certain matters stated in such opinion, the
consideration to be received by the stockholders of IDRC was fair, from a
financial point of view, to the stockholders of IDRC.
The post-merger ownership between IDRC and TeleSpectrum security holders was
determined in arm's-length negotiations. The allocation was approved based upon
the board's evaluation of a number of factors including:
. the amount of revenue and earnings before income taxes;
. depreciation and amortization expenses contributed by each party in the
IDRC merger;
. the historical operating results of each party;
. the synergies to be realized as a result of IDRC's contribution to the
combined company's operations;
. the prospects and relative strengths of each party; and
. other relative contributions of each party.
The IDRC board considered a number of benefits and positive factors in its
deliberations concerning the IDRC merger, including:
. the larger market presence of the combined company which will result in
significant increases in marketing strength and will improve the combined
company's competitive posture;
. because of the complementary nature of the products offered by IDRC on
one hand and TeleSpectrum on the other, the IDRC merger represents an
opportunity to more rapidly increase sales revenue through increased
product offerings to the existing customers of both companies;
. the significant potential enhancement of the strategic and market
position of the combined company beyond that achievable by IDRC alone;
. the diverse experience of the combined management team will be more
efficient and provide a sharper focus on the key competencies of each
company;
. the increased size of the combined company will enhance its ability to
attract and retain skilled management and sales personnel, in particular
in the area of sales and operations; and
. the efficiencies of combining operations and administrative functions
will result in cost savings by eliminating certain fixed costs and other
operating inefficiencies.
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The IDRC Merger
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The IDRC board also considered a number of risks and potentially negative
factors in its deliberations concerning the IDRC merger, including:
. the risk that the combined company might not be able to achieve revenues
equal to the sum of the anticipated revenues of IDRC and TeleSpectrum as
independent entities;
. the risk that revenue might decrease in the event significant customers
reduce or terminate their purchase of services because of uncertainties
concerning the IDRC merger;
. the risk that the combined company might not achieve expected operating
synergies;
. the adverse effects of one-time charges expected to be incurred in
connection with the costs of the IDRC merger and the subsequent
integration of the companies;
. the potential adverse effects on the combined company's results of
operations resulting from the amortization of goodwill that would be
recorded in connection with the IDRC merger; and
. the risk that certain key employees or members of management of either
IDRC or TeleSpectrum may decide not to continue employment with the
combined company.
After carefully considering the potentially negative factors set forth above,
the board concluded that the potential benefits attendant to the IDRC merger
outweighed such negative factors and determined that the IDRC merger is fair to
and in the best interest of the IDRC stockholders. The IDRC board of directors
reaffirmed their support of the IDRC merger at its May 20, 1999 special
meeting.
The discussion of the information and positive and negative factors
considered by the IDRC board in approving the IDRC merger agreement is not
intended to be exhaustive, but includes the factors considered by the IDRC
board to have been material in their analysis of the merger proposal. In
considering the merger proposal, given the number and diversity of the
potentially positive and negative factors considered, the IDRC board did not
quantify or otherwise attempt to assign any relative or specific values to any
of the foregoing factors. In making their determination, individual directors
may have accorded different values to different factors.
Federal Income Tax Consequences of the IDRC Merger
The following general discussion summarizes the material federal income tax
consequences generally applicable to holders of shares of IDRC common stock
who, as part of the IDRC merger, exchange their shares of IDRC common stock
solely for shares of TeleSpectrum common stock and warrants exercisable for
shares of TeleSpectrum common stock. This discussion is based on the Internal
Revenue Code of 1986, existing and proposed U.S. Treasury regulations
promulgated under the Internal Revenue Code, existing administrative
interpretations and court decisions, all of which are subject to change. Future
legislation, regulations, administrative interpretations or court decisions
could significantly change such authorities either prospectively or
retroactively.
The discussion below does not address all aspects of federal income taxation
that may be important to you in light of your particular circumstances.
Further, the discussion does not address all aspects of federal income taxation
that may be applicable to certain holders subject to special rules, such as:
. holders who are not United States persons;
. financial institutions;
. tax-exempt organizations;
. insurance companies;
. dealers or brokers in securities;
. holders who are subject to the alternative minimum tax provisions of the
Internal Revenue Code;
. holders who held their stock as part of a hedge, appreciated financial
position, straddle, conversion transaction or other risk reduction
transaction; or
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. holders who acquired their TeleSpectrum or IDRC shares as the result of
the exercise of employee stock options or otherwise as compensation.
It is the opinion of Morgan, Lewis & Bockius LLP and Cooley Godward LLP that
the IDRC merger will constitute a reorganization according to Section 368(a) of
the Internal Revenue Code. In addition, it is a condition to the obligations
under the IDRC merger agreement that TeleSpectrum receive a closing opinion
from Morgan, Lewis & Bockius and that IDRC receive a closing opinion from
Cooley Godward confirming that the IDRC merger will constitute a
reorganization. Such conditions will not be waived without resolicitation of
consent by the stockholders of TeleSpectrum and the stockholders of IDRC.
Neither TeleSpectrum nor IDRC intends to request a ruling from the IRS with
respect to the tax consequences of the IDRC merger.
The opinions described in the preceding paragraph are referred to
collectively as the IDRC tax opinions. The IDRC tax opinions:
. are neither binding on the IRS nor preclude the IRS from adopting a
contrary position;
. are based on the assumptions discussed below, as well as representations
received from TeleSpectrum and IDRC;
. are based on the assumption that the IDRC merger will be completed in
accordance with the terms of the IDRC merger agreement; and
. are subject to the limitations discussed below.
The IDRC tax opinions assume and are conditioned upon:
. the truth and accuracy of the statements, covenants, representations and
warranties contained in the IDRC merger agreement, in the tax
representations received from TeleSpectrum and IDRC to support the IDRC
tax opinions and in all other instruments and documents related to the
formation, organization and operation of TeleSpectrum and IDRC examined
by and relied upon by Morgan, Lewis & Bockius and Cooley Godward in
connection with the IDRC merger;
. that original documents submitted to such counsel, including signatures
on such documents, are authentic, and documents submitted to such counsel
as copies conform to the original documents;
. that all such documents have been, or will be by the time the IDRC merger
becomes effective, referred to elsewhere as the completion of the IDRC
merger, duly and validly executed and delivered where due execution and
delivery are a prerequisite to the effectiveness thereof;
. that all covenants contained in the IDRC merger agreement and the tax
representations described above are performed without waiver or breach of
any material provision thereof;
. that the IDRC merger will be reported by TeleSpectrum and IDRC on their
respective federal income tax returns in a manner consistent with the
IDRC tax opinions; and
. that any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.
Subject to the limitations and qualifications described in this section and
in the IDRC tax opinions, and assuming the IDRC merger is treated as a
reorganization in accordance with the IDRC tax opinions, the following U.S.
federal income tax consequences will result:
. No gain or loss will be recognized for federal income tax purposes by the
holders of shares of TeleSpectrum common stock at the time of the IDRC
merger. The aggregate basis of the shares of TeleSpectrum common stock
held before the IDRC merger will remain the same. The holding period for
shares of TeleSpectrum common stock held before the IDRC merger will
include the pre-merger holding period for those who continue to hold
shares of TeleSpectrum common stock;
. No gain or loss will be recognized for federal income tax purposes by the
holders of shares of IDRC common stock upon the receipt of shares of
TeleSpectrum common stock and warrants exercisable for
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The IDRC Merger
<PAGE>
shares of TeleSpectrum common stock solely in exchange for such shares of
IDRC common stock in the IDRC merger except to the extent, if any, of cash
received instead of fractional shares;
. The aggregate tax basis of the shares of TeleSpectrum common stock and
warrants exercisable for shares of TeleSpectrum common stock so received
by each IDRC stockholder in the IDRC merger including any fractional
share of TeleSpectrum common stock not actually received will be the same
as the aggregate tax basis of the shares of IDRC common stock surrendered
by such IDRC stockholder in exchange therefor;
. The holding period of shares of TeleSpectrum common stock so received by
each IDRC stockholder in the IDRC merger will include the period for
which the shares of IDRC common stock surrendered in exchange therefor
was considered to be held, provided that the shares of IDRC common stock
so surrendered are held as capital assets at the time the IDRC merger
becomes effective;
. Cash payments received by holders of shares of IDRC common stock instead
of fractional shares will be treated as if such fractional shares of
TeleSpectrum common stock had been issued in the IDRC merger and then
redeemed by TeleSpectrum;
. An IDRC stockholder receiving such cash will recognize gain or loss upon
such payment, measured by the difference, if any, between the amount of
cash received and the basis in such fractional share;
. The gain or loss should be capital gain or loss provided that each share
of IDRC common stock surrendered in exchange for such fractional share of
TeleSpectrum common stock was held as a capital asset at the time the
IDRC merger becomes effective;
. Holders of IDRC preferred stock who receive cash in exchange for such
shares in the IDRC merger will recognize gain or loss measured by the
difference, if any, between the amount of cash received and the basis in
such shares of IDRC preferred stock;
. The gain or loss should be capital gain or loss, provided that each share
of IDRC preferred stock surrendered in exchange for such cash was held as
a capital asset at the time the IDRC merger becomes effective;
. The cash distribution of accrued and unpaid dividends with respect to the
IDRC preferred stock should result in ordinary income to the recipients
of such cash;
. An IDRC stockholder who properly exercises appraisal rights under any
applicable law with respect to a share of IDRC common stock and receives
payments for such stock in cash should recognize capital gain or loss, if
such stock was held as a capital asset at the time the IDRC merger
becomes effective, measured by the difference between the amount of cash
received and the stockholder's basis in such share, provided that such
payment neither is essentially equivalent to a dividend within the
meaning of Section 302 of the Internal Revenue Code nor has the effect of
a distribution of a dividend within the meaning of Section 356(a)(2) of
the Internal Revenue Code. A sale of IDRC shares incident to an exercise
of appraisal rights will generally not be a dividend equivalent
transaction if, as a result of such exercise, the dissenting stockholder
owns no shares of TeleSpectrum common stock, either actually or
constructively within the meaning of Section 318 of the Internal Revenue
Code, immediately after the IDRC merger; and
. Neither TeleSpectrum nor IDRC will recognize gain solely as a result of
the IDRC merger.
A successful IRS challenge to the reorganization status of the IDRC merger
would result in significant adverse tax consequences to the IDRC stockholders.
Under these circumstances, IDRC would be treated as though it had sold its
assets in a taxable sale and then liquidated. An IDRC stockholder would
recognize gain or loss with respect to each share of IDRC common stock
surrendered equal to the difference between the stockholder's basis in such
share and the fair market value, as of the completion of the IDRC merger, of
the shares of TeleSpectrum common stock received in exchange therefor and cash
received instead of a fractional share of TeleSpectrum common stock. In such
event, a stockholder's aggregate basis in the shares of TeleSpectrum common
stock so received would equal its fair market value, and the stockholder's
holding period for such stock would begin the day after the closing date of the
IDRC merger.
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The IDRC Merger
<PAGE>
Even if the IDRC merger qualifies as a reorganization, a recipient of shares
of TeleSpectrum common stock would recognize income to the extent that, for
example, any such shares were determined to have been received in exchange for
services, to satisfy obligations or in consideration for anything other than
the shares of IDRC common stock surrendered. In addition, to the extent that an
IDRC stockholder were treated as receiving, directly or indirectly,
consideration other than shares of TeleSpectrum common stock in exchange for
such stockholder's shares of IDRC common stock, gain, if any, would have to be
recognized.
Some non-corporate IDRC stockholders may be subject to backup withholding at
a rate of 31% on cash payments received instead of fractional shares of
TeleSpectrum common stock. Backup withholding will not apply, however, to a
stockholder who furnishes a correct taxpayer identification number and
certifies that he, she or it is not subject to backup withholding on the
substitute Form W-9 included in the letter of transmittal, who provides a
certificate of foreign status on Form W-8, or who is otherwise exempt from
backup withholding. A stockholder who fails to provide the correct taxpayer
identification number on Form W-9 may be subject to a $50 penalty imposed by
the IRS. Each IDRC stockholder will be required to retain records and file with
such holder's U.S. federal income tax return a statement setting forth certain
facts relating to the IDRC merger.
TeleSpectrum will report to shareholders of TeleSpectrum and to the IRS the
amount of "reportable payments" and any amount withheld with respect to shares
of TeleSpectrum common stock during each calendar year.
The discussion set forth above does not purport to be a complete analysis or
description of all potential federal income tax consequences of the IDRC
merger. In addition, the foregoing discussion does not address tax consequences
which may vary with, or are contingent on, individual circumstances. Moreover,
this discussion does not address any taxes other than income taxes, or any
foreign, state or local tax consequences of the IDRC merger. Nor does this
discussion address the tax consequences of any transactions other than the IDRC
merger, whether or not such transactions are in connection with the IDRC
merger. Accordingly, you are strongly urged to consult with your tax advisor to
determine the particular United States federal, state, local or foreign income
or other tax consequences of the IDRC merger to you.
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The IDRC Merger
<PAGE>
The CRW Merger
The CRW merger provides for the merger of a subsidiary of TeleSpectrum with
CRW. CRW will survive this merger and become a subsidiary of TeleSpectrum.
Holders of CRW Common Stock. CRW stockholders will no longer own shares of
CRW. Instead, they will own shares of TeleSpectrum. They will receive .709 of
a share of TeleSpectrum common stock for each share of CRW common stock.
Holders of CRW Stock Options and Warrants. All outstanding CRW options and
warrants to acquire CRW common stock will be assumed by TeleSpectrum and
become options to acquire an aggregate of 1,089,333 shares of TeleSpectrum
common stock.
Background of the CRW Merger
In October 1996, CRW announced that its board had voted to "break up" CRW
and would seek to sell its collection business and would consider transferring
its casino check cashing business to its stockholders.
In February 1997, CRW completed the sale of its collections business to NCO
Group, Inc.
On October 15, 1997, CRW formed a special committee to evaluate strategic
alternatives. The CRW special committee initially consisted solely of Robert
Verratti, the only director of CRW who was not also a director or stockholder
of TeleSpectrum. Shortly thereafter, CRW retained Janney Montgomery Scott Inc.
to provide financial advisory services in connection with a possible sale of
its casino check cashing business and to evaluate strategic alternatives for
CRW.
In November 1997, CRW began discussions with TeleSpectrum regarding a
possible business combination transaction between the two companies.
TeleSpectrum formed a special committee to evaluate this opportunity.
TeleSpectrum decided to postpone these negotiations in January 1998 as a
result of operational difficulties and its determination to hire a new chief
executive.
In March 1998, Mr. Alessi was hired as TeleSpectrum's new Chief Executive
Officer and President.
In May 1998, TeleSpectrum contacted CRW to resume the negotiations.
TeleSpectrum's desire to resume negotiations was based on Mr. Alessi's review
of the proposed transaction and the possibility that such a transaction could
be beneficial to both companies. During this period, counsel for TeleSpectrum
and CRW exchanged drafts of a proposed non-binding letter of intent. In June
1998, both the CRW board and the TeleSpectrum board approved the letter of
intent. Shortly thereafter, a non-binding letter of intent with respect to the
CRW merger was executed and a joint press release was issued.
In May 1998, CRW entered into a letter of intent to sell its casino check
cashing business to the O'Neill Group LLC, an affiliate of J. Brian O'Neill.
Although the parties exchanged draft agreements and counsel for the parties
met by telephone conference to negotiate the final terms and conditions, the
parties did not execute a definitive agreement and the letter of intent
expired by its terms.
On August 6, 1998, the TeleSpectrum board held a special meeting that was
also attended by representatives of its financial advisor, independent auditor
and outside legal counsel. The board discussed a draft of the CRW merger
agreement and approved the CRW merger in the form presented and authorized
management to complete and execute the agreement.
On August 25, 1998, the CRW board held a special meeting that was attended
by representatives of its financial advisor, independent auditor and outside
legal counsel. At the meeting, Arthur Andersen LLP provided certain tax advice
to the CRW board and JMS indicated that it was prepared to render an opinion
regarding the fairness of the merger consideration to be received by the CRW
stockholders.
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The CRW Merger
<PAGE>
Thereafter, TeleSpectrum sought and received the required consents and
waivers from its primary lender, Mellon Bank, N.A.
The CRW merger agreement was executed on September 3, 1998 and press
releases were issued later that day.
Shortly thereafter in September 1998, CRW was approached by Innovative
Financial Systems, Inc. and commenced negotiations for the sale of CRW's
casino check cashing business. During the month of September and in early
October 1998, the parties met on several occasions, culminating in the
execution of a definitive agreement on October 7, 1998 and a closing of the
transaction on October 30, 1998. The sale agreement included post-closing
adjustments to the purchase price, all of which were settled in December 1998.
The sale agreement also provided for post-closing indemnity, which survived
until December 1998 and no claims were made thereunder.
TeleSpectrum's Reasons for the CRW Merger
Because CRW has no operating activities, TeleSpectrum's primary reasons for
the CRW merger are that it will reduce the number of its outstanding shares
and decrease the concentration of ownership of its shares. As a result of the
CRW merger, the net shares of TeleSpectrum common stock outstanding will
initially be reduced by 2,042,061 shares. TeleSpectrum will, however, assume
in the CRW merger the obligation to issue an additional 1,089,333 shares of
TeleSpectrum common stock upon the exercise of options and 678,410 shares of
TeleSpectrum common stock upon the exercise of warrants of CRW that will
become options and warrants of TeleSpectrum. These options and warrants have
an average exercise price of $2.50 and $1.50, respectively. While TeleSpectrum
cannot be certain that all of these options and warrants will be exercised, it
would be entitled to receive approximately $4.9 million if they were fully
exercised. In addition, as a result of the CRW merger, the shares of
TeleSpectrum common stock will be redistributed to the stockholders of CRW in
a more widespread fashion. This will significantly reduce the concentration of
shares held by any one stockholder.
In reaching its determination to recommend approval of the CRW merger, the
TeleSpectrum board and special committee considered a number of positive
factors:
. due diligence on CRW which indicated a low probability for unknown
liabilities;
. the possible reduction in ownership concentration; and
. the opportunity to reduce its outstanding shares of common stock.
The TeleSpectrum board and special committee also considered a number of
negative factors, including:
. the potential for the existence of undisclosed liabilities of CRW; and
. the perception of any conflict of interest between TeleSpectrum and CRW
as a result of Mr. O'Neill's service on the board of both companies and
past service as the Chairman, Chief Executive Officer and President of
TeleSpectrum.
The TeleSpectrum board did not attempt to analyze each individual factor
separately to determine how it affected the fairness of the CRW merger.
Consequently, individual members of the TeleSpectrum board may not have viewed
each factor in the same way.
CRW's Reasons for the CRW Merger; Recommendation of the CRW Board
The full CRW board and a special committee of the CRW board has unanimously
determined that the terms of the CRW merger are fair to, and in the best
interest of, CRW and its stockholders and accordingly the full CRW board
recommends that the stockholders of CRW vote FOR approval of the CRW merger
agreement and the transactions contemplated thereby.
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The CRW Merger
<PAGE>
In reaching its determination to recommend approval of the CRW merger, the
CRW board considered a number of factors including:
. the continued costs of remaining as an independent public company;
. that the consideration to be received by CRW's stockholders would
represent a premium based on the prices which the TeleSpectrum and CRW
stock had historically traded;
. the opinion of Janney Montgomery Scott Inc. that the consideration to be
received by the CRW stockholders in the CRW merger is fair from a
financial point of view;
. that CRW had sold or was seeking to sell its remaining operating
businesses and it had a low tax basis in its TeleSpectrum stock;
. the belief that the CRW merger would provide CRW stockholders with a more
liquid investment by giving them a direct interest in shares of
TeleSpectrum common stock which has a higher trading volume, a higher
market capitalization, a greater number of holders and is traded on a
more visible trading market; and
. the ability to exchange shares of CRW common stock for shares of
TeleSpectrum common stock without CRW or its stockholders recognizing
taxable income.
The CRW board also considered a number of negative factors, including:
. the perception of any conflict of interest between TeleSpectrum and CRW
as a result of Mr. O'Neill's service on the board of both companies and
past service as the Chairman, Chief Executive Officer and President of
TeleSpectrum; and
. TeleSpectrum's operating losses in 1997 and 1998.
The CRW board and its special committee also discussed the fact that the
number of shares to be received by its stockholders was less than the number
of shares of TeleSpectrum then owned by CRW. They determined, however, that
this reduction in the number of shares was outweighed by the fact that the
stockholders will receive shares of TeleSpectrum in a tax-free transaction. If
CRW distributed its shares of TeleSpectrum directly to its stockholders, the
stockholders would have to pay a tax which would impose a greater burden on
the stockholders than the reduction in the number of shares negotiated by the
parties.
The foregoing discussion of the information and factors considered and given
weight by the CRW board is not intended to be exhaustive but is believed to
include all material factors considered by the CRW board. In view of the
variety of factors considered in connection with its evaluation of the CRW
merger, the CRW board did not find it practicable to and did not quantify or
otherwise assign relative weights to the specific factors considered in
reaching its determination. The CRW board did however, adopt the conclusions
set forth in the JMS opinion. In addition, the CRW board did not attempt to
analyze each individual factor separately to determine how it affected the
fairness of the CRW merger. Consequently, individual members of the CRW board
may have given different weights to different factors.
Federal Income Tax Consequences of the CRW Merger
The following general discussion summarizes the material federal income tax
consequences generally applicable to holders of shares of CRW common stock
who, as part of the CRW merger, exchange their shares of CRW common stock
solely for shares of TeleSpectrum common stock. This discussion is based on
the Internal Revenue Code of 1986, as amended, existing and proposed U.S.
Treasury regulations promulgated under the Internal Revenue Code, existing
administrative interpretations and court decisions, all of which are subject
to change. Future legislation, regulations, administrative interpretations or
court decisions could significantly change such authorities either
prospectively or retroactively.
Neither the discussion below nor the opinions discussed below address all
aspects of federal income taxation that may be important to you in light of
your particular circumstances. Further, the discussion and the
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The CRW Merger
<PAGE>
opinions do not address all aspects of federal income taxation that may be
applicable to certain holders subject to special rules, such as:
. holders who are not United States persons;
. financial institutions;
. tax-exempt organizations;
. insurance companies;
. dealers or brokers in securities;
. holders who are subject to the alternative minimum tax provisions of the
Internal Revenue Code;
. holders who held their stock as part of a hedge, appreciated financial
position, straddle, conversion transaction or other risk reduction
transaction; or
. holders who acquired their TeleSpectrum or CRW shares as the result of
the exercise of employee stock options or otherwise as compensation.
CRW has received an opinion from Arthur Andersen LLP substantially to the
effect that, for federal income tax purposes: (i) the CRW merger should
constitute a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code, and CRW, CRW Acquisition Corp. and TeleSpectrum will
each be a party to such reorganization within the meaning of Section 368(b) of
the Internal Revenue Code; (ii) no gain or loss should be recognized by CRW,
CRW Acquisition Corp. and TeleSpectrum as a result of the CRW merger; (iii) no
gain or loss should be recognized by the stockholders of CRW upon the exchange
of their CRW common stock solely for shares of TeleSpectrum common stock as a
result of the CRW merger, except with respect to cash, if any, received
instead of fractional shares of TeleSpectrum common stock; (iv) the aggregate
tax basis of the shares of TeleSpectrum common stock received solely in
exchange for CRW common stock as a result of the CRW merger (including
fractional shares of TeleSpectrum common stock for which cash is received)
should be the same as the aggregate tax basis of the CRW common stock
exchanged therefor; (v) the holding period for shares of TeleSpectrum common
stock received in exchange for CRW common stock as a result of the CRW merger
should include the holding period of such CRW common stock exchanged therefor,
provided such CRW common stock was held as a capital asset by the stockholder
at the completion of the CRW merger; and (vi) a stockholder of CRW who
receives cash instead of a fractional share of TeleSpectrum common stock
should recognize gain or loss equal to the difference, if any, between the
amount of cash received instead of such fractional share and such
stockholder's stockholder's tax basis in such fractional share (as described
in (iv) above).
In rendering the above opinions, which are referred to below as the CRW tax
opinions, Arthur Andersen has relied upon representations of TeleSpectrum and
representations of CRW. The CRW tax opinions are:
. neither binding on the IRS nor preclude the IRS from adopting a contrary
position;
. based on the assumptions discussed below, as well as representations
received from TeleSpectrum and CRW;
. based on the assumption that the CRW merger will be completed in
accordance with the terms of the CRW merger agreement; and
. subject to the limitations discussed below.
The CRW tax opinion assumes and is conditioned upon:
. the truth and accuracy of the statements, covenants, representations and
warranties contained in the CRW merger agreement, in the tax
representations received from TeleSpectrum and CRW to support the CRW tax
opinions and in all other instruments and documents related to the
formation, organization and operation of TeleSpectrum and CRW examined by
and relied upon by Arthur Andersen in connection with the CRW merger;
. that original documents submitted to Arthur Andersen, including
signatures on such documents, are authentic, and documents submitted to
Arthur Andersen as copies conform to the original documents;
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The CRW Merger
<PAGE>
. that all such documents have been, or will be by the time the CRW merger
becomes effective, referred to elsewhere as the completion of the CRW
merger, duly and validly executed and delivered where due execution and
delivery are a prerequisite to the effectiveness thereof;
. that all covenants contained in the CRW merger agreement and the tax
representations described above are performed without waiver or breach of
any material provision thereof;
. that the CRW merger will be reported by TeleSpectrum and CRW on their
respective federal income tax returns in a manner consistent with the CRW
tax opinions; and
. that any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.
Subject to the limitations and qualifications described in this section and
in the CRW tax opinions, and assuming the CRW merger is treated as a
reorganization in accordance with the CRW tax opinions, the following U.S.
federal income tax consequences will result:
. No gain or loss should be recognized for federal income tax purposes by
the holders of shares of TeleSpectrum common stock at the time the CRW
merger becomes effective, referred to elsewhere as the time of the CRW
merger. The aggregate basis of the shares of TeleSpectrum common stock
held before the CRW merger should remain the same. The holding period for
shares of TeleSpectrum common stock held before the CRW merger should
include the pre-merger holding period for those who continue to hold
shares of TeleSpectrum common stock;
. No gain or loss should be recognized for federal income tax purposes by
the holders of shares of CRW common stock upon the receipt of shares of
TeleSpectrum common stock solely in exchange for such shares of CRW
common stock in the CRW merger except to the extent, if any, of cash
received instead of fractional shares;
. The aggregate tax basis of the shares of TeleSpectrum common stock so
received by each CRW stockholder in the CRW merger, including any
fractional share of TeleSpectrum common stock not actually received,
should be the same as the aggregate tax basis of the shares of CRW common
stock surrendered by such CRW stockholder in exchange therefor;
. The holding period of shares of TeleSpectrum common stock so received by
each CRW stockholder in the CRW merger should include the period for
which the shares of CRW common stock surrendered in exchange therefor
were considered to be held, provided that the shares of CRW common stock
so surrendered are held as capital assets at the time the CRW merger
becomes effective;
. Cash payments received by holders of shares of CRW common stock instead
of fractional shares should be treated as if such fractional shares of
TeleSpectrum common stock had been issued in the CRW merger and then
redeemed by TeleSpectrum;
. A CRW stockholder receiving such cash should recognize gain or loss upon
such payment, measured by the difference, if any, between the amount of
cash received and the basis in such fractional share;
. The gain or loss should be capital gain or loss provided that each share
of CRW common stock surrendered in exchange for such fractional share of
TeleSpectrum common stock was held as a capital asset at the time the CRW
merger becomes effective;
. A CRW stockholder who properly exercises appraisal rights under any
applicable law with respect to a share of CRW common stock and receives
payments for such stock in cash should recognize capital gain or loss, if
such stock was held as a capital asset at the time the CRW merger becomes
effective, measured by the difference between the amount of cash received
and the stockholder's basis in such share, provided that such payment
neither is essentially equivalent to a dividend within the meaning of
Section 302 of the Internal Revenue Code nor has the effect of a
distribution of a dividend within the meaning of Section 356(a)(2) of the
Internal Revenue Code. A sale of CRW shares incident to an exercise of
appraisal rights will generally not be a dividend equivalent transaction
if, as a result of such exercise, the dissenting stockholder owns no
shares of TeleSpectrum common stock, either actually or
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The CRW Merger
<PAGE>
constructively within the meaning of Section 318 of the Internal Revenue
Code, immediately after the CRW merger; and
. Neither TeleSpectrum nor CRW will recognize gain solely as a result of
the CRW merger.
Each holder of CRW common stock that receives TeleSpectrum common stock in
the CRW merger will be required to retain records and file with that holder's
federal income tax return a statement setting forth facts relating to the CRW
merger.
Some non-corporate CRW stockholders may be subject to backup withholding at a
rate of 31% on cash payments received instead of fractional shares of
TeleSpectrum common stock. Backup withholding will not apply, however, to a
stockholder who furnishes a correct taxpayer identification number and
certifies that he, she or it is not subject to backup withholding on the
substitute Form W-9 included in the letter of transmittal, who provides a
certificate of foreign status on Form W-8, or who is otherwise exempt from
backup withholding. A stockholder who fails to provide the correct taxpayer
identification number on Form W-9 may be subject to a $50 penalty imposed by
the IRS. Each CRW stockholder will be required to retain records and file with
such holder's U.S. federal income tax return a statement setting forth certain
facts relating to the CRW merger.
The discussion set forth above does not purport to be a complete analysis or
description of all potential federal income tax consequences of the CRW merger.
In addition, the foregoing discussion does not address tax consequences which
may vary with, or are contingent on, individual circumstances. Moreover, this
discussion does not address any taxes other than income taxes, or any foreign,
state or local tax consequences of the CRW merger. Nor does this discussion
address the tax consequences of any transactions other than the CRW merger,
whether or not such transactions are in connection with the CRW merger.
Accordingly, you are strongly urged to consult with your tax advisor to
determine the particular United States federal, state, local or foreign income
or other tax consequences of the CRW merger to you. No rulings have been or
will be sought from the IRS concerning the tax consequences of the CRW merger.
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Rights of Stockholders to Appraisals
The Delaware General Corporation Law (the "DGCL") grants appraisal rights in
the IDRC merger and the CRW merger to the holders of IDRC common and preferred
stock and CRW common stock. Under the DGCL, IDRC or CRW stockholders may
object to the IDRC merger or the CRW merger, as applicable, and demand in
writing that IDRC or CRW pay the fair value of their shares. Fair value takes
into account all relevant factors but excludes any appreciation or
depreciation in anticipation of the applicable merger. Stockholders who elect
to exercise appraisal rights must comply with all of the procedures to
preserve those rights. We have attached a copy of Section 262 of the DGCL
(which sets forth the appraisal rights) as Appendix III to the joint proxy
statement/prospectus.
Section 262 sets forth the required procedure a stockholder requesting
appraisal must follow. Making sure that you actually perfect your appraisal
rights can be complicated. The procedural rules are specific and must be
followed completely. Failure to comply with the procedure may cause a
termination of your appraisal rights. We are providing you only a summary of
your rights and the procedure. The following information is qualified in its
entirety by the provisions of Section 262. Please review Section 262 for the
complete procedure. Neither IDRC nor CRW will give you any notice other than
as described in this joint proxy statement/prospectus and as required by the
DGCL.
Appraisal Rights Procedures
If you are an IDRC or CRW stockholder and you wish to exercise your
appraisal rights, you must satisfy the provisions of Section 262 of the DGCL.
Section 262 requires the following:
. Your written demand for appraisal: You must deliver a written demand for
appraisal to IDRC or CRW, as applicable, on or before the vote is taken
at the IDRC or CRW stockholders meeting. This written demand for
appraisal must be separate from your proxy. In other words, a vote
against the IDRC or CRW merger agreement will not alone constitute demand
for appraisal.
. You refrain from voting for approval of the merger: You must not vote for
approval of the IDRC or CRW merger agreement, as applicable. If you vote,
by proxy or in person, in favor of the IDRC or CRW merger agreement, this
will terminate your right to appraisal. You can also terminate your right
to appraisal if you return a signed proxy and (i) fail to vote against
approval of the IDRC or CRW merger or (ii) fail to note that you are
abstaining from voting. Your appraisal rights will be terminated even if
you previously filed a written demand for appraisal.
. You continuously hold your IDRC or CRW shares: You must continuously hold
your shares of IDRC or CRW stock, as applicable, from the date you make
the demand for appraisal through the closing of the IDRC or CRW merger.
You should read the paragraphs below for more details on making a demand
for appraisal.
A written demand for appraisal of IDRC or CRW stock is only effective if it
is signed by, or for, the stockholder of record who owns such shares at the
time the demand is made. The demand must be signed as the stockholder's name
appears on their stock certificate(s). If you are the beneficial owner of IDRC
or CRW stock, but not the stockholder of record, you must have the stockholder
of record sign a demand for appraisal.
If you own IDRC or CRW stock in a fiduciary capacity, such as a trustee,
guardian, or custodian, you must disclose the fact that you are signing the
demand for appraisal in that capacity.
If you own IDRC or CRW stock with more than one person, such as in a joint
tenancy or tenancy in common, all of the owners must sign, or have signed for
them, the demand for appraisal. An authorized agent, which could include one
or more of the joint owners, may sign the demand for appraisal for a
stockholder of record; however, the agent must expressly disclose who the
stockholder of record is and that he is signing the demand as that
stockholder's agent.
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Rights of Stockholders to Appraisals
<PAGE>
If you are a record owner, such as a broker, who holds IDRC or CRW stock as
a nominee for others, you may exercise a right of appraisal with respect to
the shares held for one or more beneficial owners, while not exercising such
right for other beneficial owners. In such a case, you should specify in the
written demand the number of shares as to which you wish to demand appraisal.
If you do not expressly specify the number of shares, we will assume that your
written demand covers all the shares of IDRC or CRW common stock that are in
your name.
If you are an IDRC stockholder, you should address the written demand to
International Data Response Corporation, PO Box 7130, Rancho Santa Fe,
California 92067-7130, Attention: Mr. Paul J. Grinberg, Chief Financial
Officer. If you are a CRW stockholder, you should address the written demand
to CRW Financial, Inc., 200 Four Falls Corporate Center, West Conshohocken, PA
19428; Attention: Mr. Jonathan P. Robinson, Secretary. It is important that
IDRC and CRW receive all written demands before the vote concerning the IDRC
or CRW, as the case may be, merger agreement is taken at the IDRC or CRW
stockholders meeting. As explained above, this written demand should be signed
by, or on behalf of, the stockholder of record. The written demand for
appraisal should specify the stockholder's name and mailing address, the
number of shares of stock owned, and that the stockholder is thereby demanding
appraisal of such stockholder's shares.
If you fail to comply with any of these conditions and your merger becomes
effective, you will only be entitled to receive the merger consideration
provided in your merger agreement.
Written notice: Within ten days after the closing of the IDRC or CRW merger,
your company must give written notice that your merger has become effective to
each stockholder who has fully complied with the conditions of Section 262.
Petition with the chancery court: Within 120 days after the closing of the
IDRC or CRW merger, either your company or any stockholder who has complied
with the conditions of Section 262, may file a petition in the Delaware Court
of Chancery. This petition should request that the chancery court determine
the value of the shares of common stock held by all of the stockholders who
are entitled to appraisal rights. If you intend to exercise your rights of
appraisal, you should file such a petition in the chancery court. Your company
has no intentions at this time to file such a petition. Because your company
has no obligation to file such a petition, if you do not file such a petition
within 120 days after the closing, you will lose your rights of appraisal.
Withdrawal of demand: If you change your mind and decide you no longer want
appraisal rights, you may withdraw your demand for appraisal rights at any
time within 60 days after the closing of your merger. You may also withdraw
your demand for appraisal rights after 60 days after the closing of your
merger, but only with the written consent of your company. If you withdraw
your demand for appraisal rights, you will receive the merger consideration
provided in your merger agreement.
Request for appraisal rights statement: If you have complied with the
conditions of Section 262, you are entitled to receive a statement from IDRC
or CRW, as the case may be. This statement will set forth the number of shares
that have demanded appraisal rights, and the number of stockholders who own
those shares. In order to receive this statement, you must send a written
request to your company within 120 days after the closing of your merger.
After your merger, your company has ten days after receiving a request to mail
the statement to the stockholder.
Chancery court procedures: If you properly file a petition for appraisal in
the chancery court and deliver a copy to your company, your company will then
have 20 days to provide the chancery court with a list of the names and
addresses of all stockholders who have demanded appraisal rights and have not
reached an agreement with your company as to the value of their shares. The
chancery court will then send notice to all of the stockholders who have
demanded appraisal rights. If the chancery court thinks it is appropriate, it
has the power to conduct a hearing to determine whether the stockholders have
fully complied with Section 262 of the DGCL and whether they are entitled to
appraisal rights under that section. The chancery court may also require you
to submit your stock certificates to the Registry in Chancery so that it can
note on the certificates that an
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Rights of Stockholders to Appraisals
<PAGE>
appraisal proceeding is pending. If you do not follow the chancery court's
directions, you may be dismissed from the proceeding.
Appraisal of chancery shares: After the chancery court determines which
stockholders are entitled to appraisal rights, the chancery court will
appraise the shares of stock. To determine the fair value of the shares, the
chancery court will consider all relevant factors except for any appreciation
or depreciation due to the anticipation or accomplishment of the applicable
merger. After the chancery court determines the fair value of the shares, it
will direct your company to pay that value to the stockholders who are
entitled to appraisal rights. The chancery court can also direct your company
to pay interest, simple or compound, on that value if the chancery court
determines that interest is appropriate. In order to receive your fair value
for your shares, you must surrender your stock certificates to your company.
The chancery court could determine that the fair value of shares of stock is
more than, the same as, or less than the merger consideration. In other words,
if you demand appraisal rights, you could receive less consideration than you
would under your merger agreement. You should also be aware that an opinion of
an investment banking firm that your merger is fair is not an opinion that
your merger consideration is the same as the fair value under Section 262.
Costs and Expenses of Appraisal Proceeding: The costs and expenses of the
appraisal proceeding may be assessed against your company and the stockholders
participating in the appraisal proceeding, as the chancery court deems
equitable under the circumstances. You can request that the chancery court
determine the amount of interest, if any, your company should pay on the value
of stock owned by stockholders entitled to the payment of interest. You may
also request that the chancery court allocate the expenses of the appraisal
action incurred by any stockholder pro rata against the value of all of the
shares entitled to appraisal.
Loss of Stockholder's Rights: If you demand appraisal rights, after the
closing of your merger you will not be entitled to:
. vote your shares of stock, for any purpose, for which you have demanded
appraisal rights;
. receive payment of dividends or any other distribution with respect to
such shares, except for dividends or distributions, if any, that are
payable to holders of record as of a record date prior to the effective
time of your merger; or
. receive the payment of the consideration provided for in your merger
agreement.
However, you can regain these rights if no petition for an appraisal is
filed within 120 days after the closing of your merger, or if you deliver to
your company a written withdrawal of your demand for an appraisal and your
acceptance of your merger, either within 60 days after the closing of your
merger or with the written approval of your company. As explained above, these
actions will also terminate your appraisal rights. However, an appraisal
proceeding in the chancery court cannot be dismissed unless the chancery court
approves. The chancery court may condition its approval upon any terms that it
deems just.
If you fail to comply strictly with these procedures you will lose your
appraisal rights. Consequently, if you wish to exercise your appraisal rights,
we strongly urge you to consult a legal advisor before attempting to exercise
your appraisal rights.
TeleSpectrum Stockholders' Rights
TeleSpectrum stockholders are not entitled to appraisal rights in connection
with either the IDRC merger or the CRW merger.
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Rights of Stockholders to Appraisals
<PAGE>
The Meetings
TeleSpectrum and CRW will each hold an annual meeting of its stockholders.
IDRC will hold a special meeting of its stockholders. Our boards of directors
are providing you with this joint proxy statement/prospectus in order to
solicit your proxy for use at the meetings. We mailed this joint proxy
statement/prospectus and accompanying form of proxy to you on or about June 9,
1999.
Times and Places; Purposes
TeleSpectrum Annual Meeting. TeleSpectrum will hold its annual meeting at
Philadelphia Marriott Hotel, 1201 Market Street, Philadelphia, Pennsylvania on
June 30, 1999, starting at 9:00 a.m., local time. At the TeleSpectrum meeting,
the stockholders of TeleSpectrum will consider and vote upon:
. the IDRC merger agreement;
. the election of directors;
. adoption of the plan amendment and restatement; and
. such other matters as may properly come before the TeleSpectrum meeting.
CRW Annual Meeting. CRW will hold its annual meeting at the Philadelphia
Marriott Hotel, 1201 Market Street, Philadelphia, Pennsylvania, June 30, 1999,
starting at 9:00 a.m., local time. At the CRW meeting, the stockholders of CRW
will consider and vote upon:
. the CRW merger agreement;
. the election of directors; and
. such other matters as may properly come before the CRW meeting.
IDRC Special Meeting. IDRC will hold a special meeting of its stockholders at
the offices of Cooley Godward LLP, counsel to IDRC, at 4365 Executive Drive,
Suite 1100, San Diego, California, on June 30, 1999, starting at 7:00 a.m.,
local time. At the IDRC meeting, the holders of outstanding shares of IDRC
common and preferred stock, voting as a single class, will consider and vote
upon:
. the IDRC merger agreement; and
. such other matters as may properly come before the IDRC meeting.
Voting Rights; Votes Required for Approval
TeleSpectrum. The TeleSpectrum board has set the close of business on May 28,
1999 as the TeleSpectrum record date. Only holders of record of shares of
TeleSpectrum common stock on May 28, 1999 are entitled to notice of and to vote
at the TeleSpectrum annual meeting. On the TeleSpectrum record date, there were
25,842,948 shares of TeleSpectrum common stock outstanding and entitled to vote
at the TeleSpectrum meeting. These shares were held by approximately 150
stockholders of record.
CRW. The CRW board has set the close of business on May 28, 1999 as the CRW
record date. Only holders of record of shares of CRW common stock on May 28,
1999 are entitled to notice of and to vote at the CRW annual meeting. On the
CRW record date, there were 6,917,521 shares of CRW common stock outstanding
and entitled to vote at the CRW meeting. These shares were held by
approximately 32 stockholders of record.
IDRC. The IDRC board has set the close of business on June 4, 1999 as the
IDRC record date. Only holders of record of shares of IDRC common stock and
IDRC preferred stock on June 4, 1999 are entitled to notice of and to vote at
the IDRC special meeting. On the IDRC record date, there were 476,100 shares of
IDRC common stock outstanding and 600,000 shares of IDRC preferred stock
entitled to vote at the IDRC meeting. These shares were held by approximately
37 stockholders of record.
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The Meetings
<PAGE>
At the TeleSpectrum annual meeting:
. each record holder is entitled to one vote per share;
. the presence in person or by proxy of the holders of a majority of the
outstanding shares is necessary to constitute a quorum;
. approval of the IDRC merger agreement requires that a majority of the
outstanding shares of the TeleSpectrum common stock vote in favor;
. the TeleSpectrum stockholder support agreements obligate Messrs. Alessi,
O'Neill and Virtue and CRW to vote their shares in favor of the IDRC
merger;
. the seven persons receiving the greatest number of votes will be elected
as directors; and
. approval of the plan amendment and restatement requires that a majority
of the shares of TeleSpectrum common stock present in person or by proxy
at the meeting vote in favor.
At the CRW annual meeting:
. each record holder is entitled to one vote per share;
. the presence in person or by proxy of the holders of a majority of the
outstanding shares is necessary to constitute a quorum;
. approval of the CRW merger agreement requires that a majority of the
outstanding shares of the CRW common stock vote in favor;
. the CRW voting agreements obligate the CRW officers and directors and
their affiliates to vote their shares in favor of the CRW merger; and
. the two persons receiving the greatest number of votes will be elected as
Class III directors and the person receiving the greatest number of votes
will be elected as the Class I director.
At the IDRC special meeting:
. each record holder of common stock is entitled to one vote per share;
. each record holder of preferred stock is entitled to one vote per share;
. the presence in person or by proxy of the holders of a majority of the
outstanding shares is necessary to constitute a quorum;
. approval of the IDRC merger agreement requires the approval of a majority
of the outstanding shares of IDRC common stock and preferred stock,
voting together as a single class; and
. the IDRC stockholder support agreements obligate Messrs. Stiefler and
Grinberg and McCown De Leeuw & Co. and its affiliates to vote their
shares in favor of the IDRC merger. These stockholders own approximately
67.3% of the voting power of IDRC.
Proxies
. Completed Proxies. If you complete and return a proxy and your company
receives the proxy prior to or at your meeting, your proxy will be voted
in accordance with your instructions.
. Proxies with No Instructions. If you execute and return a proxy but you
do not provide instructions as to your vote, your proxy will be voted FOR
the IDRC merger agreement, the CRW merger agreement, the plan amendment
and the nominees for election to the TeleSpectrum and CRW boards, as the
case may be.
. Proxies Marked Abstain. If you execute and return a proxy marked ABSTAIN,
your proxy will count for purposes of determining whether there is a
quorum and for purposes of determining the voting power and number of
shares entitled to vote at the meetings but your proxy will not vote.
Proxies marked ABSTAIN will have the effect of a vote AGAINST the IDRC
merger agreement, the CRW
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The Meetings
<PAGE>
merger agreement and the plan amendment (as the case may be). Proxies
marked ABSTAIN will have no effect on the election of directors.
. Broker Non-Votes. Shares represented by "broker non-votes" will be
counted for purposes of determining whether there is a quorum at the
meetings. "Broker non-votes" generally means brokers and nominees are
precluded from exercising their voting discretion with respect to any
matter or the election of directors. Broker non-votes will have the same
effect as a proxy marked ABSTAIN.
. Other Business. We are not aware of any business for consideration at the
meetings other than as described in this joint proxy
statement/prospectus. However, if matters are properly brought before the
meetings, then the person appointed as proxies will have the discretion
to vote or act thereon according to their best judgment.
. Adjournments. We may adjourn our meetings in order to solicit additional
proxies. Proxies marked AGAINST approval of either the IDRC merger
agreement or the CRW merger agreement will be considered as a vote
against any proposal to adjourn the meeting(s) for the purpose of
soliciting additional proxies.
. Revocation. You may revoke your proxy at any time prior to its use. In
order to revoke your proxy, you must deliver to the secretary of
TeleSpectrum, IDRC or CRW, as the case may be, a signed notice of
revocation or you must deliver a later-dated proxy changing your vote. In
addition, you may choose to attend your meeting and vote in person.
Please realize that simply attending the meeting will not in itself
constitute the revocation of your proxy.
. Confidentiality of Proxies. It is our policy to keep proxy cards, ballots
and voting tabulations that identify individual stockholders
confidential. Please realize that disclosure may be required by law and
in limited circumstances.
. Costs of Solicitation. Each company will pay the costs associated with
soliciting proxies from its stockholders. In order to ensure sufficient
representation at our meetings, we may request by telephone or telegram
the return of your proxy card. Please assist us by promptly returning
your proxy card without delay.
. Appraisal Rights. If you are an IDRC or CRW stockholder and you plan to
assert your appraisal rights, we urge you to review "The Mergers--
Appraisal Rights Procedures" for a description of how your proxy may
affect your rights.
Please do not send your stock certificates with your proxy card. We will
mail you a separate transmittal form with instructions for the surrender of
your certificates as soon as practicable after the completion of the mergers.
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The Meetings
<PAGE>
Management of TeleSpectrum Following the Mergers
Directors
If the nominees for election to the TeleSpectrum board are elected by the
TeleSpectrum stockholders at the annual meeting, and the mergers are completed,
the directors of TeleSpectrum after the mergers are expected to be the
individuals described below:
From TeleSpectrum:
Keith E. Alessi will serve as the Chief Executive Officer and President and
as a director. Mr. Alessi has been Chairman of the Board, Chief Executive
Officer and President since March 1998. Mr. Alessi had been Chairman, Chief
Executive Officer and President of Jackson Hewitt, Inc., the nation's second
largest tax preparation service company from 1996 through 1998. From 1988 to
1996, Mr. Alessi served in several executive positions with Farm Fresh, Inc., a
grocery company, and was Vice Chairman upon his departure.
Joseph V. Del Raso has been a partner at the law firm of Pepper Hamilton LLP
since January 1998. Prior thereto, Mr. Del Raso was a partner at the law firm
of Stradley Ronon Stevens & Young from 1992 through January 1998. From 1988 to
1992, he was a partner at the law firm of Holland and Knight in Ft. Lauderdale,
Florida. Mr. Del Raso has been a director of TeleSpectrum since February 1997.
Michael E. Julian has been a director of TeleSpectrum since September 1998.
Mr. Julian has served as Chief Executive Officer of Jitney-Jungle Stores of
America since March 1997 and as Chairman of the Board since August 1998. From
1988 until March 1997, Mr. Julian served as Chairman of the Board and Chief
Executive Officer of Farm Fresh, Inc. In January 1998, Farm Fresh Inc.
petitioned for a prepackaged Chapter 11 bankruptcy and emerged from the
proceedings in May 1998.
David R. Kriegel has been a director of TeleSpectrum since September 1998.
Mr. Kriegel has been Chairman, Chief Executive Officer and President of Drug
Emporium, Inc. since January 1993.
J. Brian O'Neill served as the Chairman of the Board and Chief Executive
Officer from the formation of TeleSpectrum in April 1996 to March 1998. Mr.
O'Neill has been the Chairman of the Board and Chief Executive Officer of CRW
Financial, Inc. since May 1995. From July 1992 to May 1995, Mr. O'Neill was
Chairman and Chief Executive Officer of Casino and Credit Services, Inc. Mr.
O'Neill is currently involved in operating a privately-held real estate
company.
Richard W. Virtue served as Chief Executive Officer of SOMAR, Inc., a
predecessor of TeleSpectrum, from 1982 until August 1996. He has been a
director of TeleSpectrum since August 1996.
Kevin W. Walsh has been a partner of the law firm Adelman Lavine Gold and
Levin, a professional corporation, since 1988. He has been a director of
TeleSpectrum since August 1996.
From IDRC:
Jeffrey E. Stiefler, age 51, will serve as Chairman of the Board of
Directors. Mr. Stiefler has served as the Chief Executive Officer and Chairman
of the Board of IDRC since June 1996. He served as President and a director of
American Express Company, a publicly-traded financial services company, from
1993 to 1995. Mr. Stiefler currently serves as Chairman of OSI Holdings, Inc.,
a privately held outsourcing services firm and as a director of Safeskin
Corporation, a publicly-traded medical products company. Mr. Stiefler has been
an operating partner of McCown De Leeuw & Co., a privately-held venture capital
firm, since January 1996.
Robert B. Hellman, Jr., age 38, will serve as a director. Mr. Hellman has
served as a director and secretary of IDRC since March 1996. He is a managing
director of MDC Management Company III, L.P., which is the general partner of
McCown De Leeuw & Co. III, L.P. and McCown De Leeuw & Co. Offshore (Europe)
III, L.P. He is also a managing director of MDC Management Company IIIA, L.P.,
which is the general partner of
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Directors and Management of TeleSpectrum Following the Mergers
<PAGE>
McCown De Leeuw & Co. (Asia), L.P. These partnerships are engaged in investment
activities. Mr. Hellman is also a member of The Gamma Fund LLC, a limited
liability company engaged in investment activities. Mr. Hellman has been
associated with McCown De Leeuw & Co. since 1987. From 1982 to 1985, he worked
for Bain & Company, a management consulting company. Mr. Hellman currently
serves as a director of a number of privately-held companies.
Committees of the Board of Directors
From the closing of the mergers until successors are elected or appointed,
the members of the committees of the board of directors of TeleSpectrum are
expected to be as follows:
Executive Committee
. Keith E. Alessi
. Jeffrey E. Stiefler
Audit Committee
. Joseph V. Del Raso
. Michael E. Julian
Compensation Committee
. Robert B. Hellman, Jr.
. David R. Kriegel
. Kevin W. Walsh
Executive Officers of TeleSpectrum
In addition to Keith E. Alessi, who will serve as Chief Executive Officer and
President of TeleSpectrum, the executive officers of TeleSpectrum following the
IDRC merger are expected to include the following individuals from IDRC:
Paul J. Grinberg, age 37, has served as the Executive Vice President and
Chief Financial Officer of IDRC since February 1997. From September 1983 to
February 1997, Mr. Grinberg served in many different positions at the
accounting and consulting firm of Deloitte & Touche LLP, including from May
1994 to February 1997 as a partner in the Mergers and Acquisitions Services
Group.
John D. Weil, age 50, has served as the President and Chief Executive Officer
of IDRC US since January 1998, prior to which he served on the IDRC board
beginning in April 1996. From October 1995 through December 1997, Mr. Weil
served in several senior management and board positions with portfolio
companies affiliated with McCown De Leeuw & Co., a privately held venture
capital firm. From October 1995 through December 1997, Mr. Weil served as
Executive Chairman of AmeriComm Holdings, Inc., a McCown De Leeuw & Co.
portfolio investment. From 1982 to 1994, he served as President, CEO and a
director of American Envelope Company, a privately-held company. Mr. Weil
currently serves as a director of certain privately held companies, including
DIMAC Holdings, Inc. and Sage Enterprises, Inc.
David B. Parkes, age 51, has served as the President and Chief Executive
Officer of IDRC International since September 1997. Beginning in September 1997
through the present, Mr. Parkes has also served as President and Chief
Executive Officer of IDRC's subsidiary in Canada, S&P Data Corp. From January
1995 to June 1997, Mr. Parkes served as President and Chief Executive Officer
of Sprint Canada, Inc., a wholly-owned subsidiary of a publicly-traded
telecommunications company. From 1984 to 1994, Mr. Parkes served in many
different positions at Rogers Cantel Mobile Communications, a privately-held
telecommunications company,
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Directors and Management of TeleSpectrum Following the Mergers
<PAGE>
including from 1992 to 1994 as Executive Vice President, Sales and Customer
Care (National). He also serves as director of the Canadian Special Olympics.
Jill A. Ward, age 37, joined IDRC in September 1997 and has served as the
President of IDRC US Inbound and Customer Care since April 1998. From October
1992 to July 1997, Ms. Ward served as Senior Vice President of Marketing and
Business Planning at Fidelity Investments, a financial services company. Before
joining Fidelity Investments, Ms. Ward was a strategy consultant and manager at
Bain & Company.
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Directors and Management of TeleSpectrum Following the Mergers
<PAGE>
Interests of IDRC Management -- These Interests May Be in Addition to
or in Conflict with Your Interests
You should be aware that executive officers of IDRC, including one officer
who is also a director of IDRC, have interests in the IDRC merger that are
different from, or in addition to, the interests of you as stockholders
generally. These interests include the right to receive employment and
severance benefits, and the acceleration of option vesting. Jeffrey E.
Stiefler, IDRC's Chief Executive Officer, was also the Chairman of IDRC's board
of directors when the IDRC board approved the IDRC merger. Robert B. Hellman, a
director of IDRC and a managing director of McCown De Leeuw & Co. will become a
director of TeleSpectrum.
Agreements with TeleSpectrum
At the closing of the IDRC merger, the agreements that each of Messrs.
Grinberg, Weil, Parkes and Ms. Ward have with IDRC will be assumed by
TeleSpectrum. Jeffrey E. Stiefler will receive an agreement with TeleSpectrum
relating to his service as Chairman upon the closing of the IDRC merger.
Jeffrey E. Stiefler. Jeffrey E. Stiefler will serve as the Chairman of the
Board of Directors of TeleSpectrum after the closing of the IDRC merger. The
terms of his service to TeleSpectrum will be under an agreement containing the
following terms:
. initial term of two years;
. annual base salary will be $200,000 through December 31, 1999 and
$100,000 thereafter;
. stock options to purchase 250,000 shares of TeleSpectrum common stock
which will vest ratably over three years;
. annual bonuses based upon specific performance measurements; and
. participation in any medical and other employee benefit plans of
TeleSpectrum comparable to his benefit plans with IDRC.
Paul J. Grinberg. Mr. Grinberg's existing employment and noncompetition
agreement with IDRC contains the following terms:
. annual base salary of $225,000 with any salary increases and bonuses at
board's discretion;
. annual bonuses of up to 100% of base salary, as determined in accordance
with plans adopted by board;
. participation in any medical and other employee benefit plans of IDRC;
. 12 months severance if his employment is terminated without cause plus
proration of non-discretionary bonus amounts if termination is due to
death, disability or without cause;
. any termination within 12 months following a relocation of Mr. Grinberg's
offices more than 50 miles outside of San Diego is deemed a termination
"without cause;" and
. an additional 12 months severance upon termination by IDRC for any reason
if IDRC seeks to enforce a non-competition covenant.
John D. Weil. Mr. Weil's existing employment and nonsolicitation agreement
with IDRC contains the following terms:
. an initial term ending on January 1, 2000, subject to automatic renewals
for consecutive one year terms;
. base compensation of $300,000;
. annual bonuses of up to 200% of his annual salary, as determined in
accordance with plans adopted by board;
. participation in any medical and other employee benefit plans of IDRC;
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Interests of IDRC Management
<PAGE>
. severance payments equal to two times his annual base salary pro rata
through the end of the initial term plus an additional 12 months salary.
During any subsequent term, Mr. Weil shall be entitled to 12 months
salary if terminated without cause; and
. proration of non-discretionary bonus amounts if termination is due to
death, disability or without cause after initial term.
David B. Parkes. Mr. Parkes' existing employment and noncompetition agreement
with IDRC contains the following terms:
. employment term that automatically renews for one year terms unless
either party gives written notice to the other at least 60 days prior to
the end of the term;
. base compensation of $400,000 (Canadian) with salary increases and
bonuses at board's discretion;
. annual bonuses of up to 200% of annual base salary as determined in
accordance with plans adopted by board;
. participation in any medical and other employee benefit plans of IDRC;
. entitled to 24 months severance if his employment is terminated without
cause and a failure to renew agreement is considered a termination
without cause; and
. proration of any non-discretionary bonus amounts will occur if
termination is due to death, disability or without cause.
Jill A. Ward. Ms. Ward's existing employment arrangement with IDRC contains
the following terms:
. base compensation of $220,000;
. annual bonuses of up to 80% of annual salary;
. participation in any medical and other employee benefits plans of IDRC;
and
. entitlement to the lesser of salary and benefits until she obtains full-
time employment or 12 months salary and benefits if her employment is
terminated without cause.
Registration Rights
Each of Messrs. Grinberg, Parkes and Weil will have the right to require
TeleSpectrum to register under the Securities Act, at TeleSpectrum's expense,
all of his shares of TeleSpectrum common stock if terminated by TeleSpectrum
for any reason other than cause, as defined in their respective employment
agreements. Ms. Ward will have a similar right to require TeleSpectrum to
register her shares if she is terminated by TeleSpectrum for any reason.
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Interests of IDRC Management
<PAGE>
Accelerated Vesting of Options
All stock options held by IDRC executive officers who will become a director
or an executive officer of TeleSpectrum will become fully vested as a result of
the IDRC merger. Listed below is certain information with respect to these
options as of June 2, 1999, including the number of shares that will be
underlying vested TeleSpectrum options if the IDRC merger is completed. The
shares underlying TeleSpectrum options include shares underlying TLSP warrants.
<TABLE>
<CAPTION>
Shares Underlying
Options Which Vest as a Shares Underlying
Shares Underlying Result of the IDRC TeleSpectrum Options
Name Vested Options Merger (pro forma)
- ---------------- ----------------- ----------------------- --------------------
<S> <C> <C> <C>
Jeffrey E.
Stiefler....... 12,656 24,844 328,729
John D. Weil.... 3,175 10,508 113,959
Paul J.
Grinberg....... 3,016 9,619 119,947
David B.
Parkes......... 3,000 10,333 110,760
Jill A. Ward.... 2,375 10,625 116,878
</TABLE>
Indemnification and Insurance
TeleSpectrum is required by the IDRC merger agreement to provide
indemnification and liability insurance arrangements for officers and directors
of IDRC.
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Interests of IDRC Management
<PAGE>
Interests of CRW Management -- These Interests May Be in Addition to
or in Conflict with Your Interests
You should be aware that executive officers and directors of CRW have
interests in the CRW merger that may be different from, or in addition to, the
interests of you as stockholders generally.
Ownership of CRW and TeleSpectrum securities
All of CRW's officers and directors own shares of CRW common stock and
options to purchase shares of CRW common stock. These options will be assumed
by TeleSpectrum and become options to purchase TeleSpectrum common stock. In
addition, J. Brian O'Neill, the Chairman and Chief Executive Officer of CRW,
and Jonathan P. Robinson, the Chief Financial Officer of CRW, each own shares
of TeleSpectrum common stock.
Indemnification and Insurance
TeleSpectrum is required by the CRW merger agreement to provide
indemnification and liability insurance arrangements for officers and directors
of CRW.
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Interests of CRW Management
<PAGE>
The IDRC Merger Agreement
The following summarizes the material terms of the IDRC merger agreement, a
copy of which is attached as Appendix I to this joint proxy
statement/prospectus and is incorporated into this joint proxy
statement/prospectus by reference. This summary is qualified in its entirety by
reference to the IDRC merger agreement. We urge you to read the IDRC merger
agreement in its entirety for a more complete description of the terms and
conditions of the IDRC merger.
The IDRC Merger
After the stockholders of IDRC and TeleSpectrum approve the IDRC merger
agreement and other conditions to the IDRC merger are satisfied, IDRC will be
merged with TeleSpectrum. The separate existence of IDRC will cease and
TeleSpectrum will be the surviving corporation.
The merger closing will take place the next business day, or on such later
date as IDRC and TeleSpectrum may agree upon, after the later of:
. the date the stockholders of IDRC and TeleSpectrum have each approved the
IDRC merger agreement; or
. the first business day on which the last of the other closing conditions
are fulfilled or waived.
Conversion of Securities
As a result of the IDRC merger:
. holders of IDRC common stock and options will have the right to receive
an aggregate of 9,200,000 shares of TeleSpectrum common stock and the
TLSP warrants;
. each outstanding share of IDRC preferred stock will be redeemed for $20
in cash and all accrued and unpaid dividends then payable in preferred
stock of IDRC will be paid in cash; and
. the shares of IDRC common stock held by a holder who, under Delaware law,
properly demands an appraisal of such shares will not be converted into
the right to receive shares of TeleSpectrum common stock or TLSP
warrants.
Exchange of Certificates
Exchange of Stock Certificates. Shortly after the IDRC merger is completed,
TeleSpectrum will mail a letter of transmittal to each person who was a holder
of IDRC common stock and preferred stock. This letter will specify that
delivery will be effected, and that risk of loss of the certificates will pass
only upon delivery of the certificates to TeleSpectrum. It will also contain
instructions for use in effecting the surrender of the certificates for shares
of TeleSpectrum common stock and TLSP warrants or cash, as the case may be.
IDRC common stockholders will not be entitled to receive certificates
representing the shares of TeleSpectrum common stock and TLSP warrants until
they have surrendered their IDRC stock certificates and delivered a letter of
transmittal. Holders of IDRC preferred stock will not receive any cash that
they are entitled to until they have surrendered their preferred stock
certificates and delivered a letter of transmittal.
Exchange of Option Agreements. After the completion of the IDRC merger,
TeleSpectrum will mail new option agreements to each holder of IDRC options who
has elected to have their options assumed by TeleSpectrum and participate in
the escrow arrangement.
No Further Ownership Rights in IDRC Common Stock or IDRC Preferred Stock.
After the merger is completed:
. each certificate which represented shares of IDRC common stock will,
until surrendered for exchange, be deemed for all purposes to evidence
ownership of shares of TeleSpectrum common stock and TLSP warrants into
which the shares of IDRC common stock were converted; and
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<PAGE>
. each certificate which represented shares of IDRC preferred stock will be
deemed for all purposes to have been redeemed and to evidence only that
cash amount payable upon redemption without the right to receive any
interest from the time the IDRC merger is completed until the time
payment is received by the holder.
Fractional Shares. TeleSpectrum will not issue any fractional shares in the
IDRC merger. Instead of fractional shares, each holder of a certificate
previously evidencing IDRC common stock will be paid an amount in cash without
interest.
Dividends and Distributions. No dividend or other distribution declared or
made after the IDRC merger is completed with respect to TeleSpectrum common
stock with a record date after the time the IDRC merger is completed will be
paid to the holder of any unsurrendered certificate. This applies until the
holder of such certificate surrenders the certificate with a properly executed
letter of transmittal.
Lost Certificates. TeleSpectrum will not deliver shares of TeleSpectrum
common stock, TLSP warrants or cash on account of any certificates that have
been lost, stolen or destroyed, until the making of an affidavit by the person
claiming certificates to be lost, stolen or destroyed. As a condition precedent
to such delivery, the person to whom shares of TeleSpectrum common stock, TLSP
warrants or cash is to be issued, must give TeleSpectrum a bond or indemnity
reasonably satisfactory to TeleSpectrum, its transfer agent and their
respective insurance carriers, against any claim that may be made against
TeleSpectrum with respect to the certificates alleged to have been lost, stolen
or destroyed.
Representations and Warranties
The IDRC merger agreement contains representations and warranties made by
IDRC and TeleSpectrum. These are statements regarding a company's business
which the other company relied upon when agreeing to the IDRC merger. These
representations and warranties deal with issues such as:
. corporate organization, powers and qualifications;
. capital structure;
. certificates of incorporation, bylaws, minute books and records;
. the authorization, execution, delivery and enforceability of the IDRC
merger agreement;
. the corporate power to complete the transactions contemplated by the IDRC
merger agreement and related matters;
. absence of conflicts under certificates of incorporation, bylaws or
agreements;
. absence of violations of any instruments or law;
. required consents or approvals of the IDRC merger;
. accuracy of information, including financial statements;
. absence of material adverse events or changes;
. absence of undisclosed liabilities;
. agreements, contracts and commitments;
. absence of litigation and claims;
. intellectual property;
. accuracy of information supplied in connection with this joint proxy
statement/prospectus;
. tax matters relating to the IDRC merger;
. affiliates;
. board action;
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. brokers and finders; and
. the adequacy of disclosure.
The IDRC merger agreement also contains representations and warranties made
only by IDRC to TeleSpectrum. These representations and warranties deal with
issues such as:
. insurance;
. authorizations and compliance with law;
. taxes and tax returns;
. employee benefit plans and employment agreements;
. customers;
. labor matters; and
. environmental matters.
The IDRC merger agreement also contains representations and warranties made
only by TeleSpectrum to IDRC. IDRC relied upon these assumptions when agreeing
to the IDRC merger. These representations and warranties deal with issues such
as:
. SEC reports; and
. state takeover statutes.
Covenants
Conduct Business. The parties have provided each other with covenants that
relate to the conduct of their businesses between the date of the IDRC merger
agreement and completion of the IDRC merger. These covenants require each party
to conduct its business only in the ordinary course and in a manner consistent
with past practice. Each party is also required to use its commercially
reasonable efforts to preserve substantially intact its business organizations,
to keep available the services of its present officers and employees that are
integral to the operation of its business as presently conducted and to
preserve its present relationships with customers, suppliers and other persons
of which it has significant business relations. In addition, in some instances,
IDRC must obtain TeleSpectrum's consent before it can take action.
Stockholders' Meetings. TeleSpectrum is required to take all action necessary
in accordance with the Exchange Act, the Delaware law, the rules of Nasdaq and
its certificate of incorporation and bylaws to call, give notice of, convene
and hold the TeleSpectrum annual meeting as promptly as practicable to consider
and vote upon the approval of the IDRC merger agreement.
As promptly as practicable, IDRC will take all action necessary in accordance
with the Delaware law and its certificate of incorporation and bylaws to call,
give notice of, convene and hold the IDRC special meeting as promptly as
practicable to consider and vote upon the approval of the IDRC merger
agreement.
Registration Rights. TeleSpectrum is required to file a registration
statement on Form S-8 registering the shares of TeleSpectrum common stock to be
issued to the holders of assumed IDRC options. TeleSpectrum is required to
maintain the effectiveness of this registration statement for so long as the
options remain outstanding. TeleSpectrum is also required to register the
shares of common stock underlying the TLSP warrants and maintain the
effectiveness of this registration statement until the issuance of all such
shares covered by the TLSP warrants.
Director and Officer Indemnification. For a period of six years after the
IDRC merger is completed, TeleSpectrum is required to indemnify and hold
harmless the directors and officers of IDRC with respect to matters existing or
occurring at or prior to the time the IDRC merger was completed, whether
asserted or claimed prior to, at, or after the IDRC merger was completed, to
the full extent to which IDRC is permitted to
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<PAGE>
indemnify and hold harmless such officers and directors under its certificate
of incorporation and bylaws and applicable law. TeleSpectrum is required to
provide each individual who served as a director or officer of IDRC at any time
prior to the completion of the IDRC merger with liability insurance for a
period of three years after the completion of the IDRC merger no less favorable
in coverage and amount than any applicable insurance in effect immediately
prior to the completion of the IDRC merger. However, TeleSpectrum will only be
obligated to obtain and provide such coverage which is available at a cost of
up to 150% of the cost of such coverage immediately prior to completion of the
IDRC merger.
Other Covenants. Pursuant to the IDRC merger agreement, each of IDRC and
TeleSpectrum has agreed to:
. promptly disclose to the other party any information contained in their
respective disclosure schedules; or in the representations and
warranties;
. give the other party access to all its properties, books, contracts,
commitments and records, and to furnish related information reasonably
requested by the other;
. jointly prepare and file with the SEC this joint proxy
statement/prospectus;
. jointly prepare and file any other filings required to be filed by each
party;
. cooperate with each other and provide to each other all information
necessary in order to prepare, amend or supplement this joint proxy
statement/prospectus and other filings;
. supply true and correct information for inclusion or incorporation by
reference in this joint proxy statement/prospectus;
. use best efforts to complete the IDRC merger as promptly as practical;
. not make any public announcements with respect to the IDRC merger
agreement or any other transactions contemplated;
. promptly deliver copies of reports filed with the SEC;
. not to control the other party's operations before the IDRC merger is
completed;
. use best efforts to obtain any consents, authorizations or orders from
governmental entities or other third parties in connection with the IDRC
merger;
. not take any action reasonably likely to jeopardize the tax treatment of
the IDRC merger;
. negotiate in good faith with, and promptly communicate with each other
regarding, the negotiations with any lender;
. not unreasonably delay its determination regarding any written consent
requested by the other party under the covenant provisions; and
. file prompt amendments to the registration statement.
TeleSpectrum has also agreed to:
. provide prompt notice of any material developments relating to the CRW
merger;
. promptly notify IDRC regarding comments from the SEC; and
. apply for listings of the TeleSpectrum common stock.
IDRC has also agreed:
. not to solicit regarding other acquisition proposals;
. not to terminate, amend, modify or waive any provision of any
confidentiality or standstill agreement;
. to execute and deliver to TeleSpectrum the IDRC stockholder support
agreements;
. to cooperate with TeleSpectrum in the transactions contemplated; and
. to use commercially reasonable efforts to disclose employee benefits
information, if not already disclosed.
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<PAGE>
Conditions to Obligations to Effect the IDRC Merger
Conditions to the Obligations of Each Party. The obligations of IDRC and
TeleSpectrum to complete the IDRC merger do not arise until the following
conditions have been satisfied or waived:
. the stockholders of each of TeleSpectrum and IDRC have approved the IDRC
merger agreement;
. no government entity or regulatory body has taken or threatened action
which would have made the IDRC merger illegal or prohibit the IDRC
merger;
. the SEC has declared effective the registration statement of which this
joint proxy statement/prospectus forms a part;
. Nasdaq has approved the listing of the TeleSpectrum common stock issuable
in connection with the IDRC merger;
. IDRC and TeleSpectrum have obtained governmental and third party consents
necessary for completion of the IDRC merger; and
. all parties required to sign the indemnity escrow agreement have actually
signed that agreement.
Conditions to the Obligations of TeleSpectrum. The obligation of TeleSpectrum
to effect the IDRC merger is subject to the satisfaction or waiver of the
following conditions:
. The representations and warranties of IDRC in the agreement will be true
and correct as of the date of the agreement and as of the closing date as
though made on and as of the closing date, except for changes expressly
contemplated by the agreement and inaccuracies which have not had and
would not reasonably be expected to have an expanded material adverse
effect on IDRC. An expanded material adverse effect on IDRC does not
include the effect of any changes:
- resulting from general conditions applicable to the industries in which
IDRC operates and not specifically relating to IDRC, or from general
business or United States economic conditions which do not have a
disproportionate effect on IDRC;
- caused by the transactions contemplated by the agreement and the public
announcement thereof; or
- any actions taken or omissions by IDRC with the prior written consent
of TeleSpectrum.
. IDRC has performed each of the obligations required by the agreement.
. From the date of the agreement through the date the merger is completed,
no expanded material adverse effect on IDRC has occurred that has not
been cured in all material respects. As of the date the merger is
completed, there has not been a material adverse effect on IDRC.
. IDRC has closed one of its call centers in Phoenix, Arizona and its call
centers in Bloomfield, Iowa and Wichita, Kansas.
. All of the outstanding warrants associated with IDRC's preferred stock
will have been exercised by the delivery of an aggregate of 300,000
shares of IDRC preferred stock in payment of the exercise price thereof.
. The appraisal shares, if any, do not represent more than 3% of the
aggregate outstanding shares of IDRC capital stock.
. The IDRC's existing stockholders' and advisory services agreements have
been terminated.
. The senior credit facility with Banque Nationale de Paris has been
obtained and become available or will be obtained and become available
contemporaneously with the closing of the IDRC merger under the terms
outlined in a commitment letter identified as an exhibit to the IDRC
merger agreement.
. TeleSpectrum has received the opinion of Morgan, Lewis & Bockius, its
counsel, stating that the IDRC merger will be treated as a reorganization
described in Section 368(a) of the Internal Revenue Code.
Conditions to the Obligations of IDRC. The obligation of IDRC to complete the
IDRC merger is subject to the satisfaction or waiver of the following
conditions:
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The IDRC Merger Agreement
<PAGE>
. The representations and warranties of TeleSpectrum in the agreement are
true and correct as of the date of the agreement and as of the closing
date as though made on and as of the closing date, except for changes
expressly contemplated by the agreement and inaccuracies which have not
had and would not reasonably be expected to have an expanded material
adverse effect on TeleSpectrum. An expanded material adverse effect on
TeleSpectrum does not include the effect of any changes:
- resulting from general conditions applicable to the industries in which
TeleSpectrum operates and not specifically relating to TeleSpectrum, or
from general business or United States economic conditions which do not
have a disproportionate effect on TeleSpectrum;
- caused by the transactions contemplated by the agreement and the public
announcement thereof; or
- any actions taken or omissions by TeleSpectrum with the prior written
consent of IDRC.
. TeleSpectrum has performed each of the obligations required by the
agreement.
. From the date of the agreement through the date the merger is completed,
no expanded material adverse effect on TeleSpectrum has occurred that has
not been cured in all material respects. As of the date the IDRC merger
is completed, there is no material adverse effect on TeleSpectrum.
. IDRC has received the opinion of Cooley Godward LLP, their counsel,
stating that the IDRC merger will be treated as a reorganization as
described in Section 368(a) of the Internal Revenue Code.
. The TeleSpectrum board of directors has adopted a resolution expanding
its board by two members and, upon completion of the IDRC merger,
electing Robert B. Hellman, Jr. and Jeffrey E. Stiefler to fill the
vacancies created thereby.
Intention to resolicit proxies. TeleSpectrum and IDRC intend to resolicit
proxies before either company waives any material conditions to the IDRC
merger.
Termination; Termination Fees and Expenses
The IDRC merger agreement may be terminated or abandoned at any time prior to
the closing date:
. by mutual written consent of each of TeleSpectrum and IDRC;
. by either TeleSpectrum or IDRC if the IDRC merger has not been completed
on or before July 31, 1999, and if the terminating party's failure to
fulfill any obligation under the agreement has not been the cause of the
failure of completion of the IDRC merger to occur on or before such date;
. by either TeleSpectrum or IDRC if a governmental entity has taken any
action to permanently restrain, enjoin or otherwise prohibit the
transactions;
. by TeleSpectrum if TeleSpectrum has not materially breached the
agreement, and IDRC has breached, or failed to comply with any of its
obligations under the agreement or any representation or warranty made by
IDRC was incorrect or has since ceased to be correct and such breach,
failure or misrepresentation is not cured by April 30, 1999 and that has
caused or would reasonably be expected to cause a material adverse effect
on IDRC;
. by IDRC if IDRC has not materially breached the agreement, and
TeleSpectrum has breached, or failed to comply with any of its
obligations under the agreement or any representation or warranty made by
TeleSpectrum was incorrect or has since ceased to be correct, and such
breach, failure or misrepresentation is not cured by April 30, 1999, and
that has caused or would reasonably be expected to cause a material
adverse effect on TeleSpectrum;
. by TeleSpectrum at any time after April 30, 1999 if from the date of the
agreement through the date the IDRC merger is completed there has
occurred an expanded IDRC material adverse effect that has not been cured
in all material respects by April 30, 1999 or at any time after April 30,
1999 there has occurred an expanded IDRC material adverse effect;
. by IDRC at any time after April 30, 1999 if from the date of the
agreement through the date the IDRC merger is completed an expanded
TeleSpectrum material adverse effect has occurred that has not been
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cured in all material respects by April 30, 1999, or at any time after
April 30, 1999 there has occurred an expanded TeleSpectrum material
adverse effect;
. by TeleSpectrum or IDRC if approval of the agreement has not been
obtained at the IDRC stockholders' meeting; or
. by IDRC or TeleSpectrum if approval of the agreement has not been
obtained at the TeleSpectrum stockholders' meeting.
In the event of termination of the IDRC merger agreement, the agreement will
become void and there will be no liability or obligation on the part of any of
the parties, except in the events of a breach against confidentiality
provisions in the agreement.
Amendment and Waiver
The IDRC merger agreement may not be amended except in writing signed by
IDRC and TeleSpectrum. However, after approval of the agreement by the
stockholders of each of IDRC and TeleSpectrum, no amendment may be made which
would by applicable law require the further vote of the IDRC stockholders
without first obtaining such further vote.
At any time before the merger is completed, any party may:
. extend the time for the performance of any of the obligations or other
acts of the other parties;
. waive any inaccuracies in the representations and warranties made to such
party in the agreement or in any document delivered pursuant thereto; or
. waive compliance with any of the agreements or conditions for the benefit
of such party.
Description of TLSP Warrants
The holders of shares of IDRC common stock and options exercisable for IDRC
common stock will by reason of the IDRC merger have the right to receive the
TLSP warrants. The TLSP warrants are exercisable for an aggregate of 2,500,000
shares of TeleSpectrum common stock. All of the TLSP warrants will be
identical except as to the number of shares issuable thereunder. The shares of
TeleSpectrum common stock issuable upon exercise of the TLSP warrants will be
freely transferable, unless you are an affiliate of TeleSpectrum, in which
case you may be subject to restrictions on transfer.
Warrant Exercise Period. You may exercise your TLSP warrants at any time
after the first anniversary of the date of completion of the IDRC merger, but
must exercise them prior to the seventh anniversary of the date of completion
of the IDRC merger. If you do not exercise your TLSP warrants prior to the
seventh anniversary of the date of completion, they will terminate. There is
no obligation to exercise a whole warrant at one time.
Exercise Price. The exercise price will be $6.504 per share. This price is
equal to the average closing price of the TeleSpectrum common stock for the 10
trading days prior to the amendment of the IDRC merger agreement effective May
13, 1999.
Mechanics of Exercise. There are two ways that you can exercise your TLSP
warrants. First, you may elect to pay cash for the portion of the TLSP
warrants you wish to exercise. Second, you may elect to exercise your warrants
on a "cashless" basis. This means that you can instruct TeleSpectrum to retain
a number of shares of TeleSpectrum common stock under your TLSP warrants in
payment for the shares you receive. The shares retained must have an aggregate
fair market value at the time of exercise equal to your aggregate exercise
price.
The following illustrates your alternatives for an exercise for 1,000 shares
assuming a fair market value of $20 per share on the date of exercise. Because
the exercise price is $6.504 per share, the aggregate exercise price for 1,000
shares would be $6,504. If you elect to pay in cash, this is the amount
payable in cash to
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TeleSpectrum. If you elect a cashless exercise, you would instruct TeleSpectrum
to retain 325.2 shares in return for your exercise. Under this example, these
325.2 shares would have a market value of $6,504. You would then receive 674.8
shares of TeleSpectrum common stock.
Warrant Transfers. The TLSP warrants can only be transferred to:
. a spouse or child of a holder or a trust or fiduciary that acts for the
benefit of any such spouse or child, for bona fide family planning
purposes;
. the personal representative or estate of a deceased holder made pursuant
to a will or other estate-related transfer at the time of death; or
. any direct or indirect owner of any partnership interests of a holder
that is a partnership.
Any transferee will also be subject to the same transfer restrictions.
Registration of Warrant Shares. The shares of TeleSpectrum common stock
underlying TLSP warrants will be registered by TeleSpectrum under the
Securities Act of 1933. As a result, these shares will be freely transferable
upon exercise.
Description of Indemnity Escrow Agreement
Escrow Arrangement. The stockholders and option holders of IDRC who elect to
have their options assumed by TeleSpectrum are required to deposit a portion of
their TeleSpectrum securities in escrow. This escrow is meant to secure any
indemnification obligations of the IDRC stockholders and option holders to
TeleSpectrum under the IDRC merger agreement. A copy of the indemnity escrow
agreement that relates to this escrow arrangement is included as Appendix VIII
to this joint proxy statement/prospectus.
Securities Subject to Escrow. Holders of IDRC common stock will be required
to deposit a portion of their shares of TeleSpectrum common stock received in
the IDRC merger in escrow. In addition, holders of IDRC options who elect to
have their options assumed by TeleSpectrum will be required to deposit a
portion of their options in escrow. The shares of TeleSpectrum common stock
subject to escrow will have an aggregate "trading value" of $12 million.
"Trading value" means the average closing price of a share of TeleSpectrum
common stock for the 25 trading days prior to the closing of the IDRC merger.
As a result, the exact number of shares subject to escrow will not be known
until the closing date.
This $12 million of escrowed securities will be placed in two escrow funds to
secure the indemnification obligations of the IDRC stockholders and option
holders as set forth in the IDRC merger agreement. First, a $9 million "general
matters escrow fund" will secure all indemnity obligations owed to TeleSpectrum
under the IDRC merger agreement. Second, a $3 million "litigation matters
escrow fund" will secure all indemnity obligations owed to TeleSpectrum that
relate to third-party litigation. Indemnification obligations under non-
litigation matters will be satisfied only from the general matters escrow fund.
Indemnification obligations under these litigation matters must first be
satisfied by the litigation matters escrow fund until such fund is exhausted.
Any remaining indemnification obligations may then be satisfied by the general
matters fund.
Stockholders' Representative for IDRC Security Holders. Glenn McKenzie will
serve as the representative for all IDRC security holders who have TeleSpectrum
securities deposited in escrow. Mr. McKenzie is authorized to act as attorney-
in-fact with authority to make all decisions on your behalf with respect to any
matters related to your indemnification obligations. The appointed
representative shall have the right to resign. Prior to such resignation, your
representative shall appoint a successor representative, reasonably acceptable
to TeleSpectrum, to assume the representative's rights and responsibilities.
Any decisions made by your representative with respect to any matter shall be
final and binding on you. Your representative is authorized on your behalf to
generally represent you with respect to all matters arising
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under the indemnity escrow agreement and the indemnity provisions of the IDRC
merger agreement. Your representative is authorized to retain counsel to assist
him in those matters.
Your representative shall not be personally liable for any actions or
decisions taken or made in good faith in managing or discharging his duties,
except in the case of gross negligence or willful misconduct. You are required
to indemnify your representative against any and all damages incurred by him in
managing or discharging his duties under the indemnity escrow agreement and
IDRC merger agreement.
If a controversy arises among TeleSpectrum, your representative or the
indemnity escrow agent with respect to the indemnity escrow agreement or the
escrow property, or if TeleSpectrum and your representative fail to designate
another indemnity escrow agent, the indemnity escrow agent shall have the right
to:
. withhold delivery of the escrow property until the controversy is
resolved; and/or
. institute a bill of interpleader in any court of competent jurisdiction
to determine the rights of the parties.
Transfers from the Indemnity Funds. TeleSpectrum may make a claim against the
escrow property at any time prior to the expiration date of the escrow. To make
a claim, TeleSpectrum must provide notice to the stockholders' representative
and the indemnity escrow agent. If the claimed amount is liquidated, the notice
will state the amount which will be deemed the amount of the claim against the
escrow property. If the amount is not liquidated, the notice shall so state and
the claim shall be deemed asserted against the escrow property, but no transfer
shall be made until the amount of such claim is liquidated.
Unless your representative gives written notice to TeleSpectrum and the
indemnity escrow agent that it objects to any claim made in a notice within 15
business days from receipt of such notice, the indemnity escrow agent shall
promptly transfer to TeleSpectrum, to the extent the escrow property is
sufficient, an amount that has a value equal to the amount of the claim. Each
amount so transferred shall be drawn pro rata from the escrow shares, shares of
TeleSpectrum common stock underlying the escrowed options and any other
property included in the escrow property. The amount to be transferred will be
valued using the average of the closing prices for the 25 trading days
preceding the closing of the IDRC merger regardless of the actual market value
at such time. Upon the transfer of the claimed property to the indemnity escrow
agent, each option agreement shall automatically be modified to become
exercisable for such lesser number of option shares to fully reflect the option
holders pro rata contribution to the claimed property.
In the event that your representative timely objects to a transfer of the
escrow property, TeleSpectrum and your representative are required to attempt
to settle and compromise the claims. If TeleSpectrum and your representative
are unable to agree, the indemnity escrow agent is restricted from making any
transfers of escrow property until it receives a written statement executed by
TeleSpectrum and your representative or pursuant to a final court decision.
Except as set forth below, all escrow property remaining in escrow shall be
transferred to you within five business days following the expiration date of
the escrow in accordance with your respective interests in the escrow property,
if:
. all claimed property has been transferred to TeleSpectrum with respect to
each notice which has been given by TeleSpectrum as of the expiration
date; or
. no notice has been given by TeleSpectrum as of the expiration date.
If TeleSpectrum has made any claim against the escrow property to which your
representative has objected and which remains outstanding at the expiration
date, then that amount of escrow property reasonably estimated as necessary to
satisfy the claim will be held in escrow until the resolution of the claim, and
the remainder of the escrow property will be distributed to you. Any amount of
remaining escrow property not claimed will be transferred to you in accordance
with the percentages to which you are entitled. Distributions will be made by
mailing the escrow property to each entitled person.
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The parties are required to submit the resolution of any claim, cause of
action or dispute between the parties arising under the indemnity escrow
agreement or the IDRC merger agreement to arbitration. The arbitrators shall
give a decision within 30 business days (15 business days in a few cases) after
being appointed. You, on the one hand, and TeleSpectrum, on the other hand, are
required to pay your own expenses of arbitration and the expenses of the
arbitrators shall be equally shared. Any amounts due from you shall be
satisfied out of the escrow property.
Duration of Escrow. The escrow shall survive until the fifteen month
anniversary of the date of completion of the IDRC merger. At this time the
representations and warranties of IDRC will terminate and expire, and all your
liability with respect to those representations and warranties will be
extinguished except to the extent TeleSpectrum has delivered a notice prior to
the expiration date. TeleSpectrum will be entitled to pursue such claim beyond
the expiration date in accordance with the indemnity escrow agreement. You may
vote your shares on all matters submitted to a vote during the term of the
indemnity escrow agreement.
Other Agreements Relating to the IDRC Merger
The following summarizes the material terms of the IDRC stockholder support
agreements and proxies and the TeleSpectrum stockholder support agreements and
proxies, forms of which have been filed as exhibits to the registration
statement of which this joint proxy statement/prospectus forms a part. Such
summaries are qualified in their entirety by reference to the stockholder
support agreements.
IDRC Stockholder Support Agreements and Proxies. Certain stockholders of IDRC
have agreed to vote their shares of IDRC common stock in favor of the IDRC
merger agreement. The stockholders of IDRC who are bound by these agreements
are Messrs. Stiefler and Grinberg and McCown De Leeuw & Co. III L.P. and its
affiliates. These stockholders own approximately 67.3% of the outstanding IDRC
voting power. These agreements and proxies mean that IDRC will receive the
necessary stockholder approval of the IDRC merger. These stockholders of IDRC
have also agreed not to sell or dispose of any interests in any TeleSpectrum
securities received in the IDRC merger for one year and McCown De Leeuw & Co.
III L.P. has also agreed that it will not sell or dispose of an additional one-
half of its TeleSpectrum securities for 18 months.
These voting agreements are embodied in stockholder support agreements
between each such IDRC stockholder and TeleSpectrum. The IDRC stockholders have
granted irrevocable proxies to TeleSpectrum to vote their IDRC shares
accordingly. Under the IDRC stockholder support agreements, each signing
stockholder must vote all of its stock in favor of the approval of the IDRC
merger agreement. Each such IDRC stockholder has also agreed to vote all of its
shares against any significant transaction which could prevent or impede the
IDRC merger. Each IDRC stockholder who signed a stockholder support agreement
also granted a proxy to TeleSpectrum. This proxy allows TeleSpectrum to vote
all of such stockholders' IDRC common stock in favor of approval of the IDRC
merger agreement. The irrevocable proxy also allows TeleSpectrum to vote such
stock on all other matters which might delay or prevent the completion of the
IDRC merger.
Each IDRC stockholder who signed the stockholder support agreement also
agreed not to sell or transfer any of its IDRC common stock or to deposit any
of its IDRC common stock into a voting trust or enter into a voting agreement
or arrangement. Also, each such stockholder agreed that it will not initiate,
solicit, or encourage the submission of any other proposal for the acquisition
of IDRC.
The IDRC stockholder support agreements terminate upon the closing of the
IDRC merger or any termination of the IDRC merger agreement, whichever occurs
earliest. The proxies terminate upon the termination of the IDRC stockholder
support agreements.
TeleSpectrum Stockholder Support Agreements and Proxies. Certain stockholders
of TeleSpectrum have agreed to vote their shares of TeleSpectrum common stock
in favor of the IDRC merger agreement. The stockholders of TeleSpectrum who are
bound by these agreements are CRW Financial, Inc., a significant stockholder of
TeleSpectrum; Keith E. Alessi, the Chairman, Chief Executive Officer and
President of TeleSpectrum; and J. Brian O'Neill and Richard W. Virtue,
directors of TeleSpectrum. These stockholders own
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approximately 37.4% of the outstanding TeleSpectrum common stock. These
agreements and proxies make it likely that TeleSpectrum will receive the
necessary stockholder approval of the IDRC merger.
Under the TeleSpectrum stockholder support agreements, each signing
stockholder must vote all of its stock in favor of the approval of the IDRC
merger agreement. Each such TeleSpectrum stockholder has also agreed to vote
all of its shares against any significant transaction which could prevent or
impede the IDRC merger. Each TeleSpectrum stockholder who signed a stockholder
support agreement also granted an irrevocable proxy to Messrs. Hellman and
Stiefler and IDRC. This proxy allows such persons and IDRC to vote all of the
stockholders' TeleSpectrum common stock in favor of the approval of the IDRC
merger. The proxy also allows such persons and IDRC to vote such stock on all
other matters which might delay or prevent the completion of the IDRC merger.
Each of Messrs. Alessi, O'Neill and Virtue also agreed not to sell or
transfer any of their TeleSpectrum common stock or to deposit any of their
TeleSpectrum common stock into a voting trust or enter into a voting agreement
or arrangement. Also, each such stockholder, agreed that it will not initiate,
solicit, or encourage the submission of any other proposal for an acquisition
of TeleSpectrum. Except for shares of TeleSpectrum common stock which are
subject to outstanding warrants granted by CRW, CRW agreed not to sell or
transfer any of its TeleSpectrum common stock or to deposit any of its
TeleSpectrum common stock into a voting trust or enter into a voting agreement
or arrangement.
The stockholder support agreements executed by each of Messrs. Alessi,
O'Neill and Virtue each terminate upon the closing of the IDRC merger or any
termination of the IDRC merger agreement, whichever occurs earliest. The
proxies terminate upon the termination of the TeleSpectrum stockholder support
agreements.
The CRW's stockholder support agreement terminates upon the earlier of August
1, 1999 or the termination of the IDRC merger agreement. The CRW stockholder
support agreement also terminates if there is any change to the IDRC merger
agreement which increases or changes the form of the consideration received by
the IDRC stockholders, unless CRW approves the change. The CRW stockholder
support agreement can also be terminated if J.P. Morgan Securities, Inc.
withdraws its opinion that the consideration to be paid by TeleSpectrum is
fair, from a financial point of view, to TeleSpectrum. The proxies terminate
upon the termination of the TeleSpectrum stockholder support agreements.
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The CRW Merger Agreement
The following summarizes the material terms of the CRW merger agreement, a
copy of which is attached as Appendix II to this joint proxy
statement/prospectus and is incorporated into this joint proxy
statement/prospectus by reference. This summary is qualified in its entirety by
reference to the CRW merger agreement. We urge you to read the CRW merger
agreement in its entirety for a more complete description of the terms and
conditions of the CRW merger.
The CRW Merger
After the stockholders of CRW approve the CRW merger and other conditions are
satisfied, CRW Acquisition Corp., a subsidiary of TeleSpectrum, will be merged
with CRW, TeleSpectrum's largest stockholder. The separate existence of CRW
Acquisition will cease and CRW, as the surviving corporation, will be a
subsidiary of TeleSpectrum. The CRW stockholders will become holders of
TeleSpectrum common stock.
If the CRW merger agreement is approved by the stockholders of CRW, the CRW
merger closing will take place the next business day, or on such later day
TeleSpectrum and CRW may agree upon following the date on which the last of the
closing conditions is satisfied.
Conversion and Cancellation of Shares
As a result of the CRW merger:
. each share of CRW common stock will be converted into .709 of a share of
TeleSpectrum common stock;
. each share of CRW Acquisition common stock will be converted into one
common share of CRW; and
. the shares of CRW common stock held by a holder who properly demands an
appraisal of such shares will not be converted into the right to receive
the shares of TeleSpectrum common stock.
Exchange of Certificates
Exchange of Stock Certificates. Shortly after the CRW merger is completed,
but in no event later than five days after completion of the CRW merger,
TeleSpectrum will direct the exchange agent to mail a letter of transmittal to
each person who was a holder of CRW common stock. This letter will specify that
delivery will be effected, and that risk of loss and title of the certificates
will pass only upon delivery of the certificates to the exchange agent. It will
also contain instructions for exchanging CRW stock certificates for shares of
TeleSpectrum common stock or cash, as the case may be. CRW common stockholders
will not be entitled to receive shares of TeleSpectrum common stock or any cash
until they have surrendered their CRW stock certificates and delivered a letter
of transmittal.
No Further Ownership Rights in CRW Common Stock. After the CRW merger is
completed, each certificate which represented shares of CRW common stock will,
until exchanged, be deemed for all purposes to evidence ownership of shares of
TeleSpectrum common stock into which the shares of CRW common stock will have
been so converted.
Fractional Shares. TeleSpectrum will not issue any fractional shares in the
CRW merger. In place of any such fractional shares, each holder of a
certificate previously evidencing CRW common stock will be paid an amount in
cash without interest, rounded to the nearest cent.
Exchange Agent. TeleSpectrum will pay all expenses, including those of the
exchange agent, in connection with the exchange of certificates for shares of
TeleSpectrum common stock. Any TeleSpectrum common stock or other cash
delivered to the exchange agent, and not exchanged for CRW common stock or
fractional interests within 180 days after the CRW merger is completed will be
returned by the exchange agent to the
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surviving corporation which will thereafter act as exchange agent subject to
the rights of holders of CRW common stock.
No Liability. None of TeleSpectrum, CRW Acquisition, CRW, the surviving
corporation or the exchange agent will be liable to any holder of shares of CRW
common stock for any shares of TeleSpectrum common stock, or any dividends or
distributions or cash payable in place of fractional shares delivered to a
state abandoned property administrator or other public official pursuant to any
applicable abandoned property, escheat or similar law.
Dividends and Distributions. No dividend or other distribution declared or
made after the CRW merger is completed with respect to the TeleSpectrum common
stock with a record date after the CRW merger is completed will be paid to the
holder of any unsurrendered certificate. This applies until the holder of such
certificate surrenders the certificate with a properly executed letter of
transmittal.
Lost Certificates. The exchange agent will not deliver TeleSpectrum common
stock on account of any certificates that have been lost, stolen or destroyed,
until the making of an affidavit by the person claiming certificates to be
lost, stolen or destroyed. As a condition precedent to such delivery, the
person to whom the TeleSpectrum common stock is to be issued must give
TeleSpectrum a bond or indemnity reasonably satisfactory to TeleSpectrum, its
transfer agent and their respective insurance carriers, against any claim that
may be made against TeleSpectrum with respect to the certificates alleged to
have been lost, stolen or destroyed the other company.
Representations and Warranties
The CRW merger agreement contains many representations and warranties made by
CRW and TeleSpectrum. These are statements regarding a company's business which
the other company relied upon when agreeing to the CRW merger. The
representations and warranties provided by CRW deal with issues such as:
. corporate organization, powers and qualifications of CRW and its
subsidiaries;
. capital structure of CRW;
. certificates of incorporation, bylaws and minute books;
. the authorization, execution, delivery and enforceability of the CRW
merger agreement;
. the corporate power to complete the transactions contemplated by the CRW
merger agreement and related matters;
. absence of conflicts under certificate of incorporation or bylaws or CRW
agreements;
. absence of violations of any instruments or law;
. required consents or approvals of the CRW merger;
. SEC reports;
. accuracy of information relating to CRW and to be contained in documents
and financial statements to be filed with the SEC in connection with the
CRW merger;
. absence of material adverse events or changes;
. absence of undisclosed liabilities;
. assets;
. agreements, contracts and commitments;
. insurance;
. authorizations and compliance with law;
. taxes and tax returns;
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. absence of litigation and claims;
. employee benefit plans and employment agreements;
. labor matters;
. intellectual property;
. adequacy of disclosure;
. accuracy of information supplied by CRW in connection with this joint
proxy statement/prospectus;
. tax matters relating to the CRW merger;
. affiliates;
. board action;
. vote required;
. applicability of Section 203 of Delaware law;
. opinion of financial advisor; and
. brokers and finders.
The representation and warranties provided by TeleSpectrum to CRW deal with
such issues as:
. corporate organization and powers of TeleSpectrum and CRW Acquisition;
. authorization, execution, delivery and enforceability of the CRW merger
agreement; corporate power to complete the transactions contemplated by
the CRW merger agreement and related matters;
. conflicts under certificates of incorporation or bylaws or TeleSpectrum
agreements; violations of any instruments or law;
. required consents or approvals of the CRW merger;
. capital structure of TeleSpectrum and CRW Acquisition;
. accuracy of information supplied by TeleSpectrum in connection with this
joint proxy statement/prospectus;
. SEC reports;
. accuracy of information relating to TeleSpectrum and CRW Acquisition and
to be contained in documents and financial statements to be filed with
the SEC;
. absence of material adverse events or changes;
. absence of litigation and claims;
. tax matters relating to the CRW merger;
. affiliates;
. adequacy of disclosure; and
. brokers and finders.
Covenants
Conduct of CRW's Business. CRW has provided TeleSpectrum with covenants that
relate to the conduct of its business between the date of the CRW merger
agreement and completion of the CRW merger. These covenants require the
business of CRW to be conducted only in the ordinary course of business.
TeleSpectrum's Undertakings. TeleSpectrum is required to refrain from taking
any direct or indirect action that would cause the CRW merger not to be treated
as a reorganization within the meaning of Section 368(a) of the Code.
TeleSpectrum is required to apply for approval for listing of TeleSpectrum
common stock to be issued pursuant to the CRW merger on Nasdaq upon official
notice of issuance.
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Stockholders' Meetings. CRW is required to take all actions necessary in
accordance with the Exchange Act, Delaware law, the rules of the Nasdaq
SmallCap Market and its certificate of incorporation and bylaws to hold its
annual meeting to consider and vote upon the approval of the CRW merger
agreement. Subject to the fiduciary duties of the board of directors under
applicable law, as determined by such directors in good faith after
consultation with and based upon the written advice of independent legal
counsel, the board of directors of CRW is required to use its efforts to
solicit and secure from its stockholders such approval of the CRW merger
agreement and the transactions contemplated hereby.
Stock Plans-Warrants. At the time the CRW merger is completed, each option
and warrant granted or issued by CRW and exercisable for shares of CRW common
stock, which is outstanding and unexercised or unconverted, will be assumed by
TeleSpectrum. These securities will be converted into an option or warrant to
purchase shares of TeleSpectrum stock. This option or warrant will be exercised
for such number of shares of TeleSpectrum common stock at such exercise price
as is determined as provided below, and will otherwise have the same duration
and other terms as the original option or warrant:
. the number of shares of TeleSpectrum common stock to be subject to the
new option or warrant will be equal to the product of:
--the number of shares of CRW common stock subject to the option or
warrant immediately prior to the time the CRW merger is completed; and
--exchange ratio, the product being rounded to the nearest whole share;
and
. the exercise or convertible price per share of TeleSpectrum common stock
under the new option or warrant will be equal to the exercise price per
share of the CRW common stock under the option or warrant immediately
prior to the completion of the CRW merger divided by the exchange ratio,
rounded to the nearest cent.
Those warrants that were issued by CRW that are by their terms exercisable
for shares of TeleSpectrum common stock will be unaffected by the CRW merger.
Registration Rights. TeleSpectrum is required to file a registration
statement on Form S-8 promptly after the time the CRW merger is completed, with
respect to shares of TeleSpectrum common stock to be issued to holders of
assumed CRW options. TeleSpectrum is also required to file a registration
statement on Form S-3 with respect to shares of TeleSpectrum common stock to be
issued to holders of assumed CRW warrants that had been registered by CRW on a
registration statement on Form S-3. TeleSpectrum, from time to time, is also
required to prepare such resale prospectuses for inclusion in the TeleSpectrum
Form S-3 on the same basis as contemplated by the CRW Form S-3. TeleSpectrum is
required to use all reasonable efforts to maintain the effectiveness of such
Form S-8 registration statement for so along as such options remain outstanding
and the TeleSpectrum Form S-3 for such period covered by the existing CRW Form
S-3.
Director and Officer Indemnification. For a period of six years after the CRW
merger is completed, TeleSpectrum is required to:
. maintain in effect the current provisions regarding indemnification of
officers and directors contained in the certificates of incorporation and
bylaws of CRW; and
. indemnify the directors and officers of CRW to the full extent to which
CRW is permitted to indemnify such officers and directors under its
certificates of incorporation and bylaws and applicable law.
TeleSpectrum is also required to provide each individual who served as a
director or officer of CRW at any time prior to the completion of the CRW
merger with liability insurance for a period of thirty-six months after the
completion of the CRW merger is completed no less favorable in coverage and
amount than any applicable insurance in effect immediately prior to the
completion of the CRW merger. TeleSpectrum will, however, not be obligated to
provide such coverage to the extent that the cost of such coverage exceeds 150%
of the cost of such coverage immediately prior to the completion of CRW merger.
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Other Covenants. Pursuant to the CRW merger agreement, each of CRW and
TeleSpectrum has also agreed:
. for CRW to give TeleSpectrum access to all its properties, books,
contracts, commitments and records, and to furnish related information
reasonably requested by the other;
. to jointly prepare and file with the SEC this joint proxy
statement/prospectus;
. to jointly prepare and file any other filings required to be filed by
each party;
. to cooperate with each other and provide to each other all information
necessary in order to prepare, amend or supplement this joint proxy
statement/prospectus;
. to promptly notify each other of comments from the SEC;
. to supply true and correct information for inclusion or incorporation by
reference in the SEC transaction filings;
. to use best efforts to complete the CRW merger as promptly as practical;
. not to make any public announcements with respect to the CRW merger
agreement or any other transactions contemplated;
. to notify the other party promptly of breach of its representations and
warranties and use best efforts to prevent or promptly remedy such
breach;
. to timely file subsequent financial statements with the SEC;
. not to control the other party's operations before the CRW merger is
completed;
. to use best efforts to obtain any consents, authorizations or orders from
governmental entities or other third parties in connection with the CRW
merger;
. not to take any action reasonably likely to jeopardize the tax treatment
of the CRW merger;
. not to solicit other acquisition proposals; and
. to negotiate in good faith before accepting a superior proposal.
Conditions to Obligations to Effect the CRW Merger
Conditions to the Obligations of Each Party. The obligations of CRW, on the
one hand, and TeleSpectrum and CRW Acquisition, on the other hand, to effect
the CRW merger do not arise until the following conditions have been satisfied
or waived:
. the CRW merger agreement has been approved by the vote of the
stockholders of CRW in accordance with Delaware law and the certificate
of incorporation and bylaws of CRW;
. no legal or regulatory restraint or prohibition has been issued and is
effective, restraining or prohibiting the completion of the CRW merger;
. the registration statement of which this joint proxy statement/prospectus
forms a part has been declared effective under the Securities Act;
. TeleSpectrum has received approval from Nasdaq for the issuance of common
stock as part of the CRW merger; and
. CRW has made its special cash distribution.
Conditions to the Obligations of TeleSpectrum and CRW Acquisition. The
obligation of TeleSpectrum and CRW Acquisition to effect the CRW merger are
subject to the satisfaction or waiver of the following conditions:
. the representations and warranties of CRW contained in the CRW merger
agreement or in any other document delivered pursuant hereto will be true
and correct in all material respects on and as of the closing date with
the same effect as if made on and as of the closing date;
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. CRW has performed in all material respects on or before the closing date
each of the obligations required by the CRW merger agreement;
. no CRW material adverse effect will have occurred, and no fact or
circumstances will exist which could reasonably be expected to result in
a CRW material adverse effect;
. there will not be any proceeding pending or threatened to restrain or
invalidate the transaction contemplated by the CRW merger agreement,
which in the reasonable judgment of TeleSpectrum would make the
completion of the CRW merger inadvisable in light of applicable law or
the defense of which would involve material expense;
. there will not be any securities, rights, warrants, options, or other
instruments outstanding which, after completion of the CRW merger, would
be convertible into or exercisable for securities of TeleSpectrum, and
TeleSpectrum shall be satisfied that all outstanding options, warrants
and convertible securities of CRW will become options, warrants and
convertible securities solely with respect to the TeleSpectrum common
stock on the terms described in the agreement;
. the appraisal shares, if any, will not represent more than 10% of the
aggregate outstanding shares of CRW common stock; and
. all authorizations, consents, orders or approvals of, or declarations or
filings with, and all expirations of waiting periods imposed by, any
governmental body, agency or official necessary for the completion of the
transaction, other than consents the failure to obtain which would not
have material adverse effect on the completion of the transactions will
have occurred or have been obtained and all such required approvals will
be in full force and effect.
Conditions to the Obligations of CRW. The obligation of CRW to effect the CRW
merger is subject to the satisfaction or waiver of the following conditions:
. the representations and warranties of TeleSpectrum and CRW Acquisition
contained in the CRW merger agreement or in any other document delivered
will be true and correct in all material respects on and as of the
closing date with the same effect as if made on and as of the closing
date and at the closing;
. TeleSpectrum and CRW Acquisition have performed in all material respects
on or before the closing date each of the obligations required by the
terms of the CRW merger agreement;
. no TeleSpectrum material adverse effect will have occurred, and no fact
or circumstance will exist which could reasonably be expected to result
in a TeleSpectrum material adverse effect;
. there will not be any litigation or other proceeding pending or
threatened to restrain or invalidate the transactions contemplated by the
CRW merger agreement, which in the reasonable judgment of CRW would make
the completion of the CRW merger inadvisable in light of applicable law;
. the fairness opinion issued by CRW's financial advisor has not been
rescinded; and
. the opinion of Arthur Andersen LLP dated on or prior to the date of
completion of the CRW merger in form and substance reasonably
satisfactory to CRW is in full force and effect.
Intention to resolicit proxies. CRW intends to resolicit proxies before it
waives any material conditions to the CRW merger.
Termination; Termination Fees and Expenses
The CRW merger agreement may be terminated or abandoned at any time prior to
the date of completion:
. by mutual written consent of each of TeleSpectrum and CRW;
. by either TeleSpectrum or CRW if the CRW merger has not been completed on
or before July 31, 1999, provided that the terminating party's failure to
fulfill any obligation under the CRW merger agreement
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has not been the cause of the failure of the completion of the CRW merger
to occur on or before the termination date;
. by either TeleSpectrum or CRW if a governmental entity or arbitrator has
issued a final and nonappealable order, decree or ruling or taken any
other action, permanently restraining, enjoining or otherwise prohibiting
the transactions;
. by TeleSpectrum if CRW has breached, or failed to comply with, in any
material respect any of its obligations under the CRW merger agreement or
any representation or warranty made by CRW was incorrect or has since
ceased to be true and correct in any material respect, and such breach,
failure or misrepresentation is not cured within thirty days after notice
thereof;
. by CRW if TeleSpectrum has breached, or failed to comply with, in any
material respect any of its obligations under the CRW merger agreement or
any representation or warranty made by TeleSpectrum was incorrect or will
have since ceased to be true and correct in any material respect, and
such breach, failure or misrepresentation is not cured within thirty days
after notice thereof;
. by TeleSpectrum if the board of directors of CRW or any committee of the
board of directors of CRW (i) has withdrawn or modified in any adverse
manner its approval and recommendation of the CRW merger agreement; (ii)
has approved or recommended any acquisition of the shares of TeleSpectrum
common stock owned by it, other than the outstanding warrants exercisable
for TeleSpectrum common stock, or any tender offer for shares of its
capital stock, in each case, other than by TeleSpectrum; (iii) has
recommended that the stockholders of CRW tender their shares or publicly
announced its intention to take no position with respect to a tender
offer or exchange offer for any of the outstanding shares of CRW common
stock that has been commenced or a registration statement with respect
thereto has been filed; or (iv) resolved to take any of the actions
specified in this clause;
. by either TeleSpectrum or CRW if the CRW stockholder approval required
has not been obtained at the stockholders meeting; or
. by CRW if it has complied with all its obligations, prior to the approval
of the CRW merger agreement by the stockholders of CRW upon five days'
prior notice to TeleSpectrum, if, as a result of a superior proposal by a
party other than TeleSpectrum, the board of directors of CRW determines
in good faith that their fiduciary obligations under applicable law
require that such superior proposal be accepted.
In the event of termination of the CRW merger agreement, the CRW merger
agreement will become void and there will be no liability on the part of any of
the parties, except in the event of a breach of confidentiality and as stated
below, and nothing in the agreement will relieve any party from liability for
any willful breach.
TeleSpectrum is entitled to cash compensation if the Agreement is terminated:
. by TeleSpectrum if the board of directors of CRW or any committee of the
board of directors of CRW (i) withdraws or modifies in any adverse manner
its approval of the CRW merger agreement (ii) approves or recommends any
acquisition of the shares of TeleSpectrum common stock owned by it or any
tender offer for shares of its capital stock, in each case, other than by
TeleSpectrum, (iii) has recommended that the stockholders of CRW tender
their shares or publicly announced its intention to take no position with
respect to a tender offer or exchange offer for any of the outstanding
shares of CRW common stock that has been commenced or a registration
statement with respect thereto has been filed, other than by TeleSpectrum
or an affiliate thereof, and (iv) resolves to take any of the actions
specified in this clause;
. by TeleSpectrum if the CRW stockholder approval required has not been
obtained at the stockholders meeting;
. by CRW if it has complied with all its obligations, prior to the approval
of the CRW merger agreement by the stockholders of CRW upon five days'
prior notice to TeleSpectrum, if, as a result of a superior proposal by a
party other than TeleSpectrum, the board of directors of CRW determines
in good faith that their fiduciary obligations under applicable law
require that such superior proposal be accepted; or
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. as a result of CRW's breach of the non-solicitation covenant in the
agreement which is not cured within 10 days after notice thereof to CRW
and either:
- at the time of such termination or prior to the stockholders meeting,
there shall have been an acquisition proposal; or
- within one year after termination of the agreement CRW shall have
entered into an agreement with respect to, or completed, an acquisition
proposal.
Under these circumstances, TeleSpectrum is entitled to a cash termination fee
of $1,800,000, and the first $150,000 of expenses incurred by TeleSpectrum in
connection with the negotiation, execution and performance of the transactions.
Amendment and Waiver
The CRW merger agreement may be amended by TeleSpectrum and CRW pursuant to a
writing adopted by TeleSpectrum and CRW at any time before the CRW merger is
completed. However, after approval of the CRW merger agreement by the
stockholders of CRW, no amendment may be made which would alter or change the
amount or kinds of consideration to be received by the holders of CRW common
stock upon completion of the CRW merger which would materially and adversely
affect the holders of CRW common stock.
At any time before the CRW merger is completed, any party may:
. extend the time for the performance of any of the obligations or other
acts of the other parties;
. waive any inaccuracies in the representations and warranties or in any
document delivered pursuant hereto; and
. waive compliance with any of the agreements or conditions contained in
the agreement.
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Opinions of Financial Advisors
Set forth below are summaries of the opinions rendered by and underlying
analyses of the financial advisors to the board of directors of each of
TeleSpectrum and IDRC in connection with the consideration to be paid in the
proposed merger. As described in further detail below, valuation is a
qualitative process that is subject to the numerous uncertainties associated
with evaluating, among other factors, the historical and future performance of
each company and prospective market and macroeconomic conditions. Accordingly,
the forecasts used and assumptions made by financial advisors in performing the
same valuation methodology could result in materially different valuation
conclusions. Indeed, in the course of performing discounted cash flow analyses
of IDRC which we describe in greater detail below, J.P. Morgan, TeleSpectrum's
financial advisor, and Houlihan Lokey, IDRC's financial advisor, reached
materially different valuation conclusions. Although differences of opinion
about value are the essence of any transaction, there are two primary reasons
that the discounted cash flow analyses of IDRC performed by J.P. Morgan and
Houlihan Lokey based on the same set of management projections yielded
competing valuation outcomes. These reasons are:
. that J.P. Morgan used a range of discount rates in its discounted cash
flow analysis for IDRC of 11.5% to 12.5%, whereas Houlihan Lokey
employed a range of 19.0% to 21.0% in its analysis; and
. that J.P. Morgan calculated terminal values in its discounted cash flow
analysis for IDRC using a multiple of Earnings Before Interest, Taxes,
Depreciation and Amortization of 7.5x to 8.5x, whereas Houlihan Lokey
utilized the perpetuity method which assumed that IDRC's cash flows
would grow perpetually at 5-6%.
Discount rates are based upon an analysis of the cost of debt and equity
capital of a business entity, like IDRC, appropriately weighted between debt
and equity to reflect the debt and equity capitalizations of each company. J.P.
Morgan chose its range of discount rates based on those of public companies
that are comparable to IDRC because public companies provide the only source of
observable data in this regard. Houlihan Lokey selected its discount rates
based on an analysis of the cost of IDRC's debt and equity capital as they
perceived them to have existed as of January 5, 1999.
Terminal value reflects the assumed value of IDRC at the end of the valuation
period, which for the discounted cash flow analyses of J.P. Morgan and Houlihan
Lokey was the five-year period ending in 2003. Once determining the terminal
values for IDRC, each of J.P. Morgan and Houlihan Lokey discounted those values
back to present value using the discount rates that each bank employed as noted
above. J.P. Morgan and Houlihan Lokey used two different, but otherwise
generally accepted methodologies in determining the terminal value of a company
in their respective discounted cash flow analyses--the terminable multiple
(J.P. Morgan) and perpetuity, also known as the Gordon Growth Model (Houlihan
Lokey), methods.
These different methodologies in calculating terminal values are not readily
comparable. However, in order to facilitate comparison between the analyses,
the growth rate used by Houlihan Lokey in performing its perpetuity analyses
implies a multiple of IDRC cash flows of 2.5x, to 3.5x, as compared to that
used by J.P. Morgan of 7.5x to 8.5x. In selecting these different implied or
express cash flow multiples, each bank made decisions based on its own
professional judgment, in light of the information available to it at the time.
As a result of the differences between these assumptions, J.P. Morgan's
discounted cash flow analysis assigned a value to IDRC of $465 million to $565
million based on the management case, which we describe below, and of $130
million to $170 million based on the sensitivity case, which we describe below,
whereas Houlihan Lokey's discounted cash flow analysis valued IDRC at $115
million to $136 million based on the management case.
Opinion of TeleSpectrum's Financial Advisor
Pursuant to an engagement letter dated November 30, 1998, TeleSpectrum
retained J.P. Morgan to deliver an opinion as to the fairness from a financial
point of view to TeleSpectrum of the proposed IDRC merger consideration.
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At the meeting of TeleSpectrum's board of directors on January 11, 1999, J.P.
Morgan rendered its oral opinion, subsequently confirmed in writing, to the
board of directors that, as of that date, the consideration to be paid by
TeleSpectrum in the proposed IDRC merger was fair from a financial point of
view to TeleSpectrum. TeleSpectrum's board of directors did not limit J.P.
Morgan in any way in the investigations it made or the procedures it followed
in rendering these opinions.
We have attached as Appendix IV to this document the full text of J.P.
Morgan's written opinion dated January 11, 1999. This opinion sets forth the
assumptions made, matters considered and limits on the review undertaken. We
incorporate the J.P. Morgan opinion into this document and summary of opinion
by reference and urge you to read the opinion in its entirety. J.P. Morgan
addressed its written opinion to the TeleSpectrum board. The opinion addresses
only the consideration to be paid in the proposed IDRC merger and is not a
recommendation to any TeleSpectrum stockholder as to how that stockholder
should vote at TeleSpectrum's annual meeting.
In arriving at its opinion, J.P. Morgan reviewed, among other things:
. the draft of the IDRC merger agreement that was furnished to
TeleSpectrum's board of directors on January 11, 1999;
. the audited financial statements of TeleSpectrum for the fiscal year
ended December 31, 1997, and the unaudited financial statements of
TeleSpectrum for the period ended September 30, 1998;
. current and historical market prices and trading volume of the common
stock of TeleSpectrum;
. publicly available information concerning the business of TeleSpectrum
and IDRC and of selected other companies that we identify below as being
engaged in businesses comparable to those of TeleSpectrum and IDRC, and
the reported market prices for other companies' securities deemed
comparable;
. the terms of other business combinations that J.P. Morgan deemed
relevant;
. internal financial analyses and forecasts concerning TeleSpectrum and
IDRC prepared by the management of each of TeleSpectrum and IDRC, the
material line items of which are noted below; and
. material agreements relating to outstanding indebtedness or other
obligations of the companies.
J.P. Morgan also held discussions with members of the management of
TeleSpectrum and IDRC regarding the strategic rationale for, and the potential
benefit of, the IDRC merger, the past and current business operations of
TeleSpectrum and IDRC, the financial condition and future prospects and
operations of TeleSpectrum and IDRC, the effects of the IDRC merger on the
financial condition and future prospects of TeleSpectrum, and other matters
that J.P. Morgan believed necessary or appropriate to its inquiry. In addition,
J.P. Morgan visited representative facilities of TeleSpectrum and IDRC, and
reviewed other financial studies and analyses and considered any other
information that it deemed appropriate for the purposes of its opinion. Other
than as described above, J.P. Morgan did not review any additional information
in preparing its opinion that were material to its analyses or fairness
determination.
J.P. Morgan relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was publicly available or
that was furnished to it by TeleSpectrum and IDRC or otherwise reviewed by J.P.
Morgan. J.P. Morgan is not responsible or liable for that information or its
accuracy. J.P. Morgan has not conducted any valuation or appraisal of any
assets or liabilities, nor have any valuations or appraisals been provided to
J.P. Morgan. In relying on financial analyses and forecasts provided to it,
J.P. Morgan has assumed that they have been reasonably prepared based on
assumptions reflecting the best currently available estimates and judgments by
management as to the expected future results of operations, anticipated
synergies from the merger and the financial condition of TeleSpectrum and IDRC
to which those analyses or forecasts relate. Further, J.P. Morgan has also
assumed that the expected future results of operations and synergies will be
realized as described by management. Additionally, J.P. Morgan has considered
the substantial long-term competitive benefits that management of TeleSpectrum
believes should accrue to
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TeleSpectrum as a result of the IDRC merger. TeleSpectrum's or IDRC's inability
to realize the expected future results of operations, merger synergies and
other long-term competitive benefits could affect J.P. Morgan's opinion, and
J.P. Morgan expressed and expresses no view as to whether TeleSpectrum will
realize these future results of operations, merger synergies and other long-
term competitive benefits. J.P. Morgan has also assumed that the IDRC merger
will have the tax consequences described in discussions with, and materials
furnished to J.P. Morgan by, representatives of TeleSpectrum, and that the
parties will complete the other transactions contemplated by the IDRC merger
agreement as described in that agreement.
The managements of each of TeleSpectrum and IDRC prepared the projections
furnished to J.P. Morgan for that company. Neither TeleSpectrum nor IDRC
publicly discloses internal management projections of the type provided to J.P.
Morgan in connection with its analysis of the IDRC merger, and neither company
prepared its projections with a view toward public disclosure or compliance
with published guidelines of either the SEC or the American Institute of
Certified Public Accountants. These projections were based on numerous
variables and assumptions that are inherently uncertain and may be beyond the
control of management, including, but not limited to, factors related to
general economic and competitive conditions and prevailing interest rates.
Accordingly, actual results could vary significantly from those set forth in
the projections.
As is customary in the rendering of fairness opinions, J.P. Morgan based its
opinion on economic, market and other conditions as in effect on, and the
information made available to, J.P. Morgan as of January 11, 1999. J.P. Morgan
is not required, and does not intend, to update, revise or reaffirm its opinion
in connection with the proposed IDRC merger unless TeleSpectrum's board of
directors asks J.P. Morgan to do so in connection with a material amendment to
the merger agreement that constitutes a material increase in the value of the
consideration to be received by the IDRC security holders. Numerous subsequent
developments, may affect an analysis that is performed after January 11, 1999
of the fairness from a financial point of view to TeleSpectrum of the proposed
IDRC merger consideration. These developments include, but are not limited to,
changes in industry performance, general business, economic and market
conditions, as well as changes to either or both of TeleSpectrum's or IDRC's
business, financial condition or results of operations. Additionally, J.P.
Morgan expressed and expresses no opinion as to the price at which
TeleSpectrum's stock will trade at any future time.
J.P. Morgan did not provide advice concerning the structure, the specific
amount of the consideration, or any other aspects of the IDRC merger, and did
not provide services other than the delivery of its opinion, nor did
TeleSpectrum request it to do so. J.P. Morgan did not participate in
negotiations on the terms of the IDRC merger and related transactions, which
were the product of direct negotiations between TeleSpectrum and IDRC.
Consequently, J.P. Morgan has assumed that those terms are the most beneficial,
from TeleSpectrum's perspective, that could be negotiated among the parties to
the transactions under the circumstances.
In accordance with customary investment banking practice, J.P. Morgan
employed generally accepted valuation methods in reaching its opinion. The
following is a summary of the material financial analyses that J.P. Morgan
utilized in providing its opinion. We have presented some of the summaries of
financial analyses in tabular format. In order to understand the financial
analyses used by J.P. Morgan more fully, you should read the tables together
with the text of each summary. The tables alone do not constitute a complete
description of J.P. Morgan's financial analyses.
Discounted Cash Flow Analysis. J.P. Morgan conducted a discounted cash flow
analysis to determine the fully diluted equity value per share for each of
TeleSpectrum's and IDRC's common stock by valuing each company based on the
present value of that company's projected free cash flows, assuming no debt
obligations. In conducting this analysis, J.P. Morgan calculated the debt-free
free cash flows that TeleSpectrum and IDRC were expected to generate during
fiscal years 1999 through 2003 based upon two different sets of projections,
the management case and the sensitivity case. The management case was based
upon financial projections prepared by the management of TeleSpectrum and IDRC,
whereas the sensitivity case was based upon projections over the same time
period which reflected more moderate growth in revenues and lower operating
margins during the five-year period. The management case differs from the
sensitivity case in that the sensitivity case considered the impact on the
discounted cash flow valuations of each company of slower growth in revenues
and lower gross and profit margins.
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The following tables summarize the forecasts:
TeleSpectrum Management Case (in millions)
<TABLE>
<CAPTION>
Item 1999 2000 2001 2002 2003
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $202 $206 $219 $232 $247
Operating Income $26 $27 $29 $32 $34
EBITDA $34 $38 $43 $48 $46
</TABLE>
TeleSpectrum Sensitivity Case (in millions)
<TABLE>
<CAPTION>
Item 1999 2000 2001 2002 2003
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $196 $192 $198 $204 $210
Operating Income $19 $20 $20 $21 $22
EBITDA $28 $31 $34 $37 $33
</TABLE>
IDRC Management Case (in millions)
<TABLE>
<CAPTION>
Item 1999 2000 2001 2002 2003
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $205 $282 $388 $524 $711
Operating Income $20 $33 $50 $67 $93
EBITDA $30 $45 $67 $91 $126
</TABLE>
IDRC Sensitivity Case (in millions)
<TABLE>
<CAPTION>
Item 1999 2000 2001 2002 2003
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $190 $224 $275 $342 $427
Operating Income $13 $14 $24 $31 $37
EBITDA $24 $26 $33 $41 $51
</TABLE>
Using both the management case and the sensitivity case, J.P. Morgan also
calculated terminal values for TeleSpectrum and IDRC at the conclusion of a
five-year period ending in 2003. In calculating this range of terminal values,
J.P. Morgan applied a multiple of 2003 Earnings Before Interest, Tax
Depreciation and Amortization, often known as EBITDA, ranging from 7.5x to 8.5x
for TeleSpectrum and IDRC during the final year of the five-year period. J.P.
Morgan then discounted these free cash flows, assuming no debt obligations, and
the range of these terminal values to present values using a range of discount
rates from 11.5% to 12.5%. J.P. Morgan thereafter adjusted the present value of
these debt-free free cash flows and the range of terminal values for estimated
1998 fiscal year-end excess cash, option exercise proceeds, total debt and the
value of net operating losses, for each of TeleSpectrum and IDRC.
Based on the management case, the discounted cash flow analysis indicated a
range of equity values of between $285 million and $320 million or $10.40 and
$11.80 per share for TeleSpectrum's common stock on a stand-alone basis (i.e.,
without synergies), and a range of equity values of between $465 million and
$565 million for IDRC on a stand-alone basis (i.e., without synergies). Based
on the sensitivity case, the discounted cash flow analysis yielded a range of
equity values of between $210 million and $235 million or $7.60 and $8.60 per
share for TeleSpectrum's common stock on a stand-alone basis (i.e., without
synergies), and a range of equity values of between $130 million and $170
million for IDRC on a stand-alone basis (i.e., without synergies).
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Public Trading Multiples. Using publicly available information, J.P. Morgan
compared financial data of TeleSpectrum and IDRC with similar data for selected
publicly traded companies engaged in businesses that J.P. Morgan judged to be
analogous to those of IDRC. The purpose of this analysis was to provide
information regarding the fairness from a financial point of view of the
proposed IDRC merger consideration based upon a comparison of specific
financial information of IDRC and TeleSpectrum with several comparable public
companies. These companies were:
. APAC Teleservices;
. Aegis Communications;
. ICT Group;
. NCO Group;
. Precision Response Corp;
. RMH Teleservices;
. Sitel Corp;
. Sykes Enterprises;
. West Teleservices; and
. TeleTech Holdings.
J.P. Morgan selected these companies because they engage in businesses
analogous to those of TeleSpectrum and IDRC, among other reasons. For each
comparable company, J.P. Morgan measured publicly available financial
performance through the twelve months ended September 30, 1998, as well as
financial projections by the equity analysts covering each comparable company.
J.P. Morgan selected a range of values around the middle value for each
multiple of three financial performance benchmarks, specifically:
<TABLE>
<CAPTION>
Financial Performance
Benchmark Range of Multiples
--------------------- ------------------
<S> <C>
1999 EBITDA 6.5x--10.0x
1999 Earnings before Interest
and Taxes, often called EBIT 8.5x--13.5x
1999 Earnings 15.0x--18.0x
</TABLE>
J.P. Morgan then applied these multiples to each of TeleSpectrum's and IDRC's
management case and sensitivity case EBITDA, EBIT and Earnings, yielding
implied trading values for TeleSpectrum's common stock of approximately $9.50
to $12.50 per share, and indicating an implied equity value for IDRC of
approximately $60 million to $135 million.
Contribution Analysis. J.P. Morgan analyzed the TeleSpectrum stockholder pro
forma ownership level implied by the pro forma contribution by each of
TeleSpectrum and IDRC to the revenue, EBITDA, EBIT and Earnings of the combined
company, adjusted to reflect the companies' respective net debt balances,
assuming completion of the IDRC merger. The purpose of this analysis was to
assess the fairness from a financial point of view of the proposed IDRC merger
consideration based on specific historical and estimated future operating and
financial information comparing the contribution of TeleSpectrum and IDRC to
the combined company with the percentage of the combined company that each
company's shareholders would hold upon completion of the merger.
The following tables set forth the ownership levels suggested by the selected
financial performance benchmarks based on the management case and sensitivity
case, as compared to the pro forma fully diluted ownership of the TeleSpectrum
stockholders after the IDRC merger of 72.5%.
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Management Case
<TABLE>
<CAPTION>
TeleSpectrum IDRC
------------ ----
<S> <C> <C>
1998 Revenues 52% 48%
1999 Revenues 50% 50%
1998 EBITDA 6% 94%
1999 EBITDA 53% 47%
1998 EBIT 100% 0%
1999 EBIT 55% 45%
1998 Earnings 36% 64%
1999 Earnings 82% 18%
</TABLE>
Sensitivity Case
<TABLE>
<CAPTION>
TeleSpectrum IDRC
------------ ----
<S> <C> <C>
1998 Revenues 52% 48%
1999 Revenues 51% 49%
1998 EBITDA 6% 94%
1999 EBITDA 54% 46%
1998 EBIT 100% 0%
1999 EBIT 58% 42%
1998 Earnings 36% 64%
1999 Earnings 94% 6%
</TABLE>
Warrant Valuation. J.P. Morgan analyzed the value of the warrants using the
Black-Scholes option pricing model. The purpose of this analysis was to assign
a range of values to the warrants proposed to be paid by TeleSpectrum in the
IDRC merger, using the standard valuation methodology for options and warrants,
which takes into account, among other factors, the exercise price, the term of
the warrants and volatility of the underlying security. In its analysis, J.P.
Morgan assumed:
. a volatility of 60%-80%;
. a strike price at 100% (at-the-money), which for the purposes of this
analysis was $9.80 representing the average share price of TeleSpectrum
for the 25 trading days prior to January 6, 1999;
. that the warrants are American-style warrants with a one year exercise
delay; and
. no liquidity discount for the warrants.
This analysis yielded values of the warrants of $6.50-$7.50.
This summary does not purport to be a complete description of the analyses or
data presented by J.P. Morgan. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description. J.P. Morgan believes that one must consider its opinion,
this summary and its analyses as a whole. Selecting portions of this summary
and these analyses, without considering the analyses as a whole, would create
an incomplete view of the processes underlying the analyses and opinion. In
arriving at its fairness determination, J.P. Morgan considered the results of
all of the analyses, as a whole. No single factor or analysis was determinative
of J.P. Morgan's fairness determination. Nevertheless, in light of the analyses
performed, none of the factors that we have described above did not support
J.P. Morgan's fairness determination. Additionally, and most importantly to the
fairness determination, J.P. Morgan concluded that the totality of the factors
considered and analyses performed operated collectively to support its
determination.
J.P. Morgan based the analyses on assumptions that it deemed reasonable,
including assumptions concerning general business and economic conditions which
impact the companies' growth rates, labor costs and price competition and
industry-specific factors similar to those set forth under the heading "Risk
Factors"
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on pages 30 through 40 of this document. This summary sets forth, under the
description of each analysis, the other principal assumptions upon which J.P.
Morgan based that analysis. J.P. Morgan's analyses are not necessarily
indicative of actual values or actual future results that either company or the
combined company might achieve, which values may be higher or lower than those
indicated. Analyses based upon forecasts of future results are inherently
uncertain, as they are subject to numerous factors or events beyond the control
of the parties and their advisors. Accordingly, these forecasts and analyses
are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by those analyses.
Therefore, none of TeleSpectrum, IDRC, J.P. Morgan, Houlihan Lokey or any other
person assumes responsibility if future results are materially different from
those forecasted. Moreover, J.P. Morgan's analyses are not and do not purport
to be appraisals or otherwise reflective of the prices at which businesses
actually could be bought or sold.
As a part of its investment banking business, J.P. Morgan and its affiliates
are continually engaged in the valuation of businesses and their securities for
mergers and acquisitions, investments for passive and control purposes,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements, and valuations for estate, corporate and other
purposes. TeleSpectrum selected J.P. Morgan to deliver an opinion to the
TeleSpectrum board as to the fairness from a financial point of view of the
proposed IDRC merger consideration on the basis of its experience and
familiarity with TeleSpectrum.
For delivering its opinion, TeleSpectrum has agreed to pay J.P. Morgan a fee
of $950,000. In addition, TeleSpectrum has also agreed to reimburse J.P. Morgan
for its expenses incurred in providing its services, including the fees and
disbursements of counsel, and will indemnify J.P. Morgan against liabilities to
which J.P. Morgan or its affiliates or those entities' agents may be exposed in
connection with its engagement by, and performance of services for,
TeleSpectrum, including liabilities arising under the federal securities laws.
During the past two years, J.P. Morgan and its affiliates did not receive any
compensation from TeleSpectrum, other than $362,000 paid in 1997 in connection
with an equity offering.
J.P. Morgan and its affiliates maintain banking and other business
relationships with TeleSpectrum and its affiliates, for which it receives
customary fees. In the ordinary course of their businesses, J.P. Morgan and its
affiliates may actively trade the debt and equity securities of TeleSpectrum
for their own accounts or for the accounts of customers. Accordingly, they may
hold long and/or short positions in those securities at any given time.
J.P. Morgan consented to the use of its opinion letter dated January 11, 1999
that is attached as Appendix IV to this document, as well as to the references
to its opinion in this document. In giving its consent, J.P. Morgan did not
admit that it came within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, or the rules and regulations of
the SEC under that Act. Further, J.P. Morgan did not, and does not, admit that
it is an expert as to any part of this document within the meaning of the term
"experts" as used in that Act or those rules and regulations.
Opinion of IDRC's Financial Advisor
IDRC engaged Houlihan Lokey to render an opinion to the IDRC board as to the
fairness, from a financial point of view, of the consideration to be received
by the stockholders of IDRC in connection with the IDRC merger. Houlihan Lokey
is a nationally recognized investment banking firm that provides financial
advisory services in connection with mergers and acquisitions, leveraged
buyouts, business valuations for a variety of regulatory and planning purposes,
recapitalizations, financial restructurings, and private placements of debt and
equity securities. Houlihan Lokey has performed financial advisory services for
IDRC in the past, including rendering a fairness opinion in connection with a
private placement of $12 million of Series A Preferred Stock in April 1998, for
which Houlihan Lokey received a fee of $125,000.
IDRC agreed to pay Houlihan Lokey a fee of $190,000 for its preparation and
delivery of the fairness opinion. No portion of Houlihan Lokey's fee is
contingent upon the successful completion of the IDRC merger.
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IDRC retained Houlihan Lokey solely to deliver its fairness opinion. IDRC
agreed to indemnify Houlihan Lokey and its affiliates against certain
liabilities, including liabilities under federal securities laws that arise out
of the engagement of Houlihan Lokey. The full text of Houlihan Lokey's opinion,
which sets forth the assumptions made, general procedures followed, factors
considered and limitations on the review undertaken by Houlihan Lokey in
rendering its opinion is attached as Appendix V and is incorporated herein by
reference.
Houlihan Lokey has not been requested and does not intend to update, revise
or reaffirm its fairness opinion in connection with the IDRC merger unless
requested to do so by IDRC's board of directors. Events that could affect the
fairness of the IDRC merger, from a financial point of view, to the IDRC
stockholders include adverse changes in industry performance, market conditions
and changes to either or both of IDRC's and TeleSpectrum's business, financial
condition and results of operations.
IDRC has advised Houlihan Lokey that it will not seek an update to the
Houlihan Lokey fairness opinion unless the IDRC board asks Houlihan Lokey to do
so in connection with:
. a material modification to the terms of the merger consideration or other
material amendments to the IDRC merger agreement that the IDRC board
determines would be reasonably likely to impact the overall fairness of
the merger to the IDRC stockholders; or
. the occurrence of a material event with respect to general market
conditions, the industry in which IDRC and TeleSpectrum operate, or the
business, financial condition or results of operations of IDRC or
TeleSpectrum which the IDRC board determines would be reasonably likely
to affect Houlihan Lokey's fairness opinion if such opinion were reissued
taking into account such event.
IDRC has informed Houlihan Lokey that as of the date of this joint proxy
statement, the board believes that there has been no material change in the
terms of the merger consideration or any other material event that the board
believes would be reasonably likely to affect Houlihan Lokey's fairness opinion
since Houlihan Lokey rendered such opinion.
Houlihan Lokey did not, and was not requested by IDRC to, make any
recommendations as to the form or amount of consideration to be received by the
IDRC stockholders and does not express any opinion as to the fairness of any
aspect of the IDRC merger not expressly addressed in its fairness opinion.
In arriving at its opinion, attached as Appendix V to this joint proxy
statement/prospectus and incorporated herein by reference, among other things,
Houlihan Lokey:
. reviewed certain of IDRC's and TeleSpectrum's audited and interim
financial statements as well as TeleSpectrum's 1997 Form 10-K;
. reviewed the material transaction documents related to the IDRC merger,
including the IDRC merger agreement and form of TLSP warrant;
. met with certain members of the senior management of IDRC and
TeleSpectrum to discuss the companies' respective businesses;
. visited facilities and business offices of IDRC and TeleSpectrum;
. reviewed forecasts and projections prepared by IDRC's management and a
budget prepared by TeleSpectrum's management;
. reviewed the historical market prices and trading volume for
TeleSpectrum's common stock; and
. reviewed other publicly available financial data for companies that
Houlihan Lokey deemed comparable to IDRC and TeleSpectrum and publicly
available prices and premiums paid in other transactions that Houlihan
Lokey considered similar to the IDRC merger.
In connection with the IDRC merger, Houlihan Lokey determined that the total
aggregate consideration of approximately $205.2 million for the assets of IDRC
was composed of the following: (i) $89.7 million for
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9,200,000 shares of common stock based on the closing price of TeleSpectrum's
common stock as of January 5, 1999; (ii) $14.4 million attributable to warrants
to purchase 3,000,000 shares of TeleSpectrum common stock determined using the
Black-Scholes Option Model; (iii) $6.7 million in cash for the redemption of
IDRC's preferred stock and accrued dividends; and (iv) the assumption of $94.4
million of total interest bearing debt as of October 31, 1998, which management
of IDRC represented to Houlihan Lokey as the most recent debt balance
available.
Houlihan Lokey primarily used three methodologies to assess the fairness,
from a financial point of view, of the consideration to be received by the IDRC
stockholders in connection with the IDRC merger. Each methodology provided an
estimate as to the aggregate value of the assets of IDRC being acquired by
TeleSpectrum. The analyses required studies of the overall market, economic and
industry conditions in which IDRC operations, and the operating results of
IDRC.
Comparable Company Analysis. Using publicly available information, Houlihan
Lokey compared selected financial data of IDRC with similar data of various
companies engaged in businesses considered by Houlihan Lokey to be comparable
to that of IDRC, including APAC TeleServices, Inc., Aegis Communications Group,
Inc., ICT Group, Inc., RMH Teleservices, Inc., Sitel Corporation, TeleSpectrum
and West Teleservices Corporation. For each of the comparable companies,
Houlihan Lokey calculated, reviewed and analyzed numerous financial and
operating performance ratios, as well as numerous market capitalization ratios,
such as the enterprise value (aggregate equity plus total interest-bearing
debt) to the latest twelve months earnings before interest, taxes, depreciation
and amortization.
Based on its comparable company analysis, Houlihan Lokey determined that the
consideration to be received by the stockholders of IDRC is fair from a
financial point of view.
There are inherent differences between the businesses, operations, and
prospects of IDRC and the comparable companies. Accordingly, Houlihan Lokey
believed that it was inappropriate to, and therefore did not, rely solely on
the above-described quantitative results of the comparable company analysis and
accordingly also made qualitative judgments concerning differences between the
financial and operating characteristics and prospects of IDRC and the
comparable companies that would, in Houlihan Lokey's opinion, affect the public
market valuation of such companies.
Comparable Transaction Analysis. Houlihan Lokey analyzed certain financial
performance measures for the thirteen merger and acquisition transactions
involving companies in the teleservices and call center-based sectors set forth
below:
. SA Intuiparc/Sitel Corp.;
. ITI Marketing Services, Inc./APAC TeleServices, Inc.;
. IQI, Inc./ATC Communications Group, Inc.;
. UTICS Corp./Datamatic, Inc.;
. Corporacion Interamericana/Sitel Corp.;
. Telephone Marketing Services Ltd./Sitel Corp.;
. Paragren Technologies, Inc./APAC TeleServices, Inc.;
. Svanberg & Co. Interessenter AB/Sitel, Corp.;
. Encyclopedia Britannica, Inc./ACI Telecentrics, Inc.;
. Support Systems Developers, Inc./Sitel Corp.;
. L&R Group Ltd./Sitel Corp.;
. Softmart, Inc.,/Sitel Corp.; and
. Levita Group Pty. Ltd./Sitel Corp.
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Opinions of Financial Advisors
<PAGE>
In performing its analysis, Houlihan Lokey considered that the merger and
acquisition transaction environment varies over time because of, among other
things, interest rate and equity market fluctuations and industry results and
growth expectations.
No company or transaction used in the analysis described above was directly
comparable to IDRC or the IDRC merger. Accordingly, Houlihan Lokey reviewed the
foregoing transactions to understand the range of multiples of revenues and
multiples of EBITDA (i.e., earnings determined before taking into account the
effect of interest, taxes, depreciation and amortization) paid for companies in
the teleservices or related industries. The lowest and highest ranges of
multiples of revenues paid for such companies was .5x to 1.18x, respectively,
and the lowest and highest ranges of multiples of EBITDA paid for such
companies was 14.2x to 15.3x, respectively. Based upon IDRC's historical
revenues and EBITDA for the 12-month period ended October 31, 1998 and based
upon the lowest and highest multiples of revenues and EBITDA determined under
the comparable transaction analyses, Houlihan Lokey calculated the enterprise
value for IDRC to be between approximately $75.0 million to $200.0 million.
Discounted Cash Flow Analysis. Houlihan Lokey performed a discounted cash
flow analysis. Houlihan Lokey calculated the debt-free cash flows (i.e., cash
flows before payments made to equity investors and holders of interest-bearing
debt) that IDRC was expected to generate for the fiscal years ending December
31, 1999 through 2003 based upon projections furnished by IDRC management.
Houlihan Lokey also calculated a range of terminal values for IDRC at the
conclusion of a five-year period ending in 2003. In calculating this range in
terminal value, Houlihan Lokey used discount rates ranging from 19% to 21% and
terminal growth rates of 5% to 6%. Houlihan Lokey then discounted these debt-
free cash flows, assuming no debt obligations, and the range of these terminal
values to the present using a range of discount rates from 19% to 21%. Houlihan
Lokey selected these discount rates based on an analysis of the cost of IDRC's
debt and equity capital as they existed as of January 5, 1999.
Based on the IDRC management projections, the discounted cash flow analysis
indicated a range of enterprise values of between $115 million and $136 million
for IDRC.
As a matter of course, IDRC does not publicly disclose forward-looking
financial information. Nevertheless, in connection with its review of IDRC's
business, Houlihan Lokey considered financial projections for the years ending
December 31, 1999 through December 31, 2003 furnished by IDRC management in
connection with Houlihan Lokey's fairness opinion. Such projections are set
forth in the following table.
<TABLE>
<CAPTION>
IDRC Management's Projections
-------------------------------------------------
1999 2000 2001 2002 2003
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues..................... $205,425 $ 282,145 $388,351 $524,182 $711,181
Operating Income............. 19,834 32,511 50,224 66,624 92,519
% of Total Revenues.......... 9.7% 11.5% 12.9% 12.7% 13.0%
</TABLE>
These financial projections were prepared in December 1998 by IDRC
management. The projections were prepared under market conditions as they
existed as of approximately December 1998 and management does not intend to
provide Houlihan Lokey with any updated or revised projections in connection
with this merger. The projections do not take into account any circumstances or
events occurring after the date they were prepared. The projections do not take
into account the combination of the operations of IDRC and Telespectrum or any
changes that might result from or relate to the IDRC merger. In addition,
factors such as industry performance, general business, economic, regulatory,
market and financial conditions, as well as changes to IDRC's business,
financial condition or results of operation, may cause the IDRC projections or
the underlying assumptions to be inaccurate. As a result, the IDRC projections
should not be relied upon as necessarily indicative of future results, and
readers of this joint proxy statement/prospectus are cautioned not to place
undue reliance on such projections.
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Opinions of Financial Advisors
<PAGE>
Market Trading Analysis. Houlihan Lokey reviewed current and historical
market prices and trading data of the TeleSpectrum common stock. During the
period from August 8, 1996, the date of TeleSpectrum's initial public offering,
to January 5, 1999, seven business days prior to the announcement of the
transaction, TeleSpectrum's common stock closing prices ranged from a high of
$21.88 per share to a low of $2.75 per share with an average price of $9.82 per
share; during the period January 4, 1998 to January 5, 1999, TeleSpectrum's
common stock closing prices ranged from a high of $11.00 per share to a low of
$2.75 per share and an average price of $7.19 per share. Houlihan Lokey also
compared the relative performance of the TeleSpectrum common stock to the
comparable companies during the one-year period from January 4, 1998 to January
5, 1999. The market trading analysis was performed to provide background
information and to add context to the other analyses performed by Houlihan
Lokey as described above.
Houlihan Lokey drew no specific conclusion from its comparable transaction,
discounted cash flows and market trading analyses, but subjectively factored
its observations from these analyses into its qualitative assessment of the
relevant facts and circumstances.
Houlihan Lokey's analyses indicated that the consideration to be received by
IDRC's stockholders in connection with the IDRC merger is fair to the
stockholders from a financial point of view.
In arriving at its fairness opinion, Houlihan Lokey reviewed key economic and
market indicators, including growth in Gross Domestic Product, inflation rates,
interest rates, consumer spending levels, manufacturing productivity levels,
unemployment rates and general stock market performance. Houlihan Lokey's
opinion is based on the business, economic, market and other conditions as they
existed as of January 5, 1999 and on the projected financial information
provided to Houlihan Lokey as of such date. In rendering its opinion, Houlihan
Lokey has relied upon and assumed, without independent verification that the
historical and projected financial information provided to Houlihan Lokey by
IDRC has been reasonably and accurately prepared based upon the best current
available estimates of the financial results and condition of IDRC.
Additionally, Houlihan Lokey has relied upon and assumed, without independent
verification, that the historical and projected financial information provided
to Houlihan Lokey by TeleSpectrum has been reasonably and accurately prepared
based upon the best current available estimates of the financial results and
condition of TeleSpectrum. Houlihan Lokey did not independently verify the
accuracy or completeness of the information supplied to it with respect to IDRC
or TeleSpectrum and does not assume responsibility for it. Except as set forth
above, Houlihan Lokey did not make any independent appraisal of the specific
properties or assets of IDRC or TeleSpectrum.
The summary set forth above describes the material points of more detailed
analyses performed by Houlihan Lokey in arriving at its fairness opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinion, Houlihan Lokey made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Houlihan
Lokey believes that its analyses and summary set forth herein must be
considered as a whole. In its analysis, Houlihan Lokey made numerous
assumptions with respect to IDRC, TeleSpectrum, industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of IDRC. The estimates contained in such analyses
are not necessarily indicative of actual values or predictive of future results
or values, which may be more or less favorable than suggested by such analyses.
However, there were no specific factors reviewed by Houlihan Lokey that did not
support its opinion. Additionally, analyses relating to the value of businesses
or securities are not appraisals. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty.
Opinion of CRW's Financial Advisor
CRW retained JMS to act as its financial advisor, including with the CRW
merger. JMS provided the CRW special committee and the CRW board with its oral
opinion on August 25, 1998, the date of the CRW
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Opinions of Financial Advisors
<PAGE>
board meeting at which the execution of the CRW merger agreement by CRW was
authorized and approved, and such opinion was thereafter confirmed in writing
on September 2, 1998. The JMS opinion stated that, as of such date and based
and subject to the assumptions, limitations and qualifications set forth in the
JMS opinion, the consideration to be received by the CRW stockholders in the
CRW merger was fair from a financial point of view. The full text of the JMS
opinion is included as Appendix VI to this proxy statement. CRW'S stockholders
are urged to read the JMS opinion for a discussion of assumptions made, matters
considered and limitations on the review undertaken by JMS in rendering the JMS
opinion. The summary of the JMS opinion set forth in this proxy statement is
qualified in its entirety by reference to the full text of the JMS opinion.
The JMS opinion was prepared for the CRW special committee and the CRW board
and is directed only to the fairness of the consideration to be received by
CRW's stockholders from a financial point of view. The JMS opinion does not
constitute a recommendation to any stockholder of CRW as to how such
stockholder should vote at the CRW annual meeting nor does it constitute an
opinion as to the price at which TeleSpectrum common stock will actually trade
at any time. JMS was not requested to find buyers for the TeleSpectrum stock
owned by CRW. In arriving at its opinion, JMS did not ascribe a specific range
of value to TeleSpectrum. Instead, JMS made its determination as to the
fairness, from a financial point of view, of the consideration to be received
by CRW's stockholders on the basis of the financial and comparative analyses
described below. While JMS provided CRW advice during its negotiations with
TeleSpectrum, JMS did not make any recommendation as to the form or amount of
the consideration to be received by CRW's stockholders in the CRW merger. The
form and amount of consideration was ultimately determined through arm's-length
negotiations between the parties. CRW imposed no restrictions or limitations
upon JMS with respect to the investigations made or the procedures followed by
JMS in rendering its opinion.
In arriving at its opinion, JMS reviewed and analyzed:
. the CRW merger agreement and the specific terms of the CRW merger;
. business, operating results and financial condition and prospects of CRW;
. publicly available financial and operating information with respect to
the business, operations and prospects of TeleSpectrum;
. a comparison of the historical financial results and present financial
condition of TeleSpectrum with those of other companies that JMS deemed
comparable;
. a comparison of the financial terms of the CRW merger agreement with the
financial terms of other transactions that JMS deemed comparable;
. a comparison of historical block sales of common stock which constitute
large, illiquid stockholdings but do not represent a majority interest in
companies that JMS deemed comparable; and
. an analysis of public offering costs, related to initial public offerings
and follow-on offerings which JMS deemed relevant.
In addition, JMS also reviewed the terms of the stock options and warrants
issued by CRW and analyzed the historical stock prices and volume of the common
stocks of CRW and TeleSpectrum and the trading relationships between these
stocks.
In arriving at its opinion, JMS assumed and relied upon the accuracy and
completeness of the financial and other information that was available from
public sources and that was provided to it by CRW without assuming any
responsibility for independent verification of such information. JMS did not
conduct a physical inspection of the properties and facilities of TeleSpectrum
and did not make or obtain any evaluations or appraisals of the assets or
liabilities of TeleSpectrum. Upon the advice of CRW and its tax advisors, JMS
assumed that the CRW merger would qualify as a tax-deferred reorganization
under the Code to CRW's stockholders and TeleSpectrum.
In connection with the preparation of the JMS opinion, JMS performed the
financial and comparative analyses described below. The preparation of a
fairness opinion involves a determination as to the most
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Opinions of Financial Advisors
<PAGE>
appropriate and relevant methods of financial and comparative analysis and the
application of those methods to the particular circumstances. Furthermore, in
arriving at its opinion, JMS did not attribute any particular weight to any
analysis or factor considered by it. JMS did not form a conclusion as to
whether any individual analysis, considered in isolation, supported or failed
to support an opinion as to the fairness of the consideration from a financial
point of view. Accordingly, although there were no factors considered by JMS
that did not support the JMS opinion, JMS believes that its analyses must be
considered as a whole and that considering any portion of such analyses and
factors, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying its opinion. The JMS
opinion is necessarily based on the information made available to it as of the
date of the JMS opinion.
The CRW board has not requested JMS to reaffirm the JMS opinion as of a more
recent date but would do so if it believed a material event occurred since the
date of the JMS opinion. Since CRW's assets consist predominantly of its
ownership interest in Telespectrum common stock and Telespectrum will exchange
shares of its common stock for shares of CRW common stock in the CRW merger,
JMS primarily only foresees events which alter the CRW exchange ratio, or which
permit CRW to distribute the shares of Telespectrum common stock owned by it
directly to CRW's stockholders on a tax-free or tax-deferred basis, as likely
to alter the JMS opinion. CRW is not aware of any such events as of the date of
this proxy statement prospectus. Accordingly, CRW does not intend to request
JMS to reaffirm the JMS opinion unless there is a change in the CRW exchange
ratio or a change in the law which would permit CRW to distribute the shares of
Telespectrum common stock owned by it directly to CRW's stockholders on a tax-
free or tax-deferred basis.
Comparison of Net Asset Value to Merger Consideration. JMS computed net asset
values for CRW on both aggregate and per shares bases. Based upon the
approximately 6.3 million shares of TeleSpectrum common stock held by CRW and
the stock price of $5.125 at September 2, 1998, the TeleSpectrum common stock
represents $32.1 million in aggregate value, a signed letter of intent for
Casino Money Centers indicating a $2.1 million purchase price and net cash from
other assets and liabilities, and the present value of proceeds from options
and warrants at a discount rate of 8.0% was $3.2 million, JMS derived an
aggregate net asset value of $37.0 million for CRW before corporate income
taxes. Based upon an estimation of $8.7 million in corporate income taxes after
the utilization of net operating loss carryforwards, JMS calculated a net asset
value of $28.3 million for CRW after taxes. On a fully-diluted per share basis,
this would equate to a $3.35 net asset value. Based upon the trading price per
share of CRW common stock of $2.75 at September 2, 1998 and the TeleSpectrum
merger consideration of $3.83 per share for CRW stock, JMS calculated premiums
to 14.3% to the net asset value and 39.2% to the CRW current stock trading
price. The discount to TeleSpectrum's current price was 13.1% at the fixed
exchange rate of .709 shares of TeleSpectrum common stock for each share of CRW
common stock and TeleSpectrum's stock price of $5.125 on September 2, 1998. The
discount rate decreases with an increase in TeleSpectrum's stock price. The net
asset value does not reflect transaction and liquidation costs, such as
brokerage commissions and corporate expenses, that CRW would incur in
liquidating CRW. Furthermore, CRW would most likely have to offer such a
substantial block of TeleSpectrum common stock at a discount to TeleSpectrum's
current trading price.
Stock Repurchase Transaction Analyses. JMS compared the premium/discount paid
in comparable transactions involving purchases of large blocks of stock. The
transactions analyzed included all stock repurchases between $10 million and
$50 million from January 1, 1992 to September 28, 1998 and representing
ownership interests from 10% to 49%, based on information that was publicly
available. JMS analyzed the price per share paid in each of these transactions
and the transaction total enterprise value, defined as purchase consideration
plus debt minus cash and equivalents. The repurchase transactions were
segregated into those repurchases whereby the purchase price represented a
premium to the price prior to the announcement and those transactions whereby
the purchase price represented a discount to the stock price of the common
stock to the announcement. Of the repurchase transactions analyzed, 19 were
completed at a premium and 21 were completed at a discount to the trading price
of the common stock prior to announcement. The average and median transaction
values for the blocks of common stock acquired in which a premium was paid for
the repurchase transactions were $26.8 million and $28.2 million, respectively.
The average and median percentages of shares repurchased in these transactions
were 19.8% and 19.1%, respectively. The average and median transaction values
for the blocks of common stock acquired in which a discount was paid for the
repurchase transactions were $25.7 million and $23.6 million, respectively. The
average and median percentages of shares repurchased in these transactions were
18.1% and 16.8%, respectively. JMS felt the most relevant premiums and
discounts were those associated with the stock price four weeks
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Opinions of Financial Advisors
<PAGE>
prior to the announcement given the fact that news of potential transactions
could leak into the market at the one week and one day prior to announcement
time periods and thereby distort the premiums and discounts. The average and
median premiums for four weeks prior to announcement were 12% and 4%,
respectively. The divergence between the average and median reflects the fact
that 14 of the 19 repurchase transactions completed at a premium were completed
a premium of less than 10%, thereby exhibiting the impact of a non-controlling
block sale. The average and median discounts for four weeks prior to
announcement were 11% and 10%, respectively. Eleven of the 21 repurchase
transactions completed at a discount were completed at discounts between 10%
and 25%. Based upon the foregoing stock repurchase analyses, JMS believes that
the discount implicit in the exchange ratio to TeleSpectrum's current stock
price compares favorably to the discount rates in the repurchase transactions
analyzed.
Transaction and Liquidation Costs. JMS compared the discount to
TeleSpectrum's common stock in the exchange ratio to costs of selling the
TeleSpectrum common stock and liquidating CRW. Transaction costs would include
brokerage and underwriting commissions, legal fees and the costs of operating
CRW while in the process of liquidating CRW. JMS analyzed offering expenses,
including the gross spread, and offering expenses as a percentage of the total
amount offered for both initial offerings and follow-on offerings of equity
securities for the 52 weeks ending September 2, 1998. For the initial public
offerings, 224 transactions were analyzed, and the average for offering
expenses was 9.64%. For the follow-on offerings, 224 transactions were
analyzed, and the average for offering expenses was 6.33%. Based upon the
foregoing analysis and based upon the fact any offering for CRW's shareholdings
of TeleSpectrum common stock would be a one-time transaction, JMS believes that
CRW would experience offering costs approximating the 9.64% associated with
initial public offerings. Combined with the discount associated with the sale
of a block of TeleSpectrum common stock, CRW would likely experience
transaction and liquidation costs that would equal or exceed the discount to
TeleSpectrum's common stock price in the exchange ratio.
Comparable Public Company Analysis. JMS compared the historical financial and
operating performance of publicly traded teleservice companies that it
considered comparable with the historical financial and operating performance
of TeleSpectrum. JMS included the following companies in its universe of
comparable teleservice companies:
. APAC Teleservices, Inc.;
. ICT Group, Inc.;
. LCS Industries, Inc.;
. Precision Response Corporation;
. RMH Teleservices, Inc.;
. Sitel Corporation; and
. Snyder Communications, Inc.
Given the stock repurchase nature of the CRW merger transaction, JMS did not
view this analysis as a significant factor in reaching its recommendation.
Based upon the foregoing comparable company analyses, JMS believes, based on
publicly available information, that the consideration to be received by CRW's
shareholders is fair from a financial point of view.
Other Considerations. In addition to the foregoing quantitative analyses, JMS
also considered subjective factors. JMS considered the recent relative
performance of the teleservice industry and the fact that no offer had been
made to CRW for the TeleSpectrum stock after the announcement that CRW was for
sale. JMS believed that if the merger was not fair to CRW's shareholders from a
financial point of view, a higher or better offer would have emerged.
Consequently, the lack of any higher or better offer supported JMS' fairness
opinion. JMS considered the fact that the vast majority of the value of CRW
resided in its shareholdings in TeleSpectrum and that the CRW merger allows
CRW's shareholders to make individual investment decisions as to whether to
continue to hold the TeleSpectrum common stock or to sell it. JMS also
considered the fact
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Opinions of Financial Advisors
<PAGE>
that CRW, after the sale of Casino Money Centers, would have no operating
businesses and limited capital to acquire and develop operating businesses.
General. JMS is a nationally recognized investment banking firm. As part of
its investment banking activities, JMS is regularly engaged in the evaluation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
The CRW board selected JMS because of its expertise, reputation and familiarity
with CRW and TeleSpectrum in particular, and the teleservice industry in
general, and because its investment banking professionals have substantial
experience in transactions similar to the merger.
CRW entered into two agreement letters with JMS in connection with the merger
and the sale of the Casino Money Centers subsidiary of CRW. CRW has agreed to
pay JMS total fees of up to $250,000 upon the sale of Casino Money Centers and
completion of the CRW merger. CRW has paid JMS $100,000 for the sale of Casino
Money Centers and $100,000 in connection with CRW merger and $50,000 is payable
upon the closing of the CRW merger. CRW has also agreed to reimburse JMS for
its reasonable out-of-pocket expenses whether or not the CRW merger is
completed, and to indemnify JMS against liabilities arising out of or in
connection with this engagement.
JMS is acting as financial advisor to CRW in connection with the CRW merger.
The fee to be paid JMS was determined in arms-length negotiations between JMS
and CRW. In the ordinary course of its business, JMS may actively trade in the
equity securities of CRW and TeleSpectrum for the accounts of its customers
and, accordingly, may at any time hold a long or short position in such
securities.
Opinions of Financial Advisors
-108-
<PAGE>
Ownership of TeleSpectrum, IDRC and CRW
A person or entity has beneficial ownership of shares if it has the power to
vote or dispose of the shares. This power can be exclusive or shared, direct or
indirect. In addition, a person beneficially owns shares underlying options and
warrants if the option or warrant is presently exercisable or will become
exercisable within 60 days.
As of the date of this joint proxy statement/prospectus, there were
25,842,948 outstanding shares of TeleSpectrum common stock, 6,917,521 shares of
CRW common stock and, after giving effect to the exercise of all IDRC warrants,
1,114,258 shares of IDRC common stock. To calculate a stockholder's percentage
of beneficial ownership, you must include in both the numerator and denominator
those shares underlying the stockholder's options and warrants owned by that
stockholder. Options and warrants held by other stockholders, however, are not
included. Therefore, the denominator used in calculating beneficial ownership
among the stockholders of a corporation may differ.
The following table sets forth information regarding the beneficial ownership
of the TeleSpectrum common stock, the IDRC common stock, the CRW common stock
and the TeleSpectrum common stock on a pro forma basis after giving effect to
the mergers, held by:
. each person known to us to own beneficially more than 5% of the
outstanding shares of any such company;
. the chief executive officer and the four other most highly compensated
executive officers of each such company;
. each director of each such company; and
. all directors and executive officers of each company as a group.
<TABLE>
<CAPTION>
Pro forma
Beneficial Ownership Beneficial Ownership
of TeleSpectrum Beneficial Ownership Beneficial Ownership of TeleSpectrum
common stock of IDRC common stock of CRW common stock common stock
----------------------- -------------------- ----------------------- -----------------------
Name of Beneficial Owner Shares Percent Shares Percent Shares Percent Shares Percent
- ------------------------ ------------ ---------- ----------- ---------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Executive Officers and
Directors of
TeleSpectrum:
J. Brian O'Neill (1).... 2,115,281 7.7% -- -- 2,130,454 26.1% 3,625,773 11.2%
Richard W. Virtue (2)... 885,392 3.4% -- -- -- -- 885,392 2.8%
Keith E. Alessi (3)..... 844,631 3.2% -- -- -- -- 844,631 2.6%
Michael E. Julian (4)... 87,500 * -- -- -- -- 87,500 *
David R. Kriegel (4).... 12,500 * -- -- -- -- 12,500 *
Joseph V. Del Raso (5).. 9,500 * -- -- -- -- 9,500 *
Kevin W. Walsh (6)...... 7,500 * -- -- -- -- 7,500 *
All executive officers
and directors as a
group (7 persons)(7)... 3,962,304 14.1% -- -- 2,130,454 26.1% 5,472,796 17.0%
Five Percent Holders of
TeleSpectrum:
CRW Financial, Inc.
(8).................... 6,946,583 26.2% -- -- -- -- -- --
Alliance Capital
Management L.P. (9).... 3,396,200 13.1% -- -- -- -- 3,396,200 10.8%
Highfields Group (10)... 1,740,500 6.7% -- -- -- -- 1,740,500 5.5%
Executive Officers and
Directors of IDRC:
George E. McCown (11)... -- -- 761,357 73.87% -- -- 6,674,132 20.1%
Robert B. Hellman, Jr.
(11)................... -- -- 761,357 73.87% -- -- 6,674,132 20.1%
David E. King (11)...... -- -- 761,357 73.87% -- -- 6,674,132 20.1%
Jeffrey E. Stiefler
(11)................... -- -- 761,357 73.87% -- -- 6,674,132 20.1%
Bruce E. Rogoff (12).... -- -- 100,335 18.03% -- -- 879,546 2.8%
Vikas Kapoor (13)....... -- -- 1,000 * -- -- 8,766 *
Glenn McKenzie (11)..... -- -- 761,357 73.87% -- -- 6,674,132 20.1%
Paul J. Grinberg (14)... -- -- 14,096 * -- -- 123,567 *
David B. Parkes (15).... -- -- 13,333 * -- -- 116,878 *
Jill A. Ward (16)....... -- -- 13,000 * -- -- 113,959 *
John D. Weil (17)....... -- -- 23,863 * -- -- 209,158 *
All executive officers
and directors as a
group (11
persons)(18)........... 926,984 80.61% 8,126,033 24.0%
</TABLE>
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Ownership of TeleSpectrum, IDRC and CRW
<PAGE>
<TABLE>
<CAPTION>
Pro forma
Beneficial Ownership Beneficial Ownership
of TeleSpectrum Beneficial Ownership Beneficial Ownership of TeleSpectrum
common stock of IDRC common stock of CRW common stock common stock
------------------------ -------------------- ----------------------- -----------------------
Name of Beneficial Owner Shares Percent Shares Percent Shares Percent Shares Percent
- ------------------------ ------------- ---------- ----------- ---------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Five Percent Holders of
IDRC:
McCown De Leeuw & Co.
III L.P. (11).......... -- -- 761,357 73.87% -- -- 6,674,132 20.1%
TN Investments '96 LP
(12)................... -- -- 100,335 18.03% -- -- 879,546 2.8%
Dodger Blue Enterprises,
Ltd. (19).............. -- -- 114,036 20.40% -- -- 999,651 3.1%
Dan Plashkes (21)....... -- -- 114,036 20.40% -- -- 999,651 3.1%
Steven C. Moak (20)..... -- -- 83,357 15.67% -- -- 730,716 2.3%
Executive Officers and
Directors of CRW:
J. Brian O'Neill (1).... 2,115,281 7.7% -- -- 2,130,454 26.1% 3,625,773 11.2%
Eustace Mita (21)....... -- -- -- -- 183,838 2.6% 130,342 *
Jonathan P. Robinson.... 100,000 * -- -- 141,200 2.0% 200,111 *
Mark J. DeNino (22)..... -- -- -- -- 104,702 1.5% 74,233 *
Bernard Morgan.......... -- -- -- -- 20,000 * 14,180 *
Robert N. Verratti
(23)................... -- -- -- -- 37,500 * 26,587 *
All executives officers
and directors of CRW as
a group (6
persons)(24)........... 2,215,281 8.1% -- -- 2,617,694 31.2% 4,071,228 12.5%
Five Percent Holders of
CRW:
Jeffrey Tannenbaum
(25)................... -- -- -- -- 1,364,803 19.7% 967,645 3.1%
Fir Tree Value Fund,
L.P. (26).............. -- -- -- -- 1,364,803 19.7% 967,645 3.1%
Technology Leaders II,
L.P. (27).............. -- -- -- -- 745,413 10.8% 528,497 1.7%
TL Ventures Third
Corporation (27)....... -- -- -- -- 592,132 8.6% 419,821 1.3%
</TABLE>
- -------
* Less than one percent.
(1) Includes 1,002,500 and 610,160 shares of TeleSpectrum common stock
obtainable upon the exercise of stock options and warrants, respectively.
Includes 951,412 and 300,000 shares of CRW common stock obtainable upon
the exercise of stock option and warrants, respectively. Excludes any
shares of TeleSpectrum common stock owned by CRW. Mr. O'Neill is the
Chairman and Chief Executive Officer of CRW.
(2) Includes 7,500 and 129,500 shares of TeleSpectrum common stock obtainable
upon the exercise of stock options and warrants, respectively.
(3) Includes 500,000 shares of TeleSpectrum common stock obtainable upon the
exercise of stock options.
(4) Includes 2,500 shares of TeleSpectrum common stock obtainable upon the
exercise of stock options and 7,500 shares of TeleSpectrum common stock
obtainable upon exercise of stock options if the amendment to the
TeleSpectrum equity compensation plan is approved at the TeleSpectrum
meeting.
(5) Includes 7,500 shares of TeleSpectrum common stock obtainable upon the
exercise of stock options.
(6) Represents 7,500 shares of TeleSpectrum common stock obtainable upon the
exercise of stock options.
(7) Includes 1,859,500 shares of TeleSpectrum common stock obtainable upon the
exercise of stock options and warrants and 1,251,433 shares of CRW common
stock obtainable upon the exercise of stock options and warrants.
(8) Includes 678,410 shares of TeleSpectrum common stock transferable to
others upon the exercise of outstanding warrants. The address of CRW
Financial, Inc. is 200 Four Falls Corporate Center, West Conshohocken, PA
19428.
(9) These shares are held by Alliance Capital Management L.P. ("Alliance"), an
investment advisor registered under the Investment Advisors Act of 1940.
Alliance has sole investment power with respect to 3,396,260 shares, sole
voting power as to 75,200 of the shares and shared voting power as to
3,321,000 shares. Alliance is a subsidiary of The Equitable Companies
Incorporated, a Delaware corporation ("Equitable"). The Mutuelles AXA as a
group controls AXA, which beneficially owns a majority interest in
Equitable. The foregoing information was derived from Amendment No. 1 to a
Schedule 13G filed by Equitable and various entities in the AXA group on
February 10, 1999. The address of Equitable is 1290 Avenue of the
Americas, New York, New York 10104.
-110-
Ownership of TeleSpectrum, IDRC and CRW
<PAGE>
(10) Of the shares listed, 107,238 are beneficially owned by Highfields Capital
I, LP, a Delaware Limited Partnership, and 208,918 shares are beneficially
owned by Highfields Capital II, LP, a Delaware limited partnership.
Highfields Associates LLC, a Delaware limited liability company, is the
general partner of these partnerships. Messrs. Richard Grubman and
Jonathan S. Jacobson are the managing members of Highfield Associates LLP
and direct the operations in that capacity. The remaining 1,424,344 shares
are beneficially owned by Highfields Capital Management, LP ("Highfields
Capital"), a Delaware limited partnership, which serves as investment
manager to Highfields Capital Ltd., a Cayman Islands company, with respect
to shares directly owned by Highfields, Ltd. Messrs. Grubman and Jacobson
are managing members of Highfields GP LLC, a Delaware limited liability
company, which is a general partner of Highfields Capital, and directs its
operations in that capacity. Highfields Ltd., the client of Highfields
Capital, has the power to direct the receipt of dividends and proceeds
from the sale of these shares. The foregoing information is derived from a
Schedule 13G filed by Highfield Associates LLC, Highfield Capital and
Messrs. Grubman and Jacobson on February 16, 1999.
(11) Includes (i) 440,021 shares of IDRC common stock obtainable upon the
exercise of warrants owned by McCown De Leeuw & Co. III, L.P., an
investment partnership whose general partner is MDC Management Company
III, L.P. ("MDC III"), (ii) 31,186 shares of IDRC common stock obtainable
upon the exercise of warrants held by McCown De Leeuw & Co. Offshore
(Europe) III, L.P., an investment partnership whose general partner is MDC
Management Company IIIE, L.P. ("MDC IIIE"); (iii) 7,553 shares of IDRC
common stock obtainable upon the exercise of warrants held by McCown De
Leeuw & Co. III (Asia), L.P., an investment partnership whose general
partner is MDC Management Company IIIA, L.P. ("MDC IIIA"); and (iv) 8,528
shares of IDRC common stock obtainable upon the exercise of warrants owned
by The Gamma Fund LLC, a California limited liability company. The members
of The Gamma Fund LLC are George E. McCown, David De Leeuw, David E. King,
Robert B. Hellman, Jr., Charles Ayres and Steven Zuckerman, who are also
the only managing directors of MDC III, MDC IIIE and MDC IIIA. Jeffrey E.
Stiefler is a managing director of MDC III. Glenn McKenzie is a member of
an operating affiliate of McCown De Leeuw & Co. Voting and dispositive
decisions regarding the IDRC common stock owned by MDC III, MDC IIIE and
MDC IIIA are made by Mr. McCown and Mr. De Leeuw, as managing directors of
each of such partnerships, who together have more than the required two-
thirds-in-interest vote of the managing general partners necessary to
effect such decisions on behalf of any such entity. Voting and dispositive
decisions regarding the IDRC common stock owned by The Gamma Fund are made
by a vote or consent of a majority in number of the members of The Gamma
Fund. No managing director is able to individually direct the voting or
disposition of common stock beneficially owned by MDC III, MDC IIIE and
MDC IIIA. Messrs. McCown, De Leeuw, King, Hellman, Ayres and Zuckerman
have no direct ownership of any shares of common stock and disclaim
beneficial ownership of any shares of IDRC common stock except to the
extent their proportionate partnership interest or membership interests
(in the case of The Gamma Fund). Includes 3,982 shares of IDRC common
stock obtainable upon the exercise of warrants and 37,500 shares of IDRC
class A common stock, obtainable upon the exercise of stock options owned
by Mr. Stiefler. Other than 44,816 shares beneficially owned by Mr.
Stiefler, Mr. Stiefler has no direct ownership of any shares of IDRC
common stock and disclaims beneficial ownership of any shares of IDRC
common stock except to the extent of his proportionate partnership
interest. Mr. McKenzie disclaims beneficial ownership of any shares of
IDRC common stock. The address of all MDC entities and The Gamma Fund is
c/o McCown De Leeuw & Co., 3000 Sand Hill Road, Building 3, Suite 290,
Menlo Park, California 94025.
(12) All shares are owned of record and beneficially by TN Investments '96 LP.
Mr. Rogoff is an officer and director of TN Investments '96 LP and
disclaims beneficial ownership of the shares. The address of TN
Investments '96 LP is 133 Federal Street, Boston, Massachusetts 02110.
(13) Includes 1,000 shares of IDRC class A common stock obtainable upon the
exercise of stock options.
(14) Includes 795 shares of IDRC common stock obtainable upon the exercise of
warrants, 12,635 shares of IDRC class A common stock obtainable upon the
exercise of stock options and 666 shares of IDRC class A common stock.
-111-
Ownership of TeleSpectrum, IDRC and CRW
<PAGE>
(15) Represents 13,333 shares of IDRC class A common stock obtainable upon the
exercise of stock options.
(16) Represents 13,000 shares of IDRC class A common stock obtainable upon the
exercise of stock options.
(17) Represents 13,683 shares of IDRC class A common stock obtainable upon the
exercise of stock options and 10,000 shares of IDRC issuable upon the
exercise of warrants.
(18) Includes 666 shares of IDRC class A common stock and 556,677 shares of
IDRC common stock issuable upon the exercise of outstanding warrants and
91,151 shares of IDRC class A common stock issuable upon the exercise of
outstanding options, in each case, as beneficially owned by those persons
corresponding to or set forth in footnotes 11 through 17.
(19) Includes 57,018 shares of IDRC Class A common stock obtainable upon the
exercise of stock options owned by Dan Plashkes and 26,840 shares of IDRC
common stock owned by Dodger Blue Enterprises, Ltd. Dan Plashkes is an
officer and director of Dodger Blue Enterprises, Ltd. and disclaims
beneficial ownership of the 26,840 shares held by Dodger Blue Enterprises,
Ltd. The address of Dodger Blue Enterprises, Ltd. is P.O. Box 2513 Rancho
Santa Fe, California 92067.
(20) Includes 30,000 shares of IDRC common stock obtainable upon the exercise
of warrants.
(21) Mr. O'Neill is Mr. Mita's cousin. Together, Mr. O'Neill and Mr. Mita
beneficially own approximately 28.8% of CRW. However, Messrs. O'Neill and
Mita disclaim being part of any group with respect to CRW. Includes 97,500
shares of CRW common stock obtainable upon the exercise of stock options.
(22) Includes 97,500 shares of CRW common stock obtainable upon the exercise of
stock options.
(23) Includes 27,500 shares of CRW common stock obtainable upon the exercise of
stock options.
(24) Includes 1,473,912 shares of CRW common stock obtainable upon exercise of
stock options and warrants.
(25) Jeffrey Tannenbaum is general partner of Fir Tree Value Fund and has
voting and dispositive authority with respect to shares held by Fir Tree
Value Fund, LP. Number of shares includes shares held by Fir Tree
Institutional Value Fund LP and Fir Tree Value Partners LDC for which Mr.
Tannenbaum has voting and dispositive authority.
(26) The address of Fir Tree Value Fund is 535 Fifth Avenue, 31st Floor, New
York, NY 10017.
(27) The address of Technology Leaders II, L.P. and TL Ventures Third
Corporation is 800 The Safeguard Building, 435 Devon Park Drive, Wayne,
Pennsylvania.
Shares of Common Stock Subject to Outstanding Options and Warrants as of June
2, 1999
On June 2, 1999 there were 25,842,948 shares of TeleSpectrum common stock
outstanding. We expect that after the mergers, there will be 31,481,469 shares
of TeleSpectrum common stock outstanding. The following table sets forth the
number of shares of common stock underlying IDRC, CRW and TeleSpectrum options
and warrants outstanding as of June 2, 1999 and the number shares of common
stock of TeleSpectrum underlying options and warrants that we expect will be
outstanding after the mergers. This table assumes that the IDRC warrants have
not been exercised.
<TABLE>
<CAPTION>
TeleSpectrum
IDRC CRW TeleSpectrum (pro forma)
------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Options and Warrants........... 832,753 1,536,436 6,316,506 11,425,256
</TABLE>
-112-
Ownership of TeleSpectrum, IDRC and CRW
<PAGE>
Comparison of the Rights of Holders of
TeleSpectrum, CRW and IDRC Capital Stock
The statements set forth under this heading are brief summaries of the DGCL,
IDRC's amended and restated certificate of incorporation and bylaws, CRW's
certificate of incorporation and bylaws and TeleSpectrum's certificate of
incorporation and amended and restated bylaws. TeleSpectrum's certificate of
incorporation and bylaws are incorporated by reference in its 1998 Form 10-K
which is included as Annex I to this joint proxy statement/prospectus. The
following summary does not purport to be complete and is subject to the
detailed provisions of the DGCL, IDRC's certificate of incorporation and bylaws
and TeleSpectrum's certificate of incorporation and amended and restated
bylaws.
General
The following summary compares rights of the holders of IDRC capital stock
and CRW capital stock to the rights of the holders of TeleSpectrum capital
stock. The rights of holders of IDRC and CRW capital stock are governed
principally by the DGCL and the certificate of incorporation and bylaws of IDRC
and CRW. Upon completion of the IDRC merger, IDRC and CRW stockholders will
become holders of TeleSpectrum common stock, and their rights will be governed
principally by the DGCL and the certificate of incorporation and bylaws of
TeleSpectrum. The rights of TeleSpectrum stockholders are substantially similar
to those of IDRC stockholders. The rights of TeleSpectrum stockholders are
substantially similar to those of CRW stockholders. The following summarizes
the material differences between the rights of holders of' IDRC and CRW capital
stock and TeleSpectrum capital stock.
Capital Stock
Under the certificates of incorporation of each of TeleSpectrum, IDRC and
CRW, each company is authorized to issue common stock and preferred stock. IDRC
has shares of common stock, class A common stock and series A preferred stock
outstanding. TeleSpectrum and CRW only have shares of common stock outstanding.
Dividends
IDRC's certificate of incorporation provides that IDRC shall pay dividends
annually to the holders of series A preferred stock in shares of series A-1
preferred stock commencing on April 30, 1999. Dividends shall accrue daily
commencing on April 30, 1998. Dividends for common stock shall be paid subject
to other classes and series of shares ranking prior to common stock. No
dividends shall be paid on class A common stock unless an equal dividend has
been paid on the common stock. IDRC has never paid any cash dividends since
becoming a C corporation on January 1, 1996.
CRW has never paid any cash dividends. Immediately prior to the completion of
the IDRC offering, CRW intends to make a special cash distribution to its
stockholders and to the holders of its outstanding warrants as of June 30,
1999. This special cash distribution is expected to be in an aggregate amount
equal to CRW's cash on hand after reserving an amount to pay all of its
remaining liabilities.
TeleSpectrum has never paid any cash dividends and has no plans to pay cash
dividends in the near future. For more information on dividends, see "Common
Stock" under "Description of TeleSpectrum Stock."
Voting Rights
Each share of IDRC common stock, CRW common stock and TeleSpectrum common
stock is entitled to one vote on each matter submitted to a vote of
stockholders. Unlike IDRC's common stock, its class A common stock is not
entitled to vote. Neither the holders of IDRC common stock, CRW common stock
nor the holders of TeleSpectrum common stock have cumulative voting rights in
the election of directors.
-113-
Comparison of the Rights of Holders
<PAGE>
Directors of each of TeleSpectrum, IDRC and CRW are elected by plurality
vote. This means that the persons that receive the most votes are elected as
directors. For additional information regarding the comparable voting rights of
the holders of TeleSpectrum common stock, see "Common Stock" under "Description
of TeleSpectrum Stock."
Directors
Number and Election of Directors. Under the DGCL, the certificate of
incorporation or bylaws of a corporation may specify the number of directors of
a corporation. IDRC's bylaws provides that its board shall consist of not less
than eight nor more than eleven directors as may be fixed from time to time by
the board of directors. The bylaws of CRW and TeleSpectrum each provide that
their respective boards shall consist of such number of directors as the
respective board shall designate. The CRW bylaws divide the CRW board into
three classes, with each director serving a three-year term and until their
successors are elected and qualified. The TeleSpectrum bylaws do not divide the
board into classes and directors serve until the term for which they are
selected expires and until their successors are elected and qualified.
Currently, the CRW board is designated at five directors and the TeleSpectrum
board is designated at seven directors. Each of the IDRC, CRW and TeleSpectrum
boards may fill vacancies and newly created directorships.
Removal. IDRC and TeleSpectrum directors may be removed, with or without
cause, by a majority vote of the holders entitled to vote at the meeting at
which the vote is taken. CRW directors may only be removed for cause.
Nomination. Neither the certificate of incorporation or bylaws of IDRC, the
certificate of incorporation or bylaws of CRW, nor the certificate of
incorporation or bylaws of TeleSpectrum contain provisions relating to the
nominations of directors.
Liability of Directors. The DGCL permits a corporation to limit the personal
liability of its directors, with specified exceptions. The certificates of
incorporation of IDRC, CRW and TeleSpectrum eliminate director liability to the
maximum extent permitted by the DGCL. For more information on these rules, see
"Certain Provisions of Delaware Law and TeleSpectrum's Certificate of
Incorporation and Bylaws" under "Description of TeleSpectrum Stock."
Call of Special Meetings
A special meeting of the stockholders of IDRC may be called by:
. a majority of the IDRC board;
. the chairman of the IDRC board; or
. a committee of the board that has been duly designated by the board.
IDRC stockholders may not request a special meeting.
The chairman of the board or a majority of the CRW board may call a special
meeting of the stockholders. CRW stockholders may not request a special
meeting.
Special meetings of stockholders of TeleSpectrum may be called by:
. the chairman of the board;
. the president of TeleSpectrum;
. a majority of the TeleSpectrum board; or
. a majority of the TeleSpectrum stockholders.
-114-
Comparison of the Rights of Holders
<PAGE>
Action of Stockholders Without a Meeting
The DGCL permits the stockholders of a corporation to consent in writing to
any action without a meeting, unless the certificate of incorporation of such
corporation provides otherwise. However, this is only applicable if such
consent is signed by stockholders having at least the minimum number of votes
required to authorize such action at a meeting of stockholders.
The bylaws of each of IDRC, CRW and TeleSpectrum each specifically allow the
stockholders of IDRC, CRW and TeleSpectrum to take action without a meeting,
without notice and without a vote:
. for IDRC, this applies if written consents setting forth the action to be
taken are signed by the holders of outstanding stock, having at least the
minimum number of votes that would be necessary to authorize the action
at a meeting of stockholders called for that purpose at which all shares
entitled to vote were present and voted; and
. for CRW and TeleSpectrum, this applies if written consents setting forth
the action to be taken are signed by the holders of all of the
outstanding stock entitled to vote with respect to such action at any
annual or special meeting of stockholders of the corporation.
Amendment to Certificate of Incorporation
Under the DGCL, the certificate of incorporation of a corporation may be
amended by the vote of the holders of a majority of the outstanding shares of
stock entitled to vote thereon. With respect to any amendment to the
certificate of incorporation of a corporation that would adversely affect a
particular class or series of stock, the DGCL requires the separate approval by
the holders of the affected class or series of stock, voting as a single class.
The certificates of incorporation of each of IDRC, CRW and TeleSpectrum each
provide that their certificates of incorporation may be amended in the manner
prescribed by the DGCL. In addition:
. any amendment to the authorized capital stock shall be approved by the
vote of a majority of the outstanding shares of CRW or TeleSpectrum
common stock; and
. any amendment to the authorized capital stock of IDRC must be approved by
the holders of at least 80% of the outstanding IDRC common stock.
Amendment to Bylaws
IDRC's certificate of incorporation provides that the board is expressly
authorized to make, repeal, alter, amend and rescind IDRC's bylaws.
CRW's and TeleSpectrum's bylaws may be amended or repealed if a majority of
the board present at any meeting or holders of common stock at any meeting vote
in favor.
Indemnification of Directors and Officers
Section 145 of the DGCL permits a corporation to indemnify any person who was
or is a party or is threatened to be made a party to legal actions. The
certificates of incorporation of each of IDRC, CRW and TeleSpectrum provide for
the indemnification of directors and officers to the maximum extent permitted
by the DGCL. The bylaws of each of IDRC, CRW and TeleSpectrum authorize their
respective boards, from time to time, to indemnify employees and agents to the
maximum extent permitted by their respective bylaws.
Liquidation
IDRC's certificate of incorporation provides that upon the liquidation,
dissolution or winding up of the affairs of IDRC, the holders of outstanding
shares of IDRC preferred stock are entitled to receive, prior to any
distribution of any of the assets of IDRC to any holders of IDRC common stock,
$20 for each share of
-115-
Comparison of the Rights of Holders
<PAGE>
preferred stock and cash in an amount equal to all accrued and unpaid dividends
on such shares. The holders of IDRC common stock and class A common stock are
entitled, together as a single class to share ratably in all remaining assets
of IDRC available for distribution to such holders.
The rules are the same for each of CRW and TeleSpectrum. Upon the
liquidation, dissolution or winding up of the affairs of CRW or TeleSpectrum,
the holders of CRW or TeleSpectrum common stock are entitled to share ratably
in all remaining assets of CRW or TeleSpectrum available for distribution to
such holders, subject to the prior rights of the holders of any outstanding
series of preferred stock. For more information, see "Certain Provisions of
Delaware Law and TeleSpectrum's Certificate of Incorporation and Bylaws" under
"Description of TeleSpectrum Common Stock."
Miscellaneous
Shares of CRW and TeleSpectrum common stock do not have preemptive,
redemption or conversion rights. Shares of IDRC capital stock have the
following rights:
Preemptive rights. The certificate of incorporation of IDRC specifies
circumstances under which the holders of common stock and class A common stock
have preemptive rights.
Redemption rights. After April 2006, upon written request by a majority of
the holders of the series A preferred stock and the series A-1 preferred stock,
such shares may be exchanged for cash by IDRC.
Conversion rights. Upon an initial public offering, each share of class A
common stock automatically converts into one share of common stock. Upon
exercise of warrants connected thereto, shares of series A preferred stock
convert into an equal number of shares of series A-1 preferred stock.
-116-
Comparison of the Rights of Holders
<PAGE>
Description of TeleSpectrum Stock
The statements set forth under this heading are brief summaries of the DGCL
and TeleSpectrum's certificate of incorporation and amended and restated
bylaws. TeleSpectrum's certificate of incorporation and bylaws are incorporated
by reference in its 1998 Form 10-K which is included as Annex I to this joint
proxy statement/prospectus. The following summary does not purport to be a
complete discussion and is subject to the detailed provisions of the DGCL,
TeleSpectrum's certificate of incorporation and bylaws.
Authorized Capital Stock
. 200 million shares of common stock, par value $.01 per share.
. 5 million shares of preferred stock, par value $.01 per share.
. Following the CRW merger and the IDRC merger, approximately 31.4 million
shares of common stock will be outstanding, and no shares of preferred
stock will be outstanding.
Common Stock
Voting
. One vote for each share of record.
. Election of directors by plurality of votes cast. Plurality voting means
that the persons that receive the most votes will be elected directors.
. No cumulative voting rights. Cumulative voting rights means that each
holder is given as many votes as there are positions to be filled and
allowed to cast those votes for one candidate or distributed among
candidates.
. Mergers and significant asset sales by the majority of the outstanding
common stock.
. All other matters by majority of votes present and entitled to vote
thereon (except as otherwise required by law).
Dividends
. Subject to preferred stock rights, entitled to receive ratably declared
dividends.
. The board may only declare dividends out of legally available funds.
Under the DGCL, a corporation may pay dividends out of surplus. Surplus means
the excess, if any, of its net assets over capital. If no such surplus exists,
dividends may be paid out of its net profits for the fiscal year in which such
dividends are declared and/or for its preceding fiscal year. However, dividends
may not be paid out of net profits if the capital of the corporation is less
than the aggregate amount of capital represented by the issued and outstanding
stock of all classes having a preference upon the distribution of assets.
Additional Rights
. No preemptive rights.
. No subscription rights.
. No redemption rights.
. No sinking fund rights.
. No conversion rights.
-117-
Description of TeleSpectrum Stock
<PAGE>
Preferred Stock
By resolution of the board, TeleSpectrum may, without any further vote by its
stockholders, authorize and issue an aggregate of five million shares of
preferred stock. The preferred stock may be issued in one or more classes or
series. With respect to each class or series, the board may determine the
designation and the number of shares, voting rights, preferences, limitations
and special rights, including any dividend rights, conversion rights,
redemption rights and liquidation preferences. Because of the rights that may
be granted, the issuance of preferred stock may delay or prevent a change of
control.
Certain Provisions of Delaware Law and TeleSpectrum's Certificate of
Incorporation and Bylaws
Liability of directors. The DGCL permits a corporation to include in its
certificate of incorporation a provision limiting or eliminating the liability
of its directors to the corporation or its stockholders for monetary damages
arising from a breach of fiduciary duty, except for:
. a breach of the duty of loyalty to the corporation or its stockholders;
. acts or omissions not in good faith or constituting intentional
misconduct or a knowing violation of law;
. a declaration of a dividend or the authorization of the repurchase or
redemption of stock in violation of the DGCL; or
. any transaction from which the director derived an improper personal
benefit.
TeleSpectrum's certificate of incorporation eliminates director liability to
the maximum extent permitted by the DGCL.
Anti-takeover provisions. Section 203 of the DGCL generally prohibits a
public Delaware corporation from engaging in business combinations with
interested stockholders. This prohibition lasts for a period of three years
after the date of the transaction in which a stockholder became an interested
stockholder. An interested stockholder is someone who owns 15% or more of the
outstanding voting stock of the corporation, or an affiliate thereof. The
following are exceptions to this prohibition:
. the board of directors of such corporation approved, prior to the date
such stockholder became such, either such business combination or such
transaction;
. upon completion of such transaction, such stockholder owns at least 85%
of the voting shares of such corporation (excluding specified shares); or
. such business combination is approved by the board of directors of such
corporation and authorized at an annual or special meeting if at least 66
2/3% of the outstanding voting shares of such corporation (excluding
shares held by such stockholder) vote in favor.
Approval of Mergers and Asset Sales. Under the DGCL, no vote of the
stockholders of a constituent corporation surviving a merger is necessary to
authorize such merger if:
. the agreement of merger does not in any way amend the certificate of
incorporation of such corporation;
. each share of stock of such corporation outstanding is to be an identical
outstanding or treasury share of the surviving corporation after such
merger;
. either no shares of common stock of the surviving corporation and no
shares of securities or obligations convertible into such common stock
are to be issued under the plan of merger, or the number of shares of
common stock issued or so issuable does not exceed 20% of the number
thereof outstanding immediately prior to such merger; and
. other required conditions are satisfied.
In addition, the DGCL provides that a parent corporation that is the record
holder of at least 90% of the outstanding shares of each class of stock of a
subsidiary may merge such subsidiary into such parent corporation without the
approval of such subsidiary's stockholders or board of directors.
-118-
Description of TeleSpectrum Stock
<PAGE>
Liquidation. The liquidation, dissolution or winding up of the affairs of a
corporation are different steps in the procedure of cessation of a
corporation's legal existence.
Under the DGCL, upon the cessation of the affairs of TeleSpectrum, the
holders of TeleSpectrum common stock are entitled to share ratably in all
remaining assets of TeleSpectrum available for distribution to such holders,
subject to the prior rights of the holders of any outstanding series of
preferred stock.
Transfer Agent and Registrar
The transfer agent and registrar for the TeleSpectrum common stock is
ChaseMellon Shareholder Services, L.L.C.
-119-
Description of TeleSpectrum Stock
<PAGE>
IDRC Business
General
IDRC is a provider of outsourced telephone, customer service and sales
programs typically on behalf of large corporations. IDRC handles calls in over
13 languages from more than 3,300 workstations in 18 call centers located in
the United States and Canada. IDRC has three business operating units:
telemarketing, customer care, and international. In 1998, telemarketing,
customer care and international represented 60%, 13%, and 27% of total
revenues, respectively. Telemarketing services consist of direct marketing
applications such as product sales, signing up customers for service businesses
and campaigns aimed at retaining customers. Customer care services consist of
call-processing applications such as taking orders for products, providing
customer service and providing product support. International is comprised of a
teleservices firm in Canada and offers a variety of telemarketing and customer
care services. In 1998, the telemarketing and customer care components of the
international business represented 73% and 27% of total international revenue,
respectively. IDRC currently provides services to more than 100 clients,
principally in the telecommunications, financial services, insurance, consumer
and technology industries.
IDRC is a Delaware corporation and its principal executive office is located
at 6041 La Flecha, Suite B, Rancho Santa Fe, California 92067.
Industry Overview
IDRC competes in the telecommunications, financial services, consumer
products and services, and insurance industries. In addition, it competes with
other forms of advertising media including direct mail, TV, radio and, to a
lesser extent, on-line services. IDRC believes that the principal competitive
factors are:
. reputation for quality;
. sales results;
. price;
. technological expertise; and
. the ability to promptly provide clients with customized solutions to
their sales, marketing and customer service needs.
Services
IDRC offers services that enable its clients to manage each phase of the
relationship with their customers. Because IDRC has inbound, outbound and on-
line communications capabilities, it is able to offer a full range of services
to permit its clients to acquire new customers, sell upgrades and related
products to those customers, assure customer satisfaction and loyalty and win
back disgruntled customers, thereby covering the entire range of a typical
customer life cycle.
Telephone-based communications can be either inbound or outbound. For an
inbound contact, the customer will typically call a toll-free "800" or "888"
number which is routed to an IDRC call center. The incoming call is identified
by the number dialed and linked to the representative that is best trained and
available to handle the call. At the same time, relevant customer and/or
product information is delivered to the representative's computer screen,
complete with prompts and response text necessary to handle the inquiry. As the
communication evolves, the representative is able to make logical responses
based on the input from the customer and is able to obtain information
regarding that customer in a rational, progressive fashion. When the call is
completed, all information gathered is stored and delivered back to the
client's central data files. Outbound contacts operate in much the same manner
except IDRC generates the call to a predetermined list of approved customers or
prospects using specialized dialing software that presents only live
connections to the representative, thus making him or her much more productive.
Once the call is linked to a live person, the call
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is sent instantaneously, along with all relevant information, to the
appropriate representative. Information is gathered and transmitted in the same
fashion as for inbound calls.
On-line communications can be handled similarly with either real-time "chat"
communications or time-delayed electronic mail communications.
A more comprehensive list of services offered by IDRC that are tailored to
its clients' needs are:
<TABLE>
<CAPTION>
Applications Customer Acquisition Customer Development Customer Service
- ------------ ----------------------------- ------------------------------ ------------------------
<S> <C> <C> <C>
Inbound Product inquiry Product information Product information
Product sale Selling related goods/upgrades Service inquiry
Order taking Retention incentives Response to request
Selling related goods Segmentation information Problem resolution
Credit card processing Collections Technical support
Scheduling/dispatch Billing inquiries
Complaints
Outbound Product sale Selling related goods/upgrades Database maintenance and
Lead generation Welcome calls satisfaction survey
Direct mail follow-up Activation of new services Service follow-up
Partnership/affinity programs Rewards Response to request
Product awareness Winning back old customers
Customer loyalty programs
</TABLE>
Sales and Marketing
IDRC believes that its marketing, sales and customer support organizations
are important to its long-term growth and give IDRC the ability to respond,
develop and generate new business opportunities. Historically, IDRC has
attracted new clients and marketed its service primarily by responding to
requests for proposals, pursuing client referrals, selling related goods and
other services to existing clients, attending trade shows and advertising in
industry publications. Although IDRC will continue to utilize these sources to
identify potential clients, IDRC has developed a more targeted approach to
identifying new clients and the potential additional needs of existing clients.
IDRC's approach is to differentiate itself from other teleservices providers by
offering customer life cycle management solutions that address the specialized
needs of its clients. Often IDRC initially develops a specific plan for a new
client to demonstrate IDRC's abilities and the effectiveness of telephone-based
marketing and customer service. IDRC's sales and client services personnel also
assist clients in identifying target customers and developing programs to reach
those customers, communicate results of the program and assist clients in
modifying programs for future use.
IDRC has hired and continues to seek to hire, sales and marketing personnel
with significant industry experience in order to take advantage of their
expertise and established relationships. Once a client campaign is initiated,
IDRC's account management and client services teams are responsible for
servicing such clients. The account executives maintain an ongoing dialogue
with existing clients, solicit client feedback, monitor active programs and
coordinate the dissemination of qualitative and quantitative marketing
information.
Information Technology
IDRC's inbound and outbound systems offer both predictive and preview dialing
capabilities that reduce the amount of time its sales associates spend doing
things other than talking to prospects and customers. Predictive dialing is a
computer automated calling system that dials and monitors calls, routing them
to sales associates only once a connection is made. With preview dialing,
customer data is provided to sales associates immediately before a call is
made, thereby increasing the efficiency of calls. Customer information and
other data is managed through a centralized data warehousing system. This
centralized database currently has the capacity to store more than 2.3 million
pages of single-spaced text, or more than 1,500 standard white page
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<PAGE>
phone books of information. The information is automatically transferred
between IDRC's call center locations and its corporate offices.
Reporting Systems
Data derived from marketing and customer service programs are a source of
valuable information to IDRC's clients in evaluating ongoing programs and
planning and designing future programs. IDRC has developed technologies and
reporting procedures that effectively convert raw data gathered during the
course of the program into useful information upon which clients can base
strategic decisions and more effectively respond to customer needs and
inquiries. Clients have the ability to monitor their programs on-line, in real-
time, to obtain comprehensive trend analyses and modify program parameters as
necessary. In addition, IDRC provides clients with customized reports in
printed form, electronic mail, computer-to-computer transmission, disk, tape
and on-line.
Quality Assurance
Because IDRC's services involve direct contact with its client's customers,
IDRC's reputation for quality service is critical to acquiring and retaining
clients. Therefore, IDRC and its clients monitor IDRC's representatives for
strict compliance with the client's script, to maintain quality and efficiency
and to monitor compliance with applicable regulatory requirements. IDRC also
regularly measures the quality of its services by benchmarking such factors as
sales per hour, level of customer satisfaction, call abandonment rates and
average speed of answer. IDRC's information systems enable IDRC to provide
clients with reports on a real-time basis as to the status of an ongoing
campaign and can transmit summary data and captured information electronically
to clients. Access to this data enables IDRC's clients to modify or enhance an
ongoing campaign to improve its effectiveness.
Government Regulation
Telemarketing sales practices are regulated both federally, including by the
Federal Trade Commission and the Federal Communications Commission, and at the
state level. For example, the rules under the Federal Telephone Consumer
Protection Act of 1991 prohibit telemarketing firms from initiating telephone
solicitations to residential telephone subscribers before 8:00 a.m. or after
9:00 p.m., local time, and prohibits the use of automated telephone dialing
equipment to call certain telephone numbers.
In addition, the Federal Telemarketing and Consumer Fraud and Abuse
Prevention Act of 1994 prohibits misrepresentation regarding the cost, terms,
restrictions, performance or duration of products or services offered by
telephone solicitation. Also, from time to time, bills are introduced in
Congress which, if enacted, would regulate the use of credit information.
Most states have enacted statutes similar to the federal laws 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. IDRC trains
its telephone service representatives to comply with existing federal and state
laws.
Telemarketers operating in Canada are subject to broad federal legislation
such as the Criminal Code of Canada, which prohibits repeated phone calls
intended to harass the recipient, and provisions of the Competition Act and
provincial legislation relating to false and misleading advertising. While no
province has enacted legislation to regulate telemarketing specifically, a
number of provinces have laws which impact on telemarketing sales practices.
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Telemarketing firms are also affected by laws applicable to their client's
businesses. For example, "anti-slamming" legislation requires telecommunication
carriers to provide substantial verification from their customers that they
have authorized a change in the carrier of their telephone service. This
legislation places penalties on telecommunications carriers that do not obtain
the required verification.
Personnel and Training
IDRC believes that a key component of its success is its employees, and it
has invested significant resources in training programs that emphasize quality,
knowledge and continuous improvement. IDRC's strategy is to locate call centers
in communities and cities with favorable workforce demographics which will
ensure the availability of an adequate and qualified pool of potential
employees. IDRC's hiring procedures are designed to ensure that only the most
qualified candidates are offered employment. IDRC utilizes an in-house training
staff that is responsible for creating customized training packages including,
not only product and program knowledge, but also the development of necessary
call handling skills such as customer service or sales. Once hired, each new
customer service representative receives on-site training that usually ranges
from one to twelve weeks which provides the skills training he or she needs to
work on a specific, dedicated client program. Existing employees also receive
additional training on an on-going basis to enhance product knowledge and
skills. IDRC provides a benefits package to all full-time employees after three
months of employment.
Employees
As of January 31, 1999, IDRC had a total of 5,418 regular full-time employees
of which 2,294 were employed by telemarketing, 1,192 were employed by customer
care, 1,923 were employed by international and 9 were employed by IDRC
headquarters.
Facilities
IDRC's corporate headquarters are located in Rancho Santa Fe, California in
leased facilities consisting of approximately 2,700 square feet of office
space. IDRC also leases 17,000 and 10,000 square feet of office space for
operational headquarters in Scottsdale, Arizona and Toronto, Ontario,
respectively. In addition, as of March 31, 1999, IDRC leases the facilities
listed below:
<TABLE>
<CAPTION>
Number of
Location Workstations
-------- ------------
<S> <C>
Aliquippa, Pennsylvania 192
Bemidji, Minnesota 120
Buffalo, New York (2 call centers) 256
Duluth, Minnesota 192
Fergus Falls, Minnesota 120
Milbank, South Dakota 120
New York Mills, Minnesota 120
North Bay, Ontario 190
Phoenix, Arizona 192
Pittsburgh, Kansas 120
Pittsburgh, Pennsylvania 192
Reno, Nevada 192
St. Catharines, Ontario 228
San Diego, California 378
Tempe, Arizona 192
Toronto, Ontario 516
Victoria, Kansas 75
-----
3,395
=====
</TABLE>
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IDRC Business
<PAGE>
Litigation
NTC. In September 1998, as part of IDRC's efforts to collect approximately
$11.7 million owed by NTC to IDRC's subsidiaries, ProMark and IntelliSell, it
commenced action against NTC and its affiliated entities in the Superior Court
of New Jersey. The defendants have filed a counter suit against ProMark and
IntelliSell, alleging breach of contract and contending that errors committed
by ProMark and IntelliSell caused defendants to suffer damages. IDRC believes
that NTC's claims against ProMark and IntelliSell are without merit.
Upon summary proceeding, the New Jersey court referred $4.5 million of the
claim to arbitration in San Diego County, California, while the rest of the
suit continued in New Jersey. In November 1998, ProMark filed a demand for
arbitration against the defendants with the American Arbitration Association in
San Diego. The defendants also filed a counter suit in the AAA proceeding. On
February 26, 1999, NTC filed for reorganization under Chapter 11 of the Federal
Bankruptcy Code. The actions in New Jersey and San Diego have been stayed
pending the outcome of the bankruptcy proceedings.
IDRC has allocated approximately $6.5 million of its reserve for uncollected
accounts receivable against the amount owed from NTC. Based on current facts
and circumstances, IDRC believes that the reserve is adequate, however, IDRC
cannot assure that it will be successful at collecting the remaining portion
owed by NTC.
IntelliSell. The former shareholders of IntelliSell Corporation, initiated an
arbitration proceeding against IDRC in April 1998. The selling shareholders
contend that they are entitled to an "earnout" consisting of $3 million in cash
and possibly additional stock, and that IDRC breached the acquisition agreement
by not paying an earnout as of April 1998.
IDRC believes that payment of an earnout is not required under the terms of
the acquisition agreement as the requisite qualified gross margin dollars that
would generate payment of an earnout were not achieved.
The parties and the arbitration panel are in the final stages of determining
a hearing and discovery schedule. IDRC currently anticipates that the matter
will be arbitrated in Chicago beginning on July 6, 1999.
Other. IDRC is, from time to time, a party to litigation that arises in the
normal course of its business operations.
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IDRC Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations
of IDRC should be read in conjunction with IDRC's consolidated financial
statements and the related notes thereto included elsewhere in this joint proxy
statement/prospectus. The discussion in this joint proxy statement/prospectus
contains forward-looking statements that involve risks and uncertainties.
IDRC's actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, without limitation, those discussed in this section and
the section entitled "IDRC Business," as well as those discussed elsewhere in
this joint proxy statement/prospectus.
Overview
IDRC was formed on March 11, 1996 by the recapitalization of ProMark One
Marketing Services, Inc., one of the largest independent outbound telemarketing
companies in the United States. At the same time, IDRC acquired various
entities comprising S&P Data Corp., Canada's largest independent teleservices
company. S&P Data specializes in both outbound telemarketing and customer care.
Upon recapitalization, the name of ProMark was changed to International Data
Response Corporation. The operating results of ProMark and S&P Data are
included in the following discussion.
On April 13, 1997, IDRC acquired Telnet Systems, Inc., an outbound
telemarketing company. On April 14, 1997, Telnet signed a five-year contract to
provide substantially all of the telemarketing needs for Touch 1, a reseller of
long-distance telephone service in the United States. In March 1998, IDRC's
relationship with Touch 1 was terminated. As a result of the termination, IDRC
transferred three call centers to Touch 1 and no longer performs telemarketing
services on their behalf. During 1997 and 1996, Touch 1 was IDRC's largest
customer, representing 27% and 34% of IDRC's revenues, respectively.
On April 15, 1997, IDRC acquired IntelliSell Corporation, an independent
telemarketing company specializing in the sale of term-life and other insurance
products. At that time, IDRC's strategy was to operate IntelliSell as an
independent organization, under IntelliSell's existing management team. Shortly
after the acquisition of IntelliSell, IntelliSell experienced the loss of one
of its large insurance customers, began experiencing volume reductions from
other customers, and was unable to replace the lost business. Beginning in late
1997, IDRC management determined that IntelliSell could not operate profitably
as a stand-alone entity, and shut down the majority of IntelliSell's call
centers in 1997 and 1998 to reduce excess capacity, terminated the executive
management team in the first quarter of 1998 and consolidated the
administrative functions into ProMark.
Also during 1997, IDRC initiated the customer care business by opening two
new call centers.
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IDRC Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Year Ended December
March 31, 31,
---------------------- -------------------------
1999 1998 1998 1997 1996
--------- --------- ------ ------ -----
Actual Dollars (in
thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Telemarketing.......... $ 17.9 $ 29.4 $ 95.7 $ 96.1 $50.0
Customer Care.......... 10.2 2.6 21.3 5.7 --
International.......... 8.6 10.6 43.1 35.1 16.7
--------- --------- ------ ------ -----
Total revenue............ 36.7 42.6 160.1 136.9 66.7
Cost of services:
Telemarketing.......... 11.0 18.5 60.0 63.5 32.6
Customer Care.......... 6.2 1.6 12.5 2.6 --
International.......... 5.1 6.1 24.1 20.8 11.1
--------- --------- ------ ------ -----
Total cost of services... 22.3 26.2 96.6 86.9 43.7
Gross margin............. 14.4 16.4 63.5 50.0 23.0
Gross margin percent:
Telemarketing.......... 39% 37% 37% 34% 35%
Customer Care.......... 39% 38% 41% 54% 0%
International.......... 41% 42% 44% 41% 34%
Total gross margin
percent................. 39% 38% 40% 37% 34%
Selling general and
administrative.......... 15.8(a) 15.9 66.9(b) 47.7 20.5
Amortization of
goodwill................ 0.9 1.2 4.9 36.8(c) 4.7
Total operating
expenses................ 16.7 17.1 71.8 84.5 25.2
Operating income (loss).. (2.3) (0.7) (8.3) (34.5) (2.2)
Interest expense......... (2.4) (2.3) (9.7) (7.8) (3.7)
--------- --------- ------ ------ -----
Loss before taxes........ (4.7) (3.0) (18.0) (42.3) (5.9)
Income tax benefit
(expense)............... (0.1) 0.7 (9.1) 9.6 2.3(d)
Extraordinary loss....... -- -- -- 1.7(e) --
--------- --------- ------ ------ -----
Net loss................. $ (4.8) $ (2.3) $(27.1) $(34.4) $(3.6)
========= ========= ====== ====== =====
<CAPTION>
As a Percentage of
Revenues:
<S> <C> <C> <C> <C> <C>
Revenues:
Telemarketing.......... 49% 69% 60% 70% 75%
Customer Care.......... 28% 6% 13% 4% 0%
International.......... 23% 25% 27% 26% 25%
--------- --------- ------ ------ -----
Total revenue............ 100% 100% 100% 100% 100%
Cost of services:
Telemarketing.......... 30% 43% 37% 46% 49%
Customer Care.......... 17% 4% 8% 2% 0%
International.......... 14% 14% 15% 15% 17%
--------- --------- ------ ------ -----
Total cost of services... 61% 62% 60% 63% 66%
Selling, general and
administrative.......... 43% 37% 42% 35% 31%
Other data:
Number of call centers:
Telemarketing.......... 12 22 15 23 6
Customer Care.......... 3 2 3 2 --
International.......... 3 3 3 3 2
--------- --------- ------ ------ -----
Total.................. 18 27 21 28 8
========= ========= ====== ====== =====
Number of workstations:
Telemarketing.......... 1,875 2,714 2,004 2,790 1,108
Customer Care.......... 586 510 586 510 --
International.......... 934 859 934 859 631
--------- --------- ------ ------ -----
Total.................... 3,395 4,083 3,524 4,159 1,739
========= ========= ====== ====== =====
</TABLE>
- --------
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IDRC Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
(a) Includes a $2.0 million charge related to the closure of four call centers
in January 1999.
(b) Includes a $6.5 million charge to increase the allowance for doubtful
accounts in connection with the $11.7 million accounts receivable from NTC.
(c) Includes $31.3 million write-off of goodwill associated with the
acquisition of Telnet and IntelliSell.
(d) Through December 31, 1995, IDRC operated as an S Corporation and was not
subject to federal and certain state income taxes. IDRC became subject to
federal and state income taxes as a C Corporation commencing January 1,
1996. The provisions for federal and state income taxes assumes effective
tax rates that would have been in effect for the periods indicated.
(e) Represents an after-tax write-off of $1.7 million of debt issuance costs
resulting from the refinancing of debt in April 1997.
-127-
IDRC Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
Results of Operations
Three months ended March 31, 1999 compared to the three months ended March 31,
1998.
Revenue. Total revenue for the first three months of 1999 amounted to $36.7
million, a decrease of $5.9 million, or 14%, from revenue of $42.6 million for
the first three months of 1998. The decrease in aggregate revenue was primarily
attributable to decreased calling hours in the telemarketing business,
partially off set by increased calling hours in the customer care business.
Telemarketing. Telemarketing revenue of $17.9 million for the first three
months of 1999 accounted for 49% of IDRC's total revenue for the three months
and represents a decrease of $11.5 million from the prior year. The decrease in
revenue was caused primarily by the termination of IDRC's relationship with
Touch 1 and the shut down of IntelliSell call centers. Touch 1 represented $5.2
million or 18% of total Telemarketing revenue for the first three months of
1998. As a result of the Touch 1 termination and the IntelliSell call center
shut downs, telemarketing capacity was reduced from 22 call centers with 2,714
workstations to 12 call centers with 1,875 workstations as of March 31, 1998
and 1999, respectively.
Customer Care. Customer care revenue of $10.2 million for the first three
months of 1999 accounted for 28% of IDRC's total revenue for the three months
and represents an increase of $7.6 million from the prior year. This revenue
increase was primarily attributable to increased calling hours from existing
customers and higher average revenue rates per hour. For the first three months
of 1999, approximately 59% of customer care revenue was generated by services
provided on behalf of one telecommunications client.
International. For the first three months of 1999, international revenue of
$8.6 million accounted for 23% of IDRC's total revenue for the three months and
represents a decrease of $2.0 million from the prior year. The decrease in
international revenue for the first three months of 1999 was primarily
attributable to decreased calling hours from existing clients. For the first
three months of 1999, approximately 30% of international revenue was generated
by services provided on behalf of one telecommunications client.
Cost of Services. IDRC's total cost of services amounted to $22.3 million for
the first three months of 1999, a decrease of $3.9 from the prior year. The
gross margin as a percentage of total revenue was 39% for the first three
months of 1999 compared to 38% for 1998.
Telemarketing. Telemarketing cost of services for the first three months of
1999 was $11.0 million or 49% of IDRC's total cost of services for the first
three months of 1999 and represents a decrease of $7.5 million or 41% when
compared to telemarketing cost of services from the prior year. The
telemarketing cost of services decline is primarily attributable to the
decrease in calling hours associated with the discontinued Touch 1 relationship
and the shut down of the IntelliSell call centers.
The gross margin improved to 39% for the first three months of 1999 from 37%
for 1998. The improvement in gross margin was primarily attributable to
improved labor efficiencies resulting from the consolidation of the
telemarketing business into fewer call centers.
Customer Care. Customer care cost of services for the first three months of
1999 was $6.2 million or 28% of IDRC's total cost of services and represents an
increase of $4.6 million from 1998. The increase in cost of services was
primarily attributable to increased business from existing customers.
International. International cost of services for the first three months of
1999 was $5.1 million or 23% of IDRC's total cost of services for the three
months and represents a decrease of $1.0 million or 16% from the prior year.
The decrease in international cost of services is primarily attributable to the
decrease in calling hours for existing clients. Foreign exchange fluctuations
also reduced the cost of services for the international business in the first
three months of 1999.
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IDRC Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the first three months of 1999 amounted to $15.8
million, a decrease of $0.1 million when compared to SG&A expenses for the
prior year. In January 1999, IDRC closed four telemarketing centers and
recorded a charge of $2.0 million for employee termination costs, lease
termination costs, and the write-down of the telemarketing fixed assets.
Approximately 600 telemarketing service representatives and support staff at
four call centers were terminated and paid severance of approximately $0.2
million. Lease termination costs were approximately $0.6 million and the write-
down of fixed assets was approximately $1.2 million. The SG&A increase
associated with the charge for the closed telemarketing centers was offset by
the decrease in fixed costs resulting from the telemarketing call centers
closed during 1998 and 1999.
As a percentage of total revenue, SG&A expenses were 43% and 37% for the
three months ended March 31, 1999 and 1998, respectively. Excluding the $2.0
million charge for the closed telemarketing centers, SG&A expenses would have
been 38% of total revenue.
Net Interest Expense. Net interest expense for the first three months of 1999
amounted to $2.4 million, an increase of $0.1 million when compared to prior
year. The increase in interest expense during the first three months of 1999
was attributable to an increased level of long-term borrowings under the credit
facilities. Lower interest rates in the first three months of 1999 had a
favorable affect on interest expense.
Year ended December 31, 1998 compared to the year ended December 31, 1997
Revenue. Total revenue for 1998 amounted to $160.1 million, an increase of
$23.2 million, or 17%, from revenue of $136.9 million for 1997. The increase in
aggregate revenue was primarily attributable to increased calling hours in the
customer care and international businesses.
Telemarketing. Telemarketing revenue of $95.7 million for 1998 accounted for
60% of IDRC's total revenue for the year and represents a decrease of $0.4
million from the prior year. The decrease in revenue was caused primarily by
the termination of IDRC's relationship with Touch 1 and National
Telecommunications, a reseller of long-distance telephone service in the United
States. In July 1998 NTC unexpectedly announced that it was suspending
telemarketing operations. Together, NTC and Touch 1 represented $25.5 million
or 27% of total telemarketing revenue for 1998 compared to $40.9 million or 43%
of telemarketing revenue for 1997. This decrease in revenue was offset by
additional telemarketing volume from new and existing clients.
Customer Care. Customer care revenue of $21.3 million for 1998 accounted for
13% of IDRC's total revenue for the year and represents an increase of $15.6
million from the prior year. This revenue increase was primarily attributable
to the customer care business being operational for a full year in 1998. For
1998, approximately 37% of customer care revenue was generated by services
provided on behalf of one telecommunications client.
International. International revenue of $43.1 million for 1998 accounted for
27% of IDRC's total revenue for the year and represents an increase of $8.0
million from the prior year. The increase in International revenue for 1998 was
primarily attributable to increased calling hours from existing clients.
Foreign exchange fluctuations had a negative impact on international revenue
for 1998. For 1998, approximately 24% of international revenue was generated by
services provided on behalf of one telecommunications client.
Cost of Services. IDRC's total cost of services amounted to $96.6 million for
1998, an increase of $9.7 million from the prior year. The gross margin as a
percentage of total revenue was 40% for 1998 compared to 37% for 1997.
Telemarketing. Telemarketing cost of services for 1998 was $60.0 million or
62% of IDRC's total cost of services for 1998 and represents a decrease of $3.5
million or 5% when compared to telemarketing cost of services from the prior
year. The telemarketing cost of services decline is primarily attributable to
the decrease in calling hours associated with the discontinued Touch 1
relationship.
The gross margin improved to 37% for 1998 from 34% for 1997. The improvement
in gross margin was primarily attributable to improved labor efficiencies
compared to the prior year.
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IDRC Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
Customer Care. Customer care cost of services for 1998 was $12.5 million or
13% of IDRC's total cost of services and represents an increase of $9.9 million
from 1997. The increase in cost of services was primarily attributable to the
growth in new business compared to the prior year.
The gross margin declined to 41% for 1998 from 54% for 1997. The decline in
gross margin was primarily attributable to the addition of lower profit, higher
volume clients during the first three quarters of 1998.
International. International cost of services for 1998 was $24.1 million or
25% of IDRC's total cost of services for the year and represents an increase of
$3.3 million or 15% from the prior year. The increase in international cost of
services is primarily attributable to increased labor and telephone expense
related to the increase in call center hours.
The gross margin improved to 44% for 1998 from 41% for the prior year. The
improvement in gross margin was primarily attributable to a higher level of
government grants which reduce training costs, improved labor efficiencies and
a decline in telephone rates.
Selling, General and Administrative Expenses. SG&A expenses for 1998 amounted
to $66.9 million, an increase of $19.2 million or 40% when compared to SG&A
expenses for the prior year. This increase was primarily attributable to a $6.5
million charge for uncollectible NTC receivables, increased fixed costs and an
increase in salaries and benefits related to the hiring of management personnel
in the customer care business, and litigation settlement costs. Based on
current facts and circumstances, IDRC believes that the $6.5 million NTC
reserve is adequate, however, IDRC cannot assure that it will be successful at
collecting the remaining portion owed by NTC.
As a percentage of total revenue, SG&A expenses were 42% and 35% for the
years ended December 31, 1998 and 1997, respectively. Excluding the $6.5
million charge for uncollectible NTC receivables, SG&A expenses would have been
38% of total revenue. The increase from the prior year relates to the build-up
of call center and corporate infrastructure to support additional business
volume that did not materialize due to NTC's suspension of telemarketing
operations.
Interest Expense. Interest expense for 1998 amounted to $9.7 million, an
increase of $1.9 million when compared to prior year. The increase in interest
expense during 1998 was attributable to an increased level of long-term
borrowings under the credit facilities, partially offset by lower interest
rates on variable-rate borrowings.
Year ended December 31, 1997 compared to year ended December 31, 1996
Revenue. Total revenue for 1997 amounted to $136.9 million, an increase of
$70.2 million, or 105% from revenue of $66.7 million for 1996. This increase in
aggregate revenue for 1997 was primarily attributable to increased
telemarketing calling hours associated with the acquisition of Telnet and
IntelliSell, and the telemarketing agreement with Touch 1.
Telemarketing. Telemarketing revenue of $96.1 million for 1997 accounted for
70% of IDRC's total revenue for 1997 and represents an increase of $46.1
million from the prior year. The increase in revenue was primarily attributable
to the acquisition of Telnet and IntelliSell in April 1997 and additional
telemarketing hours relating to the new telemarketing agreement with Touch 1.
As a result of the acquisitions, telemarketing operated 23 call centers and
2,790 workstations as of December 31, 1997 compared to six call centers and
1,108 workstations as of December 31, 1996. For 1997, approximately 40% of
telemarketing revenue was generated by services provided on behalf of Touch 1.
Customer Care. IDRC commenced the Customer care business in April 1997 and
generated revenue of $5.7 million or 4% of total revenue for 1997. For 1997,
approximately 28% of Customer care revenue was generated by services provided
on behalf of one telecommunications client.
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IDRC Management's Discussion and Analysis of Financial Condition and Results of
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<PAGE>
International. International revenue of $35.1 million for 1997 accounted for
26% of total revenue for 1997 and represents an increase of $18.4 million from
the prior year. The increase in international revenue is principally
attributable to increased calling hours associated with existing clients. As of
December 31, 1997, international operated three centers and 859 workstations
compared to two call centers and 631 work stations as of December 31, 1996. For
1997, approximately 27% of International revenue was generated by services
provided on behalf of one telecommunications client.
Cost of Services. IDRC's total cost of services amounted to $86.9 million for
1997, an increase of $43.2 million from the prior year. The gross margin
improved to 37% for 1997 from 34% for 1996. The improvement in gross margin was
primarily attributable to operating efficiency improvements in the
international business and the launch of the customer care business which
benefits from a higher revenue rate per hour.
Telemarketing. Telemarketing cost of services for 1997 were $63.5 million or
73% of IDRC's total cost of services for the year and represents an increase of
$30.9 from the prior year. This increase was primarily attributable to
increased calling hours in telemarketing driven by the acquisition of Telnet
and IntelliSell, and the agreement with Touch 1.
The gross margin decreased slightly to 34% for 1997 from 35% for 1996. The
decrease in gross margin was primarily attributable to an increase in labor
costs associated with the anticipated growth of IntelliSell. The increase in
labor cost was partially offset by lower telephone rates.
Customer Care. IDRC commenced the customer care business in April 1997 and
incurred cost of services of $2.6 million for 1997, or 3% of IDRC's total cost
of services for the year.
International. International cost of services were $20.8 million or 24% of
IDRC's total cost of services for the year. This represents an increase of $9.7
million from the prior year. The increase in cost of services is primarily
attributable to increased labor and telephone expense related to the increase
in calling hours.
The gross margin increased to 41% for 1997 from 34% for 1996. The improvement
in gross margin was primarily attributable to improved labor efficiencies and
lower telephone rates.
Selling, General and Administrative Expenses. SG&A expenses were $47.7 million
for 1997, an increase of $27.2 million from the prior year. The $27.2 million
increase was attributable to the increase in fixed costs associated with the 17
additional telemarketing call centers in operation during the year.
As a percentage of total revenue, SG&A expenses increased to 35% for 1997,
from 31% for 1996. The increase in SG&A as a percent of total revenue is
primarily attributable to the rapid build-up of telemarketing capacity to
service Touch 1 and the subsequent underutilization resulting from the eventual
termination of the Touch 1 relationship, and the IntelliSell excess capacity.
Amortization and Write-Down of Goodwill and Other Intangibles. Amortization and
write-down of goodwill for 1997 were $5.5 million and $31.3 million,
respectively. As a result of the termination of the Touch 1 relationship and
the restructuring of the IntelliSell business, IDRC determined that the assets
acquired were insufficient to recover the carrying value of the goodwill and
intangibles.
Interest Expense. Interest expense for 1997 amounted to $7.8 million, an
increase of $4.1 million from the prior year. The increase in net interest
expense arose from increased levels of borrowing under the credit facility
during 1997.
Liquidity and Capital Resources
Historically, IDRC's primary source of liquidity has been borrowings under
its credit facilities. Management believes IDRC has liquidity and access to
working capital to meet its near-term cash flow demands through its
receivables-based working capital line of credit of $29.0 million, and up to
$7.5 million in temporary financing. If IDRC is unable to grow revenue in
accordance with management's expectations or to reduce operating costs, IDRC
may experience difficulty meeting its liquidity requirements. In such an event,
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IDRC Management's Discussion and Analysis of Financial Condition and Results of
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<PAGE>
IDRC may need to explore other means of financing its operations, negotiating a
new and expanded loan facility, raising funds through additional debt or equity
financing, or entering into other arrangements.
IDRC invests in call center facilities through acquisition of existing
centers and the development of new centers. New call center facilities require
capital outlays primarily for computer and telephone equipment and modular
furniture. IDRC intends to continue to add new call centers and expand existing
call centers as required by demand for its services.
On April 15, 1997, IDRC entered into a credit agreement with its bank
providing up to $104.0 million in credit facilities. The credit facilities
include a Term A Loan of $30.0 million, a Term B Loan of $25.0 million, a
working capital revolver of $29.0 million (as amended) and an expansion
revolver of $20.0 million. At March 31, 1999 and December 31, 1998 the
outstanding balances of the credit were $91.0 million and $93.5 million,
respectively. At March 31, 1999 and December 31, 1998, IDRC had $22.5 million
and $23.5 million in outstanding borrowings and $4.9 million and $0.2 million
of available borrowings under the working capital revolver, respectively. At
March 31, 1999 and December 31, 1998, IDRC had outstanding under the Term A
Loan $23.5 million and $25.0 million and had outstanding all of borrowings
under the Term B Loan of $25 million and the expansion revolver of $20 million.
IDRC can elect at the time it makes borrowings to pay interest at prime plus
1.75% or at LIBOR plus 3.250% (for the Term A Loan and working capital
revolver) or prime plus 2.25% or at LIBOR plus 3.750% (for the Term B Loan and
the expansion revolver). At March 31, 1999, the range of interest rates payable
under the credit agreement was from 8.25% to 9.5%. Borrowings under the credit
agreement are collateralized by substantially all of the assets of IDRC.
The credit agreement contains covenants, the most restrictive of which
require the maintenance of certain financial ratios, restrict dividend payments
and restrict future indebtedness. From time-to-time IDRC has sought and
obtained amendments from the bank when unable to meet these restrictive
covenants. For the three-months ended March 31, 1999 and for the year 1998,
IDRC was in compliance with its restrictive covenants. In the future, IDRC may
not be able to meet its restrictive covenants or the bank may not provide such
amendments.
On February 26, 1999, IDRC obtained a one-year commitment from one of its
credit facilities lenders to provide up to $7.5 million of additional financing
subordinated to the credit facilities. On March 3, 1999, IDRC borrowed $5.0
million under this commitment and used all of the proceeds to repay a portion
of its borrowings under the working capital revolver. The $5.0 million bears
interest at LIBOR plus 1.5% (6.5% at March 31, 1999) and is payable semi-
annually. The principal payment is due at the end of the term and the credit
facilities lender has the option to put the loan balance to IDRC's largest
shareholder under certain conditions.
To finance its 1999 operating plan in the event the TeleSpectrum merger is
not completed, IDRC will need to negotiate a new and expanded loan facility
and/or raise funds through additional debt or equity financing. IDRC may not be
able to obtain the additional funding on favorable terms, if at all.
<TABLE>
<CAPTION>
At or for the Three At or for the Year
Months Ended March 31, Ended December 31,
---------------------- ----------------------
1999 1998 1998 1997 1996
----------- ----------- ------ ------ ------
($ in millions)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.... $ 1.2 $ 5.8 $ 1.4 $ 5.9 $ 0.6
Working capital (deficit).... 13.6 15.0 14.6 6.4 (1.4)
Total assets................. 73.5 99.0 75.0 95.4 48.3
Long-term debt, including
capital lease obligations,
less current portion........ 87.3 89.5 86.4 80.2 34.4
Cash Flow Provided By (Used
By): ($ in millions)
Operating Activities......... $ (0.9) $ (7.3) $(18.6) $ (5.1) $ (0.7)
Investing Activities......... (1.5) (1.6) (5.8) (36.4) (25.6)
Financing Activities......... 2.2 8.8 19.9 46.8 26.6
</TABLE>
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IDRC Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
Three months ended March 31, 1999
The deficit in net cash from operating activities was $0.9 million resulting
from the net loss of $4.8 million.
The cash deficit from investing activities of $1.5 million was the result of
capital expenditures primarily for computer and telephone equipment upgrades.
The net cash provided from financing activities was $2.2 million resulting
primarily from the working capital revolver. Proceeds of $5.0 million from the
issuance of subordinated debt were used to repay $5.0 million in working
capital revolver. Proceeds of $4.0 million were drawn on the working capital
revolver. A principal payment of $1.5 million was made on the Term A Loan as
required under the credit facilities.
Year ended December 31, 1998
The deficit in net cash from operating activities was $18.6 million resulting
from the net loss of $27.1 million. The 1998 net loss includes significant non-
cash items for depreciation, amortization, bad debts and deferred income taxes.
The net cash deficit from investing activities of $5.8 million was the result
of capital expenditures primarily for computer and telephone hardware and
software upgrades and expansions within existing call centers and
administrative offices.
Net cash provided by financing activities was $19.9 million and included
$25.0 million in borrowings and $15.0 million in repayments under the credit
facilities with IDRC's bank. On May 28, 1998, IDRC entered into an amended
credit agreement providing an additional $9.0 million for a total commitment of
$29.0 million under the working capital revolver facility. During 1998, IDRC
borrowed $23.0 million and repaid $10.0 million under the working capital
revolver facility. At December 31, 1998, the working capital revolver balance
was $23.5 million. Under the amended credit facilities, IDRC borrowed $2.0
million under its acquisition facility for call center expansions and made $4.0
million in term loan repayments.
On May 28, 1998, IDRC completed a $12.0 million private placement of $20.00
Series A Redeemable Preferred Stock with detachable warrants which generated
$11.3 million, net of expenses. The proceeds were used primarily to repay $10.0
million of working capital revolver.
Year ended December 31, 1997
Cash used by operating activities was $5.1 million as a result of the 1997
net loss of $34.4 million which included significant non-cash items for
depreciation, amortization/write-off of intangibles, and deferred income tax.
The $36.4 million in cash used for investing activities resulted primarily
from the acquisition of two telemarketing companies and the construction of
five new call centers. The purchase of Telnet and IntelliSell included cash
consideration of $15.5 million, net of cash acquired. Capital expenditures of
$21.0 million were required to purchase equipment, and fund tenant improvements
at the new call center locations and to fund various infrastructure
improvements, primarily technology expenditures.
IDRC had net cash flows from financing activities of $46.8 million. During
1997, proceeds of $6.7 million were raised by the issuance of common stock. In
addition, on April 15, 1997, IDRC entered into an amended credit agreement
providing up to $85 million of credit facilities. Later in 1997, the $85
million credit limit was increased to $95 million. The proceeds were used to
repay the $46.0 million outstanding under the prior credit facilities, provide
cash for the acquisition of Telnet and IntelliSell, including transaction
costs, and provide for IDRC's working capital needs.
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IDRC Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
Year ended December 31, 1996
The $0.7 million deficit in cash from operating activities was the result of
a net loss of $3.6 million. The 1996 net loss included significant non-cash
expenses for depreciation and amortization.
Cash used in investing activities was $25.6 million. During 1996, $18.8
million in cash was used for the acquisition of S&P Data. Capital expenditures
of $6.9 million primarily related to the development of two new call centers.
Net cash provided from financing activities of $26.6 was the result of the
re-capitalization of ProMark and the initial funding of the IDRC credit
facilities. The credit facilities provided the cash to acquire S&P Data and
fund additional working capital.
Year 2000 Issue
The Year 2000 issue results from the risk of processing errors due to
software failure. Such failure arises from calculations using two digits rather
than four digits to define a year. The software may assume that the year 00 is
the year 1900, not the year 2000. Left uncorrected, these software problems
could result in computer system failures, miscalculations or errors that cause
disruptions of normal business operations.
State of Readiness. During 1998, IDRC developed and began implementing a Year
2000 Plan which addresses the following areas:
. the major software vendors and telecommunication service providers used
by IDRC;
. the information technology and operating systems including call
processing, network, server, security, application systems and
proprietary software developed and maintained by IDRC; and
. non-information technology systems which include building, plant,
equipment and other infrastructure systems.
The IDRC Year 2000 Plan was divided into two regional plans, the U.S. and the
international plans. Both of these Year 2000 Plans include the following
phases:
. inventory phase--all relevant resources are inventoried to identify
software or hardware that might have a Year 2000 issue;
. assessment phase--all inventoried software and hardware is assessed to
confirm that a Year 2000-related issue is present and is prioritized;
. strategy phase--for those software and hardware applications with a Year
2000 issue, a strategy is developed to upgrade, correct or replace the
problem; and
. implementation and testing phase--all steps necessary to correct the
problems are implemented and tested.
IDRC is using both internal and external resources to complete its Year 2000
Plans. The inventory phase has been completed under both the U.S. and the
international plans. The assessment phase has been completed under the
international plan and is 75% complete under the U.S. plan. The strategy phase
of the international plan is substantially complete. The strategy phase for the
U.S. plan is 25% complete. The international implementation and testing phases
are 35% complete with respect to critical third-party licensed software
applications, 60% complete with respect to other suppliers and 10% complete
with respect to proprietary software. The international plan will be
substantially complete by the end of July 1999. The U.S. implementation and
testing is approximately 20% complete. The U.S. plan will be substantially
complete by September 1999.
Cost. During 1998, many of IDRC's systems requiring modification have
simultaneously received performance upgrades or feature enhancements where
specific Year 2000 costs cannot be separated. During 1999, IDRC expects to
purchase additional performance upgrades and feature enhancements some of which
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IDRC Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
contain corrections for Year 2000 issues. IDRC does not believe that the cost
of such upgrades, done solely for the Year 2000 corrections, will be material.
Purchased hardware and software has been or will be capitalized in accordance
with normal policy. The majority of the direct costs associated with the Year
2000 Plans implemented by IDRC will be those associated with consultants and
the re-writing of proprietary code. IDRC expects these total costs will range
from $0.5 million to $1.0 million during 1999.
Risks. IDRC has a range of potential business risks associated with
processing errors due to the Year 2000 issue. Such risks include a high level
of dependency upon third-party service providers, particularly telephone
companies which provide local and long-distance telephone service to IDRC's
call centers. The widespread failure of telephone service or telephone dialing
software would cause IDRC to incur a material loss. While IDRC has made limited
inquiries and obtained vendor certifications, there can be no assurances that
IDRC's service vendors will not have Year 2000 failures and that such failures
would not have a material impact on the operations of IDRC.
Contingency Plans. IDRC has developed a limited contingency plan specific to
Year 2000 events in each area of business. IDRC maintains contingency plans,
outside of the direct scope of the Year 2000 issue, designed to address various
other business interruptions, like electrical power failure. While IDRC's
contingency plans may provide alternatives for isolated computer and business
system failures resulting from the Year 2000 issue at a limited number of
locations, such contingency plans would not prevent a material loss resulting
from the widespread failure of major telecommunications/utilities systems.
Market Risk
IDRC maintains certain non-trading market-risk sensitive financial
instruments and derivatives. IDRC selectively enters into interest rate cap
agreements to manage its exposure to interest rate changes on its long-term
debt. IDRC also purchases foreign currency options to reduce the impact of
changes in foreign exchange rates.
Interest Rate Risk. IDRC has acquired telemarketing assets and funded working
capital growth primarily through the use of long-term debt provided by its
credit facilities. At December 31, 1998, the outstanding balance under these
credit facilities was $93.5 million. The long-term debt exposes IDRC to
interest rate risk.
IDRC pays interest to the credit facilities banks based on a floating
interest rate, either the prime rate or LIBOR. Based on the outstanding balance
under the credit facilities at December 31, 1998, IDRC would be required to pay
an additional $0.935 million in interest annually for every 1% increase in the
average prime rate or LIBOR. To reduce the risk associated with a large
increase in interest rates, IDRC purchased two derivative financial instruments
known as interest rate caps with notional amounts of $10 million and $15
million. Under the terms of the interest rate cap agreements, IDRC would
receive quarterly cash payments when the 3-month LIBOR rate at the end of any
quarter exceeded 7.5% and 7.75%, respectively. The payment would be determined
by multiplying the difference between the actual LIBOR rate and either 7.5% or
7.75% interest rates by the notional amounts of $10 million and $15 million,
respectively. The 3-month LIBOR interest rate was approximately 5.813% and
5.125% at December 31, 1997 and 1998, respectively. IDRC has not received any
payment on these interest rate caps which have no fair value at December 31,
1998.
Foreign Exchange Risk. IDRC has invested approximately $20 million of the
credit facilities proceeds in the assets of its Canadian subsidiary, S&P Data.
Substantially all of the US dollars invested in S&P Data have been converted to
Canadian dollars. Under the terms of the credit facilities agreement, large
principal payments in the years 2001 and 2002 could require IDRC to convert all
or a portion of its investment from Canadian dollars to US dollars. An
unfavorable change in the Canadian dollar exchange rate at the time of the
conversion could subject IDRC to a foreign currency exchange loss. At this
time, management does not believe that such a conversion would be required.
However, based on an assumed conversion of Canadian dollars and an assumed 10%
decline in the value of the Canadian dollar at the time of the conversion, IDRC
would realize a loss of
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IDRC Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
$0.1 million for every $1.0 million in US dollars converted. IDRC has purchased
foreign currency options to sell $2.25 million Canadian dollars at an exchange
rate of 1.4286 as a partial hedge against its net investment in its Canadian
subsidiary. The spot rates for conversion of a Canadian dollar into a US dollar
were approximately 1.4313 and 1.5368 at December 31, 1997 and 1998,
respectively. At December 31, 1998, IDRC had three option contracts with a
total fair value of $0.16 million. Included in IDRC's comprehensive net loss
for the year ended December 31, 1998 was an after-tax gain of $0.14 million
available as a partial hedge against possible foreign currency loss due to
conversion for repayment of debt principal.
Credit Risk. Under the terms of the credit facilities, IDRC is required to
make quarterly principal payments in 2001 and 2002. Management believes that
IDRC will be able to re-finance all or a portion of the debt prior to these
dates. However, the availability of financing is subject to the risk of a
deterioration in IDRC's general credit rating and such re-financing may not be
possible. In addition, IDRC is subject to the risk of a reduction in the supply
of available credit facilities at the time of the re-financing. Such a
reduction in the supply of available credit facilities could result in higher
borrowing costs. The potential impact of increased interest cost due to higher
interest rates is discussed in the interest rate risk section above.
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IDRC Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
IDRC Executive Compensation
Compensation of Executive Officers
Summary of Compensation. The following table shows for the fiscal year ended
December 31, 1998 compensation awarded or paid to, or earned by, IDRC's Chief
Executive Officer and its other four most highly compensated executive
officers who earned more than $100,000 in the fiscal year ended December 31,
1998, each of whom will serve as an executive officer of TeleSpectrum upon
completion of the IDRC merger:
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------- ------------
Other Annual Securities
Name and Principal Bonus Compensation Underlying All Other
Position Year Salary ($)(1) ($) ($) Options (#) Compensation
- ------------------ ---- ------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey E. Stiefler..... 1998 350,000 -- -- 15,000 --
Chief Executive Officer
and Chairman of the
Board
John D. Weil............ 1998 300,000 150,000(2) 25,000(3) 5,333 76,000(4)
President and Chief
Executive Officer, IDRC
U.S.
David B. Parkes......... 1998 270,000 81,000(5) 16,875(6) 5,333 --
President and Chief
Executive Officer, IDRC
International
Paul J. Grinberg........ 1998 225,000 -- -- 3,574 --
Executive Vice
President and Chief
Financial Officer
Jill A. Ward............ 1998 220,000 -- -- 6,000 60,000(7)
President, U.S. Inbound
and Customer Care
</TABLE>
- --------
(1) In accordance with the rules of the Commission, the compensation described
in this table does not include medical, group life insurance or other
benefits received by the named IDRC executive officers which are available
generally to all salaried employees of IDRC, and certain perquisites and
other personal benefits received by the named IDRC executive officers
which do not exceed the lesser of $50,000 or 10% of any such officer's
salary and bonus disclosed in this table.
(2) Represents guaranteed bonus paid to Mr. Weil pursuant to the terms of his
employment agreement.
(3) Represents fringe benefit awards paid to Mr. Weil pursuant to his
employment agreement.
(4) Represents reimbursement for relocation expenses.
(5) Represents a bonus paid to Mr. Parkes pursuant to the terms of his
employment agreement.
(6) Represents fringe benefit awards paid to Mr. Parkes pursuant to his
employment agreement.
(7) Represents amounts paid as a signing bonus for commencing employment with
IDRC.
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IDRC Executive Compensation
<PAGE>
Stock Option Grants and Exercises
The following tables show for the fiscal year ended December 31, 1998,
information regarding options exercisable for class A common stock granted to,
exercised by, and held at year end by, the named IDRC executive officers:
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed Annual
Option Grants in Fiscal Year 1998 Rates of Stock
Individual Grants(1) Appreciation(4)
------------------------------------------- ----------------
% of Total
Number of Options
Securities Granted to Exercise
Underlying Employees or Base
Options in Fiscal Price Expiration
Name Granted Year(2) ($/Sh)(3) Date 5% 10%
- ---- ---------- ---------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey E.
Stiefler........ 22,500(5) 10.81% 10.00 1/25/07 124,049 305,538
15,000 7.20% 10.00 6/17/08 94,334 239,061
John D. Weil..... 8,350(6) 4.01% 10.00 (7) (8) (8)
5,333 2.56% 10.00 6/17/08 33,539 84,994
David B. Parkes.. 8,000(5) 3.84% 10.00 10/27/08 44,106 108,636
5,333 2.56% 10.00 6/17/08 33,539 84,994
Paul J.
Grinberg........ 5,361(5) 2.57% 10.00 1/31/07 29,557 72,800
3,574 1.71% 10.00 6/17/08 22,477 56,960
Jill A. Ward..... 4,000(5) 1.92% 10.00 8/31/07 22,053 54,318
6,000 2.88% 10.00 6/17/08 37,734 95,625
</TABLE>
- --------
(1) Options have a maximum term of 10 years measured from the date of grant,
subject to earlier termination upon the optionee's cessation of service
with IDRC. The options generally vest on a quarterly basis over a four-
year period. The vesting of options expiring in June 2008 accelerates upon
certain performance based goals of IDRC.
(2) Based on options to purchase 208,212 shares granted (including repriced
options) to employees in fiscal 1998, including the named IDRC executive
officers. Includes options repriced in fiscal 1998.
(3) The exercise price is equal to the fair market value of IDRC common stock
on the date of grant as determined by the IDRC board of directors on the
date of grant.
(4) Represents the hypothetical gains or "option spreads" that would exist for
the options at the end of their ten year term. These gains are based on
assumed rates of annual compound stock price appreciation of 5% and 10%
from the date the option was granted to the end of the option term and are
calculated based on the exercise price per share on the date of grant.
Such 5% and 10% assumed annual compound rates of stock price appreciation
are mandated by the rules of the SEC and do not represent IDRC's estimate
or projection of the future stock price.
(5) Options repriced in fiscal 1998 and originally issued in fiscal 1997.
(6) Includes options to purchase 8,000 shares and 350 shares repriced in
fiscal 1998 and originally issued in fiscal 1997 and 1996, respectively.
(7) Options to purchase 8,000 shares and 350 shares of IDRC class A common
stock expire on November 16, 2007 and October 14, 2006.
(8) Options to purchase 8,000 and 350 shares of IDRC class A common stock are
valued at $44,106 and $1,671 for a 5% annual increase, respectively and
$108,636 and $4,003 for a 10% annual increase, respectively.
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IDRC Executive Compensation
<PAGE>
Aggregated Option Exercises In Fiscal Year 1998 And Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-
Shares Value Underlying Unexercised the-Money Options at
Acquired on Realized Options at Fiscal Year-End Fiscal Year-End ($)(2)
Name Exercise (#) ($)(1) (#) Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------ -------- ----------------------------- -------------------------
<S> <C> <C> <C> <C>
Jeffrey E. Stiefler..... -- -- 10,312/27,187 $828,000/$2,184,000
John D. Weil............ -- -- 2,319/11,369 186,000/ 914,000
David B. Parkes......... -- -- 2,166/11,166 174,000/ 897,000
Paul J. Grinberg........ -- -- 2,457/ 6,477 197,000/ 521,000
Jill A. Ward............ -- -- 1,750/ 8,250 141,000/ 663,000
</TABLE>
- --------
(1) Based on the fair value per share of IDRC common stock (as determined by
the IDRC board of directors) at the date of exercise, less the exercise
price.
(2) Based on the fair value per share of IDRC common stock ($90.34) at
December 31, 1998, less the exercise price, multiplied by the number of
shares underlying the option.
Option Repricing
In June 1998, the compensation committee of IDRC approved the participation
of certain key employees (including executive officers) of IDRC in an option
exchange program. Under the program, outstanding options held by the
participants were eligible to be exchanged for new options to purchase the
same number of shares at a lower price. Because options are a key component of
IDRC's long-term incentive program, the committee determined that the exchange
was necessary in order to retain such key employees.
The following table shows certain information concerning the repricing of
options exercisable for IDRC class A common stock received by the named IDRC
executive officers in 1998.
<TABLE>
<CAPTION>
Length of
Number of Fair Market Original
Securities Price of Exercise Option Term
Underlying Stock at Price at New Remaining at
Options Time of Time of Exercise Date of
Name Date Repriced(#) Repricing($) Repricing($) Price($) Repricing
---- ------- ----------- ------------ ------------ -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey E. Stiefler..... 6/18/98 22,500 $7.03 $266.67(1) $10.00 8 years, 7 mths
John D. Weil............ 6/18/98 8,350 $7.03 $195.81(2) $10.00 (4)
David B. Parkes......... 6/18/98 8,000 $7.03 $200.00 $10.00 9 years, 3 mths
Paul J. Grinberg........ 6/18/98 5,361 $7.03 $174.99(3) $10.00 8 years, 8 mths
Jill A. Ward............ 6/18/98 4,000 $7.03 $200.00 $10.00 9 years, 2 mths
</TABLE>
- --------
(1) Represents a weighted average exercise price calculated as follows: 10,000
shares at $100 per share; 2,500 shares at $200 per share; 2,500 shares at
$300 per share; 2,500 shares at $400 per share; 2,500 shares at $500 per
share; and 2,500 shares at $600 per share.
(2) Represents a weighted average exercise price calculated as follows: 350
shares at $100 per share; and 8,000 shares at $200 per share.
(3) Represents a weighted average exercise price calculated as follows: 2,681
shares at $100 per share; 1,340 shares at $200 per share; and 1,340 shares
at $300 per share.
(4) Includes 8 years, 3 months for options to purchase 350 shares, and 9
years, 4 months for options to purchase 8,000 shares.
1996 Stock Option Plan
In March 1996, the IDRC board and the stockholders of IDRC adopted IDRC's
1996 Stock Option Plan. The plan was amended in January 1997 and June 1998.
The plan provides for the granting of stock options to executive officers
(including those who are directors), to other employees and to non-employee
consultants of IDRC. Such options may include incentive stock options and non-
qualified stock options. The plan, which permits up to 210,082 shares of
IDRC's class A common stock to be issued, terminates in March 2006. As of
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IDRC Executive Compensation
<PAGE>
February 26, 1999, stock options with respect to 145,494 shares of IDRC class
A common stock were outstanding. An additional 64,588 shares were available
for issuance under the plan.
Shares of IDRC class A common stock may be issued under the plan for any
lawful consideration. The plan is administered by the board or by a committee
of the IDRC board. Subject to the terms of the plan, the board of directors or
the committee determines the persons to whom options are granted and the terms
and the number of shares covered by each option.
Stock options granted under the plan may be either options that qualify as
incentive stock options, within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or those that do not qualify as such
incentive stock options. Incentive options may only be granted to persons who
are employees of IDRC, while nonqualified options may also be granted to
directors and consultants who are not employees.
Under the plan, any incentive options granted must have an exercise price
equal to or greater than the fair market value of the IDRC common stock on the
date of grant (or, for an incentive option granted to a person holding more
than 10% of IDRC's voting stock, an exercise price no less than 110% of fair
market value at the time such option is granted). Aside from the maximum
number of shares of IDRC common stock reserved under the plan, there is no
minimum or maximum number of shares that may be subject to options. However,
the aggregate fair market value of the stock subject to incentive options
granted to any optionee that are exercisable for the first time by the
optionee during any calendar year may not exceed $100,000.
The term of each option may not exceed ten years from the date the option is
granted, or five years in the case of an option granted to a holder of more
than 10% of the fully-diluted capital stock of IDRC. Options may become
exercisable in whole at grant or in installments over time, as determined by
the compensation committee.
With respect to the stock options granted by IDRC to date, such options
generally expire when the optionee ceases to be affiliated with IDRC. Options
may not be transferred other than by will or the laws of descent and
distribution, and during the lifetime of an optionee may be exercised only by
the optionee.
The plan provides that any option may contain, at the discretion of the
compensation committee, a provision conditioning or accelerating the receipt
of benefits pursuant to such option upon the occurrence of specified events,
including continued employment by IDRC, a change in control, merger,
dissolution or liquidation of IDRC, or the sale of substantially all of its
assets. The acceleration of vesting of options in the event of a merger or
other similar event may be seen as an anti-takeover provision and may have the
effect of discouraging a proposal for merger, a takeover attempt or other
efforts to gain control of IDRC.
Under the terms of the options issued to date, payment upon the exercise of
an option may be in cash, by check or, after an initial public offering, by
delivery of shares of IDRC common stock with a "fair market value," as defined
in the plan, equal to the aggregate exercise price. The exercise prices for
all outstanding options are at least equal to the fair market value of the
shares underlying those options on the date the option was granted.
Other Options
In addition to the options issued under the plan, at February 16, 1999,
there were outstanding options to purchase an aggregate of 65,018 shares of
IDRC class A common stock which options were issued outside of IDRC's 1996
Stock Option Plan. The options are exercisable for $10.00 per share. Options
to purchase 8,000 of the shares are subject to accelerated vesting upon the
achievement by the holders of performance goals.
Certain Transactions
Advisory Services Agreement. IDRC and MDC Management Company III, L.P., an
affiliate of McCown De Leeuw & Co., are parties to an advisory services
agreement entered into in March 1996. Under the
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IDRC Executive Compensation
<PAGE>
agreement, MDC provides financial and strategic advisory services to IDRC.
IDRC is obligated to pay MDC the following:
. an annual fee of $250,000 (which is subject to annual increases);
. success fees upon the completion of identified business transactions
(including acquisitions) by IDRC; and
. reimbursement of out-of-pocket expenses.
In 1998, IDRC paid MDC an aggregate of $639,000 under the agreement. The
agreement will terminate upon the closing of the IDRC merger.
IDRC Stockholders Agreement. IDRC and virtually all of its stockholders are
parties to a stockholders agreement that provides its stockholders with
certain rights, including the following:
. right to purchase equity securities issued by IDRC;
. right to sell equity securities along with sales made by IDRC;
. registration rights and rights to participate in registered equity
offerings; and
. voting rights for directors.
The stockholders agreement also places some restrictions on the
stockholders, including restrictions on the transfer of shares. The
stockholders agreement will terminate upon the closing of the IDRC merger.
IDRC Promissory Notes. In March 1996, IDRC issued promissory notes with a
principal amount of $5 million. The principal is payable in four equal
installments over a three-year period beginning in March 2001. The number of
installments over which the principal is required to be repaid is subject to
reduction based on ProMark achieving certain gross margin targets for the
three-year period ended December 31, 1998. At present, the calculation of the
gross margin targets has not been completed. IDRC is currently accruing
interest at the rate of 12% per annum on the notes. The total principal due on
the notes is subject to reduction to satisfy any indemnification obligations
owed to IDRC by the former ProMark stockholders under an agreement between
IDRC and ProMark. In addition, the payment of principal and interest on the
notes is subordinate to the rights of IDRC's senior lenders.
Employee Notes. In March 1997, Mr. Grinberg purchased 666 shares of IDRC
class A common stock and paid for such shares by tendering a promissory note
to IDRC in the principal amount of $99,899. The promissory note bears interest
at the rate of LIBOR + 150 basis points per annum payable annually. The
promissory note is secured by the shares of class A common stock. Upon Mr.
Grinberg's resignation or voluntary termination of his employment with IDRC,
amounts due under the note will be payable in three equal annual installments
on each anniversary of the date of resignation or voluntary termination.
In addition, on July 22, 1997, Mr. Grinberg borrowed $475,000 from IDRC
pursuant to a promissory note. The promissory note bears interest at 3.0% per
annum payable annually from proceeds of paid bonuses that have accrued in the
prior year. Principal and accrued interest are payable on or before July 21,
2004. The loan represented by the note was made in connection with Mr.
Grinberg's purchase of his home.
-141-
IDRC Executive Compensation
<PAGE>
Election of TeleSpectrum Directors
Election of Directors
Set forth below is certain information with respect to each nominee for
director. Each of these persons is currently serving as a director of
TeleSpectrum and their term of office will continue after the annual meeting.
Each director has provided this information at the request of TeleSpectrum.
NOMINEES FOR ELECTION
<TABLE>
<CAPTION>
Principal Occupations During Past Five Years and
Name of Director Age Certain Directorships
---------------- --- ------------------------------------------------
<C> <C> <S>
Keith E. Alessi 44 Keith E. Alessi has been Chairman of the Board, Chief
Executive Officer and President since March 1998. Mr.
Alessi had been Chairman, Chief Executive Officer and
President of Jackson Hewitt, Inc., the nation's second
largest tax preparation service company from 1996
through 1998. From 1988 to 1996, Mr. Alessi served in
several executive positions with Farm Fresh, Inc., a
grocery company, and was Vice Chairman upon his
departure.
Joseph V. Del Raso 46 Joseph V. Del Raso has been a partner at the law firm
of Pepper Hamilton LLP since January 1998. Prior
thereto, Mr. Del Raso was a partner at the law firm of
Stradley Ronon Stevens & Young from 1992 through
January 1998. From 1988 to 1992 he was a partner at the
law firm of Holland and Knight in Ft. Lauderdale,
Florida. He has been a director of TeleSpectrum since
February 1997.
Michael E. Julian 48 Michael E. Julian has been a director of TeleSpectrum
since September 1998. Mr. Julian has served as Chief
Executive Officer of Jitney-Jungle Stores of America
since March 1997 and as Chairman of the Board since
August 1998. From 1988 until March 1997, Mr. Julian
served as Chairman of the Board and Chief Executive
Officer of Farm Fresh, Inc. In January 1998, Farm Fresh
Inc. petitioned for a prepackaged Chapter 11 bankruptcy
and emerged in May 1998.
David R. Kriegel 53 David R. Kriegel has been a director of TeleSpectrum
since September 1998. Mr. Kriegel has been Chairman,
Chief Executive Officer and President of Drug Emporium,
Inc. since January 1993.
J. Brian O'Neill 39 J. Brian O'Neill was the Chairman of the Board and
Chief Executive Officer since the formation of
TeleSpectrum in April 1996 to March 1998. Mr. O'Neill
is currently involved in operating a privately-held
real estate company. Mr. O'Neill has been the Chairman
and Chief Executive Officer of CRW Financial, Inc.
since May 1995. From July 1992 to May 1995, Mr. O'Neill
was Chairman and Chief Executive Officer of Casino and
Credit Services, Inc.
Richard W. Virtue 54 Richard W. Virtue has served as a director of
TeleSpectrum since August 1996. Mr. Virtue served as
Chief Executive Officer of SOMAR, Inc., a predecessor
of TeleSpectrum, from 1982 until August 1996.
Kevin W. Walsh 44 Kevin W. Walsh has been a director of TeleSpectrum
since August 1996. Mr. Walsh has been a partner of the
law firm Adelman Lavine Gold and Levin, a professional
corporation, since 1988.
</TABLE>
The board of directors currently consists of seven directors. Each director
elected at the annual meeting will serve until the 2000 annual meeting of
stockholders and until such director's successor has been elected and
qualified, except in the event of such director's earlier death, resignation or
removal.
The board of directors has nominated Mr. Keith E. Alessi, Mr. Joseph Del
Raso, Mr. Michael E. Julian, Mr. David R. Kriegel, Mr. J. Brian O'Neill, Mr.
Richard W. Virtue and Mr. Kevin W. Walsh for election to the board of
directors.
-142-
Election of TeleSpectrum Directors
<PAGE>
The persons named as proxy agents in the enclosed proxy card intend to vote
for the election of Messrs. Alessi, Del Raso, Julian, Kriegel, O'Neill, Virtue
and Walsh as directors. In the event that a nominee should become unable to
accept nomination or election, the proxy agents intend to vote for any
alternate nominee designated by the board of directors, or the board may decide
to reduce the number of directors.
The board of directors unanimously recommends a vote FOR each nominee.
Compensation Interlocks and Insider Participation
The board of directors has a compensation committee and an audit committee.
During fiscal year 1998, the board of directors held eight meetings, the
compensation committee held two meetings and the audit committee held two
meetings. Each director attended at least 75% of the aggregate of the meetings
of the board of directors held during 1998 and of the committees on which he
served during the year.
The compensation committee makes recommendations concerning salaries and
incentive compensation for employees of and consultants to TeleSpectrum, and
the audit committee reviews the results and scope of the audit and other
services provided by TeleSpectrum's independent auditors.
The current members of the compensation committee are Messrs. Kriegel and
Walsh. The current members of the audit committee are Messrs. Del Raso, Julian
and Walsh.
Director Compensation Arrangements
Directors who are not currently receiving compensation as officers, employees
or consultants of TeleSpectrum are entitled to receive an annual retainer fee
of $7,500, plus $500 and reimbursement of expenses for each meeting of the
board of directors and each committee meeting that they attend in person.
Non-employee directors of TeleSpectrum are currently entitled to receive non-
qualified stock options pursuant to the formula grants under TeleSpectrum's
1996 Equity Compensation Plan. However, in September 1998, at a special meeting
of the board of directors of TeleSpectrum, the board decided to adopt a new
policy that would replace the existing formula provision under the plan.
Subject to stockholder approval, each non-employee director of TeleSpectrum
will instead be granted a non-qualified stock option exercisable for 10,000
shares of TeleSpectrum common stock on the date that such person is first
elected to the board. An additional grant of an option exercisable for 10,000
shares of TeleSpectrum common stock will also be granted on each date that a
director person is re-elected to the board. All options granted to non-employee
directors under this policy will vest in three annual equal installments and
contain such other terms and conditions as set forth in the plan. Pursuant to
this new policy, Messrs. Julian and Kriegel were each granted a non-qualified
stock option exercisable for 10,000 shares of TeleSpectrum common stock upon
their election to the board in September 1998.
At the annual meeting, the stockholders will vote on a proposal to amend the
various aspects of the plan, including to remove the provisions relating to
formula grants to directors.
-143-
Election of TeleSpectrum Directors
<PAGE>
Executive Compensation
The following table sets forth certain information with respect to
compensation paid or earned during the fiscal years ended December 31, 1996,
1997 and 1998 to TeleSpectrum's Chief Executive Officer and President, Chief
Financial Officer and Former Chief Executive Officer in 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation(1) Long-Term
---------------------- Compensation
Name and Position Year Salary($) Bonus ($) Awards(#)(2)
- ----------------- ---- --------- --------- ------------
<S> <C> <C> <C> <C>
Keith E. Alessi...................... 1998 $195,000(3) $ 0 2,000,000
Chairman of the Board, Chief
Executive Officer and President
Richard C. Schwenk, Jr.(4)........... 1998 200,000 0 40,000
Former Senior Vice President and 1997 200,000 40,000(5) 200,000
Chief Financial Officer 1996 122,000(6) 0 100,000
J. Brian O'Neill(7).................. 1998 171,000(8) 0 2,500
Former Chairman of the Board and 1997 130,000 0 500,000
Chief Executive Officer 1996 51,000(6) 0 500,000
</TABLE>
- --------
(1) Excludes perquisites and other personal benefits, securities or property
which are, in the aggregate, less than 10% of the total annual salary and
bonus.
(2) Represent shares of common stock underlying stock options granted by
TeleSpectrum.
(3) Represents compensation for the period from date of employment of March 18,
1998 through December 31, 1998.
(4) Mr. Schwenk resigned from his position with TeleSpectrum in April 1999.
(5) Bonus was accrued in 1997 but paid in 1998.
(6) Represents compensation for the period from date of employment until
December 31, 1996.
(7) Mr. O'Neill resigned from his position with TeleSpectrum in March 1998.
(8) Includes $117,000 of severance payments.
Employment Agreements
Mr. Alessi has an employment agreement with TeleSpectrum. Mr. Alessi's
agreement provides that he is to be employed by TeleSpectrum through March 19,
2001 at an annual salary of $200,000, plus any bonuses as determined annually
by the compensation committee. Pursuant to his agreement, Mr. Alessi was
granted three stock options exercisable for an aggregate of 2,000,000 shares of
common stock at an exercise price of $3.29 per share provided Mr. Alessi is
employed by TeleSpectrum on such dates. One of these stock options which is
exercisable for an aggregate 500,000 shares was granted under the 1996 Equity
Compensation Plan and the remaining options were not granted under the plan.
This option vests on the earlier of the date that the TeleSpectrum common stock
reaches certain closing prices, or in March 2003. The vesting schedule is as
follows: 166,667 shares become vested if the closing price of the common stock
reaches $12.00 per share prior to June 18, 2000 and 166,666 shares become
vested if the closing price of the common stock reaches $18.00 per share prior
to March 18, 2001. The first 166,667 of these shares vested in 1998 after the
closing price of the common stock reached $8.00 per share. Two of these
options, exercisable for an aggregate of 1,500,000 shares, vest in three equal
amounts on each of March 18, 1999, 2000 and 2001.
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Election of TeleSpectrum Directors
<PAGE>
Severance Arrangements
Under the terms of an employment agreement dated May 21, 1996, as amended on
January 1, 1998, J. Brian O'Neill, currently a director and the former Chairman
of the Board and Chief Executive Officer of TeleSpectrum, is entitled to
receive annual cash compensation of $150,000 per year until May 20, 2000. In
addition, this agreement provided for the full vesting of Mr. O'Neill's options
upon the hiring of Mr. Alessi in March 1998.
Consulting Agreement
Mr. Virtue has a consulting agreement with TeleSpectrum which provides for
the payment of annual consulting fees of $150,000. This agreement expires in
August 1999.
The following table sets forth certain information concerning options granted
to the named executive officers in 1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term(2)
------------------------------------------------- ----------------------
Number of
Securities Percentage of
Underlying Total Options Exercise Expiration
Name Options Granted Available(1) Price Date 5% 10%
- ---- --------------- ------------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Keith E. Alessi......... 2,000,000 30.8% $3.29 3/18/08 $4,138,000 $10,486,000
Richard C. Schwenk,
Jr..................... 40,000 0.6% $3.31 2/25/08 $ 831,200 $ 211,000
</TABLE>
- --------
(1) Based on an aggregate of 5,000,000 options currently available under the
plan and 1,500,000 Alessi options.
(2) Represents the hypothetical gains or "option spreads" that would exist for
the options at the end of their ten year term. These gains are based on
assumed rates of annual compound stock price appreciation of 5% and 10%
from the date the option was granted to the end of the option term and are
calculated based on the exercise price per share on the date of grant. Such
5% and 10% assumed annual compound rates of stock price appreciation are
mandated by the rules of the SEC and do not represent TeleSpectrum's
estimate or projection of the future common stock price.
The following table sets forth certain information concerning the number and
value of unexercised options held by the named executive officers on December
31, 1998.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options (#) In-The-Money Options ($)
------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable(1)
- ---- ----------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
Keith E. Alessi......... 0 1,833,333 $ 0 $11,958,831
Richard C. Schwenk,
Jr. ................... 300,000 40,000 $1,428,900 $ 260,120
J. Brian O'Neill........ 1,003,000 -- $4,365,000 --
</TABLE>
- --------
(1) Based on the difference between $9.813 which was the closing price per
share of TeleSpectrum's common stock as listed on the Nasdaq National
Market System on December 31, 1998, and the exercise price of each option.
-145-
Election of TeleSpectrum Directors
<PAGE>
Notwithstanding anything to the contrary, the following report of the
compensation committee and the performance graph on page 140 shall not be
deemed incorporated by reference by any general statement incorporating by
reference this proxy statement into any filing under the Securities Act of
1933, as amended, or under the Securities Exchange Act of 1934, as amended,
except to the extent that TeleSpectrum specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
acts.
Report of the Compensation Committees
The compensation committee of TeleSpectrum Board is comprised of directors
who are not employees of TeleSpectrum. The committee is responsible for the
establishment and administration of TeleSpectrum's annual executive
compensation and its stock ownership programs. The committee evaluates the
performance and determines the compensation of the chief executive officer and
the other executive officers of the Company based upon the written employment
agreements these persons have with TeleSpectrum. The committee also considers
other factors including the achievement of company financial goals and
individual performance goals and comparisons with other public companies.
The committee's policy is to offer compensation opportunities that will
enable TeleSpectrum to attract, motivate and retain individuals of outstanding
ability capable of enhancing stockholder value. The committee relies on a
combination of salary, bonus and stock options. Each of TeleSpectrum's
executive officers in 1998 have employment agreements that were signed when
they were hired by TeleSpectrum. These agreements set forth their annual salary
and fringe benefits. The employment agreement of TeleSpectrum's chief financial
officer also contains a bonus provision, although no bonus was paid in 1998
under this provision.
It is the committee's philosophy that employees who have a significant
opportunity to share in TeleSpectrum's long-term economic success are more
likely to promote long-term shareholder value. The committee intends to
consider the awarding of additional stock options in order to emphasize the
link between executive incentives and the creation of stockholder value. In
considering these awards, the committee intends to consider individual
performance, overall contribution to TeleSpectrum, differences in the number of
shares underlying stock options among executive officers and the total number
of stock options to be awarded.
Section 162(m) of the Internal Revenue Code generally denies a federal income
tax deduction for certain compensation exceeding $1,000,000 paid to the Chief
Executive Officer or any of the four other highest paid executive officers,
excluding, among other things, certain performance-based compensation. Through
December 31, 1996, this provision has not affected the Company's tax
deductions, but the Committee will continue to monitor the potential impact of
Section 162(m) on the Company's ability to deduct executive compensation.
COMPENSATION COMMITTEE--February 23,
1999.
David L. Kriegel
Kevin W. Walsh
-146-
Election of TeleSpectrum Directors
<PAGE>
Performance Graph
The following line graph compares the percentage change in the cumulative
total stockholder return on our common stock for the 28 months since our common
stock first started trading on the Nasdaq National Market on August 8, 1996,
with the cumulative total return of the Nasdaq market index and a peer group
index described more fully below. Dividend reinvestment has been assumed.
[GRAPH OF WORLDWIDE INC APPEARS HERE]
- --------
The foregoing tables assume $100 was invested in August 1996 and all
dividends have been reinvested thereafter. The peer group index is comprised of
APAC TELESERVICES, ICT GROUP INC., SITEL CORP. AND TELETECH HOLDINGS INC.,
which like us, provides telemarketing and customer care services. We were
incorporated on April 26, 1996 and our operations commenced on August 8, 1996,
the date on which we completed the acquisitions of our initial operating
businesses. The chart above presents a comparison among us, the Nasdaq market
index and our peer group index from the date of these acquisitions to December
31, 1998.
10-Year Option Repricing
The following table sets forth certain information regarding certain stock
options held by executive officers of TeleSpectrum that were repriced in
September 1997.
<TABLE>
<CAPTION>
Number of Market Length of
Securities Price of Exercise Original Term
Underlying Stock at Price at New Remaining at
Options Time of time of Exercise Date of
Name and Position Date Repriced Repricing Repricing Price Repricing
- ----------------- ------ ---------- --------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Brian O'Neill 9/2/97 500,000 $4.25 $15.00 $6.25 8 yrs. 11 mo.
(Former Chairman of the 9/2/97 100,000 4.25 14.38 6.25 9 yrs. 6 mo.
Board and Chief
Executive Officer)
Michael C. Boyd 9/2/97 300,000 4.25 15.00 6.25 8 yrs. 11 mo.
(Former President and 9/2/97 60,000 4.25 14.38 6.25 9 yrs. 6 mo.
Chief Operating
Officer)
Richard C. Schwenk 9/2/97 100,000 4.25 15.00 6.25 8 yrs. 11 mo.
(Former Chief Financial
Officer) 9/2/97 20,000 4.25 14.38 6.25 9 yrs. 6 mo.
</TABLE>
-147-
Election of TeleSpectrum Directors
<PAGE>
Certain Transactions
Headquarters Lease
TeleSpectrum subleases its headquarters, representing an aggregate of
approximately 21,000 square feet, from CRW, which has subleased the facility
from Cendant Corporation. Under this sublease, TeleSpectrum is required to pay
annual rental payments of approximately $420,000.
Purchase of Common Stock by Keith E. Alessi
On March 18, 1998, Keith E. Alessi executed his employment agreement to
become the Chairman, Chief Executive Officer and President of TeleSpectrum. In
connection with his hiring, Mr. Alessi purchased 227,964 shares of TeleSpectrum
common stock for an aggregate price of $500,000, or $2.19 per share.
Transactions with Mr. O'Neill
On March 18, 1998, J. Brian O'Neill resigned as the Chairman, Chief Executive
Officer and President of TeleSpectrum. Pursuant to the terms of an employment
agreement between TeleSpectrum and Mr. O'Neill dated as of May 20, 1996 and as
amended as of January 1, 1998, (i) Mr. O'Neill is entitled to the continuation
of his salary at an annual rate equal to $150,000 until May 20, 2000 and (ii)
all of Mr. O'Neill's options become fully vested and exercisable at any time
prior to the tenth anniversary of the applicable date of grant.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires TeleSpectrum's
directors and executive officers and persons who beneficially own more than 10%
of TeleSpectrum's common stock to file reports of ownership and changes in
ownership with the SEC. Such directors, executive officers and greater than 10%
stockholders are required by SEC regulation to furnish to TeleSpectrum copies
of all Section 16(a) forms they file.
TeleSpectrum believes that for fiscal year 1998, all Section 16(a) filing
requirements were satisfied on a timely basis except that Richard W. Virtue
filed a Form 4 relating to a November 1998 transaction approximately 100 days
late and Forms 5 for Messrs. Del Raso, O'Neill and Walsh were filed
approximately 75 days late.
This belief is based only on TeleSpectrum's review of the copies of these
reports it has received, and written representations it has received from those
persons required to report to the SEC.
-148-
Certain Transactions
<PAGE>
Election of CRW Directors
The following information is provided to the stockholders of CRW in
connection with their consideration of the proposal regarding the reelection of
nominees to the CRW board.
General
CRW's restated certificate of incorporation classifies the CRW board into
three classes. Class I is currently comprised of one director and Classes II
and III are each currently comprised of two directors. The term of office of
one class of directors expires each year in rotation so that one class is
elected at each annual meeting for a full three-year term. Class I and Class
III directors will be elected at the CRW annual meeting. Mr. Robert N. Verratti
is the current Class I director. J. Brian O'Neill and Mark J. DeNino are the
Class III directors. If the merger is completed Messrs. Verratti, O'Neill and
DeNino, together with the other CRW directors, are expected to be replaced with
nominees of TeleSpectrum in accordance with the CRW merger agreement.
CRW's board recommends that CRW's stockholders vote in favor of Messrs.
Verratti, O'Neill and DeNino to serve as members of the CRW board. If no
instructions are given on a properly executed and returned proxy, the shares of
CRW's common stock represented thereby will be voted in favor of the election
of Messrs. DeNino, O'Neill and Verratti to the CRW board.
Nominee/Director Biographical Information
The following biographical information is furnished as to each nominee for
reelection as a director and each of the current directors:
Directors--Class III (Term Expires at Annual Meeting in 2001)
J. Brian O'Neill, 39, has been the Chairman of the Board and Chief Executive
Officer of CRW since May 1995 and has held the same positions with Casino &
Credit Services, Inc., CRW's former parent company, from July 1992 to May 1995.
Mr. O'Neill is currently involved in operating a privately-held real estate
company.
Mark J. DeNino, 45, has been a director of CRW since February 1996 and has
been a general partner and managing director of Technology Leaders II
Management, L.P., the general partner of Technology Leaders II, L.P., a venture
capital firm and a significant shareholder of CRW, since 1994. For more than
three years prior to that, Mr. DeNino was President of Crossroads Capital,
Inc., an investment banking firm. Mr. DeNino is also currently a director of
Integrated Systems Consulting Group, Inc. Mr. DeNino graduated from the Harvard
Graduate School of Business Administration with an M.B.A. degree and from
Boston College with a B.S. degree in finance and accounting.
Directors--Class II (Term Expires at Annual Meeting in 2000)
Bernard Morgan, 62, has been a director of CRW since February 1996 and, prior
to retiring in 1989, worked for First Fidelity Bancorporation and Fidelcor for
20 years in various positions including Vice Chairman, Chief Executive Officer,
Deputy Chairman, Chief Operating Officer, President and Executive Vice
President. Mr. Morgan is also currently a director of Conectiv, Inc. Mr. Morgan
received his B.A. Degree from St. Joseph's University and his M.B.A. degree
from the Wharton School, University of Pennsylvania.
Eustace Mita, 45, has been a director of CRW since August 1996 and has served
as chief operating officer of HAC Group, Inc., an automobile leasing training
company, since 1990. In 1984, Mr. Mita founded Mita Leasing, an automobile
retail leasing company, and served as its President until Mita was sold in
1992. Mr. Mita is also currently a director of First Republic Bank in
Philadelphia, Pennsylvania.
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Election of CRW Directors
<PAGE>
Directors--Class I (Term Expires at Annual Meeting in 2002)
Robert N. Verratti, 55, has been a director of CRW since March 1996 and has
been Chief Executive Officer of National Media Corp. since May 1997. From 1985
to May 1997, he was the Chief Executive Officer of Charlestown Investments,
Ltd., an investment company. Prior to 1985, Mr. Verratti served as acting
President of Great Western Cities, Inc., also an investment company. He is a
graduate of the U.S. Naval Academy and served in the nuclear submarine service.
CRW knows of no family relationships between any director, executive officer
or person nominated or chosen by CRW to become a director or executive officer
other than that Messrs. O'Neill and Mita are cousins.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1998, CRW's compensation committee
of the board of directors consisted of Messrs. DeNino, Mita and Verratti. There
were no compensation committee interlocks in 1998.
Directors' Meetings and Committees
During the fiscal year ended December 31, 1998, the board of directors held
five meetings. No incumbent director who was a director or member of a
committee during 1998 attended fewer than four of the board meetings or
committee meetings held during fiscal 1998.
The board of directors has established (i) a special committee consisting of
certain independent board members to consider various alternatives to enhance
shareholder value, and (ii) an audit committee which, among other things:
. considers the overall scope and approach of the annual audit and the
recommendations of CRW's independent auditors;
. recommends the appointment of independent auditors;
. considers significant accounting methods adopted or proposed to be
adopted; and
. considers procedures for internal controls.
The special committee is comprised of Messrs. DeNino and Verratti. The
special committee met three times in 1998. The audit committee currently is
comprised of Messrs. Mita and Morgan. The audit committee met twice in 1998.
The compensation committee met once in 1998. The board does not have a standing
nominating committee.
Compensation of Directors
During 1998, CRW's non-employee directors received cash consideration of
$10,000 for their service on the board. Directors who are also employees of CRW
receive no compensation for their services as directors.
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Election of CRW Directors
<PAGE>
Executive Officers and Directors
The following table and biographies set forth information concerning
individuals who serve as executive officers and directors of CRW:
<TABLE>
<CAPTION>
Term Expires at
Name Age Position Annual Meeting
---- --- -------- ---------------
<S> <C> <C> <C>
J. Brian O'Neill(1).......... 39 Chairman of the Board and 1998
Chief Executive Officer
Jonathan P. Robinson......... 34 Vice President, Secretary, N/A
Treasurer and Chief
Financial Officer
Eustace W. Mita(1)(2)(3)..... 45 Director 2000
Mark J. DeNino(1)(3)(4)...... 45 Director 1998
Bernard Morgan(1)(2)......... 62 Director 2000
Robert N. Verratti(1)(3)(4).. 55 Director 1999
</TABLE>
- --------
(1) Background presented above. See "Election of CRW Directors."
(2) Member of audit committee.
(3) Member of compensation committee.
(4) Member of special committee.
Jonathan P. Robinson, has been the Vice President, Treasurer, Secretary and
Chief Financial Officer of CRW since May 1995 and held the same positions with
Casino Credit Services from April 1993 to May 1995. 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.
Section 16(a) of the Exchange Act and the regulations promulgated thereunder
require CRW's officers and directors, and persons who own more than ten percent
of a registered class of CRW's equity securities to file reports of ownership
and changes in ownership on Forms 3, 4 and 5 with the SEC and to furnish CRW
with copies of these reports.
Based solely on CRW's review of the copies of these reports it has received,
and written representations received from certain reporting persons, CRW
believes that all filings required to be made by reporting persons for
transactions occurring during the fiscal year ended December 31, 1998 were made
on a timely basis.
Board Compensation Committee Report on Executive Compensation
Pursuant to regulations adopted by the SEC regarding disclosure of companies'
executive compensation policies, CRW's compensation committee of the board of
directors has prepared the following report pertaining to CRW's executive
compensation policies for the fiscal year ended December 31, 1998.
Basic Policy Considerations. CRW's compensation committee of the board of
directors was responsible for formulating and administering corporate policy
with respect to executive compensation during fiscal 1998. CRW's executive
compensation is based on the principles that compensation should be, to a
significant extent, reflective of the financial performance of CRW, and that a
significant portion of executive officers' compensation should provide long-
term incentives. Executive compensation is set at levels that are sufficiently
competitive so that CRW may attract, retain and motivate the best individuals
to contribute to CRW's goals and objectives and its overall financial success.
Methods of compensation are designed to provide incentives for performance that
result in continuing improvements in CRW's financial results or condition, over
both the short term and the long term, and to assure continued service to CRW.
Stock options constitute a significant portion of incentive compensation, which
causes the ultimate interest of the executives to be aligned with the interests
of the stockholders in increasing the value of their investment. Each executive
officer's compensation is based in part upon both individual experience and
performance and CRW's net income. CRW's executive
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Election of CRW Directors
<PAGE>
compensation program is comprised of two elements: annual compensation in the
form of salary and possible bonuses as short term incentives, and long term
compensation in the form of stock options. The details of this compensation
program are discussed below.
Annual Compensation. The committee establishes annual salary by evaluating
individual performance and considering compensation of comparable executives,
although salary determinations have not been based upon any specific constant
criteria and no formal comparison of any peer group to the salaries determined
for the executive officers has been made. No one factor or combination of
factors is determinative of annual compensation for executive officers and the
ultimate compensation awarded represents a compensation committee practice of
subjective, informal compensation policies and practices.
Executive officers are eligible for annual incentive bonuses based on
specific net income and operating cash flow targets. In addition, the
compensation committee may grant bonuses at their discretion. Factors the
compensation committee considers in determining discretionary bonuses include
CRW's overall financial results, CRW's stock price performance, the overall
economic conditions in the markets in which CRW operates, the strength of the
market, CRW's competitive environment, the individual's contribution to CRW's
economic and strategic objectives, the efforts required and expended by the
individual, the individual's abilities to develop, execute and implement short
term and long term corporate goals and the individual's role in maximizing
company profitability, managing costs and reducing the impact of economic and
demographic restrictions on company performance. Nevertheless, no one factor or
combination of these factors specifically determines a discretionary bonus.
Long Term Compensation--Stock Options. The stock option component of the
executive officers' compensation package is designed to provide incentives for
the enhancement of stockholder value, since the full benefit of stock option
grants will not be realized unless there has been appreciation in per share
values over several years. In this regard, options have been granted at fair
market value on the date of grant. As with the grant of incentive cash bonuses,
no constant criteria are used year after year. Instead the committee makes a
determination of the effectiveness of the executive and the level of
contributions to CRW's success, with no one factor or combination of factors
being determinative. Because the options are granted at fair market value
relative to the date of grant, any value which ultimately accrues to the
executives is based entirely on CRW's performance, as perceived by investors
who establish the price for CRW's shares.
CEO Compensation. J. Brian O'Neill has been CRW's Chairman and Chief
Executive Officer since its inception in May 1995. In determining Mr. O'Neill's
compensation, CRW evaluated the same factors as it does with other executive
officers. During fiscal year 1998, Mr. O'Neill received salary compensation of
$115,000 and a guaranteed bonus of $25,000.
Qualifying Executive Compensation for Deductibility Under Section 162(m) of
the Code. Section 162(m) of the Internal Revenue Code of 1986 provides that
publicly held corporations may generally not deduct certain compensation for
executive officers unless such compensation is "performance-based" as defined
in Section 162(m). The compensation committee notes that the provisions of the
amended and restated 1995 Stock Option Plan are designed to satisfy the
requirements applicable to "performance-based" compensation plans and,
accordingly, to preserve the deductibility by CRW of compensation income
recognized by holders of options granted under the amended and restated 1995
Stock Option Plan. In addition, the compensation committee intends to
administer the amended and restated 1995 Stock Option Plan so that it conforms
in operation to all such requirements.
Conclusion of Report. The compensation committee believes that this
compensation program, with its emphasis on incentivizing compensation, serves
to focus the efforts of CRW's executives on the attainment of sustained growth
and profitability for the benefit of CRW and its stockholders. This report has
been submitted by the compensation committee of the board of directors.
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Election of CRW Directors
<PAGE>
Executive Compensation
The following table sets forth compensation awarded to, earned by or paid to
CRW's Chief Executive Officer and the one other executive officer of CRW
serving at the end of 1998 whose annual cash compensation exceeded $100,000
during the last three fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------- ------------------------
Other Annual Securing
Name And Principal Salary Bonus Compensation Underlying All Other
Position Year ($) ($) ($)(1) Options (#) Compensation
- ------------------ ---- -------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
J. Brian O'Neill........ 1998 $115,000 $ 25,000 $14,688 -- --
Chairman of the Board
and 1997 275,000 300,000 14,688 -- --
Chief Executive Officer 1996 275,000 85,940 14,688 450,000 (2)
Jonathan P. Robinson.... 1998 79,914 11,719 7,440 -- --
Vice President,
Treasurer, 1997 125,000 189,062 7,440 -- --
Secretary and Chief
Financial Officer 1996 125,000 39,060 7,440 90,000 (3)
</TABLE>
- --------
(1) Each executive officer pays $100 per month toward the lease payments with
respect to his CRW furnished car. The balance of the lease payments consist
of $1,224 per month as to Mr. O'Neill, and $620 per month as to Mr.
Robinson.
(2) In May 1996, Mr. O'Neill received a warrant to purchase 610,160 shares of
TeleSpectrum common stock from CRW which was exercisable at $1.50 per
share.
(3) In May 1996, Mr. Robinson received a warrant to purchase 76,316 shares of
TeleSpectrum common stock from CRW which was exercisable at $1.50 per
share.
Employment Agreements
On May 11, 1995, CRW entered into employment agreements with J. Brian O'Neill
as Chief Executive Officer and Jonathan P. Robinson as Vice President,
Treasurer and Chief Financial Officer, each for a term of three years. These
agreements expired on May 11, 1998. As of May 12, 1998, Mr. O'Neill and Mr.
Robinson continued to be employed at a salary of $1.00 per year. Mr. Robinson's
prior salary was reinstated on December 1, 1998 on a month-to-month basis.
Stock Options Granted to Certain Executive Officers in 1998
No stock options were granted to any named executive officer in 1998.
Option Exercises in 1998 and Year End Option Values
The following table sets forth certain information with regard to the
aggregated options exercised in the fiscal year ended December 31, 1998 and the
option values as of the end of that year for the named executive officers.
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised In-
Underlying Unexercised the-Money Options at
Shares Value Options at FY End (#) Fiscal Year End ($)(1)
Acquired Realized Exercisable (E) Exercisable (E)
Name on Exercise ($)(1) Unexercisable (U) Unexercisable (U)
- ---- ----------- -------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
J. Brian O'Neill........ -- -- 900,000 (E) $4,765,500 (E)
</TABLE>
- --------
(1) Based upon the fair market value of CRW's common stock of $6.75 per share
as of December 31, 1998 determined by taking the closing price of the
common stock on the Nasdaq SmallCap Market on the last trading date of the
year.
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Election of CRW Directors
<PAGE>
Stock Price Performance
[PERFORMANCE GRAPH APPEARS HERE]
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Election of CRW Directors
<PAGE>
Amendment and Restatement of the 1996 Equity Compensation Plan
Proposal
At the annual meeting, a proposal will be presented to the TeleSpectrum
stockholders to approve the adoption of an amendment and restatement effective
May 12, 1999 of the TeleSpectrum Worldwide Inc. 1996 Equity Compensation Plan
to:
. increase the number of shares of TeleSpectrum common stock reserved for
issuance under the plan from 5,000,000 to 10,000,000;
. eliminate formula grants to non-employee directors and allow for
discretionary grants of nonqualified stock options to non-employee
directors;
. expand the types of awards that may be granted for substituted stock
options to include other equity awards such as warrants;
. ensure that treatment for qualified performance-based compensation
pursuant to section 162(m) of the Internal Revenue Code of 1986, as
amended, is available for certain awards under the Plan;
. modify the amendment provision of the Plan to reflect current statutory
stockholder approval requirements; and
. make other minor necessary and conforming changes to the plan.
Effective May 12, 1999, the TeleSpectrum board adopted the amendment to the
plan, subject to stockholder approval. The amendment to the plan will not be
effective unless or until stockholder approval is obtained. The principal
terms of the plan are discussed below.
In addition to the amendments described above, effective with the completion
of the transactions with IDRC, the TeleSpectrum board adopted a resolution
directing the committee to grant options and warrants in substitution of
certain stock options granted to IDRC employees under the IDRC 1996 Stock
Option Plan. TeleSpectrum common stock and warrants will be substituted for
IDRC stock in accordance with the formula and the terms and conditions set
forth in the IDRC merger agreement.
A blacklined copy comparing the amendment to the plan to the previous version
of the plan is set forth as Appendix VII to this joint prospectus. The
following description of the plan is only a summary of the plan. Since it is
only a summary, it does not contain a complete description of the plan.
Vote Required for Approval
The proposal to amend and restate the plan requires the affirmative vote of
a majority of the shares present in person or represented by proxy at the
meeting for its approval.
The TeleSpectrum board unanimously recommends a vote FOR the proposal.
Description of the Plan
The plan provides for grants of stock options, restricted stock, stock
appreciation rights and performance units to selected employees of
TeleSpectrum or its subsidiaries, key advisors including consultants who
perform valuable services to TeleSpectrum or its subsidiaries and non-employee
directors of TeleSpectrum. Grants of stock options, restricted stock, stock
appreciation rights and performance units are referred to collectively as
"grants."
General. Subject to adjustment in certain circumstances as discussed below
and to stockholder approval of the amendment to the plan, the amendment
provides that the total number of shares of TeleSpectrum common stock that may
be issued under the plan is 10,000,000. Prior to the effective date of the
amendment to the plan, the plan provided that the total number of shares of
TeleSpectrum common stock that could be issued was 5,000,000. To the extent
grants expire, or are canceled, forfeited, exchanged, surrendered, or
terminated for any
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Amendment and Restatement of the 1996 Equity Compensation Plan
<PAGE>
reason without being exercised, or the shares subject to a grant are
forfeited, the shares of TeleSpectrum common stock subject to such grant will
again be available for grant under the plan.
Administration of the Plan. The plan is administered and interpreted by a
committee of the board consisting of not less than two persons appointed by
the board from among its members, each of whom is a "non-employee director" as
defined in Rule 16b-3 under the Securities Exchange Act of 1934 and an
"outside director" as defined by section 162(m) of the Internal Revenue Code
of 1986. The board has established the compensation committee which will serve
as the committee required by the plan.
Except with respect to grants to non-employee directors, the committee has
the sole authority to determine:
. the persons to whom grants may be made;
. the type, size and other terms and conditions of each grant;
. the time when the grants will be made and the duration of any applicable
exercise or restriction period, including the criteria for exercisability
and the acceleration of exercisability; and
. any other matters arising under the plan.
In addition to any grants made at the discretion of the committee, effective
September 4, 1998 and subject to stockholder approval, the board may grant
options to non-employee directors under the plan as described below.
The committee has full power and authority to:
. administer and interpret the plan;
. make factual determinations; and
. adopt or amend such rules, regulations, agreements and instruments for
implementing the plan and for conduct of its business as it deems
necessary or advisable, in its sole discretion;
and its determinations and interpretations are conclusive and binding on all
persons.
Grants. Grants may consist of:
. options intended to qualify as incentive stock options within the meaning
of section 422 of the Internal Revenue Code of 1986;
. nonqualified stock options that are not intended to qualify as incentive
stock options;
. restricted stock;
. stock appreciation rights; or
. performance units.
In addition, the amendment to the plan provides that the committee may make
a grant or other equity award, such as a warrant, to a former employee of
another corporation who becomes an employee of TeleSpectrum as a result of a
corporate merger, consolidation, acquisition, reorganization or liquidation in
substitution for stock options or restricted stock granted to such employee by
his previous employer. The IDRC merger agreement provides that certain
employees of IDRC will be granted options and warrants for TeleSpectrum common
stock in substitution for stock options granted under the IDRC 1996 Stock
Option Plan.
Eligibility for Participation. Grants may be made to any employees,
including officers and directors, of, or key advisors or consultants to,
TeleSpectrum or its subsidiaries and to non-employee directors. As of December
31, 1998, approximately 4,500 employees, seven directors, including six non-
employee directors, and no key advisors and consultants were eligible for
grants. Following the completion of the contemplated transactions with IDRC,
it is estimated that TeleSpectrum and its subsidiaries will employ
approximately 11,000 individuals who will be
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Amendment and Restatement of the 1996 Equity Compensation Plan
<PAGE>
eligible to participate in the plan. During any calendar year, no participant
may receive grants under the plan for more than 500,000 shares.
As of June 2, 1999, grants covering 138,833 shares for employees (including
shares for officers) and 1,000 shares for non-employees (including 1,000
shares for directors and no shares for independent contractors and
consultants) were outstanding under the plan. As of June 2, 1999, grants
representing 155,411 shares of IDRC common stock were outstanding under the
IDRC 1996 Stock Option Plan.
Because grants will be made from time to time by the committee or, in the
case of non-employee directors, the board, in its discretion, the grants that
may be received in the future by persons eligible to participate in the plan
are not presently determinable. As of June 2, 1999, the last reported price of
TeleSpectrum's common stock as reported on the Nasdaq National Market was
$6.750.
Options. The exercise price of any option granted under the plan may be
equal to, less than or greater than the fair market value of the underlying
shares of TeleSpectrum common stock on the date of grant. However, the
exercise price of an incentive stock option must be equal to or greater than
the fair market value of the underlying shares on the date of grant and the
exercise price of an incentive stock option granted to an employee who owns
more than 10% of the total combined voting power of all classes of the stock
of TeleSpectrum or its subsidiaries may not be less than 110% of the fair
market value of the underlying shares on the date of grant.
The committee will determine the term of each option; provided, however,
that the exercise period may not exceed ten years from the date of grant, and
the exercise period of an incentive stock option granted to an employee who
owns more than 10% of the total voting power of all outstanding stock of
TeleSpectrum or its subsidiaries may not exceed five years from the date of
grant.
A participant may pay the exercise price
. in cash;
. with the approval of the committee, by delivering appropriate shares of
TeleSpectrum common stock owned by the participant and having a fair
market value on the date of exercise equal to the exercise price; or
. by any other method approved by the committee.
Grants to Non-Employee Directors. Prior to September 5, 1998, each non-
employee director was granted a nonqualified stock option to purchase 2,500
shares as of the date the director first became a member of the board, and a
nonqualified stock option to purchase 2,500 shares on the date of each annual
meeting thereafter, if the individual was a non-employee director immediately
after such date. The exercise price of shares subject to these nonqualified
stock options is equal to the fair market value of the shares on the date of
grant. The term of the nonqualified stock options is ten years and the options
are immediately exercisable as of the date of grant. A non-employee director
must pay the exercise price in cash. The committee may permit a non-employee
director to instruct TeleSpectrum to deliver the shares of TeleSpectrum common
stock due upon the exercise to a designated broker instead of to the
participant.
Effective September 4, 1998 and subject to stockholder approval, the
amendment to the plan provides that the board may make discretionary grants of
nonqualified stock options to non-employee directors in accordance with the
terms of the plan and, effective September 5, 1998, the formula grants
described above will no longer apply to non-employee directors. The board has
the full power and authority reserved for the committee to administer such
grants. Options granted pursuant to this provision of the plan will become
exercisable in
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Amendment and Restatement of the 1996 Equity Compensation Plan
<PAGE>
accordance with those terms and conditions, consistent with the plan, that are
determined by the board and specified in the applicable grant instrument. The
board may accelerate the exercisability of any or all outstanding options at
any time for any reason.
Restricted Stock. The committee may issue shares of TeleSpectrum common
stock to employees or key advisors. Shares may be issued for cash
consideration or for no cash consideration, as the committee determines. The
number of shares granted to each participant shall be determined by the
committee, subject to the maximum limit described above. The committee may
establish conditions under which restrictions on shares of restricted stock
shall lapse over a period of time or according to such other criteria as the
committee deems appropriate. If a grantee ceases to be employed by
TeleSpectrum during the applicable restriction period or if other specified
conditions are not met, the grant of restricted stock will terminate as to all
shares covered for which restrictions have not lapsed and those shares will be
immediately returned to TeleSpectrum. The committee may provide for complete
or partial exceptions to this requirement as it deems appropriate.
Stock Appreciation Rights. The committee may grant stock appreciation rights
alone or in tandem with any option granted pursuant to the plan. Tandem stock
appreciation rights may be granted either at the time the option is granted or
at any time while the option is outstanding. In the case of an incentive stock
option, stock appreciation rights may be granted only at the time of the grant
of the incentive stock option. Unless the committee determines otherwise, the
base price of a stock appreciation right will be the exercise price of the
related option or, if there is no related option, the fair market value of a
share of TeleSpectrum common stock on the date of grant. When a participant
exercises a stock appreciation right, the participant will receive the amount
by which the fair market value of a share on the date of exercise exceeds the
base price of the stock appreciation right. The committee will determine
whether the appreciation will be paid in cash or in whole shares of
TeleSpectrum common stock, or in a combination of the two. To the extent a
participant exercises a tandem stock appreciation right, the related option
will terminate. Similarly, upon exercise of an option, the related stock
appreciation right, if any, will terminate. A stock appreciation right will be
exercisable during the period specified by the committee and will be subject
to any vesting or other restrictions specified by the committee. The
committee, in its sole discretion, may accelerate the exercisability of any or
all outstanding stock appreciation rights at any time for any reason. Stock
appreciation rights may be exercised while the grantee is employed by
TeleSpectrum or during the applicable period of time following termination
provided by the plan.
Performance Units. The committee may grant performance units to employees or
key advisors. The committee will establish the performance period during which
performance will be measured, performance goals applicable to the performance
units and such other conditions as the committee deems appropriate.
Performance goals may related to the financial performance of TeleSpectrum or
its operating units, the performance of TeleSpectrum common stock, individual
performance or such other criteria as the committee deems appropriate. Payment
will be contingent upon achieving performance goals by the end of the
performance period, as determined by the committee. The measure of a
performance unit may be based on the fair market value of a share or such
other measurement base as the committee may determine. Performance units may
be payable in cash or whole shares at the end of a specified performance
period. If the grantee ceases to be employed by TeleSpectrum during a
performance period, or if other established conditions are not met, the
grantee's performance units will be forfeited. The committee may provide for
complete or partial exceptions to this requirement as it deems appropriate.
Section 162(m). Under section 162(m) of the Internal Revenue Code of 1986,
TeleSpectrum may be precluded from claiming a federal income tax deduction for
total remuneration in excess of $1,000,000 paid to the chief executive officer
or to any of the other four most highly compensated officers in any one year.
Total remuneration includes amounts received upon the exercise of stock
options granted under the plan and the value of shares received when the
shares of restricted stock became transferable (or such other time when income
is recognized). An exception exists, however, for "qualified performance-based
compensation." The plan is intended to allow grants to meet the requirements
of "qualified performance-based compensation."
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Amendment and Restatement of the 1996 Equity Compensation Plan
<PAGE>
Stock options and stock appreciation rights should generally meet the
requirements of "qualified performance-based compensation," if the exercise
price is at least equal to the fair market value of the shares on the date of
grant. Nonqualified stock options granted with an exercise price that is less
than the fair market value of the underlying shares on the date of grant
(referred to as "discounted options") may be intended to be "qualified
performance-based compensation" under section 162(m) of the Internal Revenue
Code of 1986. In addition, the committee may determine that performance units
and restricted stock are intended to be "qualified performance-based
compensation" under section 162(m) of the Internal Revenue Code of 1986.
With respect to grants of discounted options and grants of restricted stock
and performance units intended to be "qualified performance-based
compensation," the committee will establish in writing the objective
performance goals that must be met and other conditions of the award before
the beginning of the performance period or during a period permitted by
section 162(m) of the Internal Revenue Code of 1986. The performance goals may
relate to the employee's business unit or the performance of TeleSpectrum and
its subsidiaries as a whole, or any combination of the two. The committee will
use objectively determinable performance goals based on one or more of the
following criteria: stock price, earnings per share, net earnings, operating
earnings, return on assets, stockholder return, return on equity, growth in
assets, unit volume, sales, market share, or strategic business criteria
consisting of one or more objectives based on meeting specified revenue goals,
market penetration goals, geographic business expansion goals, cost targets or
goals relating to acquisitions or divestitures. The committee will not have
discretion to increase the amount of compensation that is payable upon
achievement of performance goals.
Subject to the share limitations otherwise provided in the plan, if
discounted options, restricted stock or performance units measured with
respect to the fair market value of shares are granted as "qualified
performance-based compensation," not more than 500,000 shares may be granted
to an employee under the discounted options, performance units or restricted
stock for any performance period. If performance units are measured with
respect to other criteria, the maximum amount that may be paid to an employee
with respect to a performance period is $1 million. At the end of each
performance period, the committee will certify the results of the performance
goals and the extent to which the performance goals have been met. If and to
the extent the committee does not certify that the performance goals have been
met, the grants of discounted options, restricted stock and performance units
for the performance period shall be forfeited.
Transferability. Grants are generally not transferable by the participant,
except by will, by the laws of descent and distribution, if permitted under
Rule 16b-3 of the Securities Exchange Act of 1934 for grants other than
incentive stock options or if permitted by the committee pursuant to a
qualified domestic relations order. In addition, the committee may grant
nonqualified stock options that allow the participant to transfer the options
to his children, grandchildren or spouse or to trusts for the benefit of such
family members or to partnerships in which such family members are the only
partners, if the participant receives no consideration for the transfer and
the transferred options remain subject to the same terms and conditions.
Amendment and Termination of the Plan. The amendment modifies the amendment
provision of the plan to reflect current statutory stockholder approval
requirements. Subject to the following sentence, the board may amend or
terminate the plan at any time. The board may not, without stockholder
approval, make any amendment where:
. stockholder approval is required in order for incentive stock options
granted or to be granted under the plan to meet the requirements section
422 of the Internal Revenue Code of 1986; or
. stockholder approval is required in order to exempt compensation under
the Plan from the deduction limit under section 162(m) of the Internal
Revenue Code of 1986.
The plan will terminate on the date immediately preceding the tenth
anniversary of its effective date, unless terminated earlier by the board or
extended by the board with approval of the stockholders. The committee will
continue to administer any outstanding grant following the termination of the
plan pursuant to the terms of the plan.
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Amendment and Restatement of the 1996 Equity Compensation Plan
<PAGE>
A termination or amendment of the plan that occurs after a grant is made may
not materially impair the rights of a grantee unless the grantee consents or
it is required by applicable law or a valid and mandatory government
regulation. An outstanding grant may be terminated or amended at any time if
the grantee consents or it is required by applicable law or a valid and
mandatory government regulation.
Adjustment Provisions. In the event of certain transactions identified in
the plan, the committee may appropriately adjust:
. the maximum number of shares available for grants and the individual
share limits;
. the number of shares covered by outstanding grants;
. the kind of shares issued under the plan; and
. the price per share or market value of grants, and any such adjustments
will be effective and binding for all purposes of the plan.
Change of Control of TeleSpectrum. In the event of a change of control,
unless the committee determines otherwise, all options, restricted stock and
stock appreciation rights will become fully vested and participants holding
performance units will receive payment in settlement of the units based on the
target payment for the performance period and the portion of the performance
period that precedes the change of control.
A change of control will occur if:
. as a result of any transaction, any one stockholder, other than an
existing stockholder as of the effective date of the plan or his
beneficiary or estate, becomes a beneficial owner, directly or
indirectly, of securities of TeleSpectrum representing more than 40% of
the TeleSpectrum common stock or the combined voting power of
TeleSpectrum's then outstanding securities;
. a liquidation or dissolution of TeleSpectrum or sale, other than a
transfer to a subsidiary, of all or substantially all of TeleSpectrum's
assets occurs;
. any "person" as such term is used in Sections 13(d) and 14(d) of the
Exchange Act of 1934 is or becomes a "beneficial owner" as defined in
Rule 13d-3 under the Exchange Act of 1934, directly or indirectly, of
securities of TeleSpectrum representing 50% or more of the voting power
of the then outstanding securities of TeleSpectrum;
. the stockholders of TeleSpectrum approve or, if stockholder approval is
not required, the board approves, an agreement providing for:
. the merger or consolidation of TeleSpectrum with another corporation
where the stockholders of TeleSpectrum, immediately prior to the merger
or consolidation, will not beneficially own, immediately after the merger
or consolidation, shares entitling such stockholders to 50% or more of
all votes to which all stockholders of the surviving corporation would be
entitled in the election of directors, without consideration of the
rights of any class of stock to elect directors by a separate class vote,
or where the members of the board, immediately prior to the merger or
consolidation, would not, immediately after the merger or consolidation,
constitute a majority of the board of directors of the surviving
corporation;
. the sale or other disposition of all or substantially all of the assets
of TeleSpectrum; or
. a liquidation or dissolution of TeleSpectrum;
. any person has commenced a tender offer or exchange offer for 50% or more
of the voting power of the then outstanding shares of TeleSpectrum; or
. at least a majority of the board does not consist of individuals who were
elected, or nominated for election, by the directors in office at the
time of such election or nomination.
Federal Income Tax Consequences: The current federal income tax treatment of
grants is generally described below. Local and state tax authorities may also
tax incentive compensation awarded under the plan
-160-
Amendment and Restatement of the 1996 Equity Compensation Plan
<PAGE>
and tax laws are subject to change. Participants are urged to consult with
their personal tax advisors concerning the application of the general
principles discussed below to their own situations and the application of
state and local tax laws.
Nonqualified Stock Options. There are no federal income tax consequences to
a participant or to TeleSpectrum upon the grant of a nonqualified stock
option. Upon the exercise of a nonqualified stock option, a participant will
recognize ordinary compensation income in an amount equal to the excess of the
fair market value of the shares at the time of exercise over the exercise
price of the nonqualified stock option, and TeleSpectrum generally will be
entitled to a corresponding federal income tax deduction. Upon the sale of
shares acquired by the exercise of a nonqualified stock option, a participant
will have a capital gain or loss in an amount equal to the difference between
the amount realized upon the sale and the participant's adjusted tax basis in
the shares, that is, the exercise price plus the amount of ordinary income
recognized by the participant at the time of exercise of the nonqualified
stock option. The capital gain tax rate will depend on the length of time the
shares are held and certain other factors.
Incentive Stock Options. A participant who is granted an incentive stock
option will not recognize taxable income for purposes of the regular income
tax, upon either the grant or exercise of the incentive stock option. However,
for purposes of the alternative minimum tax imposed under the Internal Revenue
Code of 1986 in the year in which an incentive stock option is exercised, the
amount by which the fair market value of the shares acquired upon exercise
exceeds the exercise price will be treated as an item of adjustment and
included in the computation of the recipient's alternative minimum taxable
income in the year of exercise. A participant who disposes of the shares
acquired upon exercise of an incentive stock option after two years from the
date the incentive stock option was granted and after one year from the date
such shares were transferred to him or her upon exercise of the incentive
stock option will recognize capital gain or loss in the amount of the
difference between the amount realized on the sale and the exercise price or
the participant's other tax basis in the shares, and TeleSpectrum will not be
entitled to any tax deduction by reason of the grant or exercise of the
incentive stock option. The capital gain tax rate will depend on the length of
time the shares are held and certain other factors.
As a general rule, if a participant disposes of the shares acquired upon
exercise of an incentive stock option before satisfying both holding period
requirements, referred to as a disqualifying disposition, his gain recognized
on such a disposition will be taxed as ordinary income to the extent of the
difference between the fair market value of such shares on the date of
exercise and the exercise price, and TeleSpectrum will be entitled to a
deduction in that amount. The gain, if any, in excess of the amount recognized
as ordinary income on such a disqualifying disposition will be capital gain,
depending upon the length of time the participant held his shares prior to the
disposition and certain other factors.
Restricted Stock. A participant normally will not recognize taxable income
upon receiving restricted stock, and TeleSpectrum will not be entitled to a
deduction, until such stock is transferable by the participant or no longer
subject to a substantial risk of forfeiture for federal tax purposes,
whichever occurs earlier. When the stock is either transferable or is no
longer subject to a substantial risk of forfeiture, the participant will
recognize ordinary compensation income in an amount equal to the fair market
value of the shares less any amounts paid for such shares at that time, and
TeleSpectrum will be entitled to a deduction in the same amount. A participant
may, however, elect to recognize ordinary compensation income in the year the
restricted stock is awarded in an amount equal to the fair market value of the
shares subject to the restricted stock grant less any amounts paid for such
shares at that time, determined without regard to the restrictions. In such
event, TeleSpectrum generally will be entitled to a corresponding deduction in
the same year. Any gain or loss recognized by the participant upon subsequent
disposition of the shares will be capital gain or loss.
Stock Appreciation Rights. There are no federal income tax consequences to a
participant or to TeleSpectrum upon the grant of a stock appreciation right.
Upon the exercise of a stock appreciation right, if the participant receives
the appreciation inherent in the stock appreciation right in cash, the
participant will
-161-
Amendment and Restatement of the 1996 Equity Compensation Plan
<PAGE>
recognize ordinary compensation income in an amount equal to the cash
received. If the participant receives the appreciation in shares, the
participant will recognize ordinary compensation income in an amount equal to
the fair market value of the shares received. TeleSpectrum generally will be
entitled to a corresponding federal income tax deduction at the time of the
exercise of the stock appreciation right. Upon the sale of any shares acquired
by the exercise of a stock appreciation right, a participant will have a
capital gain or loss in an amount equal to the difference between the amount
realized upon the sale and the participant's adjusted tax basis in the shares,
that is, the amount of ordinary income recognized by the participant at the
time of exercise of the stock appreciation right. The capital gain tax rate
will depend on the length of time the shares were held and certain other
factors.
Performance Units. There are no federal income tax consequences to a
participant or to TeleSpectrum upon the grant of performance units. If the
participant receives payment of the performance units in cash, the participant
will recognize ordinary compensation income in an amount equal to the cash
received. If the participant receives payment of the performance units in
shares, the participant will recognize ordinary compensation income in an
amount equal to the fair market value of the shares received. TeleSpectrum
generally will be entitled to a corresponding federal income tax deduction at
the time of the payment of the performance units. Upon the sale of any shares
acquired upon payment of the performance units, a participant will have a
capital gain or loss in an amount equal to the difference between the amount
realized upon the sale and the participant's adjusted tax basis in the shares,
that is, the amount of ordinary income recognized by the participant at the
time of the payment of the performance units. The capital gain tax rate will
depend upon the length of time the shares were held and certain other factors.
Section 162(m). TeleSpectrum's income tax deduction in any of the foregoing
cases may be limited by the $1,000,000 limit of section 162(m) of the Internal
Revenue Code of 1986 if the grant does not qualify as "qualified performance-
based compensation" under section 162(m).
Tax Withholding. TeleSpectrum has the right to deduct from all grants paid
in cash or from other wages paid to an employee of TeleSpectrum, any federal,
state or local taxes required by law to be withheld with respect to grants,
and the participant or other person receiving shares under the plan will be
required to pay to TeleSpectrum the amount of any such taxes which
TeleSpectrum is required to withhold with respect to such shares. Subject to
the committee's prior approval, a participant may elect to satisfy
TeleSpectrum's income tax withholding obligation by withholding shares
received. The shares withheld may not exceed the participant's maximum
marginal tax rate for federal, state and local tax liabilities.
-162-
Amendment and Restatement of the 1996 Equity Compensation Plan
<PAGE>
Legal Matters
Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, will pass on the
validity of the TeleSpectrum common stock to be issued in connection with the
mergers.
Experts
The consolidated financial statements and schedule of TeleSpectrum as of
December 31, 1998 and 1997 and for the two years ended December 31, 1998 and
for the period from April 26, 1996 (inception) to December 31, 1996 included in
this joint proxy statement/prospectus, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of IDRC as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998 included in this
joint proxy statement/prospectus and included elsewhere in the registration
statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and have been so included in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of CRW as of December 31, 1998 and 1997
and for the three years ended December 31, 1998 included in this joint proxy
statement/prospectus have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
-163-
Legal Matters/Experts
<PAGE>
Where You Can Find More Information
TeleSpectrum and CRW file annual, quarterly and special reports, proxy
statements and other information with the SEC. These materials contain
additional information about TeleSpectrum or CRW, as applicable. You can
inspect and copy these materials at the public reference facilities maintained
by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. You may call the
SEC at 1-800-SEC-0330 for further information concerning the SEC's public
reference rooms. Some of this information may also be accessed on the World
Wide Web through the SEC's Internet address at http://www.sec.gov.
This joint proxy statement/prospectus incorporates by reference the
information contained in documents filed by CRW with the SEC (SEC file number
0-26014) and by TeleSpectrum with the SEC (SEC file number 0-21107) after the
date of this joint proxy statement/prospectus and before the TeleSpectrum and
CRW meetings. The information contained in any such document will be considered
part of this joint proxy statement/prospectus from the date the document is
filed.
If you are a stockholder, you can obtain many documents filed by TeleSpectrum
and CRW through us or the SEC. You may these obtain documents without charge by
writing or calling the appropriate party at the following addresses and
telephone numbers:
TeleSpectrum Worldwide Inc. CRW Financial, Inc.
443 S. Gulph Road 200 Four Falls Corporate Center
King of Prussia, PA 19406 West Conshohocken, PA 19428
610-878-7400 610-238-0700
You should rely only on the information contained in this joint proxy
statement/prospectus to vote on the mergers. We have not authorized anyone to
provide you with information that is different from what is contained in this
joint proxy statement/prospectus. This joint proxy statement/prospectus is
dated May , 1999. You should not assume that the information contained in the
joint proxy statement/prospectus is accurate as of any date other than such
date, and neither the mailing of the joint proxy statement/prospectus to
stockholders nor the issuance of TeleSpectrum common stock in the mergers shall
create any implication to the contrary.
-164-
Where You Can Find More Information
<PAGE>
Index
to
IDRC Financial Statements
Three months Ended March 31, 1999
<TABLE>
<S> <C>
Unaudited Consolidated Balance Sheets...................................... F-2
Unaudited Consolidated Statements of Operations............................ F-3
Unaudited Consolidated Statements of Stockholders' Deficit................. F-4
Unaudited Consolidated Statements of Cash Flows............................ F-5
Notes to Unaudited Consolidated Financial Statements....................... F-6
Years Ended December 31, 1998
Independent Auditors' Report............................................... F-9
Consolidated Balance Sheets................................................ F-10
Consolidated Statements of Operations...................................... F-11
Consolidated Statements of Comprehensive Loss.............................. F-12
Consolidated Statements of Stockholders' Deficit........................... F-13
Consolidated Statements of Cash Flows...................................... F-14
Notes to Consolidated Financial Statements................................. F-15
</TABLE>
F-1
<PAGE>
International Data Response Corporation
Unaudited Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents.............. $ 1,213 $ 1,352
Trade receivables, net of
allowances............... 36,884 35,852
Refundable income taxes... 45 149
Prepaid expenses and other
current assets........... 2,494 2,514
--------- ---------
Total current assets.... 40,636 39,867
PROPERTY AND EQUIPMENT--
net........................ 24,780 26,111
GOODWILL AND OTHER
INTANGIBLE ASSETS--net..... 5,693 6,400
DEFERRED DEBT ISSUANCE
COSTS--net................. 1,803 1,908
DEFERRED INCOME TAXES....... 300 352
OTHER ASSETS................ 238 318
--------- ---------
TOTAL ASSETS................ $ 73,450 $ 74,956
========= =========
LIABILITIES AND
STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of
long-term debt........... $ 9,638 $ 8,150
Accounts payable.......... 4,474 5,959
Accrued expenses.......... 8,199 7,149
Accrued payroll........... 4,282 3,027
Income taxes payable...... 60 469
Current maturities of
capital lease
obligations.............. 401 542
--------- ---------
Total current
liabilities............ 27,054 25,296
LONG-TERM DEBT, net of
current maturities......... 87,346 86,332
CAPITAL LEASE OBLIGATIONS,
net of current maturities.. -- 58
STOCKHOLDER NOTES........... 4,136 4,136
DEFERRED INCOME TAXES....... 756 528
--------- ---------
Total liabilities....... 119,292 116,350
REDEEMABLE PREFERRED STOCK.. 11,180 10,827
COMMITMENTS AND
CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock........... -- --
Class A common stock...... -- --
Common stock.............. 1 1
Additional paid-in
capital.................. 54,688 55,068
Due from stockholders..... (2,494) (2,494)
Accumulated other
comprehensive loss....... (2,087) (2,502)
Accumulated deficit....... (107,130) (102,294)
--------- ---------
Total stockholders'
deficit................ (57,022) (52,221)
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT...... $ 73,450 $ 74,956
========= =========
</TABLE>
See notes to Unaudited Consolidated Financial Statements.
F-2
<PAGE>
International Data Response Corporation
Unaudited Consolidated Statements of Operations
Three-Months Ended March 31,
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
REVENUES..................................................... $36,689 $42,574
COST OF SERVICES............................................. 22,277 26,201
------- -------
Gross margin............................................. 14,412 16,373
------- -------
OPERATING EXPENSES:
Selling, general and administrative........................ 15,840 15,884
Amortization of intangible assets.......................... 900 1,215
------- -------
Total operating expenses................................. 16,740 17,099
------- -------
LOSS FROM OPERATIONS......................................... (2,328) (726)
INTEREST EXPENSE............................................. 2,456 2,243
------- -------
LOSS BEFORE INCOME TAXES..................................... (4,784) (2,969)
INCOME TAX PROVISION (BENEFIT)............................... 52 (677)
------- -------
NET LOSS..................................................... $(4,836) $(2,292)
======= =======
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS................. $(5,189) $(2,292)
======= =======
</TABLE>
See notes to Unaudited Consolidated Financial Statements.
F-3
<PAGE>
International Data Response Corporation
Unaudited Consolidated Statements of Stockholders' Deficit
Three-Months Ended March 31, 1999
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Class A Accumulated
Common Stock Common Stock Additional Other Retained
------------- -------------- Paid-In Due From Comprehensive Earnings
Shares Amount Shares Amount Capital Stockholders Loss (Deficit) Total
------ ------ ------- ------ ---------- ------------ ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE--December 31,
1998................... 25,834 $ -- 476,100 $ 1 $55,068 $(2,494) $(2,502) $(102,294) $(52,221)
Cost of issuing
warrants............. (27) (27)
Amortization of cost
of redeemable
preferred stock and
warrants............. (53) (53)
Dividends on
redeemable preferred
stock................ (300) (300)
Other comprehensive
income............... 415 415
Net loss.............. (4,836) (4,836)
------ ----- ------- ---- ------- ------- ------- --------- --------
BALANCE--March 31,
1999................... 25,834 $ -- 476,100 $ 1 $54,688 $(2,494) $(2,087) $(107,130) $(57,022)
====== ===== ======= ==== ======= ======= ======= ========= ========
</TABLE>
See notes to Unaudited Consolidated Financial Statements.
F-4
<PAGE>
International Data Response Corporation
Unaudited Consolidated Statements of Cash Flows
Three-Months Ended March 31,
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $(4,836) $(2,292)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization--property and equipment.... 1,983 2,034
Amortization / write-off of intangible assets............ 900 1,215
Amortization / write-off of deferred debt issuance
costs................................................... 172 90
Write down of fixed assets related to closed call
centers................................................. 1,186 --
Provision for bad debts.................................. 127 137
Deferred income taxes.................................... 52 (677)
Changes in the following:
Trade receivables and work-in-progress................... (999) (4,690)
Refundable income taxes.................................. 104 --
Prepaid expenses and other assets........................ (182) (154)
Accounts payable, accrued payroll and other liabilities.. 782 (3,374)
Income taxes payable..................................... (164) 452
------- -------
Net cash used in operating activities.................. (875) (7,259)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................... (1,490) (1,559)
Proceeds from realized gain on foreign currency hedge...... 31 --
------- -------
Net cash used in investing activities.................. (1,459) (1,559)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................... 9,000 10,000
Repayments of long-term debt............................... (6,512) (1,013)
Debt issuance costs........................................ (67) (8)
Cost of issuance of warrants............................... (27) --
Payments on capital lease obligations...................... (199) (190)
------- -------
Net cash flows from financing activities............... 2,195 8,789
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS......... (139) (29)
CASH AND CASH EQUIVALENTS--Beginning of quarter.............. 1,352 5,874
------- -------
CASH AND CASH EQUIVALENTS--End of quarter.................... $ 1,213 $ 5,845
======= =======
</TABLE>
See notes to Unaudited Consolidated Financial Statements.
F-5
<PAGE>
International Data Response Corporation
Notes to Unaudited Consolidated Financial Statements
1. Basis of Presentation
The accompanying financial statements are unaudited and have been prepared by
International Data Response Corporation and subsidiaries ("IDRC" or the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The December 31, 1998 balance sheet was derived from the
audited financial statements, however, certain information and footnote
disclosures normally included in annual financial statements have been
condensed or omitted. The Company believes that the financial statements
include all adjustments of a normal and recurring nature necessary to present
fairly the results of operations, financial position and cash flows for the
periods presented. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
audited financial statements for the year ended December 31, 1998. The results
of the first three months are not necessarily indicative of the results
expected for the full year of 1999.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany balances and transactions have been
eliminated. There have been no material changes in accounting policies from
those stated in the Company's audited financial statements for the year ended
December 31, 1998. Certain prior period amounts have been reclassified to
conform with the current year presentation.
2. Company Background
On March 11, 1996, ProMark One Marketing Services, Inc. was recapitalized by
the issuance of debt and common stock to fund the redemption of the existing
shareholders. ProMark One Marketing Services Inc. was then renamed IDRC.
Immediately subsequent to the recapitalization, IDRC acquired for cash various
entities comprising S & P Data Group. IDRC acquired Telnet Systems, Inc. and
IntelliSell Corporation for cash and stock on April 13 and April 14, 1997,
respectively.
3. Recent Developments
On January 14, 1999, IDRC and TeleSpectrum Worldwide, Inc. ("TeleSpectrum")
entered into a merger agreement and on February 26, 1999 and effective May 13,
1999 they amended the agreement. Under this agreement each of the holders of
outstanding shares of IDRC common stock, options and warrants will be entitled
to receive their pro rata portion of an aggregate of 9,200,000 shares of
TeleSpectrum common stock and options and warrants exercisable for 2,500,000
shares of TeleSpectrum common stock. In addition, the IDRC redeemable preferred
stock will be exchanged for $6,000,000 of cash, plus all accrued and unpaid
dividends. The majority stockholders of IDRC will be required to invest their
proceeds from the exchange of their IDRC redeemable preferred stock of
$4,900,000 in a term note with TeleSpectrum.
4. Secured Credit Facility
On May 15, 1998, the Company entered into an amended Credit Facility which
increased the working capital revolver to $29.0 million. Under the terms of the
working capital revolver, the Company can borrow up to the lesser of $29.0
million or an amount that is determined as 90% of the net eligible accounts
receivable. At March 31, 1999 and December 31, 1998, the Company had $22.5
million and $23.5 million in outstanding borrowings and $4.9 million and $0.2
million of available borrowings under the working capital revolver,
respectively. The Credit Facility also includes a Term A Loan of $30 million
($23.5 million and $25.0 million outstanding at March 31,1999 and December 31,
1998, respectively), a Term B Loan of $25 million and an expansion revolver of
$20 million ( all of which were outstanding at March 31, 1999 and December 31,
1998).
F-6
<PAGE>
International Data Response Corporation
Notes to Unaudited Consolidated Financial Statements--continued
The Company can elect at the time it makes borrowings to pay interest at prime
plus 1.75% or at LIBOR plus 3.250% (for the Term A Loan and working capital
revolver) or prime plus 2.25% or at LIBOR plus 3.750% (for the Term B Loan and
the expansion revolver). At March 31, 1999, the range of interest rates payable
under the Credit Facility was from 8.25% to 9.5%. Borrowings under the Credit
Facility are collateralized by substantially all of the assets of the Company.
The Credit Facility also contains covenants, the most restrictive of which
require the maintenance of certain financial ratios, restrict dividend payments
and restrict future indebtedness. For the three-months ended March 31, 1999 and
1998, the Company was in compliance with its restrictive covenants.
5. Subordinated Debt
On February 26, 1999, the Company obtained a commitment from one of its
Credit Facility lenders to provide up to $7.5 million of additional financing
subordinated to the Credit Facility. On March 3, 1999, the Company borrowed
$5.0 million under this commitment and used all of the proceeds to repay a
portion of its borrowings under the working capital revolver. The $5.0 million
bears interest at LIBOR plus 1.5% (6.5% at March 31, 1999) and is payable semi-
annually. The principal payment is due at the end of five years and the lender
has the option to put the loan balance to the Company's largest shareholder
under certain conditions.
6. Supplemental Cash Flows Information
The Company paid $2.1 million and $2.5 million of interest expense for the
three months ended March 31, 1999 and 1998, respectively. The Company paid
income taxes of $0.1 million during the three months ended March 31, 1999.
7. Commitments and Contingencies
In September 1998, as part of the Company's efforts to collect approximately
$11.7 million owed by National Tele-Communications, Inc. ("NTC"), ProMark and
IntelliSell, the subsidiaries of the Company that had been engaged by NTC
commenced action against NTC, and its related entities (collectively, the
"Defendants") in the Superior Court of New Jersey. The Defendants filed a
counter suit against ProMark and IntelliSell, alleging breach of contract. The
Company believes that the Defendants' claims against ProMark and IntelliSell
are without merit.
The Company has allocated approximately $6.5 million of its reserve for
uncollected accounts receivable against the amount owed from NTC. Based on
current facts and circumstances, the Company believes that this reserve is
adequate, however, the Company cannot be certain that it will be successful in
collecting the accounts receivable due from NTC.
Upon summary proceeding, the New Jersey court referred a portion of the
claims to arbitration in San Diego County, California, while the rest of the
suit continued in New Jersey. In November, 1998, ProMark filed a Demand for
Arbitration against the Defendants with the American Arbitration Association
(the "AAA") in San Diego County. On February 26, 1999, NTC filed for
reorganization under Chapter 11 of the Federal Bankruptcy Code. The New Jersey
and San Diego actions have been staid.
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-7
<PAGE>
International Data Response Corporation
Notes to Unaudited Consolidated Financial Statements--continued
8. Concentrations of Risk
The financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
Concentrations of credit risk with respect to accounts receivable are limited
due to the large number of customers comprising the Company's customer base,
and their dispersion across many different industries and geographies. The
Company does not require collateral or other securities to support customer
accounts receivable. Except as discussed in Note 7, the Company does not
believe significant credit risk exists at March 31, 1999.
9. Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which
is effective for financial statements issued for fiscal years beginning after
December 15, 1997. The Company's comprehensive income includes net income
(loss) and unrealized gains and losses from foreign currency translation. Total
comprehensive loss for the three months ended March 31, 1999 and 1998 was $4.4
million and $2.0 million, respectively.
10. Related-Party Transactions
The Company incurred charges from an affiliate of one of its stockholders for
advisory fees of $0.1 million for the three-months ended March 31, 1999 and
1998.
11. Closed Telemarketing Centers
On January 4, 1999, the Company decided to close four of its call centers and
to move the business volume into the Company's remaining call centers. The
Company recorded a charge of $2.0 million to selling, general and
administrative expense for employee termination costs, lease termination costs
and the write-down of telemarketing fixed assets. Approximately 600
telemarketing service representatives and support staff at the four call
centers were terminated and paid severance of approximately $0.2 million. Lease
termination costs were approximately $0.6 million and the write-down of fixed
assets was approximately $1.2 million.
F-8
<PAGE>
Independent Auditors' Report
We have audited the accompanying consolidated balance sheets of International
Data Response Corporation and its subsidiaries (the "Company") as of December
31, 1998 and 1997, and the related consolidated statements of operations,
comprehensive loss, stockholders' deficit, and cash flows for the three years
in the period ended December 31, 1998. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years ended in the period December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
February 26, 1999
San Diego, California
F-9
<PAGE>
International Data Response Corporation
Consolidated Balance Sheets
December 31, 1998 and 1997
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,352 $ 5,874
Trade receivables, net allowances 1998: $8,038; 1997:
$1,675................................................... 35,852 32,674
Refundable income taxes................................... 149 710
Prepaid expenses and other current assets................. 2,514 2,203
-------- -------
Total current assets.................................... 39,867 41,461
PROPERTY AND EQUIPMENT--net................................. 26,111 29,022
GOODWILL AND OTHER INTANGIBLE ASSETS--net................... 6,400 11,738
DEFERRED DEBT ISSUANCE COSTS--net........................... 1,908 1,898
DEFERRED INCOME TAXES....................................... 352 10,808
OTHER ASSETS................................................ 318 504
-------- -------
TOTAL ASSETS................................................ $ 74,956 $95,431
======== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 8,150 $ 5,050
Accounts payable.......................................... 5,959 17,421
Accrued expenses.......................................... 7,149 7,531
Accrued payroll........................................... 3,027 4,189
Income taxes payable...................................... 469 126
Current maturities of capital lease obligations........... 542 814
-------- -------
Total current liabilities............................... 25,296 35,131
LONG-TERM DEBT, net of current maturities................... 86,332 79,547
CAPITALLEASE OBLIGATIONS, net of current maturities......... 58 604
STOCKHOLDER NOTES........................................... 4,136 4,136
DEFERRED INCOME TAXES....................................... 528 2,042
-------- -------
Total liabilities....................................... 116,350 121,460
REDEEMABLE PREFERRED STOCK, par value $.001, aggregate
liquidation value $12,800, issued 600,000 shares, net of
discount................................................... 10,827 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, par value $.001 per share; 2,069,056
shares
authorized; no shares issued.............................
Class A common stock, nonvoting, par value $.001 per
share;
300,000 shares authorized; shares issued and outstanding:
1998: 25,834; 1997: 25,834;..............................
Common stock, voting, par value $.001 per share; 1,500,000
shares
authorized; shares issued and outstanding:
1998: 476,100; 1997: 476,100;............................ 1 1
Additional paid-in capital................................ 55,068 54,620
Due from stockholders..................................... (2,494) (4,255)
Accumulated other comprehensive loss...................... (2,502) (1,221)
Accumulated deficit....................................... (102,294) (75,174)
-------- -------
Total stockholders' deficit............................. (52,221) (26,029)
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................. $ 74,956 $95,431
======== =======
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
International Data Response Corporation
Consolidated Statements of Operations
Years Ended December 31, 1998, 1997 and 1996
(In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
REVENUES......................................... $160,078 $136,871 $66,651
COST OF SERVICES................................. 96,645 86,907 43,694
-------- -------- -------
Gross margin................................. 63,433 49,964 22,957
-------- -------- -------
OPERATING EXPENSES:
Selling, general and administrative............ 66,892 47,655 20,485
Amortization of intangible assets.............. 4,884 5,508 4,684
Write-off of intangible assets................. -- 31,319 --
-------- -------- -------
Total operating expenses..................... 71,776 84,482 25,169
-------- -------- -------
LOSS FROM OPERATIONS............................. (8,343) (34,518) (2,212)
INTEREST EXPENSE................................. 9,654 7,770 3,716
-------- -------- -------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM.. (17,997) (42,288) (5,928)
INCOME TAX PROVISION (BENEFIT)................... 9,123 (9,561) (2,287)
-------- -------- -------
LOSS BEFORE EXTRAORDINARY ITEM................... (27,120) (32,727) (3,641)
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT, net
of income tax benefit of $1,136................. -- 1,703 --
-------- -------- -------
NET LOSS......................................... $(27,120) $(34,430) $(3,641)
======== ======== =======
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS..... ($28,060) ($34,430) ($3,641)
-------- -------- -------
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
International Data Response Corporation
Consolidated Statements of Comprehensive Loss
Years Ended December 31, 1998, 1997 and 1996
(In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
NET LOSS.......................................... $(27,120) $(34,430) $(3,641)
OTHER COMPREHENSIVE INCOME (LOSS), net of tax:
Foreign currency translation adjustments........ (1,389) (1,130) (123)
Securities gains arising during the period:
Unrealized foreign currency hedge gains....... 79 -- --
Realized foreign currency hedge gains......... 61 -- --
Unrealized holding gains...................... -- 10 22
Less: reclassification adjustment for gains
included in net loss......................... (32) -- --
-------- -------- -------
Other comprehensive loss.................... (1,281) (1,120) (101)
-------- -------- -------
COMPREHENSIVE LOSS................................ $(28,401) $(35,550) $(3,742)
======== ======== =======
</TABLE>
F-12
<PAGE>
International Data Response Corporation
Consolidated Statements of Stockholders' Deficit
Years Ended December 31, 1998, 1997 and 1996
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Class A
Common Stock Common stock
-------------- -----------------
Accumulated
Additional Other Retained
Paid-In Due From Comprehensive Earnings
Shares Amount Shares Amount Capital Stockholders Loss (Deficit) Total
------ ------ --------- ------ ---------- ------------ ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE--January 1,
1996.............. -- $-- 417,569 $-- $ 182 $ -- $ -- $ 2,964 $ 3,146
Distributions..... (2,653) (2,653)
Compensation
related to stock
options and stock
issued upon
exercise of stock
options.......... -- 4,099 -- 182 182
Redemption of
shares........... -- (364,668) -- (323) (36,144) (36,467)
Costs of
recapitalization.. (1,270) (1,270)
Issuance of common
stock............ 20,072 -- 319,000 -- 33,907 (3,473) 30,434
Other
comprehensive
loss............. (101) (101)
Net loss.......... (3,641) (3,641)
------ ---- --------- ---- ------- ------- ------- --------- --------
BALANCE--December
31, 1996.......... 20,072 -- 376,000 -- 33,948 (3,473) (101) (40,744) (10,370)
Common stock
issued upon
exercise of stock
options.......... 934 -- 93 93
Redemption of
shares........... (738) -- (100) 100 --
Issuance of common
stock............ 5,566 -- 100,100 1 20,679 (882) 19,798
Other
comprehensive
loss............. (1,120) (1,120)
Net loss.......... (34,430) (34,430)
------ ---- --------- ---- ------- ------- ------- --------- --------
BALANCE--December
31, 1997.......... 25,834 -- 476,100 1 54,620 (4,255) (1,221) (75,174) (26,029)
Repayment of
stockholder
note............. 17 17
Reduction in
stockholder
note............. 1,744 1,744
Warrants issued
with redeemable
preferred stock.. 1,476 1,476
Cost of issuing
warrants......... (88) (88)
Amortization of
cost of
redeemable
preferred stock
and warrants..... (140) (140)
Dividends on
redeemable
preferred stock.. (800) (800)
Other
comprehensive
loss............. (1,281) (1,281)
Net loss.......... (27,120) (27,120)
------ ---- --------- ---- ------- ------- ------- --------- --------
BALANCE--December
31, 1998.......... 25,834 $-- 476,100 $ 1 $55,068 $(2,494) $(2,502) $(102,294) $(52,221)
====== ==== ========= ==== ======= ======= ======= ========= ========
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
International Data Response Corporation
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996 (In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(27,120) $(34,430) $ (3,641)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization--property and
equipment.................................... 8,382 5,687 2,012
Amortization / write-off of intangible
assets....................................... 4,884 36,827 4,684
Amortization / write-off of deferred debt
issuance costs............................... 558 3,378 601
Stock-based compensation expense.............. -- -- 182
Loss on disposal of fixed assets.............. -- -- 554
Provision for bad debts....................... 9,316 1,794 22
Deferred income taxes......................... 8,983 (10,167) (3,379)
Changes in the following net of acquisitions:
Trade receivables and work-in-progress........ (11,345) (19,427) (6,003)
Short-term investments........................ -- 170 (9)
Refundable income taxes....................... 561 576 (1,286)
Prepaid expenses and other assets............. (270) (786) (302)
Accounts payable and accrued liabilities...... (11,697) 9,890 5,108
Accrued payroll............................... (1,162) 1,385 1,563
Income taxes payable.......................... 291 6 (773)
-------- -------- --------
Net cash used in operating activities....... (18,619) (5,097) (667)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ (5,923) (20,992) (6,862)
Acquisition of Telnet Systems, Inc.--net of
cash acquired.................................. -- (3,833) --
Acquisition of IntelliSell Corporation--net of
cash acquired.................................. -- (11,617) --
Acquisition of S&P Data Group--net of cash
acquired....................................... -- -- (18,817)
Proceeds from realized gain on foreign currency
hedge.......................................... 124 -- --
Proceeds from sale of fixed assets.............. -- -- 45
-------- -------- --------
Net cash used in investing activities....... (5,799) (36,442) (25,634)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of
costs.......................................... -- 6,724 30,434
Proceeds from long-term debt.................... 25,000 89,005 38,760
Repayments of long-term debt.................... (15,009) (45,974) (3,432)
Redemption of common stock...................... -- -- (31,467)
Debt issuance costs............................. (568) (2,192) (3,685)
Costs of recapitalization....................... -- -- (1,270)
Distributions paid to stockholders.............. -- -- (2,653)
Proceeds from issuance of redeemable preferred
stock, net of costs............................ 9,886 -- --
Proceeds from issuance of warrants on common
stock, net of costs............................ 1,388 -- --
Repayment on stockholder note receivable........ 17 -- --
Payments on capital lease obligations........... (818) (743) (84)
-------- -------- --------
Net cash flows from financing activities.... 19,896 46,820 26,603
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS..................................... (4,522) 5,281 302
CASH AND CASH EQUIVALENTS--Beginning of year..... 5,874 593 291
-------- -------- --------
CASH AND CASH EQUIVALENTS--End of year........... $ 1,352 $ 5,874 $ 593
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid--interest............................. $ 8,677 $ 5,104 $ 3,274
Cash paid--income taxes......................... 241 154 2,382
Non-cash items:
Issuance of common stock for acquisitions....... -- 12,302 --
Issuance of common stock for reduction of
promissory note payable........................ -- 864 --
Stockholder notes receivable issued for common
stock.......................................... -- 782 3,473
Promissory note payable issued for repurchase
of common stock................................ -- -- 5,000
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
International Data Response Corporation
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998, 1997 and 1996
1. Organization and Business
International Data Response Corporation, through its operating subsidiaries,
provides outsourced telephone-based sales, marketing and customer management
services to customers throughout the United States and Canada. The corporate
headquarters are in San Diego, California, with twenty-one (21) call centers in
Arizona, California, Kansas, Minnesota, New York, Nevada, Pennsylvania, South
Dakota, and Ontario, Canada.
The consolidated financial statements include the accounts of International
Data Response Corporation and its wholly owned subsidiaries (the "Company" or
"IDRC"). All significant intercompany accounts and transactions have been
eliminated.
2. Recapitalization and Acquisitions
Recapitalization--On March 11, 1996, ProMark One Marketing Services, Inc. was
recapitalized (the "Recapitalization") through the sale of 339,072 shares of
ProMark's common stock for approximately $33.9 million to unrelated entities,
the proceeds of which, along with the issuance of debt (see Note 7), were used
to redeem 364,668 shares of ProMark's common stock held by existing
shareholders for approximately $37.7 million, including transaction costs of
approximately $1.3 million. The Recapitalization was accounted for as a
treasury stock transaction with no step up in basis. Upon Recapitalization,
ProMark One Marketing Services, Inc. changed its name to IDRC and downstreamed
its telemarketing operations to a newly formed subsidiary, ProMark One
Marketing Services, Inc. ("ProMark"). Immediately prior to the
Recapitalization, the Board of Directors approved a 17.51697-to-1 stock split
of the Company's common stock.
Acquisition of S&P Data Group--Immediately subsequent to the Recapitalization
in March 1996, IDRC acquired various entities comprising S&P Data Group ("S&P
Data"). S&P Data was acquired for approximately $18.8 million in cash,
including transaction costs of approximately $1 million. The acquisition has
been accounted for under the purchase method of accounting. Goodwill and
intangibles of approximately $22.2 million were recorded upon acquisition.
Acquisition of Telnet Systems, Inc.--On April 13, 1997, IDRC acquired Telnet
Systems, Inc. ("Telnet") for a total purchase price of $9.4 million by issuing
28,016 shares of common stock valued at $200 per share and by transferring $3.8
million of cash, including transaction costs of $1.5 million, and certain other
assets and liabilities to the seller. The acquisition has been accounted for
under the purchase method of accounting. In addition, on April 14, 1997, IDRC
entered into a Telemarketing Service Agreement with an affiliate of Telnet. The
excess purchase price of approximately $11.1 million was allocated to other
intangibles (Note 5).
Acquisition of IntelliSell Corporation--On April 15, 1997 IDRC acquired
IntelliSell Corporation for a total purchase price of $18.3 million by issuing
33,500 shares of common stock valued at $200 per share and $11.6 million in
cash, including transaction costs of $1.7 million. The acquisition has been
accounted for under the purchase method of accounting. Goodwill of
approximately $20 million was recorded upon acquisition. The Agreement and Plan
of Reorganization for IntelliSell required the payment of additional cash and
stock consideration if certain financial targets were achieved by IntelliSell
during 1997. Based on the Company's estimates of these targets, no additional
consideration is required to be paid.
3. Summary of Significant Accounting Policies
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
F-15
<PAGE>
International Data Response Corporation
Notes to Consolidated Financial Statements--continued
For the Years Ended December 31, 1998, 1997 and 1996
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.
Cash and Cash Equivalents--The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Revenues and Trade Receivables--Revenues are recognized at the time the
service is performed. Allowances are provided for estimated uncollectible
receivables based on historical experience and review of specific accounts.
Property and Equipment--Property and equipment are carried at cost.
Depreciation is recognized using the straight-line method over the estimated
useful lives of the assets, ranging from 3 years to 15 years. Assets recorded
under capital leases are amortized over the shorter of their useful lives or
the term of the related leases under the straight-line method.
Goodwill and Other Intangible Assets--Goodwill and other intangible assets,
principally contracts and software acquired are being amortized on a straight-
line basis over the periods estimated to be benefited, ranging from 1 year to
35 years.
Impairment of Long-Lived Assets--Long-lived assets and certain intangible
assets are reviewed for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. If such review indicates that the carrying amount of long-lived
and intangible assets exceeds the fair value, the carrying amount of such
assets is reduced to fair value. During 1997, management determined that
certain goodwill amounts were impaired and recorded a $31.3 million charge to
write down goodwill (see Note 5).
Deferred Debt Issuance Costs--Fees associated with the establishment of
lending facilities are capitalized and amortized on a straight-line basis over
the term of the related debt. Interest expense includes amortization of
deferred debt issuance costs of approximately $0.6 million, $0.5 million and
$0.6 million for the years ended December 31, 1998, 1997 and 1996,
respectively. During 1997, certain debt issuance costs associated with
extinguishment of credit facilities were written off (see Note 7).
Income Taxes--Deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates and laws applicable to the years in which
the differences are expected to reverse. Valuation allowances, if any, are
established when necessary to reduce the deferred tax assets to the amount that
is more likely than not to be realized.
Foreign Currency Translation--The functional currency of the Company's
foreign operations, S&P, is the Canadian dollar. As such, the assets and
liabilities of S&P are translated into U.S. dollars at the exchange rates in
effect on the reporting date, and income and expenses are translated at the
weighted average exchange rate during the period. The net effect of translation
gains and losses is not included in determining net income, but is accumulated
as a separate component of stockholders' equity.
New Accounting Pronouncements--During 1998, the Company adopted the
provisions of Financial Accounting Standard No. 130--Reporting Comprehensive
Income. Financial statements for all periods presented have been revised to
reflect the retroactive application of this pronouncement. (Note 16).
F-16
<PAGE>
International Data Response Corporation
Notes to Consolidated Financial Statements--continued
For the Years Ended December 31, 1998, 1997 and 1996
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Costs, and is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Although the Company is not
currently required to report under SFAS 133, the Company has analyzed the
potential impacts of implementing SFAS 133 and has determine that
implementation, when required, will not have a material impact on the Company's
financial statements.
In June 1997 the Statement of Financial Accounting Standards No. 131 ("SFAS
131"), Disclosures about Segments of an Enterprise and Related Information, was
issued and became effective for financial statements for periods beginning
after December 15, 1997. The Company determined that SFAS 131 does not apply to
the Company's financial statements.
Reclassifications--Certain 1997 and 1996 amounts have been reclassified to
conform with the 1998 presentation.
Basis of Presentation--The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
As shown in the financial statements, during the years ended December 31, 1998,
1997 and 1996, the Company incurred losses from operations of $8,343, $34,518
and $2,212, respectively, and, as of December 31, 1998 the Company had
stockholders' deficit of $52,221.
The financial statements do not include any adjustment relating to the
recoverability and classification of recorded asset amounts or the amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Management's plan to deal with operating losses is as follows:
. Close underutilized call centers to reduce excess capacity and eliminate
fixed costs
. Increase percentage of revenue to more profitable inbound business
. Reduce SG&A costs
. Re-negotiate contracts with long-distance carriers
. Reduce customer concentration
4. Property and Equipment
A summary of property and equipment at December 31, 1998 and 1997 follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Telephone and computer equipment...................... $ 32,893 $27,839
Furniture and fixtures................................ 4,754 4,281
Leasehold improvements................................ 5,280 5,313
Vehicles.............................................. -- 23
-------- -------
42,927 37,456
Accumulated depreciation and amortization............. (16,816) (8,434)
-------- -------
Total................................................. $ 26,111 $29,022
======== =======
</TABLE>
F-17
<PAGE>
International Data Response Corporation
Notes to Consolidated Financial Statements--continued
For the Years Ended December 31, 1998, 1997 and 1996
Depreciation expense associated with property and equipment was $8.4 million,
$5.7 million, and $2.0 million for the years ended December 31, 1998, 1997 and
1996, respectively.
5. Goodwill and Other Intangible Assets
A summary of intangible assets at December 31, 1998 and 1997 follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Goodwill.............................................. $ 6,179 $ 6,815
Acquired software..................................... 12,837 13,897
-------- -------
19,016 20,712
Accumulated amortization.............................. (12,616) (8,974)
-------- -------
Total................................................. $ 6,400 $11,738
======== =======
</TABLE>
Goodwill is amortized over 35 years. Acquired software is amortized over
three years.
Goodwill and other intangible assets amortization expense of $4.9 million,
$5.5 million and $4.7 million was charged to operations for the years ended
December 31, 1998, 1997 and 1996, respectively.
During 1997, the Company determined that the carrying amount of goodwill and
other intangible assets were impaired. These assets arose during 1997 as a
result of acquisitions of Telnet and IntelliSell, as discussed in Note 2. With
regard to both transactions, the Company determined that undiscounted projected
future cash flows attributable to each business unit would be insufficient to
recover the carrying value of its goodwill. The Company then measured the fair
value of the goodwill using a discounted cash flow model. Accordingly, a charge
of $31.3 million was recorded to write down goodwill during 1997.
6. Income Taxes
The income tax provision for the year ended December 31, 1998 is comprised of
the following (in thousands):
<TABLE>
<CAPTION>
Domestic Foreign Total
-------- ------- ------
<S> <C> <C> <C>
Federal:
Current expense............................... $ -- $ 25 $ 25
Deferred expense (benefit).................... 7,814 (212) 7,602
State and local:
Current expense............................... 15 100 115
Deferred expense (benefit).................... 1,494 (113) 1,381
------ ----- ------
Net income tax expense (benefit)................ $9,323 $(200) $9,123
====== ===== ======
</TABLE>
F-18
<PAGE>
International Data Response Corporation
Notes to Consolidated Financial Statements--continued
For the Years Ended December 31, 1998, 1997 and 1996
The effective income tax provision on the loss before income taxes for 1998
differed from the U.S. federal statutory rate as follows:
<TABLE>
<S> <C>
U.S. federal statutory rate................................... $(6,119)
State and local tax benefits--net of federal benefit.......... 996
Canadian taxes in excess of U.S. federal rate................. 1,425
Valuation allowance........................................... 11,751
Goodwill, non-deductible...................................... 1,070
-------
Income tax provision.......................................... $ 9,123
=======
</TABLE>
Deferred income tax assets and liabilities at December 31, 1998 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
Domestic Foreign Total
-------- ------- -------
<S> <C> <C> <C>
Deferred income tax assets:
Net operating loss......................... $ 6,406 $ 352 $ 6,758
Intangible assets.......................... 4,175 -- 4,175
Allowance for doubtful accounts............ 3,110 -- 3,110
Accrued payroll and related items.......... 305 -- 305
Other...................................... 168 -- 168
------- ----- -------
14,164 352 14,516
Deferred income tax liabilities:
Accelerated depreciation................... (1,344) (216) (1,560)
Intangible assets.......................... -- (312) (312)
------- ----- -------
(1,344) (528) (1,872)
------- ----- -------
Net deferred asset before valuation
allowance................................... 12,820 (176) 12,644
Valuation allowance.......................... (12,820) -- (12,820)
------- ----- -------
Net deferred tax liability................... $ -- $(176) $ (176)
======= ===== =======
</TABLE>
For the year ended December 31, 1998, the Company provided a valuation
allowance of $12.8 million resulting from the 1998 operating loss and the
uncertainty of realizing the net deferred tax asset. At December 31, 1998, the
Company had net operating loss carryforwards of approximately $17.2 million and
$1.2 million for U.S. Federal income tax and Canadian federal income tax
purposes, respectively.
F-19
<PAGE>
International Data Response Corporation
Notes to Consolidated Financial Statements--continued
For the Years Ended December 31, 1998, 1997 and 1996
The income tax benefit for the year ended December 31, 1997 is comprised of the
following (in thousands):
<TABLE>
<CAPTION>
Domestic Foreign Total
-------- ------- --------
<S> <C> <C> <C>
Federal:
Current (benefit) expense....................... $ (600) $ 37 $ (563)
Deferred benefit................................ (6,044) (1,191) (7,235)
State and local:
Current (benefit) expense....................... (35) 68 33
Deferred benefit................................ (1,156) (640) (1,796)
------- ------- --------
Net income tax benefit, before benefit of
extraordinary item............................... (7,835) (1,726) (9,561)
Income tax benefit from extraordinary item........ (1,136) (1,136)
------- ------- --------
Net income tax benefit............................ $(8,971) $(1,726) $(10,697)
======= ======= ========
</TABLE>
The effective income tax rate on loss before income taxes for 1997 differed
from the U.S. federal statutory rate as follows:
<TABLE>
<S> <C>
U.S. federal statutory rate.......................................... (34.0)%
State and local tax benefits--net of federal benefit................. (5.0)
Canadian taxes in excess of U.S. federal rate........................ (0.8)
Goodwill amortization................................................ 15.0
Other................................................................ 2.2
-----
Income tax benefit, before extraordinary item........................ (22.6)%
=====
</TABLE>
Deferred income tax assets and liabilities at December 31, 1997 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
Domestic Foreign Total
-------- ------- -------
<S> <C> <C> <C>
Deferred income tax assets:
Net operating loss............................. $ 4,179 $ 296 $ 4,475
Intangible assets.............................. 4,585 32 4,617
Allowance for doubtful accounts................ 620 -- 620
Restructuring reserve.......................... 235 -- 235
Accrued payroll and related items.............. 647 -- 647
Other.......................................... 214 -- 214
-------- ----- -------
$ 10,480 $ 328 $10,808
======== ===== =======
Deferred income tax liabilities:
Accelerated depreciation....................... $ (1,172) $(343) $(1,515)
Intangible assets.............................. -- (527) (527)
-------- ----- -------
$(1,172) $(870) $(2,042)
======== ===== =======
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $10.3 million and $0.7 million for U.S. Federal income tax and
Canadian federal income tax purposes, respectively.
F-20
<PAGE>
International Data Response Corporation
Notes to Consolidated Financial Statements--continued
For the Years Ended December 31, 1998, 1997 and 1996
The income tax benefit for the year ended December 31, 1996 is comprised of
the following (in thousands):
<TABLE>
<CAPTION>
Domestic Foreign Total
-------- ------- -------
<S> <C> <C> <C>
Federal:
Current expense................................ $ 979 $ 47 $ 1,026
Deferred benefit............................... (864) (2,499) (3,363)
State and local tax expense...................... 50 -- 50
----- ------- -------
Net income tax benefit........................... $ 165 $(2,452) $(2,287)
===== ======= =======
</TABLE>
The effective income tax rate on loss before income taxes for 1996 differed
from the U.S. federal statutory rate as follows:
<TABLE>
<S> <C>
U.S. federal statutory rate.......................................... (34.0)%
State and local tax benefits--net of federal benefit................. 0.6
Goodwill amortization................................................ 1.2
Canadian taxes in excess of U.S. federal rate........................ (10.4)
Deferred tax expense on change in tax status......................... 3.0
Other................................................................ 1.0
-----
Income tax benefit................................................... (38.6)%
=====
</TABLE>
7. Long-Term Debt
Long-term debt at December 31, 1998 and 1997 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Term loan with bank, principal payable in quarterly
installments of $1,000, beginning in December 1997,
increasing to $1,500 in March 1999, $2,000 in March 2000,
and $2,750 in March 2001. Bears interest at prime plus
1.750% or Eurodollar plus 3.250% payable quarterly, through
December 2001, when all remaining principal and interest is
due and payable. At December 31, 1998, the interest rate was
8.5625%..................................................... $25,000 $29,000
Term loan with bank, principal payable in quarterly
installments of $6,000 beginning in March 2002, interest at
prime plus 2.250% or Eurodollar plus 3.750% payable
quarterly, through December 2002, when all remaining
principal and interest is due and payable. At December 31,
1998, the interest rate was 9.000%.......................... 25,000 25,000
Working capital revolver with bank, interest at prime plus
1.750% or Eurodollar plus 3.250% payable quarterly, due
December 2002, when all remaining principal and interest is
due and payable. At December 31, 1998, the weighted average
interest rate was 8.5106%................................... 23,500 10,500
Acquisition revolver with bank, 1/20th of principal payable
quarterly beginning in September 1999, including interest at
prime plus 2.250% or Eurodollar plus 3.750% payable
quarterly, through December 2002, when all remaining
principal and interest is due and payable. At December 31,
1998, the interest rate was 9.000%.......................... 20,000 18,000
Borrowings under line of credit with bank, interest at prime
rate plus 0.500%, maximum borrowings of $1,000,
collateralized by an irrevocable standby letter of credit... -- 1,000
</TABLE>
F-21
<PAGE>
International Data Response Corporation
Notes to Consolidated Financial Statements--continued
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Note payable to an agency of the Canadian government,
principal payable in monthly installments of $35, beginning
in October 1999, no interest, through December 2001.
Collateralized by certain equipment......................... 875 940
Note payable to a County Economic Development Council,
payable in monthly installments of $4.6, including interest
at 4.375%, through December 2000, when all remaining
principal and interest is due and payable. Collateralized by
certain equipment........................................... 107 157
------- -------
94,482 84,597
Less current portion......................................... (8,150) (5,050)
------- -------
Total........................................................ $86,332 $79,547
======= =======
</TABLE>
At December 31, 1998, the range of interest rates payable on the Company's
long-term debt was from 9.50% to 4.375%.
1997 Credit Facilities--On April 15, 1997 the Company entered into an amended
credit agreement providing up to $85 million of credit facilities (the "New
Facilities"). Shortly thereafter, the New Facilities were amended and increased
to $95 million. The New Facilities provide for a Term A Loan of $30 million (at
the prime rate plus 1.750% or the Eurodollar rate plus 3.250%), a Term B Loan
of $25 million (at the prime rate plus 2.250% or the Eurodollar rate plus
3.750%), a working capital revolver of $20 million (at the prime rate plus
1.750% or the Eurodollar rate plus 3.250%) and an expansion revolver of $20
million (at the prime rate plus 2.250% or the Eurodollar rate plus 3.750%). The
New Facilities were secured by substantially all of the Company's assets and
contain covenants, the most restrictive of which require the maintenance of
certain financial ratios, restrict dividend payments, and restrict future
indebtedness.
Approximately $55 million of the proceeds from the New Facilities were used
to repay all amounts outstanding under prior credit agreements, provide the
cash portion of the purchase price of certain acquisitions, pay certain
transaction costs, provide funds for the financing of new telemarketing
investments and provide for the Company's working capital requirements. During
1997 the Company recorded a pretax extraordinary loss of approximately $2.8
million ($1.7 million after tax benefit) relating to the write-off of deferred
issuance costs associated with the prior credit agreements.
1998 Credit Facilities--On May 28, 1998, the Company entered into an amended
credit agreement providing an additional $9 million of availability under the
working capital revolver (the "Amended Facilities".) The Amended Facilities
contain restrictive covenants similar to those in the New Facilities.
Additionally, effective November 2, 1998, and December 31, 1998 the Company
amended the Amended Facilities. The amendments modified certain definitions and
the terms of certain restrictive covenants.
During 1997 and 1998, the Company was in compliance with its restrictive
covenants.
F-22
<PAGE>
International Data Response Corporation
Notes To Consolidated Financial Statements--continued
For the Years Ended December 31, 1998, 1997 and 1996
Excluding any accelerated principal payments, the aggregate future principal
repayments required are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year ending December 31:
1999............................................................ $ 8,150
2000............................................................ 12,444
2001............................................................ 48,888
2002............................................................ 25,000
2003............................................................ --
Thereafter...................................................... --
-------
Total........................................................... $94,482
=======
</TABLE>
8. Commitments And Contingencies
Lease Obligations--The Company leases certain of its facilities and equipment
under operating leases. Rent expense for operating leases totaled approximately
$4.9 million, $4.2 million and $1.2 million for the years ended December 31,
1998, 1997 and 1996, respectively. The Company had the following minimum rental
commitments under leases at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1999................................................. $591 $ 3,871
2000................................................. 59 3,798
2001................................................. -- 3,048
2002................................................. -- 1,761
2003................................................. -- 1,098
2004 and thereafter.................................. -- 3,293
---- -------
Total minimum payments............................... 650 $16,869
=======
Less amount representing interest and executory
costs............................................... 50
----
Present value of minimum payments.................... $600
====
Current portion of capital lease obligations......... $542
Non-current portion of capital lease obligations..... 58
----
$600
====
</TABLE>
Employee Savings Plan--The Company formed the IDRC 401(k) Retirement Savings
Plan (the "IDRC Plan") on August 1, 1998 for employees of International Data
Response Corporation and employees of its United States subsidiaries. The IDRC
Plan is available to employees who have completed one year of company service
equal to or exceeding 1,000 hours and are at least 21 years of age.
Participants may elect to contribute 1% to 15% of their annual compensation
subject to limits. The Company matches 50% of the first 3% of employee
contributions. During 1998, the Company made contributions of $0.07 million,
under the IDRC Plan.
The Company acquired, in connection with the acquisition of IntelliSell
Corporation on April 15, 1997 (Note 2), the IntelliSell 401(k) Plan (the
"IntelliSell Plan"). The IntelliSell Plan was available to IntelliSell
employees who completed one year of service equal to or exceeding 1,000 hours
and were at least 21 years of age. Participants could contribute 1% to 15% of
their annual compensation, subject to limits. The Company
F-23
<PAGE>
International Data Response Corporation
Notes To Consolidated Financial Statements--continued
For the Years Ended December 31, 1998, 1997 and 1996
matched 25% of the first 4% of employee contributions excluding bonuses. The
Company could make additional matching contributions at the discretion of the
Board of Directors. No discretionary contributions were made during 1997 and
1996. During 1997 and 1996 the Company made contributions of $0.019 million and
$0.021 million, respectively, under the Plan. Effective January 1, 1998, the
IntelliSell Plan was frozen and no new employee contributions were made. The
IntelliSell Plan was merged into the IDRC Plan on December 31, 1998.
9. Litigation
NTC--In July 1998, the Company was notified by its largest customer, National
Tele-Communications, Inc. ("NTC"), a reseller of long distance services in the
United States, that NTC was under investigation by the Federal Communications
Commission and 21 states' attorneys general, that NTC would be immediately
ceasing all telemarketing activity and that it would only be paying the Company
a yet to be determined discounted percentage of the $11.7 million owed to the
Company.
In September 1998, as part of the Company's efforts to collect approximately
$11.7 million owed by NTC, ProMark and IntelliSell, the subsidiaries of the
Company that had been engaged by NTC for the performance of outbound
telemarketing services, commenced action against NTC, and its related entities,
Parcel Consultants, Inc. and Minimum Rate Pricing, Inc. (collectively, the
"Defendants") in the Superior Court of New Jersey. The Defendants filed a
counter suit against ProMark and IntelliSell, alleging breach of contract,
contending that errors committed by ProMark and IntelliSell caused defendants
to suffer damages from states' attorneys general and the FCC. The Company
believes that NTC's claims against ProMark and IntelliSell are without merit.
Upon summary proceeding, the New Jersey court referred a portion of the
claims to arbitration in San Diego County, California, while the rest of the
suit continued in New Jersey. Of the $11.7 million owed by NTC under
outstanding invoices, the arbitration matter would involve outstanding invoices
of $4.5 million owed to ProMark under one of its contracts with NTC. In
November, 1998, ProMark filed a Demand for Arbitration against the defendants
with the American Arbitration Association (the "AAA") in San Diego County.
The defendants also filed a counter suit in the AAA proceeding. A preliminary
hearing on this matter will occur in early March 1999. In the New Jersey case,
discovery is continuing and a trial has been scheduled in May 1999.
The Company has allocated approximately $6.5 million of its reserve for
uncollected accounts receivable against the amount owed from NTC. The Company
believes that the reserve is adequate.
IntelliSell--The former shareholders of IntelliSell Corporation (the "Selling
Shareholders"), initiated an arbitration proceeding against the Company in
April 1998. The Selling Shareholders contend that they are entitled to an
"earnout" consisting of cash and possibly additional stock, and that the
Company breached the Acquisition Agreement (the "Acquisition Agreement") by not
paying an earnout as of April 1998. The Selling Shareholders contend that the
amount of the earnout is not less than $3,000,000 and additional stock of the
Company in an unspecified amount.
The Company believes that payment of an earnout is not required under the
terms of the Acquisition Agreement as the requisite Qualified Gross Margin
Dollars (as defined in the Acquisition Agreement) that would generate payment
of an earnout were not achieved.
F-24
<PAGE>
International Data Response Corporation
Notes To Consolidated Financial Statements--continued
For the Years Ended December 31, 1998, 1997 and 1996
The parties and the arbitration panel are in the final stages of determining
a hearing and discovery schedule. It is currently anticipated that the matter
will be arbitrated in early June 1999.
Former Employee--From April 24, 1998 through May 5, 1998, a former employee
and director (the "Plaintiff") filed a series of three litigation actions
against the Company and certain stockholders and directors of the Company. The
first action named the directors of the Company as defendants and alleged that
the Offering approved by the Board of Directors in April 1998 diluted the
Plaintiff's minority ownership interest. The second action named the Company
and certain stockholders of the Company as defendants alleging various
misconduct with respect to the 1996 merger of the Company and S & P Data (of
which the Plaintiff was a significant shareholder). The final action named the
Company as defendant and alleged certain claims with regards to the Plaintiff's
employment and non-compete agreements with the Company. These actions sought
various remedies including payment of damages, rescission of the Offering and
rescission of certain purchase and sale agreements in connection with the S&P
Data acquisition. The Company settled these three actions during 1998. The
financial impact of the settlement has been reflected in the Company's
consolidated financial statements for the year ended December 31, 1998. The
Company is contractually required to keep the terms and conditions of the
settlement agreement confidential.
In addition, the Company is subject to certain other lawsuits,
investigations, and claims arising out of the ordinary conduct of its business.
In the opinion of management, the resolution of these matters will not have a
material effect on the Company's financial position or results of operations.
10. Concentrations
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company's periodic evaluations of the relative
credit standing of these financial institutions are considered in the Company's
investment strategy.
During the years ended December 31, 1998, 1997 and 1996, the following
clients individually accounted for more than 10% of the Company's revenue:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Client A.................................................. * 27% 34%
Client B.................................................. 12% 16% 12%
Client C.................................................. 13% * *
Client D.................................................. 12% * *
</TABLE>
- --------
* Accounted for less than 10% of revenue for the period indicated
F-25
<PAGE>
International Data Response Corporation
Notes to Consolidated Financial Statements--continued
For the Years Ended December 31, 1998, 1997 and 1996
At December 31, 1998, 1997 and 1996 the following clients individually
accounted for more than 10% of the Company's trade accounts receivable:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Client A.................................................. * 20% *
Client B.................................................. * * 24%
Client C * * *
Client D.................................................. 27% * *
Client E.................................................. 12% * *
Client F.................................................. * * 18%
Client G.................................................. * * 12%
</TABLE>
- --------
* Accounted for less than 10% of trade accounts receivable for the period
indicated
In addition, a substantial portion of the Company's revenue is derived from
clients in the financial services and the telecommunications industries.
11. Fair Value of Financial Instruments
The carrying amount reported in the balance sheet for cash and cash
equivalents, accounts receivable, accounts payable and short-term debt
approximates fair value because of the immediate or short-term maturity of
these financial instruments. The carrying amount reported in the balance sheet
for derivative instruments approximates fair value based on current market
conditions and the remaining length of the contracts. Based on the borrowing
rates available to the Company for bank loans with similar terms and average
maturities, the fair value of long-term debt approximates carrying value in all
material respects.
12. Transactions with Related Parties
Phone Equipment and Services--During the year ended December 31, 1996, the
Company purchased approximately $0.29 million of phone equipment and related
installation services, which are included in property and equipment, from an
affiliate which is partially owned by one of the Company's stockholders.
General Consulting Services--The Company has agreements with certain
stockholders to perform consulting and other services at various levels of
payment. During 1997 the Company paid approximately $0.24 million in fees to a
minority stockholder for general consulting services performed for the Company.
Such amounts have been classified as general and administrative expenses.
Recapitalization and Advisory Consulting Services--The Company incurred
charges from an affiliate of one of its stockholders for, among other things,
consulting and other services provided at the date of acquisition and
throughout the year. For the year ended December 31, 1996, these expenses
included $1.34 million of consulting and other services incurred in connection
with the Recapitalization and the acquisition and $0.19 million related to a
$0.25 million annual advisory fee. For the year ended December 31, 1997, these
expenses included $1.26 million of consulting and other services incurred in
connection with the acquisition of IntelliSell and Telnet and $0.383 million
related to annual advisory fees. For the year ended December 31, 1998, these
expenses included $0.231 million of consulting and other services and $0.408
million related to annual advisory fees.
Promissory Note Payable--In 1996, in connection with the Recapitalization,
the Company issued promissory notes to other stockholders in the aggregate
principal amount of approximately $5 million bearing interest at 10% annually.
Approximately $0.864 million of the notes, including interest, was contributed
as
F-26
<PAGE>
International Data Response Corporation
Notes to Consolidated Financial Statements--continued
For the Years Ended December 31, 1998, 1997 and 1996
additional equity in April 1997. Interest on the notes is payable quarterly.
Principal is due annually beginning in March 2001 through March 2004 when all
remaining principal and interest is due and payable. These notes are
subordinated to the Amended Facilities. Interest expense incurred on these
notes totalled $0.372 million, $.438 million and $0.404 million during 1998,
1997 and 1996, respectively.
13. Stock Option Plan
On March 11, 1996, the Company established a stock option plan (the "Plan")
for certain key employees, directors and non-employee consultants under which
the Company may grant options for up to 45,560 shares of the Company's Class A
nonvoting common stock. Such options may include incentive stock options and
nonqualified stock options. Options generally become exercisable in whole at
grant date or in installments over time, as determined by the Compensation
Committee of the Board of Directors, and have a term of ten years. Options are
granted at not less than the fair market value at dates of grant. In January
1997, the Plan was amended to increase the options available for grant to
100,000 shares. In June 1998, the Plan was amended to increase the options
available for grant to 300,000 shares. In June 1998, the Company repriced
options which were previously granted on various dates in 1996, 1997 and early
1998. The options were repriced with an exercise price of $10.00 per share,
which exceeded the market price at that date. All other options granted during
1998 were granted at an average exercise price of $11.02. All other options
granted during fiscal year 1998 had exercise prices equal to or less than the
market price of the common stock of the Company on the grant dates.
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
Shares
---------------------
Options Weighted Average
Options Available Exercise Price
Outstanding for Grant per Share
----------- --------- ----------------
<S> <C> <C> <C>
Balance, January 1, 1996................ -- -- $ --
Options cancelled..................... (15,496) 15,496 100
Options authorized.................... -- 45,560 --
Options granted....................... 53,002 (53,002) 104
Options exercised..................... -- -- --
Balance, December 31, 1996.............. 37,506 8,054 105
Options cancelled..................... (11,193) 11,193 100
Options authorized.................... -- 54,440 --
Options granted....................... 67,749 (67,749) 205
Options exercised..................... (934) -- 100
Balance, December 31, 1997.............. 93,128 5,938 179
Options cancelled..................... (89,422) 89,422 179
Options authorized.................... -- 200,000 --
Options granted....................... 208,212 (208,212) 11
Options exercised..................... -- -- --
------- -------- ----
Balance, December 31, 1998.............. 211,918 87,148 $ 13
======= ======== ====
Exercisable, December 31, 1996.......... 8,557 $103
Exercisable, December 31, 1997.......... 28,741 $148
Exercisable, December 31, 1998.......... 59,272 $ 22
</TABLE>
F-27
<PAGE>
International Data Response Corporation
Notes to Consolidated Financial Statements--continued
For the Years Ended December 31, 1998, 1997 and 1996
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------- ----------------------------------------------------
Weighted Average
Number Weighted Average Remaining
Outstanding Exercise Price Number Exercisable Exercise Price Life In Years
----------- -------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
203,812 $10 51,166 $10 8.46
8,106 100 8,106 100 7.36
------- --- ------ --- ----
211,918 $13 59,272 $22 8.31
======= === ====== === ====
</TABLE>
The Company's accounting for stock-based plans is in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees." For every stock option granted, the option price is not less than
the fair value of the shares on the grant date; therefore, no compensation
expense has been recognized for the Company's stock option Plan.
Had compensation expense for the Company's stock-based Plan been accounted
for using the fair value method prescribed by SFAS No. 123, the net losses
would have been as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Net loss as reported....................... $(27,120) $(34,430) $(3,641)
Pro forma net loss under SFAS No. 123...... $(27,311) $(35,368) $(4,208)
</TABLE>
As required by SFAS No. 123, the Company has determined the weighted average
fair value of each option granted in 1998, 1997 and 1996 to be $4.33, $24.30
and $47.58, respectively. The fair value of each option grant was estimated on
the date of grant using a standard option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rates............................... 5.75% 6.00% 6.21%
Expected dividends..................................... -- -- --
Expected volatility.................................... -- -- --
Expected lives in years................................ 10 10 10
</TABLE>
The effects of applying SFAS No. 123 in the above pro forma disclosure are
not indicative of future amounts.
14. Derivative Financial Instruments
Interest Rate Cap Agreements--The Company purchased two interest rate cap
agreements from a bank to hedge the effects of increases in the interest rates
on its floating rate debt in compliance with certain covenants under its debt
facilities. The first agreement has a notional amount of $10 million, matures
on November 4, 1999 and provides for payments from the bank to the Company
during periods of time in which the three-month LIBOR rate is above 7.50%. The
second agreement has a notional amount of $15 million, matures on November 4,
1999 and provides for payments from the bank to the Company when the three-
month LIBOR is above 7.75%. In the event of nonperformance by the bank on these
interest rate cap agreements, the Company, which does not anticipate such
nonperformance, is exposed to credit losses. The Company does not hold or issue
financial instruments for trading purposes.
F-28
<PAGE>
International Data Response Corporation
Notes to Consolidated Financial Statements--continued
For the Years Ended December 31, 1998, 1997 and 1996
Put Options--In 1996, the Company purchased put options on the Canadian
dollar to hedge against fluctuations in foreign exchange rates in compliance
with certain covenants under its debt facilities. A notional amount of $2.25
million in Canadian dollar puts with a strike price of 1.4286 was outstanding
at December 31, 1998. The put options expire in increments of $0.75 million on
the last day of each calendar quarter through September 1999.
Amortization and Carrying Value of Derivative Financial Instruments--The
interest rate cap agreements and put options are accounted for as hedge
instruments. The cost under the interest rate cap agreements and the cost of
the Canadian dollar put options are amortized on a straight-line basis over the
period of each respective agreement. The payments received under the interest
rate cap agreement are recorded as an adjustment to interest expense when
received. There were no payments received under the interest rate cap agreement
for any period. The carrying value of the Company's outstanding interest rate
cap agreements and the Canadian dollar put options as of December 31, 1998 and
1997 was $0.0 million and $0.16 million, respectively. The carrying value
approximates fair value based on the estimated amount the Company would receive
to terminate these agreements at December 31, 1998.
15. Redeemable Preferred Stock
On May 28, 1998, the Company completed a $12 million private placement to
certain existing stockholders (the "Offering") consisting of 600,000 Units at
$20 per Unit. Each Unit consists of one share of $20 Series A Redeemable
Preferred Stock with a detachable warrant to purchase one share of the
Company's voting common stock for $10 per share. Holders of the Series A
Redeemable Preferred Stock receive a 10% cumulative dividend payable annually
in Series A Redeemable Preferred Stock. At the option of a majority of Series A
Redeemable Preferred Stockholders, the Company must redeem all of the Series A
Redeemable Preferred Stock at $20 per share in three equal annual installments
with the first installment no earlier than May 28, 2006. The detachable
warrants expire upon the earlier of 10 years or a qualified initial public
offering or by redeeming shares of Series A Redeemable Preferred Stock as
adjusted from time-to-time.
At December 31, 1998, the carrying amount of the Redeemable Preferred Stock
is equal to the original proceeds of $12.0 million plus accrued dividends of
$0.8 million less a discount of $1.973 million. The discount consists of the
value of the warrants of $1.476 million plus the costs of issuance of $0.637
million, less the 1998 amortization of the discount of $0.140 million.
At December 31, 1998, the Company had 600,000 outstanding detachable warrants
to purchase 600,000 shares of common stock of the Company at $10.00 per share.
The estimated value of the warrants at May 28, 1998 was $2.46 per share. The
Company determined the value of the warrants at the date of issuance by using a
standard option pricing model. In addition to the warrant strike price and
expiration date, the following variables were used: value per share and
volatility, both based on adjusted public-company comparatives, and risk-free
interest rate.
16. Statement of Comprehensive Income
During 1998, the Company adopted FASB Statement No. 130, Reporting
Comprehensive Income. Statement No. 130 requires the reporting of comprehensive
income in addition to net income (loss) from operations. Comprehensive income
is a more inclusive financial reporting methodology that includes disclosure of
certain financial information that historically has not been recognized in the
calculation of net income.
During the three years ended December 31, 1998, 1997 and 1996, the Company
engaged in transactions involving foreign currency, resulting in gains (losses)
before tax. In addition, the Company held securities
F-29
<PAGE>
International Data Response Corporation
Notes to Consolidated Financial Statements--continued
For the Years Ended December 31, 1998, 1997 and 1996
classified as available-for-sale, which have unrealized gains (losses) before
tax. The before tax and after tax amount for each of these categories, as well
as the tax (expense) benefit of each, is summarized below:
<TABLE>
<CAPTION>
Tax
Before Benefit After
Tax (Expense) Tax
--------- -------- -------
<S> <C> <C> <C>
(in Thousands)
1998:
Foreign currency translation................... $ (1,389) $ -- $(1,389)
Unrealized foreign currency hedge gains........ 131 (52) 79
Realized foreign currency hedge gains.......... 101 (40) 61
Reclassification adjustment for gains included
in net loss................................... (53) 21 (32)
--------- ----- -------
$ (1,210) $ (71) $(1,281)
========= ===== =======
1997:
Foreign currency translation................... $ (1,130) $ -- $(1,130)
Unrealized holding gains....................... 16 (6) 10
--------- ----- -------
$ (1,114) $ (6) $(1,120)
========= ===== =======
1996:
Foreign currency translation................... $ (123) $ -- $ (123)
Unrealized holding gains....................... 37 (15) 22
--------- ----- -------
$ (86) $ (15) $ (101)
========= ===== =======
</TABLE>
17. Subsequent Events
On January 4, 1999, the Company decided to close four of its call centers and
to move the business volume into the Company's remaining call centers. The
Company recorded a charge of $2.0 million for employee termination costs and
lease termination costs.
On January 14, 1999, the Company entered into a merger agreement with
TeleSpectrum Worldwide, Inc. ("TeleSpectrum"). Under the terms of the
transaction as amended on February 26, 1999, TeleSpectrum will issue 9,200,000
shares of common, 3,000,000 warrants to purchase TeleSpectrum stock and
refinance substantially all of the Company's debt in return for 100% of the
Company's common stock. The transaction is expected to be consummated by mid-
May, 1999.
On February 25, 1999, the Company obtained a commitment from one of its
credit facilities lenders to provide up to $7.5 million of additional
financing. The $7.5 million bears interest at LIBOR plus 1.5% and is payable
semi-annually. The principal payment is due at the end of the five years and
the credit facilities lender has the option to put the loan balance to the
Company's largest shareholder under certain conditions.
F-30
<PAGE>
APPENDIX I:
IDRC AGREEMENT AND PLAN OF MERGER
<PAGE>
_______________________________________________________________________________
_______________________________________________________________________________
AGREEMENT AND PLAN OF MERGER
AMONG
TELESPECTRUM WORLDWIDE INC.,
INTERNATIONAL DATA RESPONSE CORPORATION
and
CERTAIN STOCKHOLDERS OF INTERNATIONAL DATA RESPONSE CORPORATION
Dated as of January 14, 1999
_______________________________________________________________________________
_______________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
W I T N E S S E T H...................................................................... 1
- -------------------
ARTICLE I
THE MERGER............................................................................... 2
SECTION 1.1 THE MERGER.......................................................... 2
SECTION 1.2 STOCKHOLDER MEETINGS, CLOSING, EFFECTIVE TIME OF THE MERGER......... 2
SECTION 1.3 CONVERSION AND CANCELLATION OF SECURITIES........................... 3
SECTION 1.4 EXCHANGE OF CERTIFICATES............................................ 4
SECTION 1.5 OPTIONS............................................................. 6
SECTION 1.6 ESCROW.............................................................. 7
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF IDRC
SECTION 2.1 ORGANIZATION, POWERS AND QUALIFICATIONS............................. 8
SECTION 2.2 SUBSIDIARIES........................................................ 8
SECTION 2.3 CAPITAL STOCK....................................................... 9
SECTION 2.4 CERTIFICATE OF INCORPORATION, BYLAWS, MINUTE BOOKS AND RECORDS...... 10
SECTION 2.5 AUTHORITY; BINDING EFFECT........................................... 10
SECTION 2.6 CONFLICT WITH OTHER AGREEMENTS; APPROVALS........................... 10
SECTION 2.7 GOVERNMENTAL CONSENTS AND APPROVALS................................. 11
SECTION 2.8 FINANCIAL STATEMENTS................................................ 11
SECTION 2.9 ABSENCE OF CERTAIN CHANGES.......................................... 12
SECTION 2.10 INDEBTEDNESS; ABSENCE OF UNDISCLOSED LIABILITIES.................... 12
SECTION 2.11 ASSETS.............................................................. 12
SECTION 2.12 CONTRACTS........................................................... 13
SECTION 2.13 INSURANCE........................................................... 13
SECTION 2.14 AUTHORIZATIONS; COMPLIANCE WITH LAW................................. 14
SECTION 2.15 TAXES............................................................... 14
SECTION 2.16 ABSENCE OF LITIGATION; CLAIMS....................................... 15
SECTION 2.17 EMPLOYEE BENEFIT PLANS; EMPLOYMENT AGREEMENTS....................... 15
SECTION 2.18 CUSTOMERS........................................................... 17
SECTION 2.19 LABOR MATTERS....................................................... 17
SECTION 2.20 ENVIRONMENTAL MATTERS............................................... 18
SECTION 2.21 INTELLECTUAL PROPERTY............................................... 18
SECTION 2.22 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS.................. 18
SECTION 2.23 TAX MATTERS......................................................... 19
SECTION 2.24 AFFILIATES.......................................................... 19
SECTION 2.25 BOARD ACTION........................................................ 19
SECTION 2.26 BROKERS AND FINDERS................................................. 19
SECTION 2.27 ADEQUACY OF DISCLOSURE.............................................. 19
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TELESPECTRUM........................................... 19
SECTION 3.1 ORGANIZATION AND POWERS............................................. 20
SECTION 3.2 SUBSIDIARIES........................................................ 20
SECTION 3.3 CAPITAL STOCK....................................................... 20
SECTION 3.4 CERTIFICATE OF INCORPORATION, BYLAWS, MINUTE BOOKS AND RECORDS...... 21
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 3.5 AUTHORITY; BINDING EFFECT...................................... 21
SECTION 3.6 CONFLICT WITH OTHER AGREEMENTS; APPROVALS...................... 21
SECTION 3.7 GOVERNMENTAL CONSENTS AND APPROVALS............................ 22
SECTION 3.8 SEC REPORTS.................................................... 22
SECTION 3.9 FINANCIAL STATEMENTS........................................... 22
SECTION 3.10 ABSENCE OF CERTAIN CHANGES..................................... 23
SECTION 3.11 INDEBTEDNESS; ABSENCE OF UNDISCLOSED LIABILITIES............... 23
SECTION 3.12 CONTRACTS...................................................... 24
SECTION 3.13 ABSENCE OF LITIGATION; CLAIMS.................................. 24
SECTION 3.14 TAX MATTERS.................................................... 24
SECTION 3.15 AFFILIATES..................................................... 24
SECTION 3.16 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS............. 24
SECTION 3.17 STATE TAKEOVER STATUTES........................................ 25
SECTION 3.18 BOARD ACTION................................................... 25
SECTION 3.19 BROKERS AND FINDERS............................................ 25
SECTION 3.20 ADEQUACY OF DISCLOSURE......................................... 25
ARTICLE IV
COVENANTS........................................................................... 25
SECTION 4.1 CONDUCT OF IDRC'S BUSINESS..................................... 25
SECTION 4.2 TELESPECTRUM'S UNDERTAKINGS.................................... 27
SECTION 4.3 UPDATING OF SCHEDULES.......................................... 29
SECTION 4.4 ACCESS TO INFORMATION.......................................... 29
SECTION 4.5 STOCKHOLDER VOTE; PROXY STATEMENT.............................. 30
SECTION 4.6 NMS APPLICATION................................................ 31
SECTION 4.7 REASONABLE BEST EFFORTS........................................ 31
SECTION 4.8 PUBLIC ANNOUNCEMENTS........................................... 31
SECTION 4.9 SUBSEQUENT FINANCIAL STATEMENTS................................ 31
SECTION 4.10 CONTROL OF OPERATIONS.......................................... 32
SECTION 4.11 REGULATORY AND OTHER AUTHORIZATIONS............................ 32
SECTION 4.12 TAKEOVER STATUTE............................................... 32
SECTION 4.13 INDEMNIFICATION OF DIRECTORS AND OFFICERS...................... 32
SECTION 4.14 TAX-FREE REORGANIZATION........................................ 33
SECTION 4.15 NO SOLICITATION................................................ 33
SECTION 4.16 BANK NEGOTIATIONS.............................................. 34
SECTION 4.17 CONSENT DETERMINATIONS......................................... 34
SECTION 4.18 FORM S-3 RESALE REGISTRATION................................... 34
SECTION 4.19 CRW DEVELOPMENTS............................................... 35
SECTION 4.20 COVENANT OF THE MDC ENTITIES................................... 35
SECTION 4.21 AGREEMENT WITH CHAIRMAN........................................ 35
SECTION 4.22 SECTION 2.17 UNDERTAKING....................................... 35
ARTICLE V
CONDITIONS TO CLOSING............................................................... 35
SECTION 5.1 CONDITIONS TO THE OBLIGATIONS OF IDRC AND TELESPECTRUM......... 35
SECTION 5.2 CONDITIONS TO THE OBLIGATIONS OF IDRC.......................... 36
SECTION 5.3 CONDITIONS TO THE OBLIGATIONS OF TELESPECTRUM.................. 37
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER................................................... 39
SECTION 6.1 TERMINATION.................................................... 39
SECTION 6.2 EFFECT OF TERMINATION.......................................... 40
SECTION 6.3 AMENDMENT...................................................... 40
SECTION 6.4 WAIVER......................................................... 40
ARTICLE VII
INDEMNIFICATION..................................................................... 40
SECTION 7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES..................... 40
SECTION 7.2 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS.................... 41
SECTION 7.3 SPECIFIC INDEMNIFICATION BY THE STOCKHOLDERS OF IDRC........... 41
SECTION 7.4 INDEMNIFICATION BY TELESPECTRUM................................ 41
SECTION 7.5 PROCEDURE OF CLAIMS............................................ 42
SECTION 7.6 LIMITATIONS ON INDEMNIFICATION................................. 43
SECTION 7.7 CLAIMS PERIOD.................................................. 43
SECTION 7.8 EXCLUSIVE REMEDY............................................... 43
SECTION 7.9 EXCEPTION TO LIMITATION........................................ 44
SECTION 7.10 EFFECT OF INVESTIGATION........................................ 44
ARTICLE VIII
MISCELLANEOUS....................................................................... 44
SECTION 8.1 ENTIRE AGREEMENT............................................... 44
SECTION 8.2 NOTICES........................................................ 44
SECTION 8.3 GOVERNING LAW.................................................. 45
SECTION 8.4 DESCRIPTIVE HEADINGS........................................... 45
SECTION 8.5 PARTIES IN INTEREST............................................ 45
SECTION 8.6 COUNTERPARTS................................................... 46
SECTION 8.7 EXPENSES....................................................... 46
SECTION 8.8 PERSONAL LIABILITY............................................. 46
SECTION 8.9 BINDING EFFECT; ASSIGNMENT..................................... 46
SECTION 8.10 INTERPRETATION................................................. 46
SECTION 8.11 SEVERABILITY................................................... 46
</TABLE>
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement"), dated as of
---------
January 14, 1999, is made by and among TELESPECTRUM WORLDWIDE INC., a Delaware
corporation ("TeleSpectrum"), INTERNATIONAL DATA RESPONSE CORPORATION, a
------------
Delaware corporation ("IDRC"), and the following stockholders of IDRC: McCown
----
De Leeuw & Co. III, L.P., McCown De Leeuw & Co. Offshore (Europe) III, L.P.,
McCown De Leeuw & Co. III, (Asia) L.P. and The Gamma Fund LLC (collectively, the
"MDC Entities").
------------
W I T N E S S E T H
-------------------
WHEREAS, the respective Boards of Directors of TeleSpectrum and IDRC have
each approved the business combination described herein in which IDRC will be
merged with and into TeleSpectrum upon the terms and subject to the conditions
hereinafter set forth (the "Merger"), pursuant to which, among other things, (i)
------
each outstanding share of Common Stock, par value $.001 per share, of IDRC
("Common Stock"), and each outstanding share of Class A Common Stock, par value
------------
$.001 per share, of IDRC ("Class A Common Stock" and together with the Common
--------------------
Stock, "IDRC Common Stock"), will be converted into the right to receive shares
-----------------
of Common Stock, par value $.001 per share, of TeleSpectrum ("TeleSpectrum
------------
Common Stock"), and warrants exercisable for TeleSpectrum Common Stock in the
- ------------
manner set forth herein and (ii) each outstanding share of Series A Preferred
Stock, par value $.001 per share, of IDRC ("Series A Preferred Stock"), and
------------------------
unpaid dividends with respect to such Series A Preferred Stock will be exchanged
or paid, as applicable, in cash;
WHEREAS, the Boards of Directors of TeleSpectrum and IDRC have each
unanimously determined that the Merger and the other transactions contemplated
hereby are consistent with, and in furtherance of, their respective business
strategies and goals and have each approved the Merger upon the terms and
conditions set forth herein;
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to TeleSpectrum's willingness to enter into this
Agreement, certain stockholders of IDRC have entered into a Stockholder Support
Agreement with TeleSpectrum, dated as of the date of this Agreement and attached
as Exhibit A hereto (the "IDRC Stockholder Support Agreement"), pursuant to
----------------------------------
which such stockholders have agreed, among other things, to vote all voting
securities of IDRC beneficially owned by them in favor of approval and adoption
of this Agreement and to refrain, except as otherwise specified in the IDRC
Stockholder Support Agreement, for a one-year period, from transferring or
otherwise disposing of any economic interest in any securities of TeleSpectrum
which are obtained pursuant to the terms of this Agreement;
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to IDRC's willingness to enter into this
Agreement, certain stockholders of TeleSpectrum have entered into Stockholder
Support Agreements with IDRC, dated as of the date of this Agreement and
attached as Exhibit B hereto (the "TeleSpectrum Stockholder Support
--------------------------------
Agreements"), pursuant to which such stockholders have agreed, among other
- ----------
things, to vote all voting securities of TeleSpectrum beneficially owned by them
in favor of approval and adoption of this Agreement;
<PAGE>
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a reorganization under Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code"); and
----
WHEREAS, for accounting purposes, it is intended that the Merger will be
accounted for as a "purchase."
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, agreements and conditions set forth below, the parties hereto,
intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. Subject to the terms and conditions hereof and
in accordance with the General Corporation Law of the State of Delaware, as
amended (the "DGCL"), at the Effective Time (hereinafter defined): (a) IDRC
----
shall be merged with and into TeleSpectrum and the separate existence of IDRC
shall cease; (b) TeleSpectrum, as the surviving corporation in the Merger (the
"Surviving Corporation"), (i) shall continue its corporate existence under the
---------------------
laws of the State of Delaware, (ii) shall retain its present name and (iii)
shall succeed to all rights, assets, liabilities and obligations of IDRC in
accordance with the DGCL; (c) the Certificate of Incorporation of TeleSpectrum,
as in effect immediately prior to the Effective Time, shall continue as the
Certificate of Incorporation of the Surviving Corporation; and (d) the Bylaws of
TeleSpectrum, as in effect immediately prior to the Effective Time, shall
continue as the Bylaws of the Surviving Corporation. From and after the
Effective Time, the Merger will have all the effects provided by applicable law
and as set forth in this Agreement.
SECTION 1.2 STOCKHOLDER MEETINGS, CLOSING, EFFECTIVE TIME OF THE MERGER.
TeleSpectrum and IDRC shall each submit this Agreement to the holders of all of
their respective securities that are entitled to vote on this Agreement for
approval and adoption at meetings, or, in the case of IDRC, by consent in lieu
of a meeting, to be held as soon as practicable following the date of this
Agreement in accordance with Section 4.5 hereof. Subject to this Agreement
receiving all requisite stockholder approvals and subject to the other
provisions of this Agreement, the parties shall hold a closing (the "Closing")
-------
on the next business day (or such later date as the parties hereto may agree)
following the later of (a) the first business day on which the stockholders of
IDRC and TeleSpectrum have each approved the Merger Agreement, or (b) the first
business day on which the last of the conditions set forth in Article V hereof
is fulfilled or waived (such later date, the "Closing Date"), at 9:00 A.M.
------------
(Philadelphia time) at the offices of Morgan, Lewis & Bockius LLP, 1701 Market
Street, Philadelphia, Pennsylvania, or at such other time or place as the
parties agree. On the Closing Date, the parties shall cause the Merger to
become effective by filing a certificate of merger (the "Certificate of Merger")
---------------------
with the Secretary of State of the State of Delaware in such form as required
by, and executed in accordance with the relevant provisions of, the DGCL (the
date and time of such filing, or such later date or time agreed upon by
TeleSpectrum and IDRC set forth therein, the "Effective Time.")
--------------
<PAGE>
SECTION 1.3 CONVERSION AND CANCELLATION OF SECURITIES.
(a) At the Effective Time and subject to Section 1.5 hereof, all (i)
shares of IDRC Common Stock and (ii) options, warrants and other rights (the
"Options") exercisable for, or providing the right to acquire, IDRC Common Stock
-------
that are issued and outstanding immediately prior to the Effective Time (other
than any shares of IDRC Common Stock described in Section 1.3(c) hereof) shall,
by virtue of the Merger and without any action on the part of the holder
thereof, be converted into the right to receive an aggregate of 9,200,000 shares
(the "Merger Shares") of TeleSpectrum Common Stock and warrants (the "Warrants")
------------- --------
exercisable for an aggregate of 3,000,000 shares (the "Warrant Shares") of
--------------
TeleSpectrum Common Stock. The Warrants shall contain such other terms and
conditions set forth in the form attached as Exhibit C hereto. Notwithstanding
---------
the foregoing, (i) no fractional shares of TeleSpectrum Common Stock shall be
issued and, in lieu thereof, a cash payment shall be made pursuant to Section
1.4(g) hereof, and (ii) the number of Merger Shares and Warrants issuable
pursuant to Section 1.3(a) shall be reduced on a proportional basis in an
aggregate amount equal to the number of Merger Shares and Warrants that would
have been received by holders of any Appraisal Shares (as such term is defined
in Section 1.3(c) hereof). The effect of the foregoing means that (A) each
share of IDRC Common Stock that is issued and outstanding immediately prior to
the Effective Time (other than any shares of IDRC Common Stock described in
Section 1.3(c) hereof) will be convertible into (i) that number of Merger Shares
equal to 9,200,000 divided by the Total IDRC Shares Outstanding, the product
being rounded, if necessary, up or down, to the nearest whole share and (ii) a
Warrant exercisable for that number of Warrant Shares equal to 3,000,000 divided
by the Total IDRC Shares Outstanding, the product being rounded, if necessary,
up or down, to the nearest whole share, and (B), subject to Sections 1.5 and 1.6
hereto, a holder of Options will be entitled to receive, upon exercise, on
account of each share of IDRC Common Stock (i) that number of Merger Shares
equal to 9,200,000 divided by the Total IDRC Shares Outstanding, the product
being rounded, if necessary, up or down, to the nearest whole share and (ii) a
Warrant exercisable for that number of Warrant Shares equal to 3,000,000 divided
by the Total IDRC Shares Outstanding, the product being rounded, if necessary,
up or down, to the nearest whole share. As used herein, the term "Total IDRC
Shares Outstanding" means the total number of shares of IDRC Common Stock and
the total number of shares of IDRC Common Stock issuable upon exercise of
Options that are issued and outstanding immediately prior to the Effective Time.
(b) At the Effective Time, (i) each outstanding share of Series A
Preferred Stock, shall be exchanged for $20 in cash, and (ii) all accrued and
unpaid dividends then payable in Series A-1 Preferred Stock, par value $.001 per
share, of IDRC (the "Series A-1 Preferred Stock"), with respect to the
--------------------------
outstanding shares of Series A Preferred Stock, shall be paid in cash in the
manner set forth in Article IV, Section E.1 of IDRC's Amended and Restated
Certificate of Incorporation in effect as of the Effective Time.
(c) At the Effective Time, each share of IDRC Common Stock held in
the treasury of IDRC immediately prior to the Effective Time, shall by virtue of
the Merger and without any action on the part of the holder thereof, be
automatically canceled and retired and cease to exist, and no cash, securities
or other property shall be payable in respect thereof.
(d) The holders of shares of TeleSpectrum Common Stock shall not be
entitled to appraisal rights under the DGCL. The holders of shares of IDRC
Common Stock held by a holder who, pursuant to Section 262 of the DGCL or any
successor provision, has the right to demand and properly demands an appraisal
of such shares of IDRC Common Stock ("Appraisal Shares"), shall not be
----------------
<PAGE>
converted into the right to receive the Merger Consideration (as defined in
Section 1.3(e)), on account of each share of IDRC Common Stock held by such
holder, unless such holder fails to perfect or otherwise loses such holder's
right to such appraisal, if any. If, after the Effective Time, such holder fails
to perfect or loses any such right to appraisal, each such share of IDRC Common
Stock held by such holder shall be treated as a share of IDRC Common Stock that
had been converted as of the Effective Time into the right to receive the Merger
Consideration. At the Effective Time, any holder of Appraisal Shares shall cease
to have any rights with respect thereto, except the rights provided in Section
262 of the DGCL or any successor provision and as provided in the immediately
preceding sentence. IDRC shall give prompt notice to TeleSpectrum of any demands
received by IDRC for appraisal of shares of IDRC Common Stock.
(e) The number of Merger Shares and Warrants to be issued pursuant to
this Agreement shall not be affected by reason of any reclassification,
recapitalization, split-up, combination or exchange of shares, or any dividend
payable in stock shall be declared thereon with a record date within such period
involving the IDRC Common Stock or the Options. The number of Merger Shares and
Warrants to be issued pursuant to this Agreement shall not be affected by reason
of any reclassification, recapitalization, split-up, combination or exchange of
shares, or any dividend payable in stock shall be declared thereon with a record
date within such period involving the TeleSpectrum Common Stock or the Options.
The Merger Shares and Warrants issued on account of each share of IDRC Common
Stock and issuable on account of each share of IDRC Common Stock underlying the
Options as a result of the Merger shall be equal. The number of Merger Shares
and Warrants issuable in exchange for each share of IDRC Common Stock and each
share of IDRC Common Stock underlying the Options is sometimes referred to
herein as the "Merger Consideration."
--------------------
SECTION 1.4 EXCHANGE OF CERTIFICATES.
(a) Subject to Section 1.6 hereof, as soon as practicable after the
Effective Time, TeleSpectrum shall mail to each person who was, at the Effective
Time, a holder of record of a certificate or certificates that immediately prior
to the Effective Time evidenced outstanding shares of IDRC Common Stock or
shares of Series A Preferred Stock (the "Certificates") (i) a letter of
------------
transmittal specifying that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon delivery of the Certificates to
TeleSpectrum, which shall be in a form and contain any other provisions as
TeleSpectrum and IDRC may reasonably agree, and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for the Merger
Consideration receivable on account of each share of IDRC Common Stock
represented thereby or the cash receivable on account of each share of Series A
Preferred Stock represented thereby. Upon the proper surrender of Certificates
to TeleSpectrum, together with a properly completed and duly executed letter of
transmittal and such other documents as may be required by TeleSpectrum, the
holder of such Certificate shall be entitled to receive in exchange therefor, in
the case of holders of IDRC Common Stock, certificates representing the shares
of TeleSpectrum Common Stock and Warrants that such holder has the right to
receive pursuant to the terms hereof (together with any dividend or distribution
with respect thereto made after the Effective Time and any cash paid in lieu of
fractional shares pursuant to Section 1.4(g)), and, in the case of holders of
Series A Preferred Stock, cash in payment of the full exchange price and accrued
and unpaid dividends. Each Certificate so surrendered shall be canceled. If any
portion of the Merger Consideration on account of IDRC Common Stock or cash on
account of Series A Preferred Stock is to be paid to a person other than the
person who is the record holder of the IDRC Common Stock or Series A Preferred
Stock, as applicable, at the Effective Time, it shall be a condition to such
payment that the Certificate
<PAGE>
evidencing the IDRC Common Stock or Series A Preferred Stock so surrendered
shall be properly endorsed or otherwise be in proper form for transfer and that
it be accompanied by all documents required to evidence and effect such transfer
and by evidence reasonably satisfactory to the TeleSpectrum and IDRC that any
applicable stock transfer tax has been paid.
(b) After the Effective Time, each outstanding Certificate which
theretofore represented shares of IDRC Common Stock shall, until surrendered for
exchange in accordance with this Section 1.4, be deemed for all purposes to
evidence ownership of whole shares of TeleSpectrum Common Stock and Warrants
into which the shares of IDRC Common Stock (which, prior to the Effective Time,
were represented thereby) shall have been so converted. After the Effective
Time, each outstanding Certificate which theretofore represented shares of
Series A Preferred Stock shall be deemed for all purposes to have been converted
and to evidence only that cash amount payable upon conversion, without the right
to receive any interest from the Effective Time until the time received by the
holder.
(c) At the Effective Time, the stock transfer books of IDRC shall be
closed and no transfer of any securities of IDRC shall thereafter be made.
(d) Neither TeleSpectrum nor IDRC will be liable to any holder of
shares of IDRC Common Stock for any Merger Consideration or any dividends or
distributions with respect thereto or cash payable in lieu of fractional shares
pursuant to Section 1.4(g) hereof or to any holder of shares of Series A
Preferred Stock for any cash, in each case which is delivered to a state
abandoned property administrator or other public official pursuant to any
applicable abandoned property, escheat or similar law.
(e) If any Certificates shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificates to be lost, stolen or destroyed, TeleSpectrum will deliver in
exchange for such lost, stolen or destroyed Certificates, the Merger
Consideration or cash, as applicable, for the shares represented thereby,
deliverable in respect thereof, as determined in accordance with the terms
hereof. When authorizing such payment in exchange for any lost, stolen or
destroyed Certificates, the person to whom the Merger Consideration or cash, as
applicable, is to be issued, as a condition precedent to such delivery, shall
give TeleSpectrum a bond or indemnity reasonably satisfactory to TeleSpectrum,
its transfer agent and their respective insurance carriers against any claim
that may be made against TeleSpectrum with respect to the Certificates alleged
to have been lost, stolen or destroyed.
(f) No dividend or other distribution declared or made after the
Effective Time with respect to the Merger Consideration with a record date after
the Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of TeleSpectrum Common Stock issuable upon surrender
thereof until the holder of such Certificate shall surrender such Certificate in
accordance with Section 1.4(a). Subject to the effect of applicable law,
following surrender of any such Certificate there shall be paid, without
interest, to the record holder of certificates representing whole shares of
TeleSpectrum Common Stock issued in exchange therefor: (i) at the time of such
surrender, the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to such whole shares of
TeleSpectrum Common Stock; and (ii) at the appropriate payment date, the amount
of dividends or other distributions with a record date after the Effective Time
but prior to surrender of such Certificate and a payment date subsequent to such
surrender payable with respect to such whole shares of TeleSpectrum Common
Stock.
<PAGE>
(g) No certificates or scrip evidencing fractional shares of
TeleSpectrum Common Stock shall be issued upon the surrender for exchange of
Certificates, and such fractional share interests shall not entitle the owner
thereof to any rights of a stockholder of TeleSpectrum. In lieu of any such
fractional shares, each holder of a Certificate previously evidencing IDRC
Common Stock, upon surrender of such Certificate for exchange pursuant to this
Article I, shall be paid an amount in cash (without interest), rounded to the
nearest cent, determined by multiplying (a) the closing price for a share of
TeleSpectrum Common Stock on the Nasdaq National Market System (the "NMS") on
---
the first business day immediately following the Effective Time, by (b) the
fractional interest to which such holder would otherwise be entitled (after
taking into account all shares of IDRC Common Stock held of record by such
holder at the Effective Time).
SECTION 1.5 OPTIONS.
(a) Except as set forth in Section 1.5(b), all Options outstanding
immediately prior to the Effective Time, shall terminate and neither IDRC nor
TeleSpectrum will have any obligation thereunder to the extent such Options are
not exercised prior to the Effective Time.
(b) Subject to the other terms and conditions in this Section 1.5, in
lieu of the termination of Options as set forth in Section 1.5(a), each holder
of outstanding Options may elect, prior to the Effective Time, to have any
Option held by such holder assumed by TeleSpectrum and become a new option (an
"Assumed Option") to purchase Merger Shares and Warrants and containing
substantially the same terms and conditions as are in effect for the original
Option outstanding immediately prior to the Effective Time only if such holder
(i) agrees to place in escrow in accordance with Section 1.6 of this Agreement,
a portion of the Assumed Option (an "Escrow Option") that is exercisable solely
for that number of shares of TeleSpectrum Common Stock equal to (A) the product
of (1) the total number of Shares of IDRC Common Stock underlying such Assumed
Option immediately prior to the Effective Time divided by the Total IDRC Shares
Outstanding, and (2) $12,000,000 divided by the "Trading Value" (as defined in
Section 1.6(b)), and (ii) completing and returning to IDRC prior to the
Effective Time a notice of election of assumption to be provided by IDRC (in
form and substance acceptable to TeleSpectrum) to each holder of Options as soon
as practicable after the date hereof. Each Assumed Option shall be evidenced by
two certificates, one representing the Escrow Option and one representing the
remaining portion of the Assumed Option (the "Non-Escrow Option").
(c) At the Effective Time, each Assumed Option shall entitle the
holder thereof to that number of Merger Shares and Warrants as set forth below:
(i) the number of Merger Shares to be issuable upon exercise of
each Assumed Option shall be equal to the product of (A) the number of shares of
IDRC Common Stock subject to the corresponding original Option and (B) (1)
9,200,000 divided by (2) the Total IDRC Shares Outstanding, the product being
rounded, if necessary, up or down, to the nearest whole share; and
(ii) the number of Warrants Shares underlying the Warrants to be
issued upon the exercise of each Assumed Option shall be equal to the product of
(A) the number of shares of IDRC Common Stock subject to the corresponding
original Option and (B) (1) 3,000,000 divided by (2) the Total IDRC Shares
Outstanding, the product being rounded, if necessary, up or down, to the nearest
whole warrant.
<PAGE>
(d) The exercise price per share of TeleSpectrum Common Stock under
each Assumed Option shall be equal to (i) the exercise price per share of the
IDRC Common Stock under the corresponding original Option divided by (ii) (A)
9,200,000 divided by (B) the Total IDRC Shares Outstanding, rounded, if
necessary, up or down, to the nearest cent. The exercise price for each Escrow
Option and each Non-Escrow Option shall be based solely on the number of Escrow
Shares represented thereby.
(e) The shares of TeleSpectrum Common Stock subject to each Warrant
underlying each Assumed Option are obtainable only after such Assumed Option and
Warrant are properly exercised in accordance with their respective terms.
(f) As soon as practicable after the Effective Time, TeleSpectrum
shall (i) deliver to holders of the original Options, agreements representing
the Escrow Options and Non-Escrow Options and (ii) file a registration statement
on Form S-8 (or any successor form thereto) registering the Merger Shares to be
issued to the holders of Escrow Options and Non-Escrow Options upon the exercise
of such Options and to maintain the effectiveness of such registration statement
(and maintain the current status of the prospectus or prospectuses contained
therein) for so long as such options remain outstanding.
SECTION 1.6 ESCROW.
(a) On the Closing Date, TeleSpectrum shall cause to be distributed
to the Indemnity Escrow Agent (as defined below) a certificate or certificates
and agreements representing the Escrow Securities (as defined below), which
shall be registered in the name of the Indemnity Escrow Agent as nominee for the
holders of IDRC Common Stock (the "IDRC Stockholders") and the holders of Escrow
Options (the "IDRC Optionholders") shall be held in accordance with the
provisions of this Section 1.6 and the Indemnity Escrow Agreement referred to
herein.
(b) At the Closing, as security for the payment of any
indemnification obligations of the IDRC Stockholders and the IDRC Optionholders
pursuant to Sections 7.2 or 7.3 hereof, the Escrow Shares and the Escrow Options
shall be delivered to an indemnity escrow agent that is mutually satisfactory to
TeleSpectrum and IDRC (the "Indemnity Escrow Agent"). The term "Escrow Shares"
----------------------
means that number of shares of TeleSpectrum Common Stock issuable to IDRC
Stockholders in the Merger (collectively, the "Escrow Shares") that, together
-------------
with the value of the Escrow Options, have an aggregate "Trading Value" of
$12,000,000, rounded up to the nearest whole share. The Escrow Shares and
Escrow Options are collectively referred to as the "Escrow Securities." Of the
-----------------
Escrow Securities, securities having an aggregate Trading Value of $9,000,000
and $3,000,000 will be held as security for any indemnification obligations
under Sections 7.2 and 7.3 hereof, respectively. As used herein, the term
"Trading Value" means the average closing price of one share of TeleSpectrum
Common Stock as quoted on the NMS during the 25 trading days immediately
preceding the Closing Date. For purposes of calculating the Trading Value of
the Escrow Securities, no value shall be ascribed to the Escrow Options other
than the value of each share of TeleSpectrum Common Stock underlying the Escrow
Options, each of which shall be valued at the Trading Value. The Escrow
Securities, together with all cash and non-cash dividends and other property at
any time received or otherwise distributed on, in respect of or in exchange for
any or all of the Escrow Securities, all securities hereafter issued in
substitution for any of the foregoing, all certificates and instruments
representing or evidencing such securities, all cash and non-cash proceeds of
all of the foregoing property and all rights, titles, interests, privileges and
<PAGE>
preferences appertaining or incident to the foregoing property are referred to
together as the "Escrow Property."
---------------
(c) The Escrow Property shall be held and disbursed by the Indemnity
Escrow Agent in accordance with the terms of an Indemnity Escrow Agreement
substantially in the form attached hereto as Exhibit D. The Indemnity Escrow
---------
Agent shall hold the Escrow Property pursuant to the Indemnity Escrow Agreement
until the later of: (a) the fifteen month anniversary of the Closing Date; or
(b) the resolution of any claim for indemnification or payment that is pending
on the fifteen month anniversary of the Closing Date.
(d) The IDRC Stockholders (and the IDRC Optionholders to the extent
such optionholders exercise Assumed Options prior to the expiration of the
Indemnity Escrow Agreement) shall be entitled to exercise all voting powers
incident to the Escrow Property held by the Indemnity Escrow Agent as their
nominee, but shall not be entitled to exercise any investment or dispositive
powers over such Escrow Property.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF IDRC
IDRC represents and warrants to TeleSpectrum that, except as set forth on a
Disclosure Schedule delivered by IDRC concurrently with the execution and
delivery of this Agreement (the "IDRC Schedule"):
-------------
SECTION 2.1 ORGANIZATION, POWERS AND QUALIFICATIONS. IDRC is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. IDRC has all requisite corporate power and authority
to carry on its business as it has been and is now being conducted and to own,
lease and operate the properties and assets used in connection therewith. IDRC
is duly qualified as a foreign corporation authorized to do business and is in
good standing in every jurisdiction in which such qualification is required or
good standing is recognized, all of which jurisdictions are disclosed in the
IDRC SCHEDULE, except where the failure to be so qualified would not have an
IDRC Material Adverse Effect. As used in this Agreement, "IDRC Material Adverse
---------------------
Effect" shall mean any fact, condition, event, development or occurrence which,
- ------
individually or when taken together with all other such facts, conditions,
events, developments or occurrences, would reasonably be expected to have a
material adverse effect on the financial condition, operating results or
business of IDRC and the IDRC Subsidiaries (hereinafter defined), taken as a
whole.
SECTION 2.2 SUBSIDIARIES.
(a) "Subsidiary" means, with respect to any party, any corporation,
----------
limited liability company, partnership, joint venture, or other business
association or entity, at least a majority of the voting securities or economic
interests of which is directly or indirectly owned or controlled by such party
or by any one or more of its Subsidiaries. As used in this Agreement, "Joint
-----
Venture" means, with respect to any party, any corporation, limited liability
- -------
company, partnership, joint venture or other business association or entity in
which (i) such party or any one or more of its Subsidiaries, directly or
indirectly, owns or controls more than five percent and less than a majority of
any class of the outstanding voting securities or economic interests, or (ii)
such party or a Subsidiary of such party is a general partner.
<PAGE>
(b) The IDRC SCHEDULE lists each Subsidiary and Joint Venture of IDRC,
the jurisdiction of its organization and the amount of its securities
outstanding and the owners thereof. Each Subsidiary of IDRC (the "IDRC
----
Subsidiaries") is duly organized, validly existing and in good standing under
- ------------
the laws of the jurisdiction of its organization. Each IDRC Subsidiary has all
requisite power and authority to carry on its business as it has been and is now
being conducted and to own, lease and operate the assets and properties used in
connection therewith. Each IDRC Subsidiary is duly qualified as a foreign
corporation authorized to do business and is in good standing in every
jurisdiction in which such qualification is required or good standing is
recognized, all of which jurisdictions are disclosed in the IDRC SCHEDULE,
except where the failure to be so qualified would not have an IDRC Material
Adverse Effect. All issued and outstanding shares of capital stock of each IDRC
Subsidiary are owned of record and beneficially by IDRC or another IDRC
Subsidiary, free and clear of all pledges, liens, claims, security interests,
encumbrances and other charges or defects in title of any nature whatsoever
("Liens"). There are no existing subscriptions, options, warrants, convertible
-----
securities, calls, commitments, agreements, conversion rights or other rights of
any character (contingent or otherwise) calling for or requiring the issuance,
transfer, sale or other disposition of any shares of the capital stock of any
IDRC Subsidiary, or calling for or requiring the issuance of any securities or
rights convertible into or exchangeable for shares of capital stock of any IDRC
Subsidiary, nor is IDRC or any IDRC Subsidiary subject to any obligation
(contingent or otherwise) to repurchase, redeem or otherwise acquire shares of
capital stock of any IDRC Subsidiary, in any case except as set forth in the
IDRC SCHEDULE. Except for the IDRC Subsidiaries and the Joint Ventures of IDRC
or as set forth in the IDRC SCHEDULE, neither IDRC nor any IDRC Subsidiary
directly or indirectly (i) owns or controls any shares of any corporation nor
has any voting securities of, or economic interest in, either of record
beneficially or equitably, in any association, partnership, limited liability
company, joint venture or other legal entity, or (ii) is a general partner of
any partnership.
SECTION 2.3 CAPITAL STOCK. As of the date hereof, IDRC has authorized
capital stock consisting of 1,500,000 shares of Common Stock, 300,000 shares of
Class A Common Stock, and 2,069,056 shares of Preferred Stock, par value $.001
per share (the "IDRC Preferred Stock"), of which 600,000 shares have been
--------------------
designated Series A Preferred Stock and 1,419,056 shares have been designated
Series A-1 Preferred Stock. As of the date hereof: (i) 476,100 shares of Common
Stock are issued and outstanding, (ii) 25,834 shares of Class A Common Stock are
issued and outstanding, (iii) 600,000 shares of Series A Preferred Stock are
issued and outstanding, (iv) no shares of Series A-1 Preferred Stock are issued
and outstanding, (v) no shares of IDRC Common Stock or IDRC Preferred Stock are
held as treasury shares, (vi) 224,242 shares of IDRC Common Stock are issuable
upon exercise of outstanding Options, of which 211,918 shares of IDRC Common
Stock are issuable upon exercise of outstanding stock options and 12,324 shares
of IDRC Common Stock are issuable upon the exercise of outstanding warrants,
(vii) 600,000 shares of IDRC Common Stock are issuable upon the exercise of
IDRC's detachable Stock Purchase Warrants which were issued in tandem with the
outstanding Series A Preferred Stock ("Detachable Warrants"), and (viii) 152,166
-------------------
shares of IDRC Common Stock are reserved for future issuance under the IDRC 1996
Stock Option Plan. Other than the Options and the Detachable Warrants, there
are no existing subscriptions, options, warrants, convertible securities, calls,
commitments, agreements, conversion rights or other rights of any character
(contingent or otherwise) calling for or requiring the issuance, transfer, sale
or other disposition of any capital stock of IDRC. All of the issued and
outstanding shares of IDRC Common Stock and IDRC Preferred Stock have been duly
authorized and are validly issued and outstanding, fully paid and nonassessable,
and were issued in compliance with all applicable Federal and state securities
laws. No shares of capital stock issued by IDRC are or were, at the time of
their issuance subject to preemptive rights. Other than the IDRC
<PAGE>
Stockholder Support Agreement and the Stockholders' Agreement (as defined in
Section 5.3(f)) there are no voting trusts or other agreements or understandings
to which IDRC is a party, nor, to the knowledge of IDRC, to which any
stockholder of IDRC is a party, with respect to the voting of capital stock of
IDRC.
SECTION 2.4 CERTIFICATE OF INCORPORATION, BYLAWS, MINUTE BOOKS AND
RECORDS. The copies of the Certificate of Incorporation and all amendments
thereto and of the Bylaws, as amended, of IDRC and the IDRC Subsidiaries which
have been delivered to TeleSpectrum by IDRC are true, correct and complete
copies thereof as in effect on the date hereof. The minute books of IDRC and
the IDRC Subsidiaries which have been made available for inspection contain
minutes, which are accurate and complete in all material respects, of all
meetings and consents in lieu of meetings of the Board of Directors (and any
committee thereof) and of the stockholders of IDRC and the IDRC Subsidiaries
since the respective dates of incorporation.
SECTION 2.5 AUTHORITY; BINDING EFFECT. IDRC has all requisite corporate
power and authority to execute and deliver this Agreement and, subject to
approval and adoption of this Agreement by a majority of the (i) shares of IDRC
Common Stock outstanding on the record date for the IDRC Stockholders' Meeting
or the date of the IDRC Consent (as such terms are defined in Section 2.22) and,
(ii) shares of IDRC Common Stock into which the warrants of IDRC that are
outstanding on the record date for the IDRC Stockholder's Meeting or the date of
the IDRC Consent is then convertible, all voting together as a single class (the
"Required IDRC Stockholder Approval"), to consummate the transactions
contemplated hereby. All necessary action, corporate or otherwise, required to
have been taken by or on behalf of IDRC by applicable law and by IDRC's
Certificate of Incorporation and Bylaws to authorize (i) the approval, execution
and delivery by IDRC of this Agreement and (ii) the performance of IDRC's
obligations under this Agreement and, subject to obtaining the Required IDRC
Stockholder Approval, the consummation of the transactions contemplated hereby
has been taken or will have been taken prior to the Closing. This Agreement
constitutes a valid and binding agreement of IDRC, enforceable against IDRC in
accordance with its terms.
SECTION 2.6 CONFLICT WITH OTHER AGREEMENTS; APPROVALS. The execution and
delivery of this Agreement by IDRC does not, and the consummation of the
transactions contemplated hereby will not, (i) violate or conflict with the
Certificate of Incorporation or Bylaws of IDRC or the comparable organizational
documents of any IDRC Subsidiary, (ii) constitute a breach or default (or an
event that with notice or lapse of time or both would become a breach or
default) or give rise to any Lien, third party right of termination,
cancellation, material modification or acceleration, or loss of any benefit,
under any IDRC Contract (hereinafter defined) to which IDRC or any IDRC
Subsidiary is a party or by which it is bound, or (iii) subject to the consents,
approvals, orders, authorizations, filings, declarations and registrations
required to be obtained prior to the Effective Time specified in Section 2.7 or
in the IDRC SCHEDULE in response thereto, conflict with or result in a violation
of any permit, concession, franchise or license or any law, rule or regulation
applicable to IDRC or any of the IDRC Subsidiaries or any of their properties or
assets, except, in the case of clauses (ii) and (iii), for any such breaches,
defaults, Liens, third party rights, cancellations, modifications, accelerations
or losses of benefits, conflicts or violations which would not have an IDRC
Material Adverse Effect and do not impair the ability of IDRC to perform its
obligations under this Agreement or prevent or delay the consummation of any of
the transactions contemplated hereby.
<PAGE>
SECTION 2.7 GOVERNMENTAL CONSENTS AND APPROVALS. Except as set forth in
the IDRC SCHEDULE, neither the execution and delivery of this Agreement by IDRC
nor the consummation by IDRC of the transactions contemplated hereby will
require any consent, approval, order, authorization, or permit of, or filing
with or notification to, any local, state, federal or foreign court,
administrative agency, commission or other governmental or regulatory authority,
agency or instrumentality ("Governmental Entity"), except (a) the filing of the
-------------------
Registration Statement (hereinafter defined) with the Securities and Exchange
Commission (the "SEC") in accordance with the Securities Act of 1933, as
---
amended, and the rules and regulations thereunder (collectively, the "Securities
----------
Act"), and the entry of an order by the SEC permitting such Registration
- ---
Statement to become effective, (b) compliance with applicable state securities
laws, (c) the filing of the Proxy Statement (hereinafter defined) and related
proxy materials with the SEC in accordance with the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder (collectively, the
"Exchange Act"), (d) the filing of a premerger notification report form and
------------
expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and regulations
thereunder (the "HSR Act"), (e) the filing of the Certificate of Merger with the
-------
Delaware Secretary of State and appropriate documents with the relevant
authorities of other states in which IDRC is qualified to do business in
accordance with the DGCL, and (f) such other consents, approvals, orders,
authorizations, registrations, declarations and filings which if not made or
obtained, would not have an IDRC Material Adverse Effect.
SECTION 2.8 FINANCIAL STATEMENTS. The IDRC SCHEDULE includes true and
complete copies of (a) the consolidated balance sheets of IDRC and the IDRC
Subsidiaries at December 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended, together with the notes thereto, audited by Deloitte & Touche LLP'; and
(b) the unaudited consolidated balance sheets of IDRC and the IDRC Subsidiaries
at November 30, 1998 and 1997 and related consolidated statements of operations,
stockholders' equity and cash flows for the 11-month periods then ended, all of
which have been prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied throughout the periods involved (except
----
as may be indicated in the notes thereto). Such balance sheets, including the
related notes, fairly present in all material respects, the consolidated
financial position, assets and liabilities (whether accrued, absolute,
contingent or otherwise) of IDRC and the IDRC Subsidiaries at the dates
indicated and such consolidated statements of operations, stockholders' equity
and cash flows fairly present the consolidated results of operations,
stockholders' equity and cash flows of IDRC and the IDRC Subsidiaries for the
periods indicated (except for the absence of notes with respect to such
unaudited financial statements). Other than those year-end adjustments
specified on the IDRC SCHEDULE, the unaudited consolidated financial statements
as of and for the period ending November 30, 1998, contain all adjustments,
which are solely of a normal recurring nature, necessary to present fairly the
financial position at November 30, 1998 and the results of operations and
changes in stockholders' equity and cash flows for the 11-month period then
ended. (The unaudited consolidated balance sheet of IDRC and the IDRC
Subsidiaries at November 30, 1998 described above is referred to herein as the
"IDRC Balance Sheet.") The accounts receivable included on the IDRC Balance
------------------
Sheet are bona fide accounts receivable created in the ordinary course of
business. Except as set forth on the IDRC SCHEDULE, the reserve for
uncollectible accounts set forth on the IDRC Balance Sheet is in accordance with
GAAP and, to the Knowledge of the Designated IDRC Officers, is reasonable in
light of past accounts receivable collection history and any known developments
or trends. As used herein, the term "Knowledge of the Designated IDRC Officers"
means to the knowledge of either Jeffrey A. Stiefler or Paul J. Grinberg after
conducting such investigation as
<PAGE>
would be reasonably be expected of the chief executive officer or chief
financial officer, as applicable, to determine the accuracy of their knowledge.
SECTION 2.9 ABSENCE OF CERTAIN CHANGES. Except as described in the IDRC
SCHEDULE, since November 30, 1998, IDRC and the IDRC Subsidiaries have conducted
their respective businesses solely in the ordinary course consistent with past
practice. Except as otherwise disclosed in the IDRC SCHEDULE, since November
30, 1998, IDRC and the IDRC Subsidiaries have not:
(a) suffered any IDRC Material Adverse Effect;
(b) been subject to any other events or conditions of any character
that would materially impair the ability of IDRC to perform its obligations
under this Agreement or prevent or delay the consummation of any of the
transactions contemplated hereby;
(c) made any material change to their respective accounting
methods, principles or practices;
(d) been subject to any revaluation of any assets of IDRC or any of
the IDRC Subsidiaries that, individually or in the aggregate has had, or would
reasonably be expected to have an IDRC Material Adverse Effect, including
writing down the value of capitalized software or inventory or writing off notes
or accounts receivable other than in the ordinary course of business consistent
with past practice;
(e) incurred or paid any material liabilities, other than
liabilities incurred or paid in the ordinary course of business consistent with
past practice, discharged or satisfied any material Lien, or failed to pay or
discharge when due any liabilities of which the failure to pay or discharge has
caused or would reasonably be expected to cause an IDRC Material Adverse Effect;
or
(f) taken or been subject to any other action or event that would
have required the consent of TeleSpectrum pursuant to Section 4.1 hereof.
SECTION 2.10 INDEBTEDNESS; ABSENCE OF UNDISCLOSED LIABILITIES. The IDRC
SCHEDULE discloses as of the date hereof all indebtedness for money borrowed by
IDRC or any IDRC Subsidiary including the payee, the original principal amount
of the loan, the current unpaid balance of the loan, the interest rate and the
maturity date. To the Knowledge of the Designated IDRC Officers, neither IDRC
nor any IDRC Subsidiaries have any material indebtedness, liability or
obligation of any kind (whether accrued, absolute, asserted or unasserted,
contingent or otherwise) except (i) as and to the extent reflected, reserved
against or otherwise disclosed on the IDRC Balance Sheet or the IDRC SCHEDULE,
(ii) for liabilities and obligations incurred subsequent to November 30, 1998 in
the ordinary course of business, and (iii) liabilities under any IDRC Contracts
(as defined in Section 2.12 hereof) specifically disclosed in the IDRC SCHEDULE
(or not required to be disclosed by the terms of Section 2.12).
SECTION 2.11 ASSETS. Except as described in the IDRC SCHEDULE, IDRC and
the IDRC Subsidiaries have good and marketable title to, or in the case of
leased assets, valid leasehold interests in, all their real and personal
properties and assets, including those assets and properties reflected in the
IDRC Balance Sheet in the amounts and categories reflected therein, free and
clear of all Liens, except (a) the lien of current taxes not yet due and
payable, (b) properties, interests, and assets disposed of or
<PAGE>
converted by IDRC or any IDRC Subsidiary since November 30, 1998 in the ordinary
course of business consistent with past practice, (c) such secured indebtedness
as is disclosed on the IDRC Balance Sheet covering the properties referred to
therein, and (d) Liens, if any, that do not materially detract from the value,
or interfere with the present or proposed use, of the properties subject thereto
("Permitted Liens"). All buildings, structures, facilities, equipment and other
- -----------------
items of tangible personal property reflected on the IDRC Balance Sheet or
acquired since the date thereof are in good operating condition and repair,
subject to normal wear and maintenance, are useable in the regular and ordinary
course of business of IDRC and the IDRC Subsidiaries and, except where the
failure to conform would not individually or in the aggregate result in an IDRC
Material Adverse Effect, conform to all applicable laws, statutes, ordinances,
codes, rules and regulations and Authorizations (hereinafter defined) relating
to their construction, use and operation.
SECTION 2.12 CONTRACTS.
(a) The IDRC SCHEDULE lists each written or oral contract,
agreement, arrangement, lease, instrument, mortgage or commitment ("Contract")
--------
to which IDRC or an IDRC Subsidiary is a party or may be bound or to which their
respective properties or assets may be subject ("IDRC Contract") (i) which is
-------------
for the sale of any goods or the provision of any services involving more than
$100,000 individually or in the aggregate with respect to any party or related
parties; (ii) which, if terminated, would result in an IDRC Material Adverse
Effect; (iii) which is with any present or former employee, for the employment
or retention as a consultant or independent contractor of any person, in each
case which (A) involves aggregate annual compensation of more than $100,000 or
(B) contains severance obligations; (iv) which is a severance agreement, program
or policy of IDRC or an IDRC Subsidiary with or relating to its employees; (v)
Contracts involving more than $100,000, the terms of which any of the rights or
obligations of a party thereto will be modified or altered as a result of the
transactions contemplated hereby or which contain change in control provisions;
(vi) Contracts involving more than $100,000 individually or in the aggregate
with respect to any party or related parties and containing a commission,
representative, franchise, distributorship, or sales agency arrangement; (vii)
which involves a license, or other arrangement which relates in whole or in part
to any software, patent, trademark, trade name, service mark or copyright which,
if terminated, would result in an IDRC Material Adverse Effect; (viii) which is
an arrangement limiting or restraining IDRC or any IDRC Subsidiary or any
successor thereto from engaging or competing in any manner or in any business;
or (ix) under which IDRC or any IDRC Subsidiary guarantees the payment or
performance by others or in any way is or will be liable with respect to
obligations of any other person, which obligations individually or in the
aggregate exceed $100,000.
(b) All IDRC Contracts are valid and binding and in full force and
effect as to IDRC on the date of this Agreement except to the extent they have
previously expired in accordance with their terms or except to the extent that
their invalidity would not have an IDRC Material Adverse Effect. None of IDRC,
the IDRC Subsidiaries nor, to IDRC's knowledge, any other parties, have violated
any provision of, or committed or failed to perform any act which with notice,
lapse of time or both would constitute a default under the provisions of, any
IDRC Contract, the termination or violation of which, or the default under
which, would reasonably be expected to have an IDRC Material Adverse Effect.
SECTION 2.1 INSURANCE. The IDRC SCHEDULE accurately sets forth as of
the day preceding the date hereof all policies of insurance, other than title
insurance policies, held by or on behalf of IDRC and all outstanding claims
under such policies. All such policies of insurance are in full force and
effect,
<PAGE>
all premiums required to be paid as of the date hereof have been paid in full,
and no notice of cancellation has been received.
SECTION 2.14 AUTHORIZATIONS; COMPLIANCE WITH LAW.
(a) IDRC and the IDRC Subsidiaries hold all licenses, franchises,
certificates, consents, permits, approvals, certificates of public convenience
and necessity, and authorizations ("Authorizations") from all Governmental
--------------
Entities and other persons which are necessary for the lawful conduct of their
respective businesses and their use and occupancy of their assets and properties
in the manner currently conducted, used and occupied, except where the failure
to hold any of the foregoing would not have an IDRC Material Adverse Effect.
All of such Authorizations are valid, in good standing and in full force and
effect and IDRC and the IDRC Subsidiaries have duly performed in all material
respects all of their respective obligations under such Authorizations. No
event has occurred with respect to the Authorizations which permits, or after
notice or lapse of time or both would permit, revocation or termination thereof
other than Authorizations, the termination or revocation of which would not have
an IDRC Material Adverse Effect or would result in any other material impairment
of the rights of the holder of any of the Authorizations, and no terminations
thereof have been, to the knowledge of IDRC, threatened.
(b) IDRC and each IDRC Subsidiary is in compliance with all
applicable laws, statutes, ordinances, codes, rules and regulations of any
Governmental Entities, except where such non-compliance would not have an IDRC
Material Adverse Effect, and IDRC has not received any notice from a
Governmental Entity since March 1, 1996 of any such non-compliance.
SECTION 2.15 TAXES.
(a) All federal, state, local and foreign tax returns, reports,
statements and other similar filings required to be filed by IDRC or the IDRC
Subsidiaries (the "Tax Returns") on or prior to the date hereof or with respect
-----------
to taxable periods ending on or prior to the date hereof with respect to any
federal, state, local or foreign taxes, assessments, deficiencies, fees and
other governmental charges or impositions (including all income tax,
unemployment compensation, social security, payroll, sales and use, excise,
privilege, property, ad valorem, transfer, franchise, license, school and any
other tax or similar governmental charge or imposition (including interest,
penalties or additions with respect thereto) under laws of the United States or
any state or municipal or political subdivision thereof or any foreign country
or political subdivision thereof ("Taxes") have been timely filed with the
-----
appropriate governmental agencies in all jurisdictions in which such Tax Returns
are required to be filed, and all such Tax Returns are true, correct and
complete in all material respects, to IDRC's knowledge.
(b) All Taxes, including those which are called for by the Tax
Returns, or heretofore or hereafter claimed to be due by any taxing authority
from IDRC and the IDRC Subsidiaries, have been fully paid or properly accrued.
The accruals for Taxes contained in the Balance Sheet are adequate to cover the
tax liabilities of IDRC and the IDRC Subsidiaries as of the Balance Sheet Date
and include adequate provision for all deferred taxes, and nothing has occurred
subsequent to that date to make any of such accruals inadequate with respect to
taxable periods (or partial periods) ending on or prior to the Closing Date.
<PAGE>
(c) Neither IDRC nor the IDRC Subsidiaries have received any notice
of assessment or proposed assessment in connection with any Taxes or Tax Returns
and, to IDRC's knowledge, there are not pending tax examinations of or tax
claims asserted against IDRC or the IDRC Subsidiaries or any of their respective
assets or properties. Neither IDRC nor any IDRC Subsidiary has extended, or
waived the application of, any statute of limitations of any jurisdiction
regarding the assessment or collection of any Taxes with respect to taxable
periods (or partial periods) ending on or prior to the Closing Date.
(d) There are no tax liens (other than any lien for current taxes
not yet due and payable) on any of the assets or properties of IDRC or the IDRC
Subsidiaries. IDRC has no knowledge of any basis for any additional assessment
of any Taxes. IDRC and the IDRC Subsidiaries have made all deposits required by
law to be made with respect to employees' withholding and other employment
taxes, including the portion of such deposits relating to taxes imposed upon
IDRC or the IDRC Subsidiaries with respect to taxable periods (or partial
periods) ending on or prior to the Closing Date.
SECTION 2.16 ABSENCE OF LITIGATION; CLAIMS. Except as set forth in the
IDRC SCHEDULE, there are no claims, actions, suits, proceedings or
investigations pending or, to the knowledge of IDRC, threatened against IDRC or
any of the IDRC Subsidiaries, or any properties or rights of IDRC or any of the
IDRC Subsidiaries, or, to IDRC's knowledge, with respect to which any director,
officer, employee or agent is or may be entitled to claim indemnification from
IDRC or any IDRC Subsidiary pursuant to IDRC's Certificate of Incorporation or
Bylaws or pursuant to any similar organizational documents of any IDRC
Subsidiary or under any indemnification agreements to which IDRC or any IDRC
Subsidiary is a party before any Governmental Entity, nor is there any
judgement, decree, injunction, rule or order of any Governmental Entity
outstanding against IDRC or any of the IDRC Subsidiaries.
SECTION 2.17 EMPLOYEE BENEFIT PLANS; EMPLOYMENT AGREEMENTS.
(a) The IDRC SCHEDULE lists all employee benefit plans (as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")), and all bonus, stock option, stock purchase, incentive,
-----
deferred compensation, supplemental retirement, severance and other similar
fringe or employee benefit plans, programs or arrangements, written or
otherwise, for the benefit of, or relating to, any current or former employee of
IDRC, any trade or business (whether or not incorporated) which is a member of a
controlled group including IDRC or which is under common control with IDRC (an
"ERISA Affiliate") the meaning of Section 414 of the Code, or any IDRC
---------------
Subsidiary, as well as each plan with respect to which IDRC, an ERISA Affiliate
or an IDRC Subsidiary could incur liability under Section 4069 (if such plan has
been or were terminated) or Section 4212(c) of ERISA (together, the "Employee
--------
Plans"), excluding Employee Plans under which IDRC has no remaining obligations
- -----
and any of the foregoing that are maintained by IDRC under the laws of any
foreign jurisdiction. With respect to each Employee Plan, as applicable, a copy
of (i) each such written Employee Plan (other than those referred to in Section
4(b)(4) of ERISA), together with all amendments, trust agreements, insurance
policies and service agreements; (ii) the three most recently filed Forms 5500
or 5500 C/R and any financial statements attached thereto; (iii) the most recent
IRS determination letter; (iv) the most recent summary plan description; (v) all
reports submitted within the preceding three years by third-party
administrators, actuaries, investment managers, consultants, or other
independent contractors, and (vi) all notices that were issued within the
preceding three years by the IRS, Department of Labor, the Pension Benefit
Guaranty Corporation, or any other Governmental Entity have been, or, pursuant
to Section (f), will be, provided to TeleSpectrum.
<PAGE>
(b) Except as set forth in the IDRC SCHEDULE, (i) none of the Employee
Plans promises or provides health or other benefits after an employee's or
former employee's retirement or other termination of employment except as
required by Section 4980B of the Code and none of the Employee Plans is a
"multiemployer plan" as such term is defined in Section 3(37) of ERISA; (ii)
there has not been any breach of any fiduciary duty, as described in Section 404
of ERISA, or no "prohibited transaction", as such term is defined in Section 406
of ERISA or Section 4975 of the Code, with respect to any Employee Plan, which
could result in any material liability of IDRC, any ERISA Affiliate or any of
the IDRC Subsidiaries; (iii) all Employee Plans are in compliance in all
material respects with the requirements prescribed by any and all statutes
(including ERISA and the Code), orders, or governmental rules and regulations
currently in effect with respect thereto (including all applicable requirements
for notification to participants or the Department of Labor, IRS or Secretary of
the Treasury), all Employee Plans have in all material respects been operated at
all times in accordance with their terms and with ERISA and the Code, and IDRC
and each of the ERISA Affiliates and the IDRC Subsidiaries have performed all
material obligations required to be performed by them under, are not in any
material respect in default under or violation of, and have no knowledge of any
default or violation by any other party to, any of the Employee Plans; (iv) each
Employee Plan intended to qualify under Section 401(a) of the Code and each
trust intended to qualify under Section 501(a) of the Code is the subject of a
favorable determination letter from the IRS, and nothing has occurred which may
reasonably be expected to impair such determination; (v) all contributions
required to be made by IDRC, an ERISA Affiliate or an IDRC Subsidiary to any
Employee Plan pursuant to Section 412 of the Code, or the terms of the Employee
Plan or any collective bargaining agreement, have been made on or before their
due dates and all benefits accrued under a funded or unfunded Employee Plan will
have been paid, accrued or otherwise adequately reserved in accordance with GAAP
as of the IDRC Balance Sheet date and all monies withheld from employee
paychecks with respect to the Employee Plans have been transferred to the
appropriate Employee Plan in a timely manner as required by applicable law; (vi)
with respect to each Employee Plan, no "reportable event" within the meaning of
Section 4043 of ERISA (excluding any such event for which the 30 day notice
requirement has been waived under the regulations to Section 4043 of ERISA) nor
any event described in Section 4062, 4063, 4604 or 4041 of ERISA has occurred;
and (vii) neither IDRC nor any ERISA Affiliate has incurred, nor reasonably
expects to incur, any liability under Title IV of ERISA (other than liability
for premium payments to the Pension Benefit Guaranty Corporation arising in the
ordinary course); (viii) neither IDRC nor any ERISA Affiliate has incurred any
material liability for any excise, income or other taxes or penalties with
respect to any Employee Plan, and no event has occurred and no circumstance
exists that could give rise to any such liability; (ix) there are no pending or
threatened claims against any Employee Plan (other than routine claims for
benefits) or against any fiduciary of an Employee Plan with respect to such
plan, nor, to the knowledge of IDRC, is there any basis for such a claim; (x) no
Employee Plan is presently under audit or examination (nor has notice been
received of a potential audit or examination) by any Governmental Entity, and no
matters are pending with respect to any Employee Plan under any governmental
corrective or remedial program; (xi) no Employee Plan contains any provision or
is subject to any law that would prohibit the transaction contemplated by this
Agreement or that would give rise to any vesting of benefits, severance,
termination or other payments or liabilities as a result of the transactions
contemplated by this Agreement; and (xii) IDRC has not made a plan or
commitment, whether or not legally enforceable, to create any additional
Employee Plan or to modify or change any existing Employee Plan and all Employee
Plans may be amended or terminated without penalty at any time on or after the
Closing; provided that, for purposes of Clause (xii), vesting under the IDRC
401(k) Plan and the IDRC 1996 Stock Option Plan shall not be deemed a penalty.
<PAGE>
(c) The IDRC SCHEDULE sets forth, or IDRC has provided, a true and
complete list of each current or former employee, officer or director of IDRC or
any of the IDRC Subsidiaries who holds any option to purchase IDRC Common Stock
as of the date hereof, together with the number of shares of IDRC Common Stock
which are subject to such option, the date of grant of such option, the extent
to which such option is vested (or will become vested within six months from the
date hereof, or as a result of, the Merger), the option price of such option (to
the extent determined as of the date hereof), whether such option is intended to
qualify as an incentive stock option within the meaning of Section 422(b) of the
Code (an "ISO"), and the expiration date of such option. The IDRC SCHEDULE
---
also sets forth the total number of such ISOs and such nonqualified options.
(d) Any amount that could be received (whether in cash or property or
the vesting of property) as a result of any of the transactions contemplated by
this Agreement by any employee, officer or director of IDRC or any of its
affiliates who is a "disqualified individual" (as such term is defined in
Proposed Treasury Regulation Section 1.280G-1) under any employment, severance
or termination agreement, other compensation arrangement or Employee Plan
currently in effect would not be characterized as an "excess parachute payment"
(as such term is defined in Section 280G of the Code) and no bonus compensation
has been declared or paid in contemplation of the transactions contemplated by
this Agreement.
(e) Any person classified by IDRC, an ERISA Affiliate or an IDRC
Subsidiary as an independent contractor satisfies and has at all times satisfied
the requirements of applicable law to be so classified, each such person's
compensation has been fully and accurately reported on IRS Form 1099 and there
are no obligations to provide benefits with respect to such person or any other
person providing services through a leasing organization under the Employee
Plans or otherwise.
SECTION 2.18 CUSTOMERS. To the knowledge of IDRC, IDRC currently has
good working relationships with all of its significant customers. The IDRC
SCHEDULE contains, with respect to each of the years ended December 31, 1996 and
1997 and the eleven months ended November 30, 1998, a list of the names of the
ten customers that were the largest dollar volume customers of products or
services sold or provided by IDRC for each such year or period. Except as set
forth in the IDRC SCHEDULE, none of such customers that are included in the list
of top ten customers for the 11-month period ended November 30, 1998 has given
IDRC notice terminating or canceling or, to the knowledge of IDRC, has
threatened to (i) terminate or cancel any Contract with IDRC or (ii)
substantially reduce the amount of business conducted with IDRC.
SECTION 2.19 LABOR MATTERS. There are no controversies pending or, to
the knowledge of IDRC, threatened, between IDRC or any of the IDRC Subsidiaries
or any of their respective employees, which controversies if decided adversely
to IDRC would have an IDRC Material Adverse Effect. Neither IDRC nor any of the
IDRC Subsidiaries is party to any collective bargaining agreement or other labor
agreement with any union or labor organization and no union or labor
organization has been recognized by IDRC nor or any of the IDRC Subsidiaries as
a bargaining representative for employees of IDRC or any of the IDRC
Subsidiaries. To IDRC's knowledge, there are no activities or proceedings of
any labor organization (or representative thereof) or employee group to organize
any of IDRC's employees. In addition, there is no strike, picketing or work
stoppage by, or any lockout of, employees of IDRC or the IDRC Subsidiaries or
any material dispute, slowdown or labor disturbance pending or, to the knowledge
of IDRC, threatened, against or involving IDRC or any of the IDRC Subsidiaries.
<PAGE>
SECTION 2.20 ENVIRONMENTAL MATTERS. To IDRC's knowledge, as of the date
of this Agreement, neither IDRC nor any IDRC Subsidiary or any current or prior
owner of any property leased or controlled by IDRC has received any written or
oral notice from a Governmental Entity or any other person that alleges that
IDRC, any IDRC Subsidiary or such current or prior owner is not, or has not
been, in compliance with any Environmental Law. To IDRC's knowledge, all
property that is leased to, controlled by or used by IDRC or any IDRC
Subsidiary, is free of any material environmental contamination of any nature.
For purposes of this Section 2.20: (i) "Environmental Law" means any federal,
state, local or foreign statute, law, rule or regulation relating to pollution
or protection of human health or the environment (including ambient air, surface
water, ground water, land surface or subsurface strata), including any law or
regulation relating to emissions, discharges, releases or threatened releases of
Materials of Environmental Concern, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Materials of Environmental Concern; and (ii) "Materials of
Environmental Concern" include chemicals, pollutants, contaminants, wastes,
toxic substances, petroleum and petroleum products and any other substance that
is now or hereafter regulated by any Environmental Law or that is otherwise a
danger to health, reproduction or the environment.
SECTION 2.21 INTELLECTUAL PROPERTY. Except as set forth in the IDRC
SCHEDULE, neither IDRC nor any IDRC Subsidiary has any registered copyrights,
patents, trademarks or applications for any registered copyrights, patents or
trademarks. IDRC possesses working copies of all software and firmware as are
necessary for or otherwise used in the current conduct of IDRC or any IDRC
Subsidiary, together with copies of all related manuals and other documentation.
All software, firmware, trademarks, trade secrets, and proprietary technologies,
know-how, and all other inventions, discoveries, improvements, processes and
formulas (secret or otherwise) related to IDRC's and any related documentation
thereto (the "Intellectual Properties") are owned or licensed by IDRC, and no
-----------------------
present or former employee of, or consultant to, IDRC has any proprietary,
commercial or other interest, direct or indirect, in the Intellectual Properties
owned or leased by IDRC, other than licensors of any such Intellectual
Properties. In conducting their respective business as presently conducted,
neither IDRC nor any IDRC Subsidiary is infringing upon or unlawfully or
wrongfully using any patent, trademark, trade name, service mark, copyright or
any other form of intellectual property or trade secret, owned or claimed by
another. Neither IDRC nor any IDRC Subsidiary is in default under, nor has it
received any notice of any claim of infringement or any other claim or
proceeding relating to, any such patent, trademark, trade name, service mark,
copyright, trade secret or any other form of intellectual property or any
agreement relating thereto.
SECTION 2.22 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. The
information supplied by IDRC for inclusion in the registration statement of
TeleSpectrum on Form S-4 pursuant to which shares of TeleSpectrum Common Stock
will be registered with the SEC (the "Registration Statement") shall not
----------------------
contain, at the time the Registration Statement is declared effective by the
SEC, any untrue statement of a material fact or omit to state any material fact
required to be stated in the Registration Statement or necessary in order to
make the statements in the Registration Statement not misleading. The
information supplied by IDRC for inclusion in the proxy statement/prospectus
(the "Proxy Statement") to be sent to the stockholders of IDRC in connection
---------------
with the special meeting of IDRC's stockholders to consider this Agreement (the
"IDRC Stockholders Meeting"), or alternatively in connection with the
-------------------------
solicitation of consents by the stockholders of IDRC in lieu of a special
meeting (the "IDRC Consent"), and to the stockholders of TeleSpectrum in
------------
connection with the special meeting of TeleSpectrum's stockholders to consider
this Agreement (the "TeleSpectrum Stockholders Meeting"),
---------------------------------
<PAGE>
shall not, at the time the Proxy Statement is first mailed to stockholders, at
the time of the IDRC Stockholders Meeting or the IDRC Consent, or at the time of
TeleSpectrum Stockholders Meeting, contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
made, in light of the circumstances under which they were made, not misleading
or omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the IDRC
Stockholders Meeting or consents for the IDRC Consent which has become false or
misleading. If at any time prior to the IDRC Stockholders Meeting, the IDRC
Consent or the TeleSpectrum Stockholders Meeting, any event relating to IDRC or
any of its affiliates should be discovered by IDRC which should be set forth in
an amendment to the Registration Statement or a supplement to the Proxy
Statement, IDRC shall promptly inform TeleSpectrum.
SECTION 2.23 TAX MATTERS. Neither IDRC nor, to the knowledge of IDRC,
any of its affiliates has taken or agreed to take any action that would prevent
the Merger from constituting a reorganization qualifying under the provisions of
Section 368(a) of the Code or make untrue any representation or warranty
contained in IDRC Tax Certificate (as defined in Section 4.14 hereof).
SECTION 2.24 AFFILIATES. Except for the persons listed in the IDRC
SCHEDULE there are no persons who, to the knowledge of IDRC, may be deemed to be
affiliates of IDRC under Rule 1-02 of Regulation S-X of the SEC and Rule 145
under the Securities Act.
SECTION 2.25 BOARD ACTION. The Board of Directors of IDRC has
unanimously determined that the transactions contemplated by this Agreement are
in the best interests of IDRC and its stockholders and has resolved to recommend
to such stockholders that they vote in favor thereof. IDRC has been advised by
each of its affiliates, directors and executive officers that each such person
intends to vote its or his shares of IDRC Common Stock in favor of the approval
and adoption of this Agreement.
SECTION 2.26 BROKERS AND FINDERS. Neither IDRC nor any IDRC Subsidiary
nor any of their respective officers, directors or employees has employed any
broker or finder or incurred any liability for any brokerage fees, commissions
or finder's fees in connection with the transactions contemplated herein.
SECTION 2.27 ADEQUACY OF DISCLOSURE. IDRC has made available to
TeleSpectrum copies of all documents listed or referred to in the IDRC SCHEDULE
hereto or referred to herein. Such copies are true and complete and include all
amendments, supplements and modifications thereto or waivers currently in effect
thereunder. No representation or warranty by IDRC in this Agreement nor the
IDRC SCHEDULE contains or will contain any untrue statement of a material fact
or omits or will omit to state a material fact required to be stated herein or
therein or necessary to make any statement herein or therein not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TELESPECTRUM
TeleSpectrum represents and warrants to IDRC that, except as set forth on a
Disclosure Schedule delivered by TeleSpectrum concurrently with the execution
and delivery of this Agreement (the "TeleSpectrum Schedule"):
---------------------
<PAGE>
SECTION 3.1 ORGANIZATION AND POWERS. TeleSpectrum is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. TeleSpectrum has all requisite corporate power and authority to
carry on its business as it has been and is now being conducted and to own,
lease and operate the properties and assets used in connection therewith. As
used in this Agreement, "TeleSpectrum Material Adverse Effect" shall mean any
------------------------------------
fact, condition, event, development or occurrence which, individually or when
taken together with all other such facts, conditions, events, developments or
occurrences, would reasonably be expected to have a material adverse effect on
the financial condition, operating results or business of TeleSpectrum and the
TeleSpectrum Subsidiaries (hereinafter defined), taken as a whole.
SECTION 3.2 SUBSIDIARIES. The TELESPECTRUM SCHEDULE lists each
Subsidiary and Joint Venture of TeleSpectrum, the jurisdiction of its
organization and the amount of its securities outstanding and the owners
thereof. Each Subsidiary of TeleSpectrum (the "TeleSpectrum Subsidiaries") is
-------------------------
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Each TeleSpectrum Subsidiary has all requisite
power and authority to carry on its business as it has been and is now being
conducted and to own, lease and operate the assets and properties used in
connection therewith. Each TeleSpectrum Subsidiary is duly qualified as a
foreign corporation authorized to do business and is in good standing in every
jurisdiction in which such qualification is required or good standing is
recognized, all of which jurisdictions are disclosed in the TELESPECTRUM
SCHEDULE, except where the failure to be so qualified would not have a
TeleSpectrum Material Adverse Effect. Except as set forth in the TELESPECTRUM
SCHEDULE, all issued and outstanding shares of capital stock of each
TeleSpectrum Subsidiary, are owned by TeleSpectrum free and clear of Liens.
There are no existing subscriptions, options, warrants, convertible securities,
calls, commitments, agreements, conversion rights or other rights of any
character (contingent or otherwise) calling for or requiring the issuance,
transfer, sale or other disposition of any shares of the capital stock of any
TeleSpectrum Subsidiary, or calling for or requiring the issuance of any
securities or rights convertible into or exchangeable for shares of capital
stock of any TeleSpectrum Subsidiary, nor is TeleSpectrum or any TeleSpectrum
Subsidiary subject to any obligation (contingent or otherwise) to repurchase,
redeem or otherwise acquire shares of capital stock of any TeleSpectrum
Subsidiary, in any case except as set forth in the TELESPECTRUM SCHEDULE.
Except for the TeleSpectrum Subsidiaries and the Joint Ventures of TeleSpectrum
or as set forth in the TELESPECTRUM SCHEDULE, neither TeleSpectrum nor any
TeleSpectrum Subsidiary directly or indirectly (i) owns or controls any shares
of any corporation nor has any voting securities of, or economic interest in,
either of record beneficially or equitably, in any association, partnership,
limited liability company, joint venture or other legal entity, or (ii) is a
general partner of any partnership.
SECTION 3.3 CAPITAL STOCK. As of the date hereof, TeleSpectrum has
authorized capital stock consisting of 200,000,000 shares of TeleSpectrum
Common Stock and 5,000,000 shares of Preferred Stock, par value $.01 per share
("TeleSpectrum Preferred Stock"). As of the date hereof: (i) 25,771,449 shares
----------------------------
of TeleSpectrum Common Stock are issued and outstanding, (ii) no shares of
TeleSpectrum Preferred Stock are issued and outstanding, (iii) no shares of
TeleSpectrum Common Stock or TeleSpectrum Preferred Stock are held as treasury
shares, (iv) 3,863,654 shares of the TeleSpectrum Common Stock are underlying
outstanding stock options granted under the TeleSpectrum's 1996 Equity
Compensation Plan (the "TeleSpectrum Stock Plan"), (v) 236,346 shares of the
-----------------------
TeleSpectrum Common Stock were reserved for future issuance of options to be
granted in the future under the TeleSpectrum Stock Plan, and (vi) 2,426,733
shares of TeleSpectrum Common Stock were reserved for issuance upon the exercise
of outstanding warrants and options not granted under the TeleSpectrum Stock
Plan. Since
<PAGE>
September 30, 1998, (i) no additional shares of capital stock have been reserved
for issuance by TeleSpectrum and (ii) the only issuances of shares of capital
stock of TeleSpectrum have been issuances of TeleSpectrum Common Stock upon the
exercise of outstanding stock options or warrants. All of the issued and
outstanding shares have been duly authorized and are validly issued and
outstanding, fully paid and nonassessable, and were issued in compliance with
all applicable Federal and state securities laws. No shares of capital stock
issued by TeleSpectrum are or were, at the time of their issuance subject to
preemptive rights. There are no existing subscriptions, options, warrants,
calls, commitments, agreements, conversion rights or other rights of any
character (contingent or otherwise) to purchase or otherwise acquire from
TeleSpectrum at any time, or upon the happening of any stated event, any shares
of the capital stock of TeleSpectrum whether or not presently issued or
outstanding, except as set forth in the TELESPECTRUM SCHEDULE or as disclosed in
this Section 3.3. All of the Merger Shares and Warrant Shares have been duly
authorized and, upon issuance in accordance with this Agreement and the terms of
the Warrants, will be validly issued, fully paid and nonassessable and will be
issued in compliance with all federal and state securities laws. All of the
Merger Shares and upon issuance, the Warrant Shares, will be freely tradable
except for restrictions that may be imposed on Affiliates (as such term is
defined in Rule 144 under the Securities Act) by Rules 144 or 145 of the
Securities Act or the IDRC Stockholder Support Agreement.
SECTION 3.4 CERTIFICATE OF INCORPORATION, BYLAWS, MINUTE BOOKS AND
RECORDS. The copies of the Certificate of Incorporation and all amendments
thereto and of the Bylaws, as amended, of TeleSpectrum and the TeleSpectrum
Subsidiaries which have been delivered to IDRC are true, correct and complete
copies thereof as in effect on the date hereof. The minute books of
TeleSpectrum and the TeleSpectrum Subsidiaries which have been made available
for inspection contain minutes, which are accurate and complete in all material
respects, of all meetings and consents in lieu of meetings of the Board of
Directors (and any committee thereof) and of the stockholders of TeleSpectrum
and the TeleSpectrum Subsidiaries since the respective dates of incorporation.
SECTION 3.5 AUTHORITY; BINDING EFFECT. TeleSpectrum has all requisite
corporate power and authority to execute and deliver this Agreement and, subject
to approval and adoption of this Agreement and approval of the Merger by a
majority of the shares of TeleSpectrum Common Stock of record outstanding on the
record date for the TeleSpectrum Stockholders' Meeting (the "Required
--------
TeleSpectrum Stockholder Approval"), to consummate the transactions contemplated
- ---------------------------------
hereby. All necessary action, corporate or otherwise, required to have been
taken by or on behalf of TeleSpectrum by applicable law and by TeleSpectrum's
Certificate of Incorporation and Bylaws to authorize (i) the approval, execution
and delivery by TeleSpectrum of this Agreement and (ii) the performance of
TeleSpectrum's obligations under this Agreement and, subject to obtaining the
Required TeleSpectrum Stockholder Approval, the consummation of the transactions
contemplated hereby has been taken or will have been taken prior to the Closing.
This Agreement constitutes a valid and binding agreement of TeleSpectrum,
enforceable against TeleSpectrum in accordance with its terms.
SECTION 3.6 CONFLICT WITH OTHER AGREEMENTS; APPROVALS. The execution
and delivery of this Agreement by TeleSpectrum does not, and the consummation of
the transactions contemplated hereby will not, (i) violate or conflict with the
Certificate of Incorporation or Bylaws of TeleSpectrum or the comparable
organizational documents of any TeleSpectrum Subsidiary, (ii) constitute a
breach or default (or an event that with notice or lapse of time or both would
become a breach or default) or give rise to any Lien, third party right of
termination, cancellation, material modification or acceleration, or loss of any
benefit, under any contract to which TeleSpectrum or any TeleSpectrum Subsidiary
is a party or by
<PAGE>
which it is bound, or (iii) subject to the consents, approvals, orders,
authorizations, filings, declarations and registrations specified in Section 3.7
or in the TELESPECTRUM SCHEDULE in response thereto, conflict with or result in
a violation of any permit, concession, franchise or license or any law, rule or
regulation applicable to TeleSpectrum or any of the TeleSpectrum Subsidiaries or
any of their properties or assets, except, in the case of clauses (ii) and
(iii), for any such breaches, defaults, Liens, third party rights,
cancellations, modifications, accelerations or losses of benefits, conflicts or
violations which would not have a TeleSpectrum Material Adverse Effect and do
not impair the ability of the TeleSpectrum to perform its obligations under this
Agreement or prevent or delay the consummation of any of the transactions
contemplated hereby.
SECTION 3.7 GOVERNMENTAL CONSENTS AND APPROVALS. Except as set forth in
the TELESPECTRUM SCHEDULE, neither the execution and delivery of this Agreement
by TeleSpectrum nor the consummation by TeleSpectrum of the transactions
contemplated hereby will require any consent, approval, order, authorization, or
permit of, or filing with or notification to, any Governmental Entity, except
(a) the filing of the Registration Statement with the SEC in accordance with
the Securities Act and the entry of an order by the SEC permitting such
Registration Statement to become effective, and compliance with applicable state
securities laws, (b) compliance with applicable securities laws, (c) the filing
of the Proxy Statement and related proxy materials with the SEC in accordance
with the Exchange Act, (d) the filing of a premerger notification report form
and expiration or termination of the waiting period under the HSR Act, (e) the
filing and recording of the Certificate of Merger with the Delaware Secretary of
State in accordance with the DGCL, and (f) such other consents, approvals,
orders, authorizations, registrations, declarations and filings which if not
made or obtained, would have a TeleSpectrum Material Adverse Effect.
SECTION 3.8 SEC REPORTS. TeleSpectrum has filed all required forms,
reports and documents with the SEC since September 30, 1996 (collectively, the
"TeleSpectrum's SEC Reports"), including TeleSpectrum's Annual Report on Form
- ---------------------------
10-K for the year ended December 31, 1997 and TeleSpectrum's Quarterly Reports
on Form 10-Q for the fiscal quarters ended March 31, 1998, June 30, 1998 and
September 30, 1998. TeleSpectrum's SEC Reports have complied in all material
respects with all applicable requirements of the Securities Act and the Exchange
Act. As of their respective dates, none of TeleSpectrum's SEC Reports,
including any financial statements or schedules included or incorporated by
reference therein, contained any untrue statement of a material fact or omitted
to state a material fact required to be stated or incorporated by reference
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. TeleSpectrum has
heretofore delivered or made available to IDRC, in the form filed with the SEC,
all of TeleSpectrum's SEC Reports.
SECTION 3.9 FINANCIAL STATEMENTS. The (a) consolidated balance sheets
of TeleSpectrum and the TeleSpectrum Subsidiaries at 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, together with the notes thereto,
audited by Arthur Andersen LLP; and (b) unaudited consolidated balance sheets of
TeleSpectrum and the TeleSpectrum Subsidiaries at September 30, 1998 and 1997
and the related consolidated statements of operations, stockholders' equity and
cash flows for the nine-month periods ended September 30, 1998 and 1997, have
been prepared in accordance with GAAP consistently applied throughout the
periods involved (except as may be indicated in the notes therein). Such
balance sheets, including the related notes, fairly present, in all material
respects, the consolidated financial position, assets and liabilities (whether
<PAGE>
accrued, absolute, contingent or otherwise) of TeleSpectrum and the TeleSpectrum
Subsidiaries at the dates indicated and such consolidated statements of
operations, stockholders' equity and cash flows fairly present the consolidated
results of operations, stockholders' equity and cash flows of TeleSpectrum and
the TeleSpectrum Subsidiaries for the periods indicated (except that for the
absence of notes with respect to the unaudited financial statements). The
unaudited consolidated financial statements as of and for the nine-month period
ending September 30, 1998 contain all adjustments, which are solely of a normal
recurring nature, necessary to present, in all material respects, fairly the
consolidated financial position at September 30, 1998, and the results of
operations, stockholders' equity and cash flows for the nine-month period then
ended. (The unaudited consolidated balance sheet of TeleSpectrum and the
TeleSpectrum Subsidiaries at September 30, 1998 described above is referred to
herein as the "TeleSpectrum Balance Sheet.")
--------------------------
SECTION 3.10 ABSENCE OF CERTAIN CHANGES. Except as described in the
TELESPECTRUM SCHEDULE, since September 30, 1998, TeleSpectrum and the
TeleSpectrum Subsidiaries have conducted their business solely in the ordinary
course consistent with past practice. Except as otherwise disclosed in the
TELESPECTRUM SCHEDULE or in TeleSpectrum's SEC Reports, since September 30,
1998, TeleSpectrum and the TeleSpectrum Subsidiaries have not
(a) suffered any TeleSpectrum Material Adverse Effect;
(b) been subject to any other events or conditions of any
character that would materially impair the ability of TeleSpectrum to perform
its obligations under this Agreement or prevent or delay the consummation of any
of the transactions contemplated hereby;
(c) made any material change to their respective accounting
methods, principles or practices, except as required by subsequent changes in
GAAP;
(d) been subject to any revaluation of any assets of
TeleSpectrum or any of the TeleSpectrum Subsidiaries that, individually or in
the aggregate has had, or would reasonably be expected to have a TeleSpectrum
Material Adverse Effect, including writing down the value of capitalized
software or inventory or writing off notes or accounts receivable other than in
the ordinary course of business consistent with past practice;
(e) incurred or paid any material liabilities, other than
liabilities incurred or paid in the ordinary course of business consistent with
past practice, discharged or satisfied any material Lien, or failed to pay or
discharge when due any liabilities of which the failure to pay or discharge has
caused or would reasonably be expected to cause a TeleSpectrum Material Adverse
Effect; or
(f) taken or been subject to any other action or event that
would have required the consent of IDRC pursuant to Section 4.2 hereof.
SECTION 3.11 INDEBTEDNESS; ABSENCE OF UNDISCLOSED LIABILITIES. The
TELESPECTRUM SCHEDULE discloses as of the date hereof all indebtedness for money
borrowed of TeleSpectrum or any TeleSpectrum Subsidiary including the payee,
the original principal amount of the loan, the current unpaid balance of the
loan, the interest rate and the maturity date. Neither TeleSpectrum nor any
TeleSpectrum Subsidiaries have any material indebtedness, liability or
obligation of any kind (whether known or unknown, accrued, absolute, asserted or
unasserted, contingent or otherwise) except (i) as and
<PAGE>
to the extent reflected, reserved against or otherwise disclosed on the
TeleSpectrum Balance Sheet or the TELESPECTRUM SCHEDULE, (ii) for liabilities
and obligations incurred subsequent to September 30, 1998 in the ordinary course
of business, and (iii) liabilities under any Contracts of TeleSpectrum.
SECTION 3.12 CONTRACTS. All contracts, documents, instruments or
arrangements that are of a nature required to be filed as an exhibit to the
TeleSpectrum SEC Reports under the Exchange Act (the "TeleSpectrum SEC
----------------
Contracts") have been filed as an exhibit thereto. All TeleSpectrum SEC
Contracts are valid and binding obligations of TeleSpectrum enforceable against
TeleSpectrum in accordance with their terms. None of TeleSpectrum, the
TeleSpectrum Subsidiaries nor, to TeleSpectrum's knowledge, any other parties,
have violated any provisions of, or committed or failed to perform any act which
with notice, lapse of time or both would constitute a default under the
provisions of, any TeleSpectrum SEC Contract, the termination or violation of
which, or the default under which, would reasonably be expected to have a
TeleSpectrum Material Adverse Effect.
SECTION 3.13 ABSENCE OF LITIGATION; CLAIMS. Except as set forth in the
TELESPECTRUM SCHEDULE, there are no claims, actions, suits, proceedings or
investigations pending or, to the knowledge of TeleSpectrum, threatened against
TeleSpectrum or any of the TeleSpectrum Subsidiaries, or any properties or
rights of TeleSpectrum or any of the TeleSpectrum Subsidiaries, or with respect
to which any director, officer, employee or agent is or may be entitled to claim
indemnification from TeleSpectrum or any TeleSpectrum Subsidiary pursuant to
TeleSpectrum's certificate of incorporation or Bylaws or pursuant to any similar
organizational documents of any TeleSpectrum Subsidiary or under any
indemnification agreements to which TeleSpectrum or any TeleSpectrum Subsidiary
is a party before any Governmental Entity, nor is there any judgement, decree,
injunction, rule or order of any Governmental Entity outstanding against
TeleSpectrum or any of the TeleSpectrum Subsidiaries.
SECTION 3.14 TAX MATTERS. The representations and warranties contained
in the TeleSpectrum Tax Certificate (as defined in Section 4.14 hereof) are true
and correct in all material respects. Neither TeleSpectrum nor, to the
knowledge of TeleSpectrum, any of its affiliates has taken or agreed to take any
action that would prevent the Merger from constituting a reorganization
qualifying under the provisions of Section 368(a) of the Code or make untrue any
presentation or warranty contained in the TeleSpectrum Tax Certificate.
SECTION 3.15 AFFILIATES. Except for the persons listed in the
TELESPECTRUM SCHEDULE, there are no persons who, to the knowledge of
TeleSpectrum, may be deemed to be affiliates of TeleSpectrum under Rule 1-02 of
Regulation S-X of the SEC.
SECTION 3.16 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. The
information supplied by TeleSpectrum for inclusion in the Registration Statement
shall not contain, at the time the Registration Statement is declared effective
by the SEC, any untrue statement of a material fact or omit to state any
material fact required to be stated in the Registration Statement or necessary
in order to make the statements in the Registration Statement not misleading.
The information supplied by TeleSpectrum for inclusion in the Proxy Statement to
be sent to the stockholders of TeleSpectrum in connection with the TeleSpectrum
Stockholders Meeting shall not, at the time the Proxy Statement is first mailed
to stockholders or at the time of the TeleSpectrum Stockholders Meeting, contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading or omit to state any material fact
<PAGE>
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the TeleSpectrum Stockholders Meeting which has
become false or misleading.
SECTION 3.17 STATE TAKEOVER STATUTES. The TeleSpectrum Board has
approved the Merger and this Agreement and such approval is sufficient to render
inapplicable to the Merger and this Agreement the provisions of Section 203 of
the DGCL to the extent, if any, that such section is applicable to the Merger
and this Agreement. To TeleSpectrum's knowledge, no other state takeover
statute or similar statute or regulation applies to or purports to apply to the
Merger or this Agreement.
SECTION 3.18 BOARD ACTION. The Board of Directors of TeleSpectrum, has
unanimously determined that the transactions contemplated by this Agreement are
in the best interests of TeleSpectrum and its stockholders and has resolved to
recommend to such stockholders that they vote in favor thereof. TeleSpectrum
represents and warrants that it has been advised by each of its directors and
executive officers that each such person intends to vote his shares of
TeleSpectrum Common Stock in favor of the approval and adoption of this
Agreement.
SECTION 3.19 BROKERS AND FINDERS. Neither TeleSpectrum nor any of its
respective officers, directors or employees has engaged any broker or finder or
incurred any liability for any brokerage fees, commissions or finder's fees in
connection with the transactions contemplated herein, except that TeleSpectrum
has retained J. P. Morgan Securities, Inc. as its financial advisor pursuant to
the terms of an engagement letter, a copy of which has previously been furnished
to IDRC.
SECTION 3.20 ADEQUACY OF DISCLOSURE. TeleSpectrum has made available to
IDRC copies of all documents listed or referred to in the TELESPECTRUM SCHEDULE
hereto or referred to herein. Such copies are true and complete and include all
amendments, supplements and modifications thereto or waivers currently in effect
thereunder. No representation or warranty by TeleSpectrum in this Agreement nor
the TELESPECTRUM SCHEDULE contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact required to be
stated herein or therein or necessary to make any statement herein or therein
not misleading.
ARTICLE IV
COVENANTS
SECTION 4.1 CONDUCT OF IDRC'S BUSINESS. IDRC covenants and agrees that,
between the date of this Agreement and the Effective Time, except to the extent
(i) TeleSpectrum shall otherwise consent in writing, (ii) as otherwise expressly
set forth in the IDRC SCHEDULE, or (iii) as may be expressly contemplated by
this Agreement, the business of IDRC and the IDRC Subsidiaries shall be
conducted only in, and such entities shall not take any action except in, the
ordinary course of business and in a manner consistent with past practice; and
IDRC and the IDRC Subsidiaries will use their commercially reasonable efforts to
preserve substantially intact their business organizations, to keep available
the services of their present officers, employees and consultants that are
integral to the operation of their businesses as presently conducted and to
preserve their present relationships with customers, suppliers and other persons
with which IDRC and the IDRC Subsidiaries have significant business relations.
Without limiting the generality of the foregoing, except to the extent (i)
TeleSpectrum shall otherwise consent in writing, (ii) as otherwise expressly set
forth in the IDRC
<PAGE>
SCHEDULE, or (iii) as may be expressly contemplated by this Agreement, IDRC will
not, and will not permit any of the IDRC Subsidiaries, directly or indirectly,
to:
(a) (i) amend or propose to amend its Certificate of Incorporation or
ByLaws; (ii) split, combine or reclassify any outstanding shares of its capital
stock, or declare, set aside or pay any dividend payable in cash, stock,
property or otherwise with respect to such shares; (iii) redeem, purchase,
acquire or offer to acquire any shares of its capital stock; (iv) issue, sell,
pledge or dispose of, or agree to issue, sell, pledge or dispose of, any
additional shares of, or securities convertible or exchangeable for, or any
options, warrants or rights of any kind to acquire any shares of, its capital
stock, or of any class or other property or assets whether pursuant to any
rights agreement, stock option plans described in the IDRC SCHEDULE or
otherwise, provided that IDRC may issue shares of IDRC Common Stock pursuant to
options and warrants outstanding as of the date of this Agreement or issued
after the date of this Agreement and prior to the Effective Time upon the prior
written consent of TeleSpectrum, and grant additional stock options in the
ordinary course of business and consistent with past practice; (v) accelerate,
amend or change the period of exerciseability of options or restricted stock
granted under any IDRC Employee Plans or authorize cash payments in exchange for
any options granted under any of such plans except as required by the terms of
such plans or any related agreements in effect as of the date of this Agreement,
or (vi) enter into any contract, agreement, commitment or arrangement with
respect to any of the matters set forth in this paragraph (a);
(b) (i) acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership, limited liability company or other
business organization or division thereof or make any equity investments
therein; (ii) incur any indebtedness for borrowed money or issue any debt
securities except in the ordinary course of business and consistent with past
practice, (iii) make any commitments or agreements for capital expenditures or
capital additions except in the ordinary course of business and consistent with
past practice; (iv) enter into or modify any material IDRC Contract except in
the ordinary course of business and consistent with past practice provided that
such amendments shall not, individually or in the aggregate, have or result in
an IDRC Material Adverse Effect; (v) terminate, modify, assign, waive, release
or relinquish any material contract rights or amend any material rights or
claims not in the ordinary course of business, except as expressly provided
herein, or where such actions, individually or in the aggregate, will not have
or result in an IDRC Material Adverse Effect; or (vi) enter into any contract,
agreement, commitment or arrangement with respect to any of the matters set
forth in this paragraph (b);
(c) (i) initiate any litigation or arbitration proceeding, unless the
failure to initiate such litigation or arbitration proceeding would materially
prejudice the rights of IDRC to initiate such litigation or arbitration
proceeding in the future, (ii) revalue any of its assets, including writing off
notes or accounts receivable, other than in the ordinary course of business,
(iii) make any material change to their respective accounting methods,
principles or practices except in response to any changes in GAAP which are
adopted after the date of this Agreement, or (iv) settle or compromise any Tax
liability, or prepare or file any Tax Return inconsistent with past practice or,
on any such Tax Return, take any position, make any election, or adopt any
method that is inconsistent with positions taken, elections made or methods used
in preparing or filing similar Tax Returns in prior periods;
(d) (i) grant any increase in the salary or other compensation of its
employees or grant any bonus to any employee, other than regularly scheduled
raises or bonuses consistent with past practice or as otherwise required
pursuant to existing employment agreements or other bonus practices or
<PAGE>
policies of IDRC or any IDRC Subsidiary, or enter into any employment agreement
or make any loan to or enter into any material transaction of any other nature
with any officer or employee; (ii) take any action to institute any new
severance or termination pay practices with respect to any directors, officers
or employees or to increase the benefits payable under its severance or
termination pay practices; or (iii) adopt or amend, in any respect, except as
may be required by applicable law or regulation, any bonus, profit sharing,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust, fund,
plan or arrangement for the benefit or welfare of any directors, officers or
employees;
(e) take any action which would cause its representations and
warranties contained herein, if made on and as of the date of such action,
untrue or incorrect in any respect such that the condition contained in Section
5.3(a) would not be satisfied as a result thereof; or
(f) take (and will use reasonable efforts to prevent any affiliate of
IDRC from taking) or agree in writing or otherwise to take, (i) any of the
actions described in this Section 4.l, (ii) any action which could prevent IDRC
from performing, or cause IDRC not to perform, its obligations under this
Agreement such that the condition contained in Section 5.3(b) would not be
satisfied as a result thereof, or (iii) any action that would cause the Merger
not to be treated as a reorganization within the meaning of Section 368(a) of
the Code.
SECTION 4.2 TELESPECTRUM'S UNDERTAKINGS. TeleSpectrum covenants and
agrees that, between the date of this Agreement and the Effective Time, except
to the extent (i) IDRC shall otherwise consent in writing, (ii) as otherwise
expressly set forth in the TELESPECTRUM SCHEDULE, or (iii) as may be expressly
contemplated by this Agreement, the business of TeleSpectrum and the
TeleSpectrum Subsidiaries shall be conducted only in, and such entities shall
not take any action except in, the ordinary course of business and in a manner
consistent with past practice; and TeleSpectrum and the TeleSpectrum
Subsidiaries will use their commercially reasonable efforts to preserve
substantially intact their business organizations, to keep available the
services of their present officers, employees and consultants that are integral
to the operation of their businesses as presently conducted and to preserve
their present relationships with customers, suppliers and other persons with
which TeleSpectrum and the TeleSpectrum Subsidiaries have significant business
relations. Without limiting the generality of the foregoing, except to the
extent (i) IDRC shall otherwise consent in writing, (ii) as otherwise expressly
set forth in the TELESPECTRUM SCHEDULE, or (iii) as may be expressly
contemplated by this Agreement, TeleSpectrum will not, and will not permit any
of the TeleSpectrum Subsidiaries, directly or indirectly, to:
(a) (i) amend or propose to amend its Certificate of Incorporation or
ByLaws; (ii) split, combine or reclassify any outstanding shares of its capital
stock, or declare, set aside or pay any dividend payable in cash, stock,
property or otherwise with respect to such shares; (iii) redeem, purchase,
acquire or offer to acquire any shares of its capital stock; provided that
TeleSpectrum may acquire shares of TeleSpectrum Common Stock upon the
consummation of its planned merger (the "CRW Merger"), through a TeleSpectrum
----------
Subsidiary, with CRW Financial, Inc., a Delaware corporation ("CRW"), pursuant
---
to the terms of that certain Agreement and Plan of Merger dated as of September
4, 1998 by and among TeleSpectrum, a TeleSpectrum Subsidiary and CRW (the "CRW
---
Agreement"); (iv) make any material amendments to, or waive any material
- ---------
conditions to closing under, the CRW Agreement; (v) issue, sell, pledge or
dispose of, or agree to issue, sell, pledge or dispose of, any additional shares
of, or securities convertible or exchangeable for, or any options, warrants or
rights of any kind to acquire any
<PAGE>
shares of, its capital stock, or of any class or other property or assets
whether pursuant to any rights agreement, stock option plans described in the
TELESPECTRUM SCHEDULE or otherwise, provided that TeleSpectrum may issue shares
of TeleSpectrum Common Stock pursuant to options and warrants outstanding as of
the date of this Agreement or issued after the date of this Agreement, grant
additional stock options in the ordinary course of business and issue shares of
TeleSpectrum Common Stock in the CRW Merger; (vi) accelerate, amend or change
the period of exerciseability of options or restricted stock granted under or
outside of any of the TeleSpectrum Stock Plans or authorize cash payments in
exchange for any options granted under any of such plans except as required by
the terms of such plans or any related agreements in effect as of the date of
this Agreement, or (vii) enter into any contract, agreement, commitment or
arrangement with respect to any of the matters set forth in this paragraph (a)
other than the CRW Agreement;
(b) (i) acquire (by merger, consolidation or acquisition of stock or
assets) any corporation (other than CRW), partnership, limited liability company
or other business organization or division thereof; (ii) incur any indebtedness
for borrowed money or issue any debt securities except in the ordinary course of
business and consistent with past practice, (iii) make any commitments or
agreements for capital expenditures or capital additions except in the ordinary
course of business and consistent with past practice; (iv) enter into or modify
any TeleSpectrum Contract except in the ordinary course of business and
consistent with past practice provided that such amendments shall not,
individually or in the aggregate, have or result in a TeleSpectrum Material
Adverse Effect; (v) terminate, modify, assign, waive, release or relinquish any
material contract rights or amend any material rights or claims not in the
ordinary course of business, except as expressly provided herein, or where such
actions, individually or in the aggregate, will not have or result in a
TeleSpectrum Material Adverse Effect; or (vi) enter into any contract,
agreement, commitment or arrangement with respect to any of the matters set
forth in this paragraph (b) other than the CRW Agreement;
(c) (i) initiate any litigation or arbitration proceeding, unless the
failure to initiate such litigation or arbitration proceeding would materially
prejudice the rights of TeleSpectrum to initiate such litigation or arbitration
proceeding in the future, (ii) revalue any of its assets, including writing off
notes or accounts receivable, other than in the ordinary course of business, or
(iii) make any material change to their respective accounting methods,
principles or practices except in response to any changes in GAAP which are
adopted after the date of this Agreement;
(d) take any action which would cause its representations and
warranties contained herein, if made on and as of the date of such action,
untrue or incorrect in any respect such that the condition contained in Section
5.2(a) would not be satisfied as a result thereof; or
(e) take (and will use reasonable efforts to prevent any affiliate of
TeleSpectrum from taking) or agree in writing or otherwise to take, (i) any of
the actions described in this Section 4.2, (ii) any action which could prevent
TeleSpectrum from performing, or cause TeleSpectrum not to perform, its
obligations under this Agreement such that the condition contained in Section
5.2(b) would not be satisfied as a result thereof, or (iii) any action that
would cause the Merger not to be treated as a reorganization within the meaning
of Section 368(a) of the Code.
<PAGE>
SECTION 4.3 UPDATING OF SCHEDULES.
(a) IDRC shall promptly disclose to TeleSpectrum any information
contained in its representations and warranties or in the IDRC SCHEDULE which,
because of an event occurring after the date hereof, is incomplete or is no
longer correct as of all times after the date hereof until the Closing Date;
provided, however, that none of such disclosures shall be deemed to modify,
amend or supplement the representations and warranties of IDRC or in the IDRC
SCHEDULE hereto for the purposes of Articles V or VII hereof, unless
TeleSpectrum shall have consented thereto in writing.
(b) TeleSpectrum shall promptly disclose to IDRC any information
contained in its representations and warranties or in the TELESPECTRUM SCHEDULE
which, because of an event occurring after the date hereof, is incomplete or is
no longer correct as of all times after the date hereof until the Closing Date;
provided, however, that none of such disclosures shall be deemed to modify,
amend or supplement the representations and warranties of TeleSpectrum or in the
TELESPECTRUM SCHEDULE hereto for the purposes of Articles V or VII hereof,
unless IDRC shall have consented thereto in writing.
SECTION 4.4 ACCESS TO INFORMATION.
(a) Between the date of this Agreement and the Effective Time, IDRC
will (a) give TeleSpectrum and its authorized representatives reasonable access,
during regular business hours upon reasonable notice, to all offices, warehouses
and other facilities and to all of its books and records, (b) permit
TeleSpectrum to make such reasonable inspections as it may require, and (c)
cause its officers and those of its subsidiaries to furnish TeleSpectrum with
such financial and operating data and other information with respect to the
business and properties of IDRC, as TeleSpectrum may from time to time
reasonably request and as IDRC may have on hand or be able to produce without
hardship; provided, however, that (i) TeleSpectrum shall ensure that no
representative of TeleSpectrum interferes with or otherwise disrupts the
business or operations of IDRC while exercising the rights provided under this
Section 4.4(a), and (ii) IDRC shall not be required to permit any inspection, or
to disclose any information, that in the reasonable judgment of IDRC, would (a)
result in the disclosure of trade secrets of third parties, (b) violate any
obligation of IDRC with respect to confidentiality, (c) jeopardize protections
afforded IDRC under the attorney-client privilege or the attorney work product
doctrine, or (d) materially interfere with the conduct of IDRC's business. All
information obtained by TeleSpectrum and its representatives pursuant to this
Section 4.4(a) shall be treated as confidential pursuant to the existing
confidentiality agreement between the parties.
(b) Between the date of this Agreement and the Closing Date,
TeleSpectrum will (a) give IDRC and its authorized representatives reasonable
access, during regular business hours upon reasonable notice, to all offices,
warehouses and other facilities and to all of its books and records, (b) permit
IDRC to make such reasonable inspections as it may require, and (c) cause its
officers and those of its subsidiaries to furnish IDRC with such financial and
operating data and other information with respect to the business and properties
of TeleSpectrum, as IDRC may from time to time reasonably request and as
TeleSpectrum may have on hand or be able to produce without hardship; provided,
however, that (i) IDRC shall ensure that no representative of IDRC interferes
with or otherwise disrupts the business or operations of TeleSpectrum while
exercising the rights provided under this Section 4.4(b), and (ii) TeleSpectrum
shall not be required to permit any inspection, or to disclose any information,
that in the reasonable judgment of TeleSpectrum, would (a) result in the
disclosure of trade secrets of third parties, (b) violate any obligation of
TeleSpectrum with respect to confidentiality, (c)
<PAGE>
jeopardize protections afforded TeleSpectrum under the attorney-client privilege
or the attorney work product doctrine, or (d) materially interfere with the
conduct of TeleSpectrum's business. All information obtained by IDRC and its
representatives pursuant to this Section 4.4(b) shall be treated as confidential
pursuant to the existing confidentiality agreement between the parties.
SECTION 4.5 STOCKHOLDER VOTE; PROXY STATEMENT.
(a) As promptly as practicable after the date hereof, TeleSpectrum
shall take all action necessary in accordance with Rules 14a-1 et. seq. of the
Exchange Act, the DGCL, the rules of the NMS and its Certificate of
Incorporation and Bylaws to call, give notice of, convene and hold the
TeleSpectrum Stockholders' Meeting as promptly as practicable (unless such date
shall be delayed due to circumstances reasonably beyond the control of the
parties) to consider and vote upon the approval and adoption of this Agreement
and for such other purposes as may be necessary or desirable.
(b) As promptly as practicable after the date hereof, IDRC shall take
all action necessary in accordance with the DGCL and its Certificate of
Incorporation and Bylaws to call, give notice of, convene and hold the IDRC
Stockholders' Meeting or obtain the IDRC Consent as promptly as practicable
(unless such date shall be delayed due to circumstances reasonably beyond the
control of the parties) to consider and vote upon the approval and adoption of
this Agreement and for such other purposes as may be necessary or desirable.
(c) As promptly as practicable after the date hereof, IDRC and
TeleSpectrum shall jointly prepare and file with the SEC preliminary proxy
materials of TeleSpectrum under the Exchange Act with respect to the Merger, and
a preliminary prospectus of TeleSpectrum covering the Merger Shares, the
Warrants and the Warrant Shares to be issued in the Merger and will thereafter
use their respective best efforts to respond to any comments of the SEC with
respect thereto and to cause the Registration Statement to become effective, and
the Proxy Statement and proxy to be mailed to TeleSpectrum's stockholders, as
promptly as practicable. The Proxy Statement shall include the unqualified
recommendation of TeleSpectrum's Board of Directors that TeleSpectrum's
stockholders vote in favor of the approval and adoption of this Agreement.
(d) As promptly as practicable after the date hereof, IDRC and
TeleSpectrum shall prepare and file any other filings required to be filed by
each under the Exchange Act or any other federal or state securities laws
relating to the Merger and the transactions contemplated hereby (collectively
"Other Filings") and will use their respective reasonable best efforts to
- --------------
respond to any comments of the SEC or any other appropriate government official
with respect thereto.
(e) IDRC and TeleSpectrum shall cooperate with each other and provide
to each other all information necessary in order to prepare, amend or
supplement, to the extent required by the Securities Act, the Registration
Statement, the Proxy Statement and the Other Filings (collectively, the "SEC
---
Transaction Filings").
- -------------------
(f) TeleSpectrum will notify IDRC promptly of the receipt of any
comments from the SEC or its staff or any other appropriate government official
and of any requests by the SEC or its staff or any other appropriate government
official for amendments or supplements to any of the SEC Transaction Filings or
for additional information and will supply IDRC with copies of all
correspondence between TeleSpectrum and any of its representatives and the SEC.
If at any time prior to the Effective
<PAGE>
Time, any event shall occur that should be set forth in an amendment of, or a
supplement to, any of the SEC Transaction Filings, IDRC and TeleSpectrum agree
promptly to prepare and file such amendment or supplement and to distribute such
amendment or supplement as required by applicable law, including, in the case of
an amendment or supplement to the Proxy Statement, mailing such supplement or
amendment to IDRC's and TeleSpectrum's stockholders. TeleSpectrum will provide
IDRC with a reasonable opportunity to review and comment on any amendment or
supplement to the Registration Statement or the Proxy Statement proposed to be
made by it prior to filing such amendment or supplement with the SEC. No
amendment or supplement to the information supplied by IDRC for inclusion in the
Proxy Statement shall be made without the approval of IDRC, which approval shall
not be unreasonably withheld or delayed. TeleSpectrum shall not be required to
maintain the effectiveness of the Registration Statement for the purpose of
resale by stockholders of IDRC who may be affiliates of IDRC or TeleSpectrum
pursuant to Rule 145 under the Securities Act.
(g) The information provided and to be provided by IDRC and
TeleSpectrum for inclusion or incorporation by reference in the SEC Transaction
Filings shall at the time such information was supplied be true and correct in
all material respects and shall not omit to state any material fact required to
be stated therein or necessary in order to make such information not false or
misleading, and IDRC and TeleSpectrum each agree to promptly correct any such
information provided by it for use in the SEC Transaction Filings that shall
have become false or misleading. The SEC Transaction Filings, when filed with
the SEC or any appropriate government official, shall comply as to form in all
material respects with all applicable requirements of law.
SECTION 4.6 NMS APPLICATION. TeleSpectrum shall as promptly as
practicable following the date hereof apply for approval for listing of the
TeleSpectrum Common Stock to be issued (i) pursuant to the Merger, (ii) upon
exercise of the New Options and (iii) upon exercise of the Warrants on the NMS
upon official notice of issuance.
SECTION 4.7 REASONABLE BEST EFFORTS. Each of the parties hereto agrees
to use its reasonable best efforts to take, or cause to be taken, all
appropriate action, and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws, statutes, ordinances, codes, rules and
regulations to consummate and make effective the transactions contemplated by
this Agreement in the most expeditious manner practicable, including the
satisfaction of all conditions to the Merger, and to consummate the Merger as
promptly as practicable, but in no event later than July 31, 1999.
SECTION 4.8 PUBLIC ANNOUNCEMENTS. No party hereto shall make any public
announcements or otherwise communicate with any news media with respect to this
Agreement or any of the transactions contemplated hereby without prior
consultation with the other parties as to the timing and contents of any such
announcement as may be reasonable under the circumstances; provided, that
nothing contained herein shall prevent any party from promptly making all
filings with Governmental Entities and all disclosure as may, in its good faith
judgment, be required or advisable in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated hereby
(in which case the disclosing party, to the extent practicable, shall advise the
other parties and provide them with a copy of the proposed disclosure or filing
prior to making the disclosure or filing).
SECTION 4.9 SUBSEQUENT FINANCIAL STATEMENTS. Prior to the Effective
Time, TeleSpectrum will timely file with the SEC, each Annual Report on Form 10-
K, Quarterly Report on Form 10-Q and Current Report on Form 8-K required to be
filed by TeleSpectrum under the Exchange Act and the rules
<PAGE>
and regulations promulgated thereunder and will promptly deliver to IDRC copies
of each such report as filed with the SEC, including any updates, amendments or
supplements thereto. Prior to the Effective Time, IDRC shall provide
TeleSpectrum, as soon as practicable but in any case within 30 days after the
end of each month, with its unaudited consolidated balance sheet and statement
of operations as of and for the month then ended, prepared on the same basis as
the financial statements for the eleven months ended November 30, 1998 included
in the IDRC SCHEDULE, and certified as such by the chief financial officer of
IDRC. In addition, IDRC shall provide TeleSpectrum, as soon as practicable but
in any event prior to March 1, 1999, with its consolidated balance sheet and
statements of operations and cash flow as of and for the year ended December 31,
1998, as certified as such by Deloitte & Touche LLP.
SECTION 4.10 CONTROL OF OPERATIONS. Nothing contained in this Agreement
shall give TeleSpectrum, directly or indirectly, the right to control or direct
IDRC's operations prior to the Effective Time. Nothing contained in this
Agreement shall give IDRC, directly or indirectly, the right to control or
direct TeleSpectrum's operations prior to the Effective Time. Prior to the
Effective Time, each of IDRC and TeleSpectrum shall exercise, consistent with
the terms and conditions of this Agreement, complete control and supervision
over its respective operations.
SECTION 4.11 REGULATORY AND OTHER AUTHORIZATIONS. Each party hereto
agrees to use commercially reasonable efforts to comply with all legal
requirements which may be imposed on such party with respect to the Merger and
to obtain all Authorizations, consents, orders and approvals of Governmental
Entities and non-governmental third parties that may be or become necessary for
its respective execution and delivery of, and the performance of its respective
obligations pursuant to, this Agreement and each party will cooperate fully with
the other parties in promptly seeking to obtain all such authorizations,
consents, orders and approvals. As promptly as practicable, but in any event
within 20 days after the date hereof, IDRC and TeleSpectrum shall each make an
appropriate filing of a Notification and Report Form pursuant to the HSR Act and
shall promptly respond to any request for additional information with respect
thereto. Each such filing shall request early termination of the waiting period
imposed by the HSR Act.
SECTION 4.12 TAKEOVER STATUTE. If any "fair price," "moratorium,"
"control share acquisition" or other form of antitakeover statute or regulation
shall become applicable to the transactions contemplated hereby, each of IDRC
and TeleSpectrum and the members of their respective Boards of Directors shall
use their reasonable best efforts to grant such approvals and take such actions
as are reasonably necessary so that the transactions contemplated hereby may be
consummated as promptly as practicable on the terms contemplated hereby and
otherwise use their reasonable best efforts to act to eliminate or minimize the
effects of such statute or regulation on the transactions contemplated hereby.
SECTION 4.13 INDEMNIFICATION OF DIRECTORS AND OFFICERS. For a period of
six years after the Effective Time, TeleSpectrum shall indemnify and hold
harmless the directors and officers of IDRC with respect to matters existing or
occurring at or prior to the Effective Time (including without limitation, the
Merger and other transactions contemplated hereby), whether asserted or claimed
prior to, at, or after the Effective Time, to the full extent to which IDRC is
permitted to indemnify and hold harmless such officers and directors under its
charter and bylaws and applicable law. TeleSpectrum shall provide each
individual who served as a director or officer of IDRC at any time prior to the
Effective Time with liability insurance for a period of three years after the
Effective Time no less favorable in coverage and amount than any applicable
insurance in effect immediately prior to the Effective Time, provided, however,
-------- -------
that TeleSpectrum shall only be obligated to obtain and provide such coverage
which is
<PAGE>
available at a cost of up to 150% of the cost of such coverage immediately prior
to the Effective Time. This Section 4.13 shall survive the consummation of the
Merger, is intended to benefit IDRC, TeleSpectrum and all parties entitled to
indemnification under this Section 4.13, and shall be binding on and enforceable
against all successors and assigns of TeleSpectrum.
SECTION 4.14 TAX-FREE REORGANIZATION.
(a) Each of TeleSpectrum and IDRC will use its best efforts to cause
the Merger to qualify as a "reorganization" within the meaning of Section 368(a)
of the Code, and to enable its respective counsel to render the opinions
contemplated by Section 4.14(c) and by Sections 5.2(d) and 5.3(h). Each party
shall make and shall use its best efforts to cause those of its respective
officers and stockholders that counsel to the parties shall reasonably request
to make, such representations and certifications as counsel to the parties shall
reasonably request to enable them to render such opinions, including the
representations of TeleSpectrum contained in a certificate of TeleSpectrum (the
"TeleSpectrum Tax Certificate") substantially in the form of the TeleSpectrum
----------------------------
Tax Certificate attached as Item 4.14 of the TELESPECTRUM SCHEDULE and
representations of IDRC contained in a certificate of IDRC (the "IDRC Tax
--------
Certificate") substantially in the form of IDRC Tax Certificate attached as Item
- -----------
4.14 to IDRC SCHEDULE.
(b) At or prior to the filing of the S-4 Registration Statement,
TeleSpectrum and IDRC shall, respectively, execute and deliver to Cooley Godward
LLP and to Morgan Lewis & Bockius LLP the TeleSpectrum Tax Certificate and the
IDRC Tax Certificate.
(c) TeleSpectrum and IDRC shall each confirm to Cooley Godward LLP and
to Morgan Lewis & Bockius LLP the accuracy and completeness as of the Effective
Time of the TeleSpectrum Tax Certificate and the IDRC Tax Certificate delivered
pursuant to Section 4.14(a).
(d) Following delivery of the TeleSpectrum Tax Certificate and the
IDRC Tax Certificate pursuant to Section 4.14(a), each of TeleSpectrum and IDRC
shall use its reasonable efforts to cause Cooley Godward LLP and Morgan Lewis &
Bockius LLP, respectively, to deliver promptly to it a legal opinion satisfying
the requirements of Item 601 of Regulation S-K promulgated under the Securities
Act. In rendering such opinions, each of such counsel shall be entitled to rely
on the TeleSpectrum Tax Certificate and the IDRC Tax Certificate delivered
pursuant to Section 4.14(a).
SECTION 4.15 NO SOLICITATION.
(a) Without the prior written consent of TeleSpectrum, from and after
the date hereof, IDRC will not, and will not authorize or permit any of the IDRC
Subsidiaries or their officers, directors, employees, financial advisors and
agents ("Representatives") to, directly or indirectly, (i) knowingly solicit,
---------------
initiate or encourage (including by way of furnishing nonpublic or proprietary
information) or take any other action to facilitate knowingly any inquiries or
the making of any proposal which constitutes or may reasonably be expected to
lead to an Acquisition Proposal by a third party (other than TeleSpectrum)
involving IDRC or any IDRC Subsidiary, (ii) engage in any discussion or
negotiations relating to an Acquisition Proposal by a third party or (iii) enter
into any agreement with respect to, agree to, approve or recommend any
Acquisition Proposal by a third party. As used herein, "Acquisition Proposal"
--------------------
shall mean a proposal or offer for a tender or exchange offer, merger,
consolidation or other business combination involving or any proposal to acquire
in any manner a
<PAGE>
substantial equity interest in, or a substantial portion of the assets of either
IDRC, TeleSpectrum or any Subsidiary of either such party.
(b) IDRC shall immediately cease and terminate any existing
solicitation, initiation, encouragement, activity, discussion or negotiation
with any parties (other than TeleSpectrum) conducted heretofore by IDRC or its
Representatives with respect to an Acquisition Proposal. IDRC shall notify
TeleSpectrum orally and in writing of any such inquiries, offers or proposals
(including the terms and conditions of any such proposal and the identity of the
person making it), promptly after the receipt thereof.
(c) During the period from the date of this Agreement through the
Effective Time, IDRC shall not terminate, amend, modify or waive any provision
of any confidentiality or standstill agreement to which it or any of the IDRC
Subsidiaries is a party in a manner adverse to IDRC or any IDRC Subsidiary.
During such period, IDRC shall use commercially reasonable efforts to enforce
the provisions of any such agreement, including by obtaining injunctions to
prevent any breaches of such agreements and to enforce specifically the terms
and provisions thereof in any court of the United States of America or of any
state having jurisdiction.
SECTION 4.16 BANK NEGOTIATIONS. TeleSpectrum and IDRC shall each
negotiate in good faith with, and promptly communicate with each other
regarding, the negotiations with any lender contemplated by Section 5.3(g).
Neither TeleSpectrum nor IDRC shall communicate or negotiate with any such
lender in the absence of the other party, unless such other party consents in
writing to such communication or negotiation.
SECTION 4.17 CONSENT DETERMINATIONS. Neither TeleSpectrum nor IDRC shall
unreasonably delay its determination regarding any written consent requested by
the other party under Sections 4.1 or 4.2.
SECTION 4.18 FORM S-3 RESALE REGISTRATION.
(a) If any of the persons listed on Schedule 4.18 hereto have their
-------------
employment with TeleSpectrum terminated by TeleSpectrum under the circumstances
described on Schedule 4.18, such person shall have the right to require
-------------
TeleSpectrum to register, at TeleSpectrum's expense, for resale all of their
Merger Shares and Warrant Shares received in the Merger on a resale registration
statement on Form S-3. Notwithstanding the foregoing, TeleSpectrum shall not be
required to effect any such registration if (i) the shares of TeleSpectrum
Common Stock would become saleable under Rule 144(k) within 90 days after
receipt of a request for registration and (ii) the shares of TeleSpectrum Common
Stock to be registered do not have an aggregate market value of at least
$100,000. TeleSpectrum shall as promptly as practicable after receiving any
request by any person listed on Schedule 4.18 use its reasonable commercial
-------------
efforts to file and have declared effective a registration statement and file
with the SEC such amendments and supplements to the registration statements and
the prospectuses incorporated therein referred to in this Section 4.18 as may be
necessary to keep such registration statements effective until the earlier to
occur of (i) the sale of all of the securities covered by any such registration
statement, and (ii) the date that all securities held by any person listed as a
selling stockholder on such registration statement may be sold under Rule 144
(or its successor) in any 90 day period.
<PAGE>
(b) As promptly as practicable after the Closing, TeleSpectrum shall
file a post-effective amendment to the Registration Statement on a Form S-3
registration statement covering the issuance by TeleSpectrum of all of the
Warrant Shares and the Warrants underlying the Assumed Options, and TeleSpectrum
shall use its reasonable commercial efforts to maintain the effectiveness of
such Form S-3 Registration Statement as may be necessary to keep such
registration statement effective until the issuance of all of the Warrant Shares
and Warrants by the Company.
SECTION 4.19 CRW DEVELOPMENTS. TeleSpectrum shall provide IDRC with
prompt notice of any material developments relating to the CRW Merger and CRW
Agreement.
SECTION 4.20 COVENANT OF THE MDC ENTITIES. Concurrent with the execution
and delivery of this Agreement, each of the MDC Entities shall execute and
deliver to TeleSpectrum the IDRC Stockholder Support Agreement in substantially
the form attached hereto as Exhibit A. The MDC Entities shall use all
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, and to assist and cooperate with TeleSpectrum in doing, all
things necessary, proper or advisable to consummate and make effective, on the
most expeditious manner practical, the transactions contemplated by this
Agreement.
SECTION 4.21 AGREEMENT WITH CHAIRMAN. On or prior to the Effective
Time, TeleSpectrum and Jeffrey A. Stiefler shall enter into a mutually
satisfactory agreement that terminates his current employment agreement with
IDRC and contains those terms contained on Exhibit 4.21 hereof.
------------
SECTION 4.22 SECTION 2.17 UNDERTAKING. To the extent that IDRC has not
provided all of the information or documentation described in Section 2.17(a) as
of the date hereof, IDRC shall use all commercially reasonable efforts to
disclose and provide such information and documentation to TeleSpectrum as soon
as practicable and, in any event, prior to the Closing.
ARTICLE V
CONDITIONS TO CLOSING
SECTION 5.1 CONDITIONS TO THE OBLIGATIONS OF IDRC AND TELESPECTRUM. The
respective obligations of IDRC and TeleSpectrum to consummate the transactions
contemplated hereby are subject to the requirements that:
(a) Stockholder Approval. This Agreement shall have been approved and
--------------------
adopted by the requisite vote of the stockholders of each of TeleSpectrum and
IDRC in accordance with the DGCL and their respective Certificates of
Incorporation.
(b) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition shall have been issued and be in effect (i) restraining or
prohibiting the consummation of the Merger or any of the transactions
contemplated hereby or (ii) prohibiting or limiting the ownership, operation or
control by TeleSpectrum of any portion of the business or assets of IDRC or
compelling TeleSpectrum to dispose of, grant rights in respect of, or hold
separate any portion of the business or assets of IDRC or any IDRC Subsidiary in
each case, where the effect, individually or in the aggregate, would result in
an IDRC Material Adverse Effect; nor shall any
<PAGE>
action have been taken by a Governmental Entity or any federal, state or foreign
statute, rule, regulation, executive order, decree or injunction shall have been
enacted, entered, promulgated or enforced by any Governmental Entity, which is
in effect and has the effect of making the Merger illegal or otherwise
prohibiting the consummation of the Merger.
(c) HSR Act. Any waiting period applicable to the consummation of the
-------
Merger under the HSR Act shall have expired or been terminated.
(d) Registration Statement. The Registration Statement shall have
----------------------
been declared effective under the Securities Act and no stop order suspending
the effectiveness of the Registration Statement shall be in effect and no
proceedings for such purpose shall be pending before or be threatened by the
SEC.
(e) Nasdaq National Market. Approval for listing by the NMS upon
----------------------
official notice of issuance of TeleSpectrum Common Stock to be issued in the
Merger shall have been received by TeleSpectrum and remain in full force and
effect.
(f) Consents. All authorizations, consents, orders or approvals of,
--------
or declarations or filings with, and all expirations of waiting periods imposed
by, any governmental body, agency or official (all of the foregoing,
"Consents") which are necessary for the consummation of the transactions
--------
contemplated hereby, other than Consents the failure to obtain which would not
have a material adverse effect on the consummation of the transactions
contemplated hereby or an IDRC Material Adverse Effect, shall have been filed,
have occurred or have been obtained (all such permits, approvals, filings and
consents and the lapse of all such waiting periods being referred to as the
"Requisite Regulatory Approvals") and all such Requisite Regulatory Approvals
------------------------------
shall be in full force and effect, provided, however, that a Requisite
Regulatory Approval shall not be deemed to have been obtained if in connection
with the grant thereof there shall have been an imposition by any state or
federal governmental body, agency or official of any condition, requirement,
restriction or change of regulation, or any other action directly or indirectly
related to such grant taken by such governmental body, which would reasonably be
expected to have an IDRC Material Adverse Effect.
(g) Indemnity Escrow Agreement. The Indemnity Escrow Agreement shall
--------------------------
have been fully executed by, and delivered to, each of the respective parties
thereunder.
SECTION 5.2 CONDITIONS TO THE OBLIGATIONS OF IDRC. The obligations of
IDRC to consummate the transactions contemplated hereby are subject to the
further requirements that:
(a) Representations and Warranties. The representations and
------------------------------
warranties of TeleSpectrum set forth in Article III of this Agreement shall be
true and correct as of the date of this Agreement (with respect solely to those
representations and warranties that speak as of the date of this Agreement or as
of an earlier date) and as of the Closing Date (except to the extent such
representations and warranties speak as of an earlier date) as though made on
and as of the Closing Date, except for (i) changes expressly contemplated by
this Agreement and (ii) inaccuracies which, individually or in the aggregate,
have not had and would not reasonably be expected to have an "Expanded
TeleSpectrum Material Adverse Effect." An Expanded TeleSpectrum Material
Adverse Effect means a TeleSpectrum Material Adverse Effect without including
the effect of any changes (i) resulting from general conditions
<PAGE>
applicable to the industries in which TeleSpectrum operates and not specifically
relating to TeleSpectrum, or from general business or United States economic
conditions which do not have a disproportionate effect on TeleSpectrum, (ii)
caused by the transactions contemplated by this Agreement and the public
announcement thereof, or (iii) any actions taken or omissions by TeleSpectrum
with the prior written consent of IDRC.
(b) Performance of Obligations. Each of the obligations of
--------------------------
TeleSpectrum to be performed on or before the Closing Date pursuant to the terms
of this Agreement shall have been duly performed in all material respects on or
before the Closing Date and TeleSpectrum shall have delivered to IDRC a
certificate to that effect at the Closing.
(c) Absence of Material Adverse Effect. From the date of this
----------------------------------
Agreement through the Effective Time there shall not have occurred an Expanded
TeleSpectrum Material Adverse Effect that has not been cured in all material
respects and as of the Effective Time, there shall be no, and no fact or
circumstance shall exist which would reasonably be expected to have, a
TeleSpectrum Material Adverse Effect.
(d) Tax Opinion. IDRC shall have received the opinion of Cooley
-----------
Godward LLP, counsel to IDRC, based upon reasonably requested representation
letters and dated as of the Closing Date, to the effect that the Merger will be
treated as a reorganization described in Section 368(a) of the Code and such
opinion shall be in full force and effect and shall not have been withdrawn,
provided, however, that if Cooley Godward LLP does not render such opinion or
withdraws or modifies such opinion, this condition shall nonetheless be deemed
satisfied if Morgan, Lewis & Bockius LLP, counsel to TeleSpectrum, renders such
opinion to IDRC.
(e) Board Representation. The TeleSpectrum Board of Directors shall
--------------------
have adopted a resolution expanding its board by two members and, subject to the
consummation of the Merger, electing Robert Hellman and Jeffrey Stiefler to fill
the vacancies created thereby.
SECTION 5.3 CONDITIONS TO THE OBLIGATIONS OF TELESPECTRUM. The
obligations of TeleSpectrum to consummate the transactions contemplated hereby
are subject to the further requirements that:
(a) Representations and Warranties. The representations and warranties
------------------------------
of IDRC set forth in Article II of this Agreement shall be true and correct as
of the date of this Agreement (with respect solely to those representations and
warranties that speak as of the date of this Agreement or as of an earlier date)
and as of the Closing Date (except to the extent such representations and
warranties speak as of an earlier date) as though made on and as of the Closing
Date, except for (i) changes expressly contemplated by this Agreement and (ii)
inaccuracies which, individually or in the aggregate, have not had and would not
reasonably be expected to have an "Expanded IDRC Material Adverse Effect." An
Expanded IDRC Material Adverse Effect means an IDRC Material Adverse Effect
without including the effect of any changes (i) resulting from general
conditions applicable to the industries in which IDRC operates and not
specifically relating to IDRC, or from general business or United States
economic conditions which do not have a disproportionate effect on IDRC, (ii)
caused by the transactions contemplated by this Agreement and the public
announcement thereof, or (iii) any actions taken or omissions by IDRC with the
prior written consent of TeleSpectrum.
<PAGE>
(b) Performance of Obligations. Each of the obligations of IDRC to
--------------------------
be performed on or before the Closing Date pursuant to the terms of this
Agreement shall have been duly performed in all material respects on or before
the Closing Date and IDRC shall have delivered to TeleSpectrum a certificate to
that effect at the Closing.
(c) Absence of Material Adverse Effect. From the date of this
----------------------------------
Agreement through the Effective Time there shall not have occurred an Expanded
IDRC Material Adverse Effect that has not been cured in all material respects
and as of the Effective Time, there shall be no, and no fact or circumstance
shall exist which would reasonably be expected to have, an Expanded IDRC
Material Adverse Effect.
(d) Exercise of Warrants All of the outstanding Detachable Warrants
--------------------
shall have been exercised by the delivery of an aggregate of 300,000 shares of
Series A Preferred Stock in payment of the exercise price thereof.
(e) Appraisal Shares. The Appraisal Shares, if any, shall not
----------------
represent more than 3% of the aggregate outstanding shares of IDRC Common Stock.
(f) Termination of Stockholders' Agreement and Advisory Services
------------------------------------------------------------
Agreements. The International Data Corporation Second Amended and Restated
- ----------
Stockholders Agreement and Irrevocable Proxy dated as of May 28, 1998 (the
"Stockholders Agreement") shall have been terminated. In addition, the Advisory
----------------------
Services Agreement dated March 11, 1996 between IDRC and MDC Management Company
III and the Advisory Services Agreement dated March 11, 1996 between IDRC and
Trans National Group Services International, Inc. shall have been terminated
without any payment or other consideration paid by IDRC. IDRC shall have
delivered to TeleSpectrum a certificate regarding the foregoing terminations at
the Closing.
(g) Credit Facility. TeleSpectrum shall have received that certain
---------------
lender's commitment letter attached hereto as Exhibit 5.3, and the closing shall
-----------
have occurred or will occur contemporaneously with the Closing of the Merger
pursuant to the terms outlined in such commitment letter, which shall not have
been materially modified or withdrawn regardless of any right that such lender
may have to modify the terms of such commitment letter.
(h) Tax Opinion. TeleSpectrum shall have received the opinion of
-----------
Morgan, Lewis & Bockius LLP, counsel to TeleSpectrum, based upon reasonably
requested representation letters and dated as of the Closing Date, to the effect
that the Merger will be treated as a reorganization described in Section 368(a)
of the Code and such opinion shall be in full force and effect and shall not
have been withdrawn, provided, however, that if Morgan, Lewis & Bockius LLP does
not render such opinion or withdraws or modifies such opinion, this condition
shall nonetheless be deemed satisfied if Cooley Godward LLP, counsel to IDRC,
renders such opinion to TeleSpectrum.
<PAGE>
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
SECTION 6.1 TERMINATION. This Agreement may be terminated (by written
notice by the terminating party to the other party), and the transactions
contemplated hereby may be abandoned at any time prior to the Closing Date:
(a) By mutual written consent of each of TeleSpectrum and IDRC;
(b) By either TeleSpectrum or IDRC if the Merger shall not have been
consummated on or before July 31, 1999 (the "Termination Date"); provided,
----------------
however, that the right to terminate this Agreement under this Section 6.1(b)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before the Termination Date;
(c) By either TeleSpectrum or IDRC if a Governmental Entity shall have
issued an order, decree or ruling or taken any other action (which order, decree
or ruling the parties shall use their commercially reasonable efforts to lift),
in each case permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement, and such order, decree, ruling or
other action shall have become final and nonappealable;
(d) By TeleSpectrum if (A) IDRC shall have breached, or failed to
comply with any of its obligations under this Agreement or any representation or
warranty made by IDRC shall have been incorrect when made or shall have since
ceased to be true and correct, and (B) after written notice, such breach,
failure or misrepresentation is not cured by April 30, 1999 and such breaches,
failures or misrepresentations, individually or in the aggregate, result or
would reasonably be expected to result in an IDRC Material Adverse Effect if, in
the case of (A) or (B), as a result of such breach or failure, the conditions
set forth in Sections 5.3(a) or 5.3(b) would not be satisfied, (it being
understood that TeleSpectrum may not terminate this Agreement pursuant to this
Section 6.1(d) if it shall have materially breached this Agreement);
(e) By IDRC if (A) TeleSpectrum shall have breached, or failed to
comply with any of its obligations under this Agreement or any representation or
warranty made by the TeleSpectrum shall have been incorrect when made or shall
have since ceased to be true and correct, and (B) after written notice, such
breach, failure or misrepresentation is not cured by April 30, 1999 and such
breaches, failures or misrepresentations, individually or in the aggregate,
result or would reasonably be expected to result in a TeleSpectrum Material
Adverse Effect if, in the case of (A) or (B), as a result of such breach or
failure, the conditions set forth in Sections 5.2(a) or 5.2(b) would not be
satisfied (it being understood that IDRC may not terminate this Agreement
pursuant to this Section 6.1(e) if it shall have materially breached this
Agreement);
(f) By TeleSpectrum at any time after April 30, 1999 if (i) from the
date of this Agreement through the Effective Time there shall have occurred an
Expanded IDRC Material Adverse Effect that has not been cured in all material
respects by April 30, 1999 or (ii) at any time after April 30, 1999 there shall
have occurred an Expanded IDRC Material Adverse Effect;
<PAGE>
(g) By IDRC at any time after April 30, 1999 if (i) from the date of
this Agreement through the Effective Time there shall have occurred an Expanded
TeleSpectrum Material Adverse Effect that has not been cured in all material
respects by April 30, 1999, or (ii) at any time after April 30, 1999 there shall
have occurred an Expanded TeleSpectrum Material Adverse Effect;
(h) By TeleSpectrum or IDRC if approval of this Agreement has not been
obtained at the IDRC Stockholders' Meeting, including any adjournments thereof,
or in the event an IDRC Stockholders' Meeting is not to be held, the IDRC
Consent is not obtained within one business day after the date that the
TeleSpectrum Stockholders approve this Agreement at the TeleSpectrum
Stockholders' Meeting; or
(i) By IDRC or TeleSpectrum if approval of this Agreement has not been
obtained at the TeleSpectrum Stockholders, meeting, including any adjournment
thereof.
SECTION 6.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided in Section 6.1 hereof, this Agreement shall forthwith
become void and there shall be no liability or obligation on the part of any of
the parties, except (i) as set forth in the last sentences of each of Sections
4.4 (a) and (b) and in Section 4.8 hereof, and (ii) nothing herein shall relieve
any party from liability for any willful breach hereof.
SECTION 6.3 AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed by each of IDRC and TeleSpectrum which writing
makes express reference to this Section; provided, however, that, after approval
of this Agreement by the stockholders of each of IDRC and TeleSpectrum, no
amendment may be made which would by applicable law require the further vote of
the IDRC stockholders without first obtaining such further vote.
SECTION 6.4 WAIVER. At any time before the Effective Time, any party
hereto may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties, (b)
waive any inaccuracies in the representations and warranties made to such party
contained herein or in any document delivered pursuant hereto or (c) waive
compliance with any of the agreements or conditions for the benefit of such
party contained herein. Any agreement on the part of a party to any such
extension or waiver shall be valid only as against such party and only if set
forth in an instrument in writing signed by such party.
ARTICLE VII
INDEMNIFICATION
SECTION 7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Except with
respect to the "IDRC Specified Representations" (as defined herein), all
representations and warranties of IDRC contained in this Agreement shall
terminate and expire as of the Closing Date, and all liability of the
stockholders of IDRC and the IDRC Optionholders with respect to such
representations and warranties shall thereupon be extinguished. The
representations and warranties of IDRC contained in Sections 2.1, 2.3, 2.5, 2.8,
2.10, 2.15, 2.16, 2.17, 2.20 and 2.23 of this Agreement (collectively, the "IDRC
Specified Representations") shall survive until the fifteen month anniversary of
the Closing Date (the "Expiration Date"), at which time such representations and
warranties shall terminate and expire, and all liability of
<PAGE>
the stockholders of IDRC and the IDRC Optionholders with respect to such
representations and warranties shall thereupon be extinguished. Except with
respect to the "TeleSpectrum Specified Representations" (as defined herein), all
representations and warranties of TeleSpectrum contained in this Agreement shall
terminate and expire as of the Closing Date, and all liability of TeleSpectrum
with respect to such representations and warranties shall thereupon be
extinguished. The representations and warranties of TeleSpectrum contained in
Sections 3.1, 3.3, 3.5, 3.8, 3.9, 3.11, 3.13, 3.14 and 3.16 of this Agreement
(collectively, the "TeleSpectrum Specified Representations") shall survive for
the period commencing on the Closing Date and ending on the Expiration Date, at
which time such representations and warranties shall terminate and expire, and
all liability of TeleSpectrum with respect to such representations and
warranties shall thereupon be extinguished. Notwithstanding the foregoing, in
the event an Indemnified TeleSpectrum Party (as defined below) delivers an
Indemnity Notice (as defined below) prior to the Expiration Date, such
Indemnified TeleSpectrum Party shall be entitled to pursue such claim beyond the
Expiration Date in accordance with the Indemnity Escrow Agreement.
Notwithstanding the foregoing, in the event an Indemnified IDRC Party (as
defined below) delivers a Claim Notice prior to the Expiration Date, such
Indemnified IDRC Party shall be entitled to pursue such claim beyond the
Expiration Date in accordance with Section 7.5 of this Agreement.
SECTION 7.2 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS OF IDRC. The
stockholders of IDRC and the IDRC Optionholders shall indemnify and hold
harmless TeleSpectrum and its stockholders, officers, directors, employees,
agents, successors and assigns (each, an "Indemnified TeleSpectrum Party"), from
------------------------------
and against any and all liabilities, claims, demands, judgments, settlement
payments, losses, costs, damages and expenses whatsoever (including reasonable
attorneys', consultants' and other professional fees and disbursement of every
kind, nature and description incurred by such Indemnified TeleSpectrum Party in
connection therewith) (collectively, "Damages") that such Indemnified
-------
TeleSpectrum Party may sustain, suffer or incur that result from or arise out of
any inaccuracy in any representation or warranty contained in the IDRC Specified
Representations including any breach of the obligation to indemnify hereunder or
failure to fulfill any covenant contained in Article IV.
SECTION 7.3 SPECIFIC INDEMNIFICATION BY THE STOCKHOLDERS OF IDRC. The
stockholders of IDRC and the IDRC Optionholders shall indemnify and hold
harmless each Indemnified TeleSpectrum Party from and against any and all
Damages that such Indemnified TeleSpectrum Party may sustain, suffer or incur
that result from or arise out of any litigation matters listed on Schedule 7.3
hereof.
SECTION 7.4 INDEMNIFICATION BY TELESPECTRUM. TeleSpectrum shall
indemnify and hold harmless the IDRC Stockholders and the IDRC Optionholders and
their successors, assigns, heirs and representatives (each an "Indemnified IDRC
----------------
Party") from and against any Damages that such Indemnified IDRC Party may
- -----
sustain, suffer or incur that result from or arise out of any breach of or
inaccuracy in any representation or warranty contained in the TeleSpectrum
Specified Representations including any breach of the obligation to indemnify
hereunder or failure to fulfill any covenant contained in Article IV.
<PAGE>
SECTION 7.5 PROCEDURE OF CLAIMS.
(a) Any Indemnified TeleSpectrum Party that desires to seek
indemnification under any part of this Article VII shall pursue the collection
of any damages suffered or incurred by such Indemnified TeleSpectrum Party in
accordance with the terms of the Indemnity Escrow Agreement.
(b) Any Indemnified IDRC Party that desires to seek indemnification
under any part of this Article VII shall give written notice (a "Claim Notice")
------------
to TeleSpectrum. Such Claim Notice shall contain such facts and information as
are then reasonably available, the specific basis for indemnification and
whether the claim has been liquidated. Unless TeleSpectrum gives written notice
to the Indemnified IDRC Party that it objects to any claim made in any Claim
Notice within 15 business days following the date on which it receives the Claim
Notice (the "Response Period"), TeleSpectrum shall be deemed not to dispute the
---------------
claim described in the Claim Notice and the Indemnified IDRC Party shall be
entitled to the full amount of the claim described in the Claim Notice. If
TeleSpectrum timely objects to a Claim Notice, then TeleSpectrum and the
Indemnified IDRC Party shall endeavor to settle and compromise the claims that
are the subject of the Claim Notice. If TeleSpectrum and the Indemnified IDRC
Party are unable to agree on any settlement or compromise, then such claim shall
be resolved in accordance with Section 7.5(d) hereof.
(c) If TeleSpectrum shall be obligated to indemnify an Indemnified
IDRC Party hereunder, TeleSpectrum shall pay to such Indemnified IDRC Party
within 5 business days after the amount to which such Indemnified IDRC Party
shall be entitled is finally determined.
(d) If there shall be a dispute as to any claim, cause of action or
dispute, the amount or manner of indemnification by TeleSpectrum under this
Article VII, TeleSpectrum and the Indemnified IDRC Party shall seek to resolve
such dispute through negotiations and, if such dispute is not resolved within
twenty days, the parties shall submit the resolution of any claim, cause of
action or dispute to expedited, binding arbitration pursuant to this Section.
Any claim, cause of action or dispute between the parties arising under this
Agreement submitted to arbitration under this Section ("Arbitrated Disputes")
-------------------
shall be resolved by binding arbitration administered by the American
Arbitration Association ("AAA") in Wilmington, Delaware, and, except as
---
expressly provided in this Agreement, shall be conducted in accordance with the
Expedited Procedures under the Commercial Arbitration Rules of the AAA, as such
rules may be amended from time to time (the "Rules"). The hearing locale shall
-----
be Wilmington, Delaware. The hearing shall be before a panel of three
arbitrators (the "Arbitrators"), one of whom shall be selected by the
Stockholders' Representative, one of whom shall be selected by TeleSpectrum, and
the third of whom shall be selected by the other two arbitrators. The
Arbitrators' decision (the "Decision") shall be binding, and the prevailing
--------
party may enforce the Decision in any court of competent jurisdiction. The
parties shall use their best efforts to cooperate with each other in causing the
arbitration to be held in as efficient and expeditious a manner as practicable,
including, but not limited to, providing such documents and making available
such of their personnel as the Arbitrators may request, so that the Decision may
be reached timely. The Arbitrators shall take into account the parties' stated
goal of expedited proceedings in determining whether to authorize discovery and,
if so, the scope of permissible discovery and other hearing and pre-hearing
procedures. The authority of the Arbitrators shall be limited to deciding
liability for, and the proper amount of, any such claim, cause of action or
dispute, and the Arbitrators shall have no authority to award punitive damages.
The Arbitrators shall have such powers and establish such procedures as are
provided for in the Rules, so long as such powers and procedures are consistent
with this Section and are necessary to resolve the Arbitrated
<PAGE>
Dispute within the time periods specified in this Agreement. The Arbitrators
shall render a Decision within 30 business days after being appointed to serve
as Arbitrators unless the parties otherwise agree in writing or the Arbitrators
make a finding that a party has carried the burden of showing good cause for a
longer period. The IDRC Indemnified Parties, on the one hand, and TeleSpectrum
on the other hand, shall pay its own expenses of arbitration and the expenses of
the Arbitrators shall be equally shared; provided, however, that if in the
opinion of the Arbitrators any claim or defense or objection thereto by either
party is unreasonable, the Arbitrators may assess, as part of the award, all or
any part of the arbitration expenses (including reasonable attorneys' fees) of
the other party and of the Arbitrators against the party raising such
unreasonable claim, defense or objection.
SECTION 7.6 LIMITATIONS ON INDEMNIFICATION. Notwithstanding any other
provision of this Section 7, (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 or breach of covenant
made in or pursuant to this Agreement until the aggregate of all Damages
incurred by the Indemnified Parties in the group to which such Indemnified Party
belongs (either Indemnified TeleSpectrum Parties, as a group, or Indemnified
IDRC Parties, as a group) exceeds $250,000 (the "Deductible Amount"), and then
-----------------
such Indemnified Party shall be entitled to indemnification for its Damages in
excess of the Deductible Amount, (ii) the stockholders of IDRC and the IDRC
Optionholders, as a group, shall not be required to indemnify the TeleSpectrum
Indemnified Parties for an aggregate amount in excess of $9,000,000 under
Section 7.2 hereof, (iii) except as set forth in the Indemnity Escrow Agreement,
the stockholders of IDRC and the IDRC Optionholders, as a group, shall not be
required to indemnify the TeleSpectrum Indemnified Parties for an aggregate
amount in excess of $3,000,000 under Section 7.3 hereof, and (iv) TeleSpectrum
shall not be required to indemnify the IDRC Indemnified Parties for an aggregate
amount in excess of $9,000,000 under Section 7.4 hereof. Without limiting the
generality of the foregoing, any indemnification payments required to be made by
the stockholders of IDRC and the IDRC Optionholders hereunder shall be made
exclusively from the Escrow Securities held by the Escrow Agent under the
Indemnity Escrow Agreement, and TeleSpectrum shall have no recourse against any
stockholders of IDRC and the IDRC Optionholders in connection with any
indemnification claim hereunder. In addition, the calculation of the Deductible
Amount shall include any Damages incurred by an Indemnified Party for which the
Indemnified Party would have been entitled to claim indemnification under this
Article VII with respect to a breach of representation or warranty but for such
representation or warranty being qualified by materiality.
SECTION 7.7 CLAIMS PERIOD. Any claim for indemnification under this
Article VII for a breach of a representation, warranty or covenant (except for
these covenants which by their context cannot be performed in full prior to the
Expiration Date) shall be made by giving notice in accordance with the Indemnity
Escrow Agreement on or before the applicable "Expiration Date."
SECTION 7.8 EXCLUSIVE REMEDY. The remedies provided by Article VII
shall constitute the exclusive remedies for the matters covered hereby. In
addition, except as provided in Section 7.9, the sole recourse of any
Indemnified TeleSpectrum Party for Damages under Sections 7.2 and 7.3 shall be
under the Indemnity Escrow Agreement, and by becoming parties to this Agreement
for purposes of Section 4.20, the MDC Entities shall not thereby assume
responsibility for the accuracy or breach of any representations, warranties or
covenants included elsewhere in this Agreement, nor shall the MDC entities
assume any liability in excess of their pro rata portion of the Escrow Property.
<PAGE>
SECTION 7.9 EXCEPTION TO LIMITATION. 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, including the right to seek general
recourse, for any representation or warranty that was known to be untrue by the
maker when made with an actual intent to mislead or defraud.
SECTION 7.10 EFFECT OF INVESTIGATION. Any claim for indemnification
shall not be invalid as a result of any investigation by or opportunity to
investigate afforded to any party, except where such party had actual current
awareness of such claim prior to the date hereof and did not provide notice to
the other party of such awareness.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all prior written and oral and all contemporaneous oral agreements
and understandings with respect to the subject matter hereof.
SECTION 8.2 NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given when delivered
in person, by telecopy, or by registered or certified mail (postage prepaid,
return receipt requested) or by overnight courier service to the respective
parties as follows:
if to TeleSpectrum:
TeleSpectrum Worldwide Inc.
443 S. Gulph Road
King of Prussia, PA 19406
Telecopy: (610) 878-7480
Attention: Mr. Keith E. Alessi
with copies to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Telecopy: (215) 963-5299
Attention: Stephen M. Goodman, Esq.
if to IDRC:
International Data Response Corporation
PO Box 7130
Rancho Santa Fe, CA 92067-7130
Telecopy: (619) 759-3350
Attention: Mr. Jeffrey E. Stiefler and Mr. Paul Grinberg
<PAGE>
with a copy to:
Cooley Godward LLP
4365 Executive Drive - Suite 100
San Diego, CA 92121
Telecopy: (619) 453-3555
Attention: Lance W. Bridges, Esq.
if to any MDC Entities:
McCown De Leeuw & Co., Inc.
3000 Sand Hill Road
Building 3, Suite 290
Menlo Park, CA 94025
Telecopy: (650) 854-0853
Attention: Mr. Robert B. Hellman, Jr.
if to the Stockholders' Representative:
Mr. Glenn McKenzie
24 Beach Palm
Hampton, NH 03842
Telecopy: (603) 929-0876
or to such other address as the party to whom notice is given may have
previously furnished to the others in writing in the manner set forth above. Any
notice or communication delivered in person shall be deemed effective on
delivery. Any notice or communication sent by telecopy shall be deemed effective
on the first business day at the place of which such notice or communication is
received following the day on which such notice or communication was sent.
SECTION 8.3 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware regardless of the
laws that might otherwise govern under principles of conflicts of laws
applicable thereto. In any action between or among any of the parties to this
Agreement: (i) each of the parties irrevocably and unconditionally consents and
submits to the exclusive jurisdiction and venue of the state courts located in
the State of Delaware; (ii) each of the parties irrevocably waives the right to
trial by jury; and (iii) 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 8.2.
SECTION 8.4 DESCRIPTIVE HEADINGS. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 8.5 PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and except as set forth in
Section 4.13, nothing in this Agreement, express or implied, is intended to
confer upon any other person (including any employee of IDRC or any IDRC
Subsidiary) any rights or remedies of any nature whatsoever under or by reason
of this Agreement.
<PAGE>
SECTION 8.6 COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may be
executed in counterparts, each of which shall be deemed to be an original, but
all of which shall constitute one and the same agreement. This Agreement may be
executed by facsimile signature which, for all purposes, shall be deemed to be
an original signature.
SECTION 8.7 EXPENSES. Except as otherwise provided herein, all costs
and expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses except that
TeleSpectrum and IDRC shall share equally (i) the filing fees payable with
respect to the required filings under the HSR Act, (ii) the registration fees
payable with respect to filing the Registration Statement, and (iii) all
printing expenses incurred with respect to the Proxy Statement and the
Registration Statement.
SECTION 8.8 PERSONAL LIABILITY. This Agreement shall not create or be
deemed to create or permit any personal liability or obligation on the part of
any direct or indirect stockholder of any party hereto or any officer, director,
employee, agent, representative or investor of any party hereto.
SECTION 8.9 BINDING EFFECT; ASSIGNMENT. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective legal
representatives and successors. This Agreement may not be assigned by any party
hereto without the prior written consent of the other parties.
SECTION 8.10 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 phrases "but not limited
to" or "without limitation." 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.
SECTION 8.11 SEVERABILITY. If any provision of this Agreement or the
application thereof to any person or circumstance is held invalid or
unenforceable in any jurisdiction, the remainder hereof, and the application of
such provision to such person or circumstance in any other jurisdiction or to
other persons or circumstances in any jurisdiction, shall not be affected
thereby, and to this end the provisions of this Agreement shall be severable.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized on the day and
year first above written.
TELESPECTRUM WORLDWIDE INC.
By:/S/ KEITH E. ALESSI
________________________________________
Name: Keith E. Alessi
Title: Chairman, CEO & President
INTERNATIONAL DATA RESPONSE CORPORATION
By:/S/ JEFFREY E. STIEFLER
________________________________________
Name: Jeffrey E. Steifler
Title: Chairman and Chief Executive Officer
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
<PAGE>
[SIGNATURES CONTINUED FROM PRECEDING PAGE]
MCCOWN DE LEEUW & CO. III, L.P.*
/S/ ROBERT B. HELLMAN, JR.
_________________________________
By: Robert B. Hellman, Jr.
Its: General Partner
MCCOWN DE LEEUW & CO. OFFSHORE
(EUROPE) III, L.P.*
/S/ ROBERT B. HELLMAN, JR.
_________________________________
By: Robert B. Hellman, Jr.
Its: General Partner
MCCOWN DE LEEUW & CO. III, (ASIA) L.P. *
/S/ ROBERT B. HELLMAN, JR.
_________________________________
By: Robert B. Hellman, Jr.
Its: General Partner
THE GAMMA FUND LLC*
/S/ ROBERT B. HELLMAN, JR.
_________________________________
By: Robert B. Hellman, Jr.
Its: Managing Member
* Indicates an entity that is a party hereto solely with respect to Sections
4.20 and 7.8 of this Agreement.
<PAGE>
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
------------------------------------------
THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER (the "Amendment") is made
---------
as of the 26th day of February 1999, by and among TeleSpectrum Worldwide Inc.,
a Delaware corporation ("TeleSpectrum"), International Data Response
------------
Corporation, a Delaware corporation ("IDRC"), and the following stockholders of
----
IDRC: McCown DeLeeuw & Co. III, L.P., McCown De Leeuw & Co. Offshore (Europe)
III, L.P., McCown De Leeuw & Co. III, (Asia) L.P. and The Gamma Fund LLC
(collectively, the "MDC Entities").
------------
BACKGROUND
----------
The parties hereto are parties to the Agreement and Plan of Merger dated as
of January 14, 1999 (the "Merger Agreement") and have agreed to enter into this
----------------
Amendment for the purpose of amending the Merger Agreement. This is a writing
as contemplated by Section 6.3 of the Merger Agreement. All terms used herein
that are not defined herein shall have the meanings ascribed to such terms in
the Merger Agreement.
TERMS
-----
In consideration of the mutual promises herein contained and intending to
be legally bound hereby, the parties hereto agree as follows:
1. Series A Preferred Stock. Clause (ii) of the first Whereas clause is
------------------------
hereby amended and restated in its entirety as follows:
(ii) each outstanding share of Series A Preferred Stock, par value $.001
per share, of IDRC (the "Series A Preferred Stock"), each outstanding share
------------------------
of Series A-1 Preferred Stock, par value $.001 per share, of IDRC (the
"Series A-1 Preferred Stock"), and accrued and unpaid dividends with
--------------------------
respect to Series A Preferred Stock will be redeemed or paid, as
applicable, in cash; unless otherwise explicitly set forth herein or unless
the context otherwise dictates, all references to the "Series A Preferred
Stock" contained herein shall also be deemed to refer to the Series A-1
Preferred Stock;
2. Conversion and Cancellation of Securities. Section 1.3(b) is hereby
-----------------------------------------
amended and restated in its entirety as follows:
(b) At the Effective Time, (i) each outstanding share of Series A
Preferred Stock and each outstanding share of Series A-1 Preferred Stock
shall be redeemed for $20 in cash, and (ii) all accrued and unpaid
dividends then payable in Series A-1 Preferred Stock, with respect to the
outstanding shares of Series A Preferred Stock, shall be entitled to
receive cash in an amount equal to that calculated
<PAGE>
pursuant to Article IV, Section E.1 of IDRC's Amended and Restated
Certificate of Incorporation as in effect as of the Effective Time (the
aggregate amount of cash to be paid to the holders of Series A Preferred
Stock and Series A-1 Preferred Stock is referred to herein as the "Cash
----
Consideration"). Notwithstanding the foregoing, the payment of the Cash
-------------
Consideration to the holders of Series A Preferred Stock and Series A-1
Preferred Stock (collectively, the "Preferred Stockholders") shall be made
----------------------
as follows:
(1) At the Effective Time, all of the Preferred Stockholders shall be
paid their pro rata portion of the total Cash Consideration to be paid
to such stockholders under subsection (b) above; and
(2) At the Effective Time, all of the total Cash Consideration to be
paid to the MDC Entities, other than the Cash Consideration paid for
redemption of Series A-1 Preferred Stock or on account of all accrued
and unpaid dividends, shall be retained by TeleSpectrum as the MDC
Entities' investment in those certain promissory notes of TeleSpectrum
substantially in the form attached as Exhibit A hereto (collectively,
the "Promissory Notes") as denominated in such amounts as set forth on
----------------
Exhibit B hereto.
3. Optionholders Lock-Up.
---------------------
(a) Section 1.5(b) of the Merger Agreement is hereby amended by adding the
following at the end of the first sentence of such section but before the
period:
"and (iii) agrees not to (A) sell, transfer, pledge, assign or otherwise
dispose of (collectively, "TRANSFER"), or (B) enter into any contract, option or
--------
other arrangement (including any profit-sharing arrangement) with respect to the
Transfer of the Assumed Options or any shares of TeleSpectrum Common Stock or
TLSP Warrants obtained upon exercise thereof to any person other than by way of
gift or for estate planning purposes where such transferee has executed an
appropriate agreement whereby such transferee agrees to be bound by all of the
terms and conditions hereof"
(b) Section 1.5(b) of the Merger Agreement is hereby amended by adding a
new second sentence as follows:
"Notwithstanding the foregoing, a holder of Options shall no longer be
bound by the restrictions contained in clause (iii) of the prior sentence if
their employment with TeleSpectrum is terminated without "cause," or such holder
terminates their employment for "good reason," to the extent and as such terms
are defined in any existing employment agreement between such holder and IDRC,
and in the absence of any such agreement, as "cause" is defined in the
TeleSpectrum Stock Plan. In addition, in the absence of any existing employment
agreement, the foregoing restrictions are removed if the holder is
2
<PAGE>
terminated by TeleSpectrum without cause or if the holder of Options terminates
his or her employment for good reason as determined by TeleSpectrum, after the
date of this Amendment."
4. Conduct of IDRC's Business. Clause (ii) of Section 4.1(b) is hereby amended
--------------------------
and restated in its entirety as follows:
(ii) incur any indebtedness for borrowed money or issue any debt securities
except in the ordinary course of business and consistent with past
practice, except that IDRC shall be permitted to incur up to $7,500,00 of
additional indebtedness for borrowed money from Banque Nationale de Paris
or the MDC Entities;
5. Bank Negotiations. The last sentence of Section 4.16 is hereby amended and
-----------------
restated in its entirety as follows:
Neither TeleSpectrum nor IDRC shall communicate or negotiate with any such
lender in the absence of the other party, unless such other party consents
in writing to such communication or negotiation; provided however, that
IDRC shall be permitted to communicate or negotiate with Banque Nationale
de Paris regarding any indebtedness contemplated by Section 4.1(b)(ii)
without the presence of TeleSpectrum but shall not make any commitments or
agreements without the prior written approval of TeleSpectrum.
6. Promissory Notes. The following is added as a new Section 5.2(f) to the
----------------
Merger Agreement:
5.2(f). MDC Promissory Notes. Each of the MDC Entities shall have received
--------------------
a Promissory Note as contemplated by Section 1.3(b)(3), duly executed by
TeleSpectrum in the amount determined pursuant to Section 1.3.
7. Change in Form of Warrant. The "Exercise Price" in the Form of Warrant
-------------------------
shall be changed from $9.665 to $8.988. The Exercise Price is equal to the
average closing price of the TeleSpectrum common stock for the ten trading days
immediately prior to the date of this Amendment.
8. Conditions to Closings. The following is added as new Section 5.3(i) to the
----------------------
Merger Agreement:
5.3(i). Call Center Closings. IDRC shall have closed its call centers
--------------------
located at Phoenix, Arizona (North Central call center), Bloomfield, Iowa
and Wichita, Kansas.
3
<PAGE>
9. Miscellaneous. Except as expressly modified hereby, the Merger Agreement
-------------
shall remain in full force and effect. This Amendment shall be governed by and
construed in accordance with the laws of the State of Delaware regardless of the
laws that might otherwise govern under principles of conflicts of laws
applicable thereto, and shall be binding upon and inure to the benefit of the
parties hereto. This Amendment may be executed in counterparts, each of which
shall be deemed to be an original, but all of which shall constitute one and the
same agreement. This Amendment may be executed by facsimile, which for all
purposes, shall be deemed an original signature.
4
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date first above written.
TELESPECTRUM WORLDWIDE INC.
By: /s/ Keith E. Alessi
--------------------------------------
Name: Keith E. Alessi
Title: Chairman, CEO & President
INTERNATIONAL DATA RESPONSE CORPORATION
By: /s/ Jeffrey E. Stiefler
--------------------------------------
Name: Jeffrey E. Stiefler
Title: Chairman and Chief Executive Officer
MCCOWN DE LEEUW & CO. III, L.P.*
By: /s/ Robert B. Hellman, Jr.
--------------------------------------
Name: Robert B. Hellman, Jr.
Its: General Partner
MCCOWN DE LEEUW & CO. OFFSHORE (EUROPE)
III, L.P.*
By: /s/ Robert B. Hellman, Jr.
--------------------------------------
Name: Robert B. Hellman, Jr.
Its: General Partner
MCCOWN DE LEEUW & CO. III, (ASIA) L.P.*
By: /s/ Robert B. Hellman, Jr.
--------------------------------------
Name: Robert B. Hellman, Jr.
Its: General Partner
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
5
<PAGE>
THE GAMMA FUND LLC*
By: /s/ Robert B. Hellman, Jr.
------------------------------------
Name: Robert B. Hellman, Jr.
Its: Managing Member
* Indicates an entity that is a party hereto solely with respect to Sections
4.20 and 7.8 of the Merger Agreement.
6
<PAGE>
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
------------------------------------------
THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER (the "Amendment") is made
---------
as of the 26th day of February 1999, by and among TeleSpectrum Worldwide Inc.,
a Delaware corporation ("TeleSpectrum"), International Data Response
------------
Corporation, a Delaware corporation ("IDRC"), and the following stockholders of
----
IDRC: McCown DeLeeuw & Co. III, L.P., McCown De Leeuw & Co. Offshore (Europe)
III, L.P., McCown De Leeuw & Co. III, (Asia) L.P. and The Gamma Fund LLC
(collectively, the "MDC Entities").
------------
BACKGROUND
----------
The parties hereto are parties to the Agreement and Plan of Merger dated as
of January 14, 1999 (the "Merger Agreement") and have agreed to enter into this
----------------
Amendment for the purpose of amending the Merger Agreement. This is a writing
as contemplated by Section 6.3 of the Merger Agreement. All terms used herein
that are not defined herein shall have the meanings ascribed to such terms in
the Merger Agreement.
TERMS
-----
In consideration of the mutual promises herein contained and intending to
be legally bound hereby, the parties hereto agree as follows:
1. Series A Preferred Stock. Clause (ii) of the first Whereas clause is
------------------------
hereby amended and restated in its entirety as follows:
(ii) each outstanding share of Series A Preferred Stock, par value $.001
per share, of IDRC (the "Series A Preferred Stock"), each outstanding share
------------------------
of Series A-1 Preferred Stock, par value $.001 per share, of IDRC (the
"Series A-1 Preferred Stock"), and accrued and unpaid dividends with
--------------------------
respect to Series A Preferred Stock will be redeemed or paid, as
applicable, in cash; unless otherwise explicitly set forth herein or unless
the context otherwise dictates, all references to the "Series A Preferred
Stock" contained herein shall also be deemed to refer to the Series A-1
Preferred Stock;
2. Conversion and Cancellation of Securities. Section 1.3(b) is hereby
-----------------------------------------
amended and restated in its entirety as follows:
(b) At the Effective Time, (i) each outstanding share of Series A
Preferred Stock and each outstanding share of Series A-1 Preferred Stock
shall be redeemed for $20 in cash, and (ii) all accrued and unpaid
dividends then payable in Series A-1 Preferred Stock, with respect to the
outstanding shares of Series A Preferred Stock, shall be entitled to
receive cash in an amount equal to that calculated
<PAGE>
pursuant to Article IV, Section E.1 of IDRC's Amended and Restated
Certificate of Incorporation as in effect as of the Effective Time (the
aggregate amount of cash to be paid to the holders of Series A Preferred
Stock and Series A-1 Preferred Stock is referred to herein as the "Cash
----
Consideration"). Notwithstanding the foregoing, the payment of the Cash
-------------
Consideration to the holders of Series A Preferred Stock and Series A-1
Preferred Stock (collectively, the "Preferred Stockholders") shall be made
----------------------
as follows:
(1) At the Effective Time, all of the Preferred Stockholders shall be
paid their pro rata portion of the total Cash Consideration to be paid
to such stockholders under subsection (b) above; and
(2) At the Effective Time, all of the total Cash Consideration to be
paid to the MDC Entities, other than the Cash Consideration paid for
redemption of Series A-1 Preferred Stock or on account of all accrued
and unpaid dividends, shall be retained by TeleSpectrum as the MDC
Entities' investment in those certain promissory notes of TeleSpectrum
substantially in the form attached as Exhibit A hereto (collectively,
the "Promissory Notes") as denominated in such amounts as set forth on
----------------
Exhibit B hereto.
3. Optionholders Lock-Up.
---------------------
(a) Section 1.5(b) of the Merger Agreement is hereby amended by adding the
following at the end of the first sentence of such section but before the
period:
"and (iii) agrees not to (A) sell, transfer, pledge, assign or otherwise
dispose of (collectively, "TRANSFER"), or (B) enter into any contract, option or
--------
other arrangement (including any profit-sharing arrangement) with respect to the
Transfer of the Assumed Options or any shares of TeleSpectrum Common Stock or
TLSP Warrants obtained upon exercise thereof to any person other than by way of
gift or for estate planning purposes where such transferee has executed an
appropriate agreement whereby such transferee agrees to be bound by all of the
terms and conditions hereof"
(b) Section 1.5(b) of the Merger Agreement is hereby amended by adding a
new second sentence as follows:
"Notwithstanding the foregoing, a holder of Options shall no longer be
bound by the restrictions contained in clause (iii) of the prior sentence if
their employment with TeleSpectrum is terminated without "cause," or such holder
terminates their employment for "good reason," to the extent and as such terms
are defined in any existing employment agreement between such holder and IDRC,
and in the absence of any such agreement, as "cause" is defined in the
TeleSpectrum Stock Plan. In addition, in the absence of any existing employment
agreement, the foregoing restrictions are removed if the holder is
2
<PAGE>
terminated by TeleSpectrum without cause or if the holder of Options terminates
his or her employment for good reason as determined by TeleSpectrum, after the
date of this Amendment."
4. Conduct of IDRC's Business. Clause (ii) of Section 4.1(b) is hereby amended
--------------------------
and restated in its entirety as follows:
(ii) incur any indebtedness for borrowed money or issue any debt securities
except in the ordinary course of business and consistent with past
practice, except that IDRC shall be permitted to incur up to $7,500,00 of
additional indebtedness for borrowed money from Banque Nationale de Paris
or the MDC Entities;
5. Bank Negotiations. The last sentence of Section 4.16 is hereby amended and
-----------------
restated in its entirety as follows:
Neither TeleSpectrum nor IDRC shall communicate or negotiate with any such
lender in the absence of the other party, unless such other party consents
in writing to such communication or negotiation; provided however, that
IDRC shall be permitted to communicate or negotiate with Banque Nationale
de Paris regarding any indebtedness contemplated by Section 4.1(b)(ii)
without the presence of TeleSpectrum but shall not make any commitments or
agreements without the prior written approval of TeleSpectrum.
6. Promissory Notes. The following is added as a new Section 5.2(f) to the
----------------
Merger Agreement:
5.2(f). MDC Promissory Notes. Each of the MDC Entities shall have received
--------------------
a Promissory Note as contemplated by Section 1.3(b)(3), duly executed by
TeleSpectrum in the amount determined pursuant to Section 1.3.
7. Change in Form of Warrant. The "Exercise Price" in the Form of Warrant
-------------------------
shall be changed from $9.665 to $8.988. The Exercise Price is equal to the
average closing price of the TeleSpectrum common stock for the ten trading days
immediately prior to the date of this Amendment.
8. Conditions to Closings. The following is added as new Section 5.3(i) to the
----------------------
Merger Agreement:
5.3(i). Call Center Closings. IDRC shall have closed its call centers
--------------------
located at Phoenix, Arizona (North Central call center), Bloomfield, Iowa
and Wichita, Kansas.
3
<PAGE>
9. Miscellaneous. Except as expressly modified hereby, the Merger Agreement
-------------
shall remain in full force and effect. This Amendment shall be governed by and
construed in accordance with the laws of the State of Delaware regardless of the
laws that might otherwise govern under principles of conflicts of laws
applicable thereto, and shall be binding upon and inure to the benefit of the
parties hereto. This Amendment may be executed in counterparts, each of which
shall be deemed to be an original, but all of which shall constitute one and the
same agreement. This Amendment may be executed by facsimile, which for all
purposes, shall be deemed an original signature.
4
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date first above written.
TELESPECTRUM WORLDWIDE INC.
By: /s/ Keith E. Alessi
--------------------------------------
Name: Keith E. Alessi
Title: Chairman, CEO & President
INTERNATIONAL DATA RESPONSE CORPORATION
By: /s/ Jeffrey E. Stiefler
--------------------------------------
Name: Jeffrey E. Stiefler
Title: Chairman and Chief Executive Officer
MCCOWN DE LEEUW & CO. III, L.P.*
By: /s/ Robert B. Hellman, Jr.
--------------------------------------
Name: Robert B. Hellman, Jr.
Its: General Partner
MCCOWN DE LEEUW & CO. OFFSHORE (EUROPE)
III, L.P.*
By: /s/ Robert B. Hellman, Jr.
--------------------------------------
Name: Robert B. Hellman, Jr.
Its: General Partner
MCCOWN DE LEEUW & CO. III, (ASIA) L.P.*
By: /s/ Robert B. Hellman, Jr.
--------------------------------------
Name: Robert B. Hellman, Jr.
Its: General Partner
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
5
<PAGE>
THE GAMMA FUND LLC*
By: /s/ Robert B. Hellman, Jr.
------------------------------------
Name: Robert B. Hellman, Jr.
Its: Managing Member
* Indicates an entity that is a party hereto solely with respect to Sections
4.20 and 7.8 of the Merger Agreement.
6
<PAGE>
APPENDIX II
CRW AGREEMENT AND PLAN OF MERGER
<PAGE>
================================================================================
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
AMONG
CRW FINANCIAL, INC.
TELESPECTRUM WORLDWIDE INC.,
and
AND CRW ACQUISITION CORP.
Dated as of September 3, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
W I T N E S S E T H............................................................................ 1
- -------------------
ARTICLE I
THE MERGER..................................................................................... 1
SECTION 1.1. THE MERGER................................................................. 1
SECTION 1.2. STOCKHOLDER MEETING, CLOSING, EFFECTIVE TIME OF THE MERGER................. 2
SECTION 1.3. CONVERSION AND CANCELLATION OF SECURITIES.................................. 2
SECTION 1.4. EXCHANGE OF CERTIFICATES................................................... 3
SECTION 1.5. OPTIONS AND WARRANTS....................................................... 5
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................................................. 6
SECTION 2.1. ORGANIZATION, POWERS AND QUALIFICATIONS.................................... 6
SECTION 2.2. SUBSIDIARIES............................................................... 6
SECTION 2.3. CAPITAL STOCK.............................................................. 7
SECTION 2.4. CERTIFICATE OF INCORPORATION, BY-LAWS AND MINUTE BOOKS..................... 8
SECTION 2.5. AUTHORITY; BINDING EFFECT.................................................. 8
SECTION 2.6. CONFLICT WITH OTHER AGREEMENTS; APPROVALS.................................. 8
SECTION 2.7. GOVERNMENTAL CONSENTS AND APPROVALS........................................ 8
SECTION 2.8. SEC REPORTS................................................................ 9
SECTION 2.9. FINANCIAL STATEMENTS....................................................... 9
SECTION 2.10. ABSENCE OF CERTAIN CHANGES................................................. 10
SECTION 2.11. INDEBTEDNESS; ABSENCE OF UNDISCLOSED LIABILITIES........................... 10
SECTION 2.12. ASSETS..................................................................... 10
SECTION 2.13. CONTRACTS.................................................................. 11
SECTION 2.14. INSURANCE.................................................................. 11
SECTION 2.15. AUTHORIZATIONS; COMPLIANCE WITH LAW........................................ 11
SECTION 2.16. TAXES...................................................................... 11
SECTION 2.17. ABSENCE OF LITIGATION; CLAIMS.............................................. 12
SECTION 2.18. EMPLOYEE BENEFIT PLANS; EMPLOYMENT AGREEMENTS.............................. 12
SECTION 2.19. LABOR MATTERS.............................................................. 14
SECTION 2.20. INTELLECTUAL PROPERTY...................................................... 14
SECTION 2.21. ADEQUACY OF DISCLOSURE..................................................... 14
SECTION 2.22. REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS......................... 14
SECTION 2.23. TAX MATTERS................................................................ 15
SECTION 2.24. AFFILIATES................................................................. 15
SECTION 2.25. BOARD ACTION; VOTE REQUIRED; APPLICABILITY OF SECTION 203.................. 15
SECTION 2.26. OPINION OF FINANCIAL ADVISOR............................................... 15
SECTION 2.27. BROKERS AND FINDERS........................................................ 15
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB........................................ 16
SECTION 3.1. ORGANIZATION AND POWERS.................................................... 16
SECTION 3.2. AUTHORITY; BINDING EFFECT.................................................. 16
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 3.3. CONFLICT WITH OTHER AGREEMENTS; APPROVALS.................................. 16
SECTION 3.4. GOVERNMENTAL CONSENTS AND APPROVALS........................................ 16
SECTION 3.5. CAPITAL STOCK.............................................................. 17
SECTION 3.6. REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS......................... 17
SECTION 3.7. SEC REPORTS................................................................ 17
SECTION 3.8. FINANCIAL STATEMENTS....................................................... 18
SECTION 3.9. ABSENCE OF CERTAIN CHANGES................................................. 18
SECTION 3.10. ABSENCE OF LITIGATION; CLAIMS.............................................. 18
SECTION 3.11. TAX MATTERS................................................................ 18
SECTION 3.12. AFFILIATES................................................................. 19
SECTION 3.13. ADEQUACY OF DISCLOSURE..................................................... 19
SECTION 3.14. BROKERS AND FINDERS........................................................ 19
ARTICLE IV
OTHER AGREEMENTS............................................................................... 19
SECTION 4.1. CONDUCT OF THE COMPANY'S BUSINESS.......................................... 19
SECTION 4.2. PARENT'S UNDERTAKINGS...................................................... 21
SECTION 4.3. ACCESS TO INFORMATION...................................................... 21
SECTION 4.4. STOCKHOLDER VOTE; PROXY STATEMENT.......................................... 21
SECTION 4.5. REASONABLE BEST EFFORTS.................................................... 23
SECTION 4.6. PUBLIC ANNOUNCEMENTS....................................................... 23
SECTION 4.7. NOTIFICATION............................................................... 23
SECTION 4.8. SUBSEQUENT FINANCIAL STATEMENTS............................................ 23
SECTION 4.9. CONTROL OF OPERATIONS...................................................... 24
SECTION 4.10. REGULATORY AND OTHER AUTHORIZATIONS........................................ 24
SECTION 4.11. TAKEOVER STATUTE........................................................... 24
SECTION 4.12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.................................. 24
SECTION 4.13. TAX-FREE REORGANIZATION.................................................... 24
SECTION 4.14. NO SOLICITATION............................................................ 25
ARTICLE V
CONDITIONS TO CLOSING.......................................................................... 26
SECTION 5.1. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND PARENT AND MERGER SUB..... 26
SECTION 5.2. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY............................... 27
SECTION 5.3. CONDITIONS TO THE OBLIGATIONS OF PARENT AND MERGER SUB..................... 27
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER.............................................................. 29
SECTION 6.1. TERMINATION................................................................ 30
SECTION 6.2. EFFECT OF TERMINATION...................................................... 30
SECTION 6.3. AMENDMENT.................................................................. 30
SECTION 6.4. WAIVER..................................................................... 30
ARTICLE VII
MISCELLANEOUS.................................................................................. 31
SECTION 7.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES................................. 31
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 7.2. ENTIRE AGREEMENT........................................................... 31
SECTION 7.3. NOTICES.................................................................... 31
SECTION 7.4. GOVERNING LAW.............................................................. 32
SECTION 7.5. DESCRIPTIVE HEADINGS....................................................... 32
SECTION 7.6. PARTIES IN INTEREST........................................................ 32
SECTION 7.7. COUNTERPARTS; FACSIMILE SIGNATURES......................................... 32
SECTION 7.8. EXPENSES................................................................... 32
SECTION 7.9. PERSONAL LIABILITY......................................................... 32
SECTION 7.10. BINDING EFFECT; ASSIGNMENT................................................. 33
SECTION 7.11. SEVERABILITY............................................................... 33
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
This Agreement and Plan of Merger and Reorganization (this
"Agreement"), dated as of September 3, 1998, is made by and among CRW FINANCIAL,
---------
INC., a Delaware corporation (the "Company"), TELESPECTRUM WORLDWIDE INC., a
-------
Delaware corporation ("Parent"), and CRW ACQUISITION CORP., a Delaware
------
corporation and wholly-owned subsidiary of Parent ("Merger Sub").
----------
W I T N E S S E T H
-------------------
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the
Company and the sole stockholder of Merger Sub have each approved the business
combination described herein in which the Company will become a subsidiary of
Parent as a result of a merger of Merger Sub with and into the Company upon the
terms and subject to the conditions hereinafter set forth (the "Merger"),
------
pursuant to which each outstanding share of common stock, par value $.01 per
share ("Company Common Stock"), of the Company will be converted into the right
--------------------
to receive shares of common stock, par value $.01 per share ("Parent Common
-------------
Stock"), of Parent in the manner set forth herein;
- -----
WHEREAS, the Boards of Directors of Parent and the Company have each
determined that the Merger is in the best interest of their respective
stockholders and have each approved this Agreement and the Merger upon the terms
and conditions set forth herein;
WHEREAS, the Board of Directors of Merger Sub has approved and adopted this
Agreement, and Parent, as the sole stockholder of Merger Sub, will adopt this
Agreement promptly after the execution hereof; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a reorganization under Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code");
----
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, agreements and conditions set forth below, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. Subject to the terms and conditions hereof and
in accordance with the General Corporation Law of the State of Delaware, as
amended (the "DGCL"), at the Effective Time (hereinafter defined): (a) Merger
----
Sub shall be merged with and into the Company and the separate existence of
Merger Sub shall cease; (b) the Company, as the surviving corporation in the
Merger (the "Surviving Corporation"), (i) shall be a wholly-owned subsidiary of
---------------------
Parent, (ii shall continue its corporate existence under the laws of the State
of Delaware, (ii shall retain its present name and (iv shall succeed to all
rights, assets, liabilities and obligations of Merger Sub and the Company in
accordance with the DGCL; (c) the Certificate of Incorporation of the Company,
as in effect immediately prior to the Effective Time, shall continue as the
Certificate of Incorporation of the Surviving Corporation; (d) the By-laws of
the Merger Sub, as in effect immediately prior to the Effective Time,
-1-
<PAGE>
shall continue as the By-laws of the Surviving Corporation; (e) the directors of
Merger Sub immediately prior to the Effective Time shall be the directors of the
Surviving Corporation; and (f) the officers of the Merger Sub immediately prior
to the Effective Time shall continue as the officers of the Surviving
Corporation. From and after the Effective Time, the Merger will have all the
effects provided by the DGCL.
SECTION 1.2. STOCKHOLDER MEETING, CLOSING, EFFECTIVE TIME OF THE MERGER.
The Company shall submit this Agreement to the holders of Company Common Stock
for approval and adoption at the Stockholders Meeting (hereinafter defined) to
be held as soon as practicable following the date of this Agreement in
accordance with Section 4.4 hereof. Subject to this Agreement receiving such
stockholder approval, and subject to the other provisions of this Agreement, the
parties shall hold a closing (the "Closing") on the next business day (or such
-------
later date as the parties hereto may agree) following the day on which the last
of the conditions set forth in Article V hereof is fulfilled or waived (such
later date, the "Closing Date"), at 9:00 A.M. at the offices of Morgan, Lewis &
------------
Bockius LLP, One Logan Square, Philadelphia, Pennsylvania, or at such other time
or place as the parties agree upon. On the next business day after the Closing
Date, the parties hereto shall cause the Merger to be consummated by filing a
certificate of merger (the "Certificate of Merger") with the Secretary of State
---------------------
of the State of Delaware in such form as required by, and executed in accordance
with the relevant provisions of, the DGCL (the date and time of such filing, or
such later date or time agreed upon by Parent and the Company and set forth
therein, the "Effective Time.")
--------------
SECTION 1.3. CONVERSION AND CANCELLATION OF SECURITIES.
(a) At the Effective Time, each share of Company Common Stock issued
and outstanding immediately prior to the Effective Time (other than any
Appraisal Shares (as defined in Section 1.3(d) hereof) and shares of Company
Common Stock described in Section 1.3(b) hereof) shall, by virtue of the Merger
and without any action on the part of the holder thereof, be converted into the
right to receive .709 (the "Exchange Ratio") of a share of Parent Common Stock
--------------
(the "Merger Consideration"); provided that no fractional shares of Parent
--------------------
Common Stock shall be issued and, in lieu thereof, a cash payment shall be made
pursuant to Section 1.4(i) hereof. For purposes hereof, Fully-Diluted Common
Stock means the number of outstanding shares of Company Common Stock as of the
Effective Time (other than those shares of Company Common Stock beneficially
owned by the Parent or any of its Subsidiaries (as defined in Section 2.2
hereof)), plus the number of shares of Common Stock obtainable upon the exercise
of all outstanding options and warrants exercisable for Company Common Stock.
(b) At the Effective Time, each share of Company Common Stock (i)
beneficially owned by the Parent (or one of its Subsidiaries) immediately prior
to the Effective Time, or (ii) held in the treasury of the Company immediately
prior to the Effective Time, shall by virtue of the Merger and without any
action on the part of the holder thereof, be automatically canceled and retired
and cease to exist, and no cash, securities or other property shall be payable
in respect thereof.
(c) At the Effective Time, each share of Merger Sub common stock,
without par value ("Merger Sub Common Stock"), issued and outstanding
-----------------------
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action by the holder thereof, be converted into one validly issued,
fully paid and nonassessable common share, par value $.01 per share, of the
Surviving Corporation ("Surviving Corporation Common Stock").
----------------------------------
-2-
<PAGE>
(d) Notwithstanding anything in this Agreement to the contrary,
shares of Company Common Stock held by a holder who, pursuant to Section 262 of
the DGCL or any successor provision, has the right to demand and properly
demands an appraisal of such shares of Company Common Stock ("Appraisal
---------
Shares"), shall not be converted into the right to receive the Merger
- ------
Consideration, unless such holder fails to perfect or otherwise loses such
holder's right to such appraisal, if any. If, after the Effective Time, such
holder fails to perfect or loses any such right to appraisal, each such share of
Company Common Stock held by such holder shall be treated as a share of Company
Common Stock that had been converted as of the Effective Time into the right to
receive the Merger Consideration. At the Effective Time, any holder of Appraisal
Shares shall cease to have any rights with respect thereto, except the rights
provided in Section 262 of the DGCL or any successor provision and as provided
in the immediately preceding sentence. The Company shall give prompt notice to
the Parent of any demands received by the Company for appraisal of shares of
Company Common Stock.
(e) If between the date of this Agreement and the Effective Time, the
number of shares of Fully-Diluted Common Stock or the outstanding shares of
Parent Common Stock shall be changed into a different number of shares by reason
of any reclassification, recapitalization, split-up, combination or exchange of
shares, or any dividend payable in stock shall be declared thereon with a record
date within such period, the Exchange Ratio shall be adjusted accordingly to
provide to the holders of Fully-Diluted Common Stock and accord the Parent and
the Merger Sub with the same economic effect as contemplated by this Agreement.
SECTION 1.4. EXCHANGE OF CERTIFICATES.
(a) Prior to the Closing Date, the Parent shall select a bank or
trust company reasonably acceptable to the Company to act as exchange and paying
agent (the "Exchange Agent") in connection with the surrender of certificates
--------------
evidencing shares of Company Common Stock converted into Merger Consideration
pursuant to the Merger. At the Effective Time, Parent shall deposit with the
Exchange Agent one or more certificates representing the shares of Parent Common
Stock to be issued in the Merger (the "Merger Stock"), which shares of Merger
------------
Stock shall be deemed to be issued at the Effective Time. Promptly after the
Effective Time, Parent shall deliver to the Exchange Agent such cash as may be
required from time to time to make payment of cash in lieu of fractional shares
in accordance with Section 1.4(i) and 1.5 hereof.
(b) As soon as practicable after the Effective Time, but in no event
later than five days after the Effective Time, Parent shall direct the Exchange
Agent to mail to each person who was, at the Effective Time, a holder of record
of a certificate or certificates that immediately prior to the Effective Time
evidenced outstanding shares of Company Common Stock (the "Certificates") (i) a
------------
letter of transmittal (with instructions for its use) specifying that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent, which shall be in
a form and contain any other provisions as Parent and the Surviving Corporation
may reasonably agree and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for the Merger Consideration. Upon the proper
surrender of Certificates to the Exchange Agent, together with a properly
completed and duly executed letter of transmittal and such other documents as
may be required by the Exchange Agent, the holder of such Certificate shall be
entitled to receive in exchange therefor, and the Surviving Corporation shall
cause to be issued and paid, certificates representing the shares of Merger
Stock that such holder has the right to receive pursuant to the terms hereof
(together with any dividend or distribution with respect thereto made after the
Effective Time and any cash paid in
-3-
<PAGE>
lieu of fractional shares pursuant to Section 1.4(i)), and the Certificate so
surrendered shall be canceled. If any portion of the Merger Consideration is to
be paid to a person other than the person who is the record holder of the
Company Common Stock at the Effective Time, it shall be a condition to such
payment that the certificate evidencing the Company Common Stock so surrendered
shall be properly endorsed or otherwise be in proper form for transfer and that
it be accompanied by all documents required to evidence and effect such transfer
and by evidence reasonably satisfactory to the Surviving Corporation and Parent
that any applicable stock transfer tax has been paid.
(c) After the Effective Time, each outstanding Certificate which
theretofore represented shares of Company Common Stock shall, until surrendered
for exchange in accordance with this Section 1.4, be deemed for all purposes to
evidence ownership of full shares of Parent Common Stock into which the shares
of Company Common Stock (which, prior to the Effective Time, were represented
thereby) shall have been so converted.
(d) Except as otherwise expressly provided herein, the Parent shall
pay all charges and expenses, including those of the Exchange Agent, in
connection with the exchange of Certificates for shares of Merger Stock. Any
Merger Stock or other cash delivered to the Exchange Agent pursuant to Section
1.4(a) hereof, and not exchanged pursuant to Section 1.4(b) hereof for Company
Common Stock or fractional interests pursuant to Section 1.4(i) hereof within
180 days after the Effective Time shall be returned by the Exchange Agent to the
Surviving Corporation which shall thereafter act as exchange agent subject to
the rights of holders of Company Common Stock hereunder.
(e) At the Effective Time, the stock transfer books of the Company
shall be closed and no transfer of shares of Company Common Stock shall
thereafter be made.
(f) None of Parent, Merger Sub, the Company, the Surviving
Corporation or the Exchange Agent will be liable to any holder of shares of
Company Common Stock for any shares of Merger Stock, dividends or distributions
with respect thereto or cash payable in lieu of fractional shares pursuant to
Section 1.4(i) hereof delivered to a state abandoned property administrator or
other public official pursuant to any applicable abandoned property, escheat or
similar law.
(g) If any Certificates shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificates to be lost, stolen or destroyed, the Exchange Agent will deliver in
exchange for such lost, stolen or destroyed Certificates the Merger
Consideration for the shares represented thereby, deliverable in respect
thereof, as determined in accordance with the terms hereof. When authorizing
such payment in exchange for any lost, stolen or destroyed Certificates, the
person to whom the Merger Consideration is to be issued, as a condition
precedent to such delivery, shall give Parent a bond or indemnity reasonably
satisfactory to Parent, its transfer agent and their respective insurance
carriers against any claim that may be made against Parent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
(h) No dividend or other distribution declared or made after the
Effective Time with respect to the Merger Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate with
respect to the shares of Merger Stock issuable upon surrender thereof until the
holder of such Certificate shall surrender such Certificate in accordance with
Section 1.4(b). Subject to the effect of applicable law, following surrender of
any such Certificate there shall be paid, without interest, to the record holder
of certificates representing whole shares of Merger Stock issued in
-4-
<PAGE>
exchange therefor: (i) at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of Merger Stock; and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to surrender of such Certificate and a
payment date subsequent to such surrender payable with respect to such whole
shares of Merger Stock. No holder of Company Common Stock shall be entitled to
any interest on any cash amounts payable for fractional interests pursuant to
this Section 1.4(h).
(i) No certificates or scrip evidencing fractional shares of Merger
Stock shall be issued upon the surrender for exchange of Certificates, and such
fractional share interests shall not entitle the owner thereof to any rights of
a stockholder of Parent. In lieu of any such fractional shares, each holder of
a Certificate previously evidencing Company Common Stock, upon surrender of such
Certificate for exchange pursuant to this Article I, shall be paid an amount in
cash (without interest), rounded to the nearest cent, determined by multiplying
(a) the closing price for a share of Parent Common Stock on the Nasdaq National
Market on the first business day immediately following the Effective Time, by
(b) the fractional interest to which such holder would otherwise be entitled
(after taking into account all shares of Company Common Stock held of record by
such holder at the Effective Time).
SECTION 1.5. OPTIONS AND WARRANTS.
(a) At the Effective Time, each option and warrant granted or issued
by the Company and exercisable for shares of Company Common Stock, which is
outstanding and unexercised or unconverted immediately prior thereto, shall be
assumed by Parent pursuant to a writing to be executed at the Closing in form
and substance reasonably acceptable to the Company, and, subject to the
following provisions, shall be converted into an option or warrant to purchase
shares of Parent Common Stock. Each such option or warrant shall be converted
into an option or warrant to purchase such number of shares of Parent Common
Stock at such exercise price as is determined as provided below (and otherwise
having the same duration and other terms as the original option or warrant):
(i) the number of shares of Parent Common Stock to be subject
to the new option or warrant shall be equal to the product of (A) the number of
shares of Company Common Stock subject to the option or warrant immediately
prior to the Effective Time and (B) the Exchange Ratio, the product being
rounded, if necessary, up or down, to the nearest whole share; and
(ii) the exercise or convertible price per share of Parent
Common Stock under the new option or warrant shall be equal to (A) the exercise
price per share of the Company Common Stock under the option or warrant
immediately prior to the Effective Time divided by (B) the Exchange Ratio,
rounded, if necessary, up or down, to the nearest cent.
Notwithstanding the foregoing, those warrants that were issued by the Company
and Parent that are by their terms exercisable for shares of Parent Common Stock
(the "TLSP/CRW Warrants") shall be unaffected as a result of the Merger.
-----------------
(b) At the Effective Time, the Purchaser shall deliver to holders of
original options and warrants (except for the TLSP/CRW Warrants) appropriate
agreements representing the new options
-5-
<PAGE>
and warrants on the terms and conditions set forth in this Section 1.5(b). The
Parent shall take all corporate action necessary to reserve for issuance a
sufficient number of shares of Parent Common Stock for delivery upon exercise of
the new options and warrants in accordance with this Section 1.5(b). The Parent
shall file (i) a registration statement on Form S-8 (or any successor form) or
another appropriate form, effective promptly after the Effective Time, with
respect to shares of Parent Common Stock subject to the new options (but not any
such new warrants) and (ii) a registration statement on Form S-3 (or any
successor form) or another appropriate form (such registration statement, the
"Parent Form S-3"), effective promptly after the Effective Time, with respect to
---------------
shares of Parent Common Stock subject to the new warrants (but only with respect
to such shares of Parent Common Stock associated with shares of Company Common
Stock that had been registered by the Company on a registration statement on
Form S-3 (the "Company Form S-3"))). The Company, from time to time, shall also
----------------
prepare such resale prospectuses for inclusion in the Parent Form S-3 on the
same basis as contemplated by the Company Form S-3. The Company shall use all
reasonable efforts to maintain the effectiveness of (i) such Form S-8
registration statement for so along as such options remain outstanding and (ii)
the Parent Form S-3 for such period covered by the existing Company Form S-3. In
addition, with respect to those individuals who subsequent to the Merger will be
subject to the reporting requirements under Section 16(a) of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder (the
"Exchange Act"), the Parent shall administer any option plans assumed pursuant
------------
to this Section 1.5(b) in a manner that complies with Rule 16b-3 promulgated
under the Exchange Act to the extent such option plan complied with such rule
prior to the Merger.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to, and agrees with, Parent and Merger
Sub as follows, except as set forth on a Disclosure Schedule delivered by the
Company concurrently with the execution and delivery of this Agreement (the
"Company Schedule"), each of which exceptions shall specifically identify the
----------------
relevant subsection hereof to which it relates and shall be deemed to be
representations and warranties as if made hereunder:
SECTION 2.1. ORGANIZATION, POWERS AND QUALIFICATIONS. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has all requisite corporate power and
authority to carry on its business as it has been and is now being conducted and
to own, lease and operate the properties and assets used in connection
therewith. The Company is duly qualified as a foreign corporation authorized to
do business and is in good standing in every jurisdiction in which such
qualification is required, all of which jurisdictions are disclosed in the
COMPANY SCHEDULE, except where the failure to be so qualified would not have a
Company Material Adverse Effect. As used in this Agreement, "Company Material
----------------
Adverse Effect" shall mean any fact, condition, event, development or occurrence
- --------------
which, individually or when taken together with all other such facts,
conditions, events, developments or occurrences, could reasonably be expected to
have a material adverse effect on the financial condition, or operating results
of the Company and its Subsidiaries (hereinafter defined), taken as a whole.
SECTION 2.2. SUBSIDIARIES. (a) "Subsidiary" means, with respect to any
----------
party, any corporation, limited liability company, partnership, joint venture,
or other business association or entity, at least a majority of the voting
securities or economic interests of which is, directly or indirectly, owned
-6-
<PAGE>
or controlled by such party or by any one or more of its Subsidiaries. As used
in this Agreement, "Joint Venture" means, with respect to any party, any
-------------
corporation, limited liability company, partnership, joint venture or other
business association or entity in which (i) such party or any one or more of its
Subsidiaries, directly or indirectly, owns or controls more than five percent
and less than a majority of any class of the outstanding voting securities or
economic interests, or (ii) such party or a Subsidiary of such party is a
general partner.
(b) The COMPANY SCHEDULE lists each Subsidiary and Joint Venture of
the Company, the jurisdiction of its organization and the amount of its
securities outstanding and the owners thereof. Each Subsidiary is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Each Subsidiary has all requisite power and
authority to carry on its business as it has been and is now being conducted and
to own, lease and operate the assets and properties used in connection
therewith. Each Subsidiary is duly qualified as a foreign corporation
authorized to do business and is in good standing in every jurisdiction in which
such qualification is required, all of which jurisdictions are disclosed on the
COMPANY SCHEDULE, except where the failure to be so qualified would not have a
Company Material Adverse Effect. All issued and outstanding shares of capital
stock of each Subsidiary have been duly authorized, are validly issued and
outstanding, are fully paid and nonassessable and were issued in compliance with
all applicable Federal and state securities laws and, except as set forth on the
COMPANY SCHEDULE, are lawfully owned of record and beneficially by the Company
or another Subsidiary of the Company, free and clear of all pledges, liens,
claims, security interests and other charges or defects in title of any nature
whatsoever ("Liens"). There are no existing subscriptions, options, warrants,
-----
convertible securities, calls, commitments, agreements, conversion rights or
other rights of any character (contingent or otherwise) calling for or requiring
the issuance, transfer, sale or other disposition of any shares of the capital
stock of any Subsidiary of the Company, or calling for or requiring the issuance
of any securities or rights convertible into or exchangeable for shares of
capital stock of any Subsidiary of the Company, nor is the Company or any
Subsidiary of the Company subject to any obligation (contingent or otherwise) to
repurchase, redeem or otherwise acquire shares of capital stock of any
Subsidiary of the Company, in any case except as set forth on the COMPANY
SCHEDULE. Except for its Subsidiaries and its Joint Ventures or as set forth in
the COMPANY SCHEDULE, neither the Company nor any Subsidiary of the Company
directly or indirectly (i) owns or controls any shares of any corporation nor
has any voting securities of, or economic interest in, either of record or
beneficially in any association, partnership, limited liability company, joint
venture or other legal entity, or (ii) is a general partner of any partnership.
SECTION 2.3. CAPITAL STOCK. The Company has authorized capital stock
consisting of 20,000,000 shares of Company Common Stock and 500,000 shares of
Preferred Stock, par value $.01 per share ("Company Preferred Stock"). As of
-----------------------
the date hereof: (i) 6,533,209 shares of Company Common Stock are issued and
outstanding, (ii) no shares of Company Preferred Stock were issued and
outstanding, (iii) no shares of Company Common Stock are held as treasury
shares, (iv) 1,205,000 shares of the Company Common Stock are underlying
outstanding stock options granted under the Company stock option or equity
compensation plans (the "Company Stock Plans"), (v) 362,500 shares of the
-------------------
Company Common Stock are underlying outstanding warrants and (vi) 352,821 shares
of the Company Common Stock are obtainable pursuant to the terms of the
convertible notes. As of the date hereof, the Company owned 6,946,583 shares of
Parent Common Stock and other than the TLSP/CRW Warrants, which as of the date
hereof were exercisable for an aggregate of 678,410 shares of Parent Common
Stock, there are no existing subscriptions, options, warrants, convertible
securities, calls, commitments, agreements, conversion rights or other rights of
any character (contingent or otherwise) calling for or
-7-
<PAGE>
requiring the issuance, transfer, sale or other disposition of any shares of
Company Common Stock or Parent Common Stock by the Company. All of the issued
and outstanding shares of Company Common Stock have been duly authorized and are
validly issued and outstanding, fully paid and nonassessable, and were issued in
compliance with all applicable Federal and state securities laws; and all of
such treasury shares were acquired by the Company in compliance with all
applicable laws, including without limitation all applicable Federal and state
securities laws. No shares of capital stock issued by the Company are or were,
at the time of their issuance, issued in violation of preemptive rights. There
are no voting trusts or other agreements or understandings to which the Company
is a party, nor, to the knowledge of the Company, to which any stockholder of
the Company is a party, with respect to the voting of capital stock of the
Company.
SECTION 2.4. CERTIFICATE OF INCORPORATION, BY-LAWS AND MINUTE BOOKS. The
copies of the Certificate of Incorporation and all amendments thereto and of the
By-laws, as amended, of the Company and the Subsidiaries which have been
delivered to Parent are true, correct and complete copies thereof as in effect
on the date hereof. The minute books of the Company and the Subsidiaries which
have been made available for inspection contain minutes, which are accurate and
complete in all material respects, of all meetings and consents in lieu of
meetings of the Board of Directors (and any committee thereof) and of the
stockholders of the Company and the Subsidiaries since the respective dates of
incorporation.
SECTION 2.5. AUTHORITY; BINDING EFFECT. The Company has all requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. All necessary action,
corporate or otherwise, required to have been taken by or on behalf of it by
applicable law, its charter document or otherwise to authorize (i) the approval,
execution and delivery on its behalf of this Agreement and (ii) its performance
of its obligations under this Agreement and the consummation of the transactions
contemplated hereby has been taken, except that this Agreement must be approved
by the holders of a majority of the outstanding Company Common Stock of record
on the record date for the Stockholders Meeting ("Required Company Stockholder
----------------------------
Approval"). This Agreement constitutes the Company's valid and binding
- --------
agreement, enforceable against it in accordance with its terms.
SECTION 2.6. CONFLICT WITH OTHER AGREEMENTS; APPROVALS. The execution and
delivery of this Agreement do not, and the consummation of the transactions
contemplated hereby will not, (i) violate or conflict with the Company's charter
or bylaws or the comparable organizational documents of any of its Subsidiaries,
or (ii) constitute a breach or default (or an event that with notice or lapse of
time or both would become a breach or default) or give rise to any Lien, third
party right of termination, cancellation, material modification or acceleration,
or loss of any benefit, under any Contract (hereinafter defined) to which the
Company or any Subsidiary of the Company is a party or by which it is bound, or
(iii) subject to the consents, approvals, orders, authorizations, filings,
declarations and registrations specified in Section 2.7 or in the COMPANY
SCHEDULE in response thereto, conflict with or result in a violation of any
permit, concession, franchise or license or any law, rule or regulation
applicable to the Company or any of its Subsidiaries or any of their properties
or assets, except, in the case of clauses (ii) and (iii), for any such breaches,
defaults, liens, third party rights, cancellations, modifications, accelerations
or losses of benefits, conflicts or violations which would not have a Company
Material Adverse Effect and do not materially impair the ability of the Company
to perform its obligations under this Agreement or prevent or materially delay
the consummation of any of the transactions contemplated hereby.
-8-
<PAGE>
SECTION 2.7. GOVERNMENTAL CONSENTS AND APPROVALS. Except as set forth on
the COMPANY SCHEDULE, neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will require any
consent, approval, order, authorization, or permit of, or filing with or
notification to, any local, state, federal or foreign court, administrative
agency, commission or other governmental or regulatory authority, agency or
instrumentality ("Governmental Entity"), except (a) the filing of the
-------------------
Registration Statement (hereinafter defined) with the Securities and Exchange
Commission (the "SEC") in accordance with the Securities Act of 1933, as
---
amended, and the rules and regulations thereunder (the "Securities Act") and the
--------------
entry of an order by the SEC permitting such Registration Statement to become
effective, and compliance with applicable state securities laws, (b) the filing
of the Proxy Statement (hereinafter defined) and related proxy materials with
the SEC in accordance with 0the Exchange Act, (c) notification pursuant to, and
expiration or termination of the waiting period under, the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and regulations
thereunder (the "HSR Act") and (d) the filing and recording of the Certificate
-------
of Merger in accordance with the DGCL.
SECTION 2.8. SEC REPORTS. The Company has filed all required forms,
reports and documents with the SEC since January 1, 1997 (collectively, the
"Company's SEC Reports"), including without limitation the Company's Annual
---------------------
Report on Form 10-K for the year ended December 31, 1997 (the "Company 1997 Form
-----------------
10-K") and the Company's Quarterly Report on Form 10-Q for the fiscal quarters
- ----
ended March 31, 1998 and June 30, 1998 (the "Company Forms 10-Q"). The
------------------
Company's SEC Reports have complied in all material respects with all applicable
requirements of the Securities Act and the Exchange Act. As of their respective
dates, none of the Company's SEC Reports, including, without limitation, any
financial statements or schedules included or incorporated by reference therein,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated or incorporated by reference therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. There have been filed as exhibits to, or
incorporated by reference in, the Company 1997 Form 10-K and Company Forms 10-Q
all contracts which, as of the date hereof, are material as described in Item
601(b)(10) of Regulation S-K. The Company has heretofore delivered or made
available to Parent, in the form filed with the SEC, all of the Company's SEC
Reports.
SECTION 2.9. FINANCIAL STATEMENTS. The (a) consolidated balance sheets
of the Company and its Subsidiaries at December 31, 1997 and 1996 and the
related consolidated statements of earnings, changes in stockholders' equity and
statements of cash flow for the years then ended, together with the notes
thereto, audited by Arthur Anderson LLP (the "'Company's Auditors"); and (b)
------------------
unaudited consolidated balance sheets of the Company and Subsidiaries at June
30, 1998 and related consolidated statements of income, changes in stockholders'
equity and statements of cash flow for the six-month period ended June 30, 1998,
(the "Balance Sheet Date") have been prepared in accordance with generally
------------------
accepted accounting principles consistently applied throughout the periods
involved ("GAAP"). Such balance sheets, including the related notes, fairly
----
present, in all material respects, the consolidated financial position, assets
and liabilities (whether accrued, absolute, contingent or otherwise) of the
Company and its Subsidiaries at the dates indicated and such consolidated
statements of income, changes in stockholders' equity and statements of cash
flow fairly present the consolidated results of operations, changes in
stockholders' equity and cash flow of the Company and its Subsidiaries for the
periods indicated. The unaudited consolidated financial statements as at and
for the six-month period ending June 30, 1998 contain all adjustments, which are
solely of a normal recurring nature, necessary to present fairly, in all
material respects, the financial position at June 30, 1998, and the results of
operations and
-9-
<PAGE>
changes in stockholders' equity and financial position for the six-month period
then ended. (The unaudited consolidated balance sheet of the Company and its
Subsidiaries at June 30, 1998 described above is referred to herein as the
"Company Balance Sheet").
---------------------
SECTION 2.10. ABSENCE OF CERTAIN CHANGES. Except as described in the
COMPANY SCHEDULE, since December 31, 1997 (the "Company Audit Date"), the
------------------
Company and the Subsidiaries have conducted their business solely in the
ordinary course consistent with past practice. Except as otherwise disclosed
on the COMPANY SCHEDULE or as referred to in the Company's SEC Reports, since
the Company Audit Date, the Company and the Subsidiaries have not:
(a) suffered any Company Material Adverse Effect;
(b) been subject to any other events or conditions of any character
that would impair the ability of the Company to perform its obligations under
this Agreement or prevent or delay the consummation of any of the transactions
contemplated hereby;
(c) made any material change to their respective accounting methods,
principles or practices;
(d) incurred any material liabilities, other than liabilities
incurred in the ordinary course of business consistent with past practice, or
discharged or satisfied any Lien material, or paid any material liabilities,
other than in the ordinary course of business consistent with past practices, or
failed to pay or discharge when due any liabilities of which the failure to pay
or discharge has caused or will cause any material damage or risk of material
loss to it or any of its material assets or properties; or
(e) taken or been subject to any other action or event that would
have required the consent of Parent pursuant to Section 4.1 hereof.
SECTION 2.1. INDEBTEDNESS; ABSENCE OF UNDISCLOSED LIABILITIES. The
COMPANY SCHEDULE discloses as of the date hereof all indebtedness for money
borrowed of the Company or any Subsidiary of the Company, accurately disclosing
for each such indebtedness the payee, the original principal amount of the loan,
the current unpaid balance of the loan, the interest rate and the maturity date.
Neither the Company nor any of its Subsidiaries has any material indebtedness,
liability or obligation of any kind (whether known or unknown, accrued,
absolute, asserted or unasserted, contingent or otherwise) except (i) as and to
the extent reflected, reserved against or otherwise disclosed in the Balance
Sheet, or (ii) for liabilities and obligations incurred subsequent to the
Balance Sheet Date in the ordinary course of business and which do not have a
Company Material Adverse Effect or materially impair the ability of Parent to
perform its obligations under this Agreement or prevent or materially delay the
consummation of any of the transactions contemplated hereby.
SECTION 2.1. ASSETS. Except as described in the COMPANY SCHEDULE, the
Company and the Subsidiaries have good and marketable title to all their real
and personal properties and assets, including without limitation those assets
and properties reflected in the Balance Sheet in the amounts and categories
reflected therein, free and clear of all Liens, except (a) the lien of current
taxes not yet due and payable, (b) properties, interests, and assets disposed of
by the Company or any Subsidiary since the Balance Sheet Date solely in the
ordinary course of business consistent with past practice, (c) such secured
indebtedness as is disclosed in the Balance Sheet covering the properties
referred to therein, and
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<PAGE>
(d) such imperfections of title, easements and encumbrances, if any, as are not
substantial in character, amount or extent and do not materially detract from
the value, or interfere with the present or proposed use, of the properties
subject thereto ("Permitted Liens").
---------------
SECTION 2.13. CONTRACTS.
(a) The COMPANY SCHEDULE lists each written or oral contract,
agreement, arrangement, lease, instrument, mortgage or commitment to which the
Company or a Subsidiary is a party or may be bound or to which their respective
properties or assets may be subject ("Contract").
--------
(b) All Contracts are valid and binding on the Company or its
Subsidiaries, as applicable, and, to the knowledge of the Company, the other
parties thereto, and are in full force and effect as to the Company on the date
of this Agreement except to the extent they have previously expired in
accordance with their terms or except to the extent that their invalidity would
not have a Company Material Adverse Effect. None of the Company, any of its
Subsidiaries nor, to the Company's knowledge, any other parties, have violated
any provision of, or committed or failed to perform any act which with notice,
lapse of time or both would constitute a default under the provisions of, any
Contract, the termination or violation of which, or the default under which,
might have a Company Material Adverse Effect.
SECTION 2.14. INSURANCE. The COMPANY SCHEDULE accurately sets forth as of
the day preceding the date hereof all policies of insurance, other than title
insurance policies, held by or on behalf of the Company and all outstanding
claims. All such policies of insurance are in full force and effect, and no
notice of cancellation has been received. In the reasonable judgment of the
Company, such policies are in amounts which are adequate in relation to the
business and properties of the Company, and all premiums to date have been paid
in full.
SECTION 2.15. AUTHORIZATIONS; COMPLIANCE WITH LAW. (a) The Company and
the Subsidiaries hold all licenses, franchises, certificates, consents, permits,
approvals, certificates of public convenience and necessity, and authorizations
("Authorizations") from all Governmental Entities and other persons which are
--------------
necessary for the lawful conduct of their respective businesses and their use
and occupancy of their assets and properties in the manner currently conducted,
used and occupied, except where the failure to hold any of the foregoing would
not have a Company Material Adverse Effect or materially impair the ability of
the Company to perform its obligations under this Agreement or materially
prevent or materially delay the consummation of any of the transactions
contemplated hereby.
(b) The Company and each of the Subsidiaries is in compliance with
all applicable laws, statutes, ordinances, codes, rules and regulations of any
Governmental Entities, except where such violations would not have a Company
Material Adverse Effect.
SECTION 2.16. TAXES.
(a) All federal, state, local and foreign tax returns, reports,
statements and other similar filings required to be filed by the Company or the
Subsidiaries (the "Tax Returns") on or prior to the date hereof or with respect
-----------
to taxable periods ending on or prior to the date hereof with respect to any
federal, state, local or foreign taxes, assessments, deficiencies, fees and
other governmental charges or impositions (including, without limitation, all
income tax, unemployment compensation, social security,
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<PAGE>
payroll, sales and use, excise, privilege, property, ad valorem, transfer,
franchise, license, school and any other tax or similar governmental charge or
imposition (including interest, penalties or additions with respect thereto)
under laws of the United States or any state or municipal or political
subdivision thereof or any foreign country or political subdivision thereof
("Taxes") have been timely filed and all such Tax Returns are true, correct and
-----
complete in all material respects.
(b) All Taxes called for by the Tax Returns have been fully paid. The
accruals for Taxes contained in the Balance Sheet are adequate to cover the
liabilities for Taxes of the Company and the Subsidiaries as of the Balance
Sheet Date and include adequate provision for all deferred taxes, and nothing
has occurred subsequent to that date to make any of such accruals inadequate.
(c) Neither the Company nor the Subsidiaries have received any notice
of assessment or proposed assessment in connection with any Taxes or Tax Returns
and there are not pending tax examinations of or tax claims asserted against the
Company or the Subsidiaries or any of their respective assets or properties.
Neither the Company nor any Subsidiary has extended, or waived the application
of, any statute of limitations of any jurisdiction regarding the assessment or
collection of any Taxes.
(d) There are no tax liens (other than any lien for current taxes not
yet due and payable) on any of the assets or properties of the Company or the
Subsidiaries. The Company has no knowledge of any basis for any additional
assessment of any Taxes. The Company and the Subsidiaries have made all
deposits required by law to be made with respect to employees' withholding and
other employment taxes, including without limitation the portion of such
deposits relating to taxes imposed upon the Company or the Subsidiaries.
SECTION 2.17. ABSENCE OF LITIGATION; CLAIMS. There are no claims, actions,
suits, proceedings or investigations pending or, to the knowledge of the
Company, threatened against the Company or any of its Subsidiaries, or any
properties or rights of the Company or any of its Subsidiaries, or with respect
to which any director, officer, employee or agent is or may be entitled to claim
indemnification from the Company or any Subsidiary of the Company, before any
Governmental Entity or arbitrator, nor is there any judgement, decree,
injunction, rule or order of any Governmental Entity or arbitrator expressly
applicable by its terms to the Company or any of its Subsidiaries.
SECTION 2.18. EMPLOYEE BENEFIT PLANS; EMPLOYMENT AGREEMENTS.
(a) The COMPANY SCHEDULE lists all employee benefit plans (as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")) and all bonus, stock option, stock purchase, incentive,
-----
deferred compensation, supplemental retirement, severance and other similar
fringe or employee benefit plans, programs or arrangements, and any current or
former employment or executive compensation or severance agreements, written or
otherwise, for the benefit of, or relating to, any employee of the Company, any
trade or business (whether or not incorporated) which is a member of a
controlled group including the Company or which is under common control with the
Company (an "ERISA Affiliate") within the meaning of Section 414 of the Code, or
---------------
any subsidiary of the Company, as well as each plan with respect to which the
Company or an ERISA Affiliate could incur liability under Section 4069 (if such
plan has been or were terminated) or Section 4212(c) of ERISA (together, the
"Employee Plans"), excluding former agreements under which the Company has no
--------------
remaining obligations and any of the foregoing that are required to be
maintained by
-12-
<PAGE>
the Company under the laws of any foreign jurisdiction. With respect to each
Employee Plan, as applicable, a copy of (i) each such written Employee Plan
(other than those referred to in Section 4(b)(4) of ERISA, together with all
amendments, trust agreements, insurance policies and service agreements; (ii)
the three most recently filed Forms 5500 or 5500 C/R and any financial
statements attached thereto; (iii) the most recent Internal Revenue Service
("IRS") determination letter; (iv) the most recent summary plan description; (v)
---
all reports submitted within the preceding three years by third-party
administrators, actuaries, investment managers, consultants, or other
independent contractors, has been made available to Parent; and (vi) all notices
that were issued within the preceding three years by the IRS, Department of
Labor, the Pension Benefit Guarantee Corporation, or any other Governmental
Entity.
(b) Except as set forth in the COMPANY SCHEDULE, (i) except as
required by Section 4980B of the Code, none of the Employee Plans promises or
provides retiree medical or other retiree welfare benefits to any person and
none of the Employee Plans is a "multi employer plan" as such term is defined in
Section 3(37) of ERISA; (ii) there has not been any breach of any fiduciary
duty, as described in Section 404 of ERISA, or no "prohibited transaction", as
such term is defined in Section 406 of ERISA or Section 4975 of the Code, with
respect to any Employee Plan, which could result in any material liability of
the Company or any of its subsidiaries; (iii) all Employee Plans are in
compliance in all material respects with the requirements prescribed by any and
all statutes (including ERISA and the Code), orders, or governmental rules and
regulations currently in effect with respect thereto (including applicable
requirements for notification to participants or the Department of Labor, IRS or
Secretary of the Treasury), all employee plans have in all material respects
been operated at all times in accordance with their terms and with ERISA and the
Code, and the Company and each of its subsidiaries have performed all material
obligations required to be performed by them under, are not in any material
respect in default under or violation of, and have no knowledge of any default
or violation by any other party to, any of the Employee Plans; (iv) each
Employee Plan intended to qualify under Section 401(a) of the Code and each
trust intended to qualify under Section 501(a) of the Code is the subject of a
favorable determination letter from the IRS, and nothing has occurred which may
reasonably be expected to impair such determination; (v) all contributions
required to be made to any Employee Plan pursuant to Section 412 of the Code, or
the terms of the Employee Plan or any collective bargaining agreement, have been
made on or before their due dates; (vi) with respect to each Employee Plan, no
"reportable event" within the meaning of Section 4043 of ERISA (excluding any
such event for which the 30 day notice requirement has been waived under the
regulations to Section 4043 of ERISA) nor any event described in Section 4062,
4063, 4604 or 4041 of ERISA has occurred; and (viii) neither the Company nor any
ERISA Affiliate has incurred, nor reasonably expects to incur, any liability
under Title IV of ERISA (other than liability for premium payments to the
Pension Benefit Guaranty Corporation arising in the ordinary course); (ix)
neither the Company nor any ERISA Affiliate has incurred any liability for any
excise, income or other taxes or penalties with respect to any Employee Plan
which has not been paid in full, and no event has occurred and no circumstance
exists that could give rise to any such liability; (x) there are no pending or
threatened claims against any Employee Plan (other than routine claims for
benefits) or against any fiduciary or an Employee Plan with respect to such
plan, nor is there any basis for such a claim; and (xi) no Employee Plan is
presently under audit or examination (nor has notice been received of a
potential audit or examination) by any governmental entity, and no matters are
pending with respect to any Employee Plan under any governmental corrective or
remedial program.
(c) The COMPANY SCHEDULE sets forth a true and complete list of each
current or former employee, officer or director of the Company or any of its
Subsidiaries who holds any option to purchase Company Common Stock as of the
date hereof, together with the number of shares of Company
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<PAGE>
Common Stock which are subject to such option, the date of grant of such option,
the extent to which such option is vested (or will become vested within six
months from the date hereof, or as a result of, the Merger), the option price of
such option (to the extent determined as of the date hereof), whether such
option is intended to qualify as an incentive stock option within the meaning of
Section 422(b) of the Code (an "ISO"), and the expiration date of such option.
---
The COMPANY SCHEDULE also sets forth the total number of such ISOs and such
nonqualified options.
(d) Except as set forth in the Company Schedule, any amount that
could be received (whether in cash or property or the vesting of property) as a
result of any of the transactions contemplated by this Agreement by any
employee, officer or director of the Company or any of its affiliates who is a
"disqualified individual" (as such term is defined in Proposed Treasury
Regulation Section 1.280G-1) under any employment, severance or termination
agreement, other compensation arrangement or Employee Plan currently in effect
would not be characterized as an "excess parachute payment" (as such term is
defined in Section 280G of the Code).
SECTION 2.19. LABOR MATTERS. There are no controversies pending or, to
the knowledge of the Company, threatened, between the Company or any of its
Subsidiaries or any of their respective employees, which controversies would
have a Company Material Adverse Effect. Neither the Company nor any of its
Subsidiaries is party to any collective bargaining agreement or other labor
agreement with any union or labor organization and no union or labor
organization has been recognized by the Company nor or any of its Subsidiaries
as a bargaining representative for employees of the Company or any of its
Subsidiaries.
SECTION 2.20. INTELLECTUAL PROPERTY. Except for that which Casino Money
Centers, Inc. ("CMC") is the registered owner (and as to which no representation
---
or warranty is made by the Company), neither the Company nor any Subsidiary of
the Company has any registered copyrights, patents, trademarks or applications
for any registered copyrights, patents or trademarks. In conducting their
respective business as presently conducted, neither the Company nor any
Subsidiary of the Company (other than CMC, as to which no representation or
warranty is made hereby) is infringing upon or unlawfully or wrongfully using
any patent, trademark, trade name, service mark, copyright or any other form of
intellectual property or trade secret, owned or claimed by another. Neither the
Company nor any Subsidiary is in default under, nor has it received any notice
of any claim of infringement or any other claim or proceeding relating to, any
such patent, trademark, trade name, service mark, copyright, trade secret or any
other form of intellectual property or any agreement relating thereto.
SECTION 2.21. ADEQUACY OF DISCLOSURE. No representation or warranty by
the Company in this Agreement, in any certificate or in the Company Schedule
furnished or to be furnished to Parent pursuant hereto, or in connection with
the negotiation, execution or performance of this Agreement, contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact required to be stated herein or therein or necessary to make any
statement herein or therein not misleading.
SECTION 2.22. REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. The
information supplied by the Company for inclusion or incorporation by reference
in the registration statement of Parent on Form S-4 pursuant to which shares of
Parent Common Stock to be issued in the Merger will be registered with the SEC
(the "Registration Statement") shall not contain, at the time the Registration
----------------------
Statement is declared effective by the SEC, any untrue statement of a material
fact or omit to state any material fact required to be stated in the
Registration Statement or necessary in order to make the
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<PAGE>
statements in the Registration Statement not misleading. The information
supplied by the Company for inclusion or incorporation by reference in the proxy
statement/prospectus (the "Proxy Statement") to be sent to the stockholders of
---------------
the Company in connection with the special meeting of the Company's stockholders
to consider this Agreement (the "Stockholders Meeting") shall not, at the time
--------------------
the Proxy Statement is first mailed to stockholders, at the time of the
Stockholders Meeting, or at the Effective Time, contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements made, in light of the circumstances under which they were made, not
misleading or omit to state any material fact necessary to correct any statement
in any earlier communication with respect to the solicitation of proxies for the
Stockholders Meeting which has become false or misleading. If at any time prior
to the Effective Time any event relating to the Company or any of its affiliates
should be discovered by the Company which should be set forth in an amendment to
the Registration Statement or a supplement to the Proxy Statement, the Company
shall promptly inform Parent.
SECTION 2.23. TAX MATTERS. Neither the Company nor, to the knowledge of
the Company, any of its affiliates has taken or agreed to take any action that
would prevent the Merger from constituting a reorganization qualifying under the
provisions of Section 368(a) of the Code or make untrue any representation or
warranty contained in the Company Tax Certificate.
SECTION 2.24. AFFILIATES. Except for the persons listed on the COMPANY
SCHEDULE there are no persons who, to the knowledge of the Company, may be
deemed to be affiliates of the Company under Rule 1-02 of Regulation S-X of the
SEC and Rule 145 under the Securities Act.
SECTION 2.25. BOARD ACTION; VOTE REQUIRED; APPLICABILITY OF SECTION 203.
(a) The Special Committee of the Board of Directors, and the entire Board of
Directors of the Company, each has unanimously determined that the transactions
contemplated by this Agreement are in the best interests of the Company and its
stockholders and has resolved to recommend to such stockholders that they vote
in favor thereof.
(b) The provisions of Section 203 of the Delaware Law will not apply
to this Agreement or any of the transactions contemplated hereby.
(c) The Company represents and warrants that it has been advised by
each of its directors and executive officers that each such person intends to
vote his shares of Company Common Stock in favor of the approval and adoption of
this Agreement.
SECTION 2.26. OPINION OF FINANCIAL ADVISOR. The Company has received the
opinion of Janney Montgomery Scott Inc. (the "Company Financial Advisor"), dated
-------------------------
September 3, 1998, to the effect that, as of such date, the Merger Consideration
is fair from a financial point of view to the holders of Company Common Stock
and a copy of such opinion has been made available to Parent.
SECTION 2.27. BROKERS AND FINDERS. Neither the Company, any Subsidiary of
the Company nor any of their respective officers, directors or employees has
engaged any broker or finder or incurred any liability for any brokerage fees,
commissions or finder's fees in connection with the transactions contemplated
herein, except that the Special Committee of the Board of Directors of the
Company has engaged the Company Financial Advisor as its financial advisor
pursuant to the terms of an engagement letter, a true and complete copy of which
has previously been furnished to Parent.
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<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub each represents and warrants to the Company as
follows, except as set forth on a Disclosure Schedule delivered by Parent
concurrently with the execution and delivery of this Agreement (the "Parent
------
Schedule"), each of which exceptions shall specifically identify the relevant
- --------
subsection hereof to which it relates and shall be deemed to be representations
and warranties as if made hereunder:
SECTION 3.1. ORGANIZATION AND POWERS. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Each of Parent and the
Merger Sub has all requisite corporate power and authority to carry on its
business as it has been and is now being conducted and to own, lease and operate
the properties and assets used in connection therewith.
SECTION 3.2. AUTHORITY; BINDING EFFECT. Parent has all requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. All necessary action,
corporate or otherwise, required to have been taken by or on behalf of it by
applicable law, its charter document or otherwise to authorize (i) the approval,
execution and delivery on its behalf of this Agreement and (ii) its performance
of its obligations under this Agreement and the consummation of the transactions
contemplated hereby has been taken. This Agreement constitutes Parent's valid
and binding agreement, enforceable against it in accordance with its terms.
SECTION 3.3. CONFLICT WITH OTHER AGREEMENTS; APPROVALS. The execution
and delivery of this Agreement do not, and the consummation of the transactions
contemplated hereby will not, (i) violate or conflict with the Parent's or any
of its Subsidiaries charter or bylaws, or (ii) constitute a breach or default
(or an event that with notice or lapse of time or both would become a breach or
default) or give rise to any Lien, third party right of termination,
cancellation, material modification or acceleration, or loss of any benefit,
under any contract to which the Parent or any Subsidiary of the Parent is a
party or by which it is bound, or (iii) subject to the consents, approvals,
orders, authorizations, filings, declarations and registrations specified in
Section 3.4 or in the PARENT SCHEDULE in response thereto, conflict with or
result in a violation of any permit, concession, franchise or license or any
law, rule or regulation applicable to the Parent or any of its Subsidiaries or
any of their properties or assets, except, in the case of clauses (ii) and
(iii), for any such breaches, defaults, liens, third party rights,
cancellations, modifications, accelerations or losses of benefits, conflicts or
violations which would not have a Parent Material Adverse Effect and do not
materially impair the ability of the Parent to perform its obligations under
this Agreement or prevent or materially delay the consummation of any of the
transactions contemplated hereby. As used in this Agreement, "Parent Material
---------------
Adverse Effect" shall mean any fact, condition, event, development or occurrence
- --------------
which, individually or when taken together with all other such facts,
conditions, events, developments or occurrences, could reasonably be expected to
have a material adverse effect on the financial condition, operating results of
Parent and its Subsidiaries, taken as a whole.
SECTION 3.4. GOVERNMENTAL CONSENTS AND APPROVALS. Except as set forth on
the PARENT SCHEDULE, neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will require any
consent, approval, order, authorization, or permit of, or filing with
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<PAGE>
or notification to, any Governmental Entity, except (a) the filing of the
Registration Statement with the SEC in accordance with the Securities Act and
the entry of an order by the SEC permitting such Registration Statement to
become effective, and compliance with applicable state securities laws, (b)
notification pursuant to, and expiration or termination of the waiting period
under the HSR Act, and (c) the filing and recording of the Certificate of Merger
in accordance with the DGCL.
SECTION 3.5. CAPITAL STOCK. Parent has authorized capital stock
consisting of 200,000,000 shares of Parent Common Stock and 5,000,000 shares of
Preferred Stock, par value $.01 per share ("Parent Preferred Stock"). As of
----------------------
August 1, 1998: (i) 25,671,205 shares of Parent Common Stock were issued and
outstanding, (ii) no shares of Parent Preferred Stock were issued and
outstanding, (iii) no shares of Parent Common Stock were held as treasury
shares, (iii) no shares of Company Common Stock were held as treasury shares,
(iv) 4,032,705 shares of the Parent Common Stock underlying outstanding stock
options were granted under the Parent's 1996 Equity Compensation Plan (the
"Parent Stock Plan"), (v) 2,467,295 shares of the Parent Common Stock were
-----------------
reserved for issuance under the Parent Stock Plan, and (vi) 2,426,733 shares of
Company Common Stock were reserved for issuance upon the exercise of outstanding
warrants and options issued outside of the Parent Stock Plan. Since June 1,
1998 until the date hereof, (i) no additional shares of capital stock have been
reserved for issuance by Parent and (ii) the only issuances of shares of capital
stock of the Parent have been issuances of Parent Common Stock upon the exercise
of outstanding stock options. All of the issued and outstanding shares have
been duly authorized and are validly issued and outstanding, fully paid and
nonassessable, and were issued in compliance with all applicable Federal and
state securities laws. No shares of capital stock issued by Parent are or were,
at the time of their issuance, issued in violation of preemptive rights. There
are no existing subscriptions, options, warrants, calls, commitments,
agreements, conversion rights or other rights of any character (contingent or
otherwise) to purchase or otherwise acquire from Parent at any time, or upon the
happening of any stated event, any shares of the capital stock of Parent whether
or not presently issued or outstanding, except as set forth on the PARENT
SCHEDULE.
SECTION 3.6. REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. The
information supplied by the Parent for inclusion or incorporation by reference
in the Registration Statement shall not contain, at the time the Registration
Statement is declared effective by the SEC, any untrue statement of a material
fact or omit to state any material fact required to be stated in the
Registration Statement or necessary in order to make the statements in the
Registration Statement not misleading. The information supplied by the Parent
for inclusion or incorporation by reference in the Proxy Statement shall not, at
the time the Proxy Statement is first mailed to stockholders, at the time of the
Stockholders Meeting, or at the Effective Time, contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements made, in light of the circumstances under which they were made, not
misleading. If at any time prior to the Effective Time any event relating to
the Parent or any of its affiliates should be discovered by the Parent which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, the Parent shall promptly inform the Company.
SECTION 3.7. SEC REPORTS. Parent has filed all required forms, reports
and documents with the SEC since January 1, 1997 (collectively, the "Parent's
--------
SEC Reports"), including without limitation Parent's Annual Report on Form 10-K
- -----------
for the year ended December 31, 1997 and Parent's Quarterly Reports on Form 10-Q
for the fiscal quarters ended March 31, 1998 and June 30, 1998. The Parent's
SEC Reports have complied in all material respects with all applicable
requirements of the Securities Act and the Exchange Act. As of their respective
dates, none of Parent's SEC Reports, including, without
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<PAGE>
limitation, any financial statements or schedules included or incorporated by
reference therein, contained any untrue statement of a material fact or omitted
to state a material fact required to be stated or incorporated by reference
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Parent has heretofore
delivered or made available to the Company, in the form filed with the SEC, all
of Parent's SEC Reports.
SECTION 3.8. FINANCIAL STATEMENTS. The (a) consolidated balance sheets
of the Parent and its subsidiaries at December 31, 1997 and 1996 and the related
consolidated statements of earnings, changes in stockholders' equity and
statements of cash flow for the years then ended, together with the notes
thereto, audited by Arthur Anderson LLP (the "'Parent's Auditors"); and (b)
-----------------
unaudited consolidated balance sheets of the Parent and its subsidiaries at June
30, 1998 and related consolidated statements of income, changes in stockholders'
equity and statements of cash flow for the six-month period ended June 30, 1998,
have been prepared in accordance with GAAP. Such balance sheets, including the
related notes, fairly present, in all material respects, the consolidated
financial position, assets and liabilities (whether accrued, absolute,
contingent or otherwise) of the Parent and its Subsidiaries at the dates
indicated and such consolidated statements of income, changes in stockholders'
equity and statements of cash flow fairly present the consolidated results of
operations, changes in stockholders' equity and cash flow of the Parent and its
Subsidiaries for the periods indicated. The unaudited consolidated financial
statements as at and for the six-month period ending June 30, 1998 contain all
adjustments, which are solely of a normal recurring nature, necessary to
present, in all material respects, fairly the financial position at June 30,
1998, and the results of operations and changes in stockholders' equity and
financial position for the periods then ended.
SECTION 3.9. ABSENCE OF CERTAIN CHANGES. Except as described in the
PARENT SCHEDULE, since December 31, 1997, the Parent and its Subsidiaries have
conducted their business solely in the ordinary course consistent with past
practice. Except as otherwise disclosed on the PARENT SCHEDULE, or in Parents'
SEC Reports, since December 31, 1997, the Parent and its Subsidiaries have not
(a) suffered any Parent Material Adverse Effect; or
(b) been subject to any other events or conditions of any character
that would have a Parent Material Adverse Effect or impair the ability of Parent
to perform its obligations under this Agreement or prevent or delay the
consummation of any of the transactions contemplated hereby.
SECTION 3.10. ABSENCE OF LITIGATION; CLAIMS. Except as set forth on the
PARENT SCHEDULE, there are no claims, actions, suits, proceedings or
investigations pending or, to the knowledge of Parent, threatened against Parent
or any of its Subsidiaries, or any properties or rights of Parent or any of its
Subsidiaries, before any Governmental Entity or arbitrator, which, if decided
adversely to Parent or such Subsidiary, would have a Parent Material Adverse
Effect or impair the ability of Parent to perform its obligations under this
Agreement or prevent or delay the consummation of any of the transactions
contemplated hereby, nor is there any judgement, decree, injunction, rule or
order of any Governmental Entity or arbitrator expressly applicable by its terms
to the Parent or any of its Subsidiaries having or which, insofar as reasonably
can be foreseen, in the future would have a Parent Material Adverse Effect.
SECTION 3.11. TAX MATTERS. The representations and warranties contained
in the Parent Tax Certificate (as defined in Section 4.13 hereof) are true and
correct. Parent has not taken or agreed to take any action that would prevent
the Merger from constituting a reorganization qualifying under the
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<PAGE>
provisions of Section 368(a) of the Code or make untrue any representation or
warranty contained in the Parent.
SECTION 3.12. AFFILIATES. Except for the persons listed on the PARENT
SCHEDULE, there are no persons who, to the knowledge of Parent, may be deemed to
be affiliates of Parent under Rule 1-02 of Regulation S-X of the SEC.
Concurrently with the execution and delivery of this Agreement, Parent has
delivered to the Company an executed letter agreement, substantially in the form
of Exhibit B hereto, from each of such persons.
SECTION 3.13. ADEQUACY OF DISCLOSURE. No representation or warranty by
Parent in this Agreement, in any certificate or in the Parent Schedule furnished
or to be furnished to the Company pursuant hereto, or in connection with the
negotiation, execution or performance of this Agreement, contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact required to be stated herein or therein or necessary to make any
statement herein or therein not misleading.
SECTION 3.14. BROKERS AND FINDERS. Neither the Parent nor any of its
respective officers, directors or employees has engaged any broker or finder or
incurred any liability for any brokerage fees, commissions or finder's fees in
connection with the transactions contemplated herein, except that the Special
Committee of the Board of Directors of Parent has engaged Legg Mason Wood
Walker, Inc. as its financial advisor.
ARTICLE IV
OTHER AGREEMENTS
SECTION 4.1. CONDUCT OF THE COMPANY'S BUSINESS. The Company covenants
and agrees that, between the date of this Agreement and the Effective Time,
unless Parent shall otherwise consent in writing, and except as otherwise
expressly contemplated hereby, the business of the Company and its Subsidiaries
shall be conducted only in, and such entities shall not take any action except
in, the ordinary course of business. By way of amplification and not
limitation, except as otherwise expressly contemplated by this Agreement or as
otherwise set forth in the Company Schedule, the Company agrees on behalf of
itself and its Subsidiaries (other than CMC, which shall not be subject to this
Section 4.1) that, without the prior written consent of Parent, they will,
between the date of this Agreement and the Effective Time:
(a) not directly or indirectly do any of the following: (i) amend or
propose to amend its Certificate of Incorporation or By-Laws; (ii) split,
combine or reclassify any outstanding shares of its capital stock, or declare,
set aside or pay any dividend payable in cash, stock, property or otherwise with
respect to such shares; (iii) redeem, purchase, acquire or offer to acquire any
shares of its capital stock; (iv) issue, sell, pledge or dispose of, or agree to
issue, sell, pledge or dispose of, any additional shares of, or securities
convertible or exchangeable for, or any options, warrants or rights of any kind
to acquire any shares of, its capital stock, its shares of Parent Common Stock
or of any class or other property or assets whether pursuant to any rights
agreement, stock option plans described in the COMPANY SCHEDULE or otherwise,
provided that the Company may issue shares of Company Common Stock pursuant to
currently outstanding options, warrants and convertible securities and may issue
one or more stock options (the "Replacement Options") to replace the conversion
rights contained in such convertible
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<PAGE>
securities; (v) accelerate, amend or change the period of exerciseability of
options or restricted stock granted under any of the Company Stock Plans or
authorize cash payments in exchange for any options granted under any of such
plans except as required by the terms of such plans or any related agreements in
effect as of the date of this Agreement, (vi) hire, engage or otherwise retain
any new employee, consultant or independent contractor or (vii) enter into any
contract, agreement, commitment or arrangement with respect to any of the
matters set forth in this paragraph (a);
(b) not, directly or indirectly (i) acquire (by merger, consolidation
or acquisition of stock or assets) any corporation, partnership, limited
liability company or other business organization or division thereof or make any
equity investments therein; provided, however, that Find Dad, Inc. and Kaplan &
Kaplan Inc. may merge with and into CMC (the "CMC Merger"); (ii) issue, sell,
----------
pledge, dispose of or encumber any assets (including without limitation
licenses, Authorizations or rights) of the Company or any of its Subsidiaries or
enter into any securitization transactions,; (iii) incur any indebtedness for
borrowed money or issue any debt securities, (iv) make any commitments or
agreements for capital expenditures or capital additions; (v) except for the CMC
Merger, enter into or modify any material contract, lease or agreement except in
the ordinary course of business and consistent with past practice; (vi)
terminate, modify, assign, waive, release or relinquish any material contract
rights or amend any material rights or claims not in the ordinary course of
business or except as expressly provided herein; or (vii) enter into any
contract, agreement, commitment or arrangement with respect to any of the
matters set forth in this paragraph (b);
(c) not, directly or indirectly (i) initiate any litigation or
arbitration proceeding, (ii) revalue any of its assets, including writing down
the value of inventory or writing off notes or accounts receivable, other than
in the ordinary course of business pursuant to arm's length transactions on
commercially reasonable terms, (iii) make any material change to their
respective accounting methods, principles or practices, or (iv) settle or
compromise any Tax liability, or prepare or file any Tax Return inconsistent
with past practice or, on any such Tax Return, take any position, make any
election, or adopt any method that is inconsistent with positions taken,
elections made or methods used in preparing or filing similar Tax Returns in
prior periods;
(d) not, directly or indirectly, (i) hire, engage or otherwise retain
any new employee, consultant or independent contractor; (ii) grant any increase
in the salary or other compensation of its employees or grant any bonus to any
employee or enter into any employment agreement or make any loan to or enter
into any material transaction of any other nature with any officer or employee
of the Company; (iii) take any action to institute any new severance or
termination pay practices with respect to any directors, officers or employees
of the Company or to increase the benefits payable under its severance or
termination pay practices; or (iv) adopt or amend, in any respect, except as may
be required by applicable law or regulation, any bonus, profit sharing,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust, fund,
plan or arrangement for the benefit or welfare of any directors, officers or
employees; provided, however, that the Company may cause its 401(k) plan to be
transfered to CMC;
(e) not, directly or indirectly, take (and will use reasonable
efforts to prevent any affiliate of the Company from taking) or agree in writing
or otherwise to take, (i) any of the actions described in this Section 4.1, (ii)
any action which would make any of the Company's representations or warranties
in this Agreement, if made on and as of the date of such action or agreement,
untrue or incorrect in any material respect, or (iii) any action which could
prevent it from performing, or cause it
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<PAGE>
not to perform, its obligations under this Agreement, or (iv) any action that
would cause the Merger not to be treated as a reorganization within the meaning
of Section 368(a) of the Code;
(f) promptly disclose to Parent any information contained in its
representations and warranties or the COMPANY SCHEDULE which, because of an
event occurring after the date hereof, is incomplete or is no longer correct as
of all times after the date hereof until the Closing Date; provided, however,
that none of such disclosures shall be deemed to modify, amend or supplement the
representations and warranties of the Company or the COMPANY SCHEDULE hereto for
the purposes of Article V hereof, unless Parent shall have consented thereto in
writing; and
(g) use reasonable efforts to obtain and deliver to the Parent at the
Closing an executed letter in substantially the form of Exhibit A from each of
the Company Affiliates;
provided, however, notwithstanding the provisions of this Section 4.1, that the
Company may make the Permitted Distribution as set forth in Section 5.1(f) and
issue any Replacement Options.
SECTION 4.2. PARENT'S UNDERTAKINGS. Parent will not, directly or
indirectly, take (and will use reasonable efforts to prevent any affiliate of
the Company from taking) any action that would cause the Merger not to be
treated as a reorganization within the meaning of Section 368(a) of the Code.
Parent shall as promptly as practicable following the date hereof apply for
approval for listing of Parent Common Stock to be issued pursuant to the Merger
on the Nasdaq National Market ("NMS") upon official notice of issuance.
SECTION 4.3. ACCESS TO INFORMATION. Between the date of this Agreement
and the Closing Date, the Company will (a) give Parent and its authorized
representatives reasonable access, during regular business hours upon reasonable
notice, to all offices, warehouses and other facilities and to all of its books
and records, (b) permit Parent to make such reasonable inspections as it may
require, and (c) cause its officers and those of its subsidiaries to furnish
Parent with such financial and operating data and other information with respect
to the business and properties of the Company, as Parent may from time to time
reasonably request and as the Company may have on hand or be able to produce
without hardship. All such access and information obtained by Parent and its
authorized representatives shall be subject to the terms and conditions of the
letter agreement between the Company and Parent (the "Confidentiality
---------------
Agreement") attached as Exhibit 4.3 hereto.
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SECTION 4.4. STOCKHOLDER VOTE; PROXY STATEMENT.
(a) As promptly as practicable after the date hereof, the Company
shall take all action necessary in accordance with Rules 14a-1 et. seq. of the
Exchange Act, the DGCL, the rules of the Nasdaq Small-cap Market and its
Certificate of Incorporation and By-laws to call, give notice of, convene and
hold the Stockholders Meeting as promptly as practicable (unless such date shall
be delayed due to circumstances reasonably beyond the control of the parties) to
consider and vote upon the approval and adoption of this Agreement and the
transactions contemplated hereby and for such other purposes as may be necessary
or desirable. Subject to the fiduciary duties of the Board of Directors under
applicable law, as determined by such directors in good faith after consultation
with and based upon the written advice of independent legal counsel, the Board
of Directors of the Company shall use its efforts to solicit and secure from its
stockholders such approval and adoption of this Agreement and the transactions
contemplated hereby.
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(b) As promptly as practicable after the date hereof, the Company and
Parent shall jointly prepare and file with the SEC preliminary proxy materials
of the Company under the Exchange Act with respect to the Merger, and a
preliminary prospectus of Parent with respect to Parent Common Stock to be
issued in the Merger and will thereafter use their respective best efforts to
respond to any comments of the SEC with respect thereto and to cause the
Registration Statement to become effective, and the Proxy Statement and related
proxy material to be mailed to the Company's stockholders, as promptly as
practicable. The Proxy Statement shall include the unqualified recommendation
of the Company's Board of Directors that the Company's stockholders vote in
favor of the approval and adoption of this Agreement, unless otherwise necessary
due to the applicable fiduciary duties of the directors of the Company, as
determined by such directors in good faith after consultation with and based
upon the written advice of independent legal counsel.
(c) As soon as practicable after the date hereof, the Company and
Parent shall prepare and file any other filings required to be filed by each
under the Exchange Act or any other federal or state securities laws relating to
the Merger and the transactions contemplated hereby (collectively, "Other
-----
Filings") and will use their respective reasonable best efforts to respond to
- -------
any comments of the SEC or any other appropriate government official with
respect thereto.
(d) The Company and Parent shall cooperate with each other and
provide to each other all information necessary in order to prepare, amend or
supplement, to the extent required by the Securities Act the Registration
Statement, the Proxy Statement and the Other Filings (collectively, the "SEC
---
Transaction Filings").
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(e) The Company and Parent will notify the other party promptly of
the receipt of any comments from the SEC or its staff or any other appropriate
government official and of any requests by the SEC or its staff or any other
appropriate government official for amendments or supplements to any of the SEC
Transaction Filings or for additional information and will supply the other
party with copies of all correspondence between the Company or any of its
representatives or Parent and any of its representatives, as the case may be, on
the one hand, and the SEC or its staff or any other appropriate government
official, on the other hand, with respect thereto. If at any time prior to the
Effective Time, any event shall occur that should be set forth in an amendment
of, or a supplement to, any of the SEC Transaction Filings, the Company and
Parent agree promptly to prepare and file such amendment or supplement and to
distribute such amendment or supplement as required by applicable law,
including, in the case of an amendment or supplement to the Proxy Statement,
mailing such supplement or amendment to the Company's stockholders. Parent will
provide the Company with a reasonable opportunity to review and comment on any
amendment or supplement to the Registration Statement or the Proxy Statement
proposed to be made by it prior to filing such amendment or supplement with the
SEC. No amendment or supplement to the information supplied by the Company for
inclusion in the Proxy Statement shall be made without the approval of the
Company, which approval shall not be unreasonably withheld or delayed. The
Company will provide the Parent with a reasonable opportunity to review and
comment on any amendment or supplement to the Proxy Statement proposed to be
made by it prior to filing such amendment or supplement with the SEC. No
amendment or supplement to the information supplied by Parent for inclusion in
the Proxy Statement shall be made without the approval of the Parent, which
approval shall not be unreasonably withheld or delayed. Parent shall not be
required to maintain the effectiveness of the Registration Statement for the
purpose of resale by stockholders of the Company who may be affiliates of the
Company or Parent pursuant to Rule 145 under the Securities Act.
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(f) The information provided and to be provided by the Company and
Parent for inclusion or incorporation by reference in SEC Transaction Filings
shall at the time such information was supplied be true and correct in all
material respects and shall not omit to state any material fact required to be
stated therein or necessary in order to make such information not false or
misleading, and the Company and Parent each agree to promptly correct any such
information provided by it for use in the SEC Transaction Filings that shall
have become false or misleading. The SEC Transaction Filings, when filed with
the SEC or any appropriate government official, shall comply as to form in all
material respects with all applicable requirements of law. For purposes of the
foregoing, information concerning or related to the Parent contained in the
Proxy Statement shall be deemed to have been supplied by the Parent and
information concerning or related to the Company and the Stockholders Meeting
shall be deemed to have been supplied by the Company.
SECTION 4.5. REASONABLE BEST EFFORTS. Subject to the fiduciary duties of
the Company's Board of Directors, as determined by such directors in good faith
after consultation with and based upon the written advice of independent legal
counsel, and except as otherwise provided herein, each of the parties hereto
agrees to use its reasonable best efforts to take, or cause to be taken, all
appropriate action, and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws, statutes, ordinances, codes, rules and
regulations to consummate and make effective the transactions contemplated by
this Agreement in the most expeditious manner practicable, including but not
limited to the satisfaction of all conditions to the Merger, and to consummate
the Merger as promptly as practicable, but in no event later than December 31,
1998.
SECTION 4.6. PUBLIC ANNOUNCEMENTS. No party hereto shall make any public
announcements or otherwise communicate with any news media with respect to this
Agreement or any of the transactions contemplated hereby without prior
consultation with the other parties as to the timing and contents of any such
announcement as may be reasonable under the circumstances; provided, that
nothing contained herein shall prevent any party from promptly making all
filings with Governmental Entities and all disclosure as may, in its good faith
judgment, be required or advisable under applicable law, regulation or stock
exchange rule in connection with the execution and delivery of this Agreement or
the consummation of the transactions contemplated hereby (in which case the
disclosing party shall advise the other parties and provide them with a copy of
the proposed disclosure or filing prior to making the disclosure or filing).
SECTION 4.7. NOTIFICATION. Each party hereto shall, or promptly after
obtaining knowledge of the occurrence of any fact or circumstance that would
cause or constitute a breach of any of its representations and warranties set
forth herein, give notice thereof to the other parties and shall use its best
efforts to prevent or promptly to remedy such breach; provided, however, that
none of such notices shall be deemed to modify, amend or supplement the
representations and warranties of the such party or the disclosure schedules of
such party for the purposes of Article V hereof, unless the other party shall
have consented thereto in writing.
SECTION 4.8. SUBSEQUENT FINANCIAL STATEMENTS. Prior to the Effective
Time, the Company and the Parent will timely file with the SEC, each Annual
Report on Form 10-K, Quarterly Report on Form 10-Q and Current Report on Form 8-
K required to be filed by such Party under the Exchange Act and the rules and
regulations promulgated thereunder and will promptly deliver to the other copies
of each such report filed with the SEC.
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SECTION 4.9. CONTROL OF OPERATIONS. Nothing contained in this Agreement
shall give Parent, directly or indirectly, the right to control or direct the
Company's operations prior to the Effective Time. Prior to the Effective Time,
each of the Company and Parent shall exercise, consistent with the terms and
conditions of this Agreement, complete control and supervision over its
respective operations.
SECTION 4.10. REGULATORY AND OTHER AUTHORIZATIONS. Each party hereto
agrees to use commercially reasonable efforts to comply with all legal
requirements which may be imposed on such party with respect to the Merger and
to obtain all Authorizations, consents, orders and approvals of Governmental
Entities and non-governmental third parties that may be or become necessary for
its respective execution and delivery of, and the performance of its respective
obligations pursuant to, this Agreement, and each party will cooperate fully
with the other parties in promptly seeking to obtain all such authorizations,
consents, orders and approvals. Without limitation, the Company and Parent
shall each make an appropriate filing of a Notification and Report Form pursuant
to the HSR Act no later than 20 days after the date hereof and shall promptly
respond to any request for additional information with respect thereto. Each
such filing shall request early termination of the waiting period imposed by the
HSR Act.
SECTION 4.11. TAKEOVER STATUTE. If any "fair price," "moratorium,"
"control share acquisition" or other form of antitakeover statute or regulation
shall become applicable to the transactions contemplated hereby, each of the
Company and Parent and the members of their respective Boards of Directors shall
use their reasonable best efforts to grant such approvals and take such actions
as are necessary so that the transactions contemplated hereby may be consummated
as promptly as practicable on the terms contemplated hereby and otherwise use
their reasonable best efforts to act to eliminate or minimize the effects of
such statute or regulation on the transactions contemplated hereby.
SECTION 4.12. INDEMNIFICATION OF DIRECTORS AND OFFICERS. For a period
of six (6) years after the Effective Time, Parent shall cause the Company as the
Surviving Corporation, and any successor in interest thereto (a) to maintain in
effect the current provisions regarding indemnification of officers and
directors contained in the charter and bylaws of the Company, and (b) to
indemnify the directors and officers of the Company to the full extent to which
the Company is permitted to indemnify such officers and directors under its
charter and bylaws and applicable law; provided, that the Parent shall so
indemnify such officers and directors upon any failure of the Company to so
indemnify. Any claim for indemnification made prior to the expiration of the
six-year (6) period set forth above shall survive until the final determination
of such claim. Parent shall provide each individual who served as a director or
officer of the Company at any time prior to the Effective Time with liability
insurance for a period of thirty-six (36) months after the Effective Time no
less favorable in coverage and amount than any applicable insurance in effect
immediately prior to the Effective Time, provided, however, that Parent shall
-------- -------
not be obligated to provide such coverage to the extent that the cost of such
coverage exceeds 150% of the cost of such coverage immediately prior to the
Effective Time but will use its reasonable best efforts to obtain as much
liability insurance as can be obtained for the remainder of such period for a
premium not in excess (on an annualized basis) of 150% of the last annual
premium paid prior to the date hereof.
SECTION 4.13. TAX-FREE REORGANIZATION. Each of Parent and the Company
will use its best efforts to cause the Merger to qualify as a "reorganization"
within the meaning of Section 368(a) of the Code, and to enable Arthur Andersen
LLP to render its opinion contemplated by Section 5.2(f) hereof. Each party
shall make and shall use its best efforts to cause those of its respective
officers and
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stockholders that counsel to the parties shall reasonably request to make, such
representations and certifications as counsel to the parties shall reasonably
request to enable them to render such opinion, including, without limitation,
the representations of Parent contained in a certificate of Parent (the "Parent
------
Tax Certificate") substantially in the form of the Parent Tax Certificate
- ---------------
attached as Item 4.13 of the Parent Letter and representations of the Company
contained in a certificate of the Company (the "Company Tax Certificate")
-----------------------
substantially in the form of the Company Tax Certificate attached as Item 4.13
to the COMPANY SCHEDULE.
SECTION 4.14. NO SOLICITATION. (a) Until the termination of this
Agreement, without the prior written consent of Parent, from and after the date
hereof, the Company will not, and will not authorize or permit any of its
Subsidiaries or their officers, directors, employees, financial advisors and
agents ("Representatives") to, directly or indirectly, (i) solicit, initiate or
---------------
encourage (including by way of furnishing information) or take any other action
to facilitate knowingly any inquiries or the making of any proposal which
constitutes or may reasonably be expected to lead to an Acquisition Proposal (as
defined herein) from any person, (ii) engage in any discussion or negotiations
relating thereto or (iii) enter into any agreement with respect to, agree to,
approve or recommend any Acquisition Proposal; provided, however, that
notwithstanding any other provision hereof, the Company may, (A) at any time
prior to the time the Company's stockholders shall have voted to approve this
Agreement engage in discussions or negotiations with a third party (and may
furnish such third party information concerning the Company and its business,
properties and assets to such party) who (without any solicitation, initiation,
encouragement or negotiation, directly or indirectly, by or with the Company or
the Representatives after the date hereof) makes an unsolicited bona fide
written Acquisition Proposal if, and only to the extent that, (1) after having
received the advice of an independent financial advisor, that such Acquisition
Proposal, if consummated, could result in a transaction that is more favorable
from financial point of view to the Company's stockholders than the Merger (such
an Acquisition Proposal, a "Superior Proposal"), and the Special Committee of
-----------------
the Company's Board of Directors shall conclude in good faith, after considering
applicable provisions of state law, on the basis of oral or written advice of
outside counsel that such action is necessary for the Board of Directors of the
Company to act in a manner consistent with its fiduciary duties under applicable
law, and (2) prior to furnishing such information to or entering into
discussions or negotiations with such person or entity, the Company receives
from such person or entity an executed confidentiality agreement in customary
form, and (3) the Company shall have fully complied with this Section 4.13; (B)
comply with Rule 14e-2 promulgated under the Exchange Act with regard to a
tender or exchange offer, and/or (C) accept a Superior Proposal from a third
party, provided the Company terminates this Agreement pursuant to Section 6.1(h)
hereof. As used herein, "Acquisition Proposal" shall mean a proposal or offer
--------------------
for a tender or exchange offer, merger, consolidation or other business
combination involving the Company or any proposal to acquire in any manner a
substantial equity interest in, or a substantial portion of the Parent Common
Stock beneficially owned by the Company.
(b) The Company shall immediately cease and terminate any existing
solicitation, initiation, encouragement, activity, discussion or negotiation
with any parties conducted heretofore by the Company or its Representatives with
respect to an Acquisition Proposal. The Company shall notify Parent orally and
in writing of any such inquiries, offers or proposals (including, without
limitation, the terms and conditions of any such proposal and the identity of
the person making it), promptly after the receipt thereof, shall keep Parent
informed of the status and details of any such inquiry, offer or proposal, and
shall give Parent at least five (5) business days prior written notice of (i)
any meeting of the Board of Directors of the Company to take any action with
respect to an Acquisition Proposal or to withdrawing or
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modifying, in a manner adverse to Parent, its recommendation to the Company's
stockholders in favor of approval of the Merger, and (ii) any agreement to be
entered into with any person making such inquiry, offer or proposal.
(c) Prior to accepting a Superior Proposal, the Company shall, and
shall cause its financial and legal advisors to, negotiate in good faith with
Parent, for a period of not less than five (5) business days, to make such
changes to the terms and conditions of this Agreement as would enable the
Company to proceed with the transactions contemplated hereby.
ARTICLE V
CONDITIONS TO CLOSING
SECTION 5.1. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND PARENT AND
MERGER SUB. The respective obligations of the Company, on the one hand, and
Parent and Merger Sub, on the other hand, to consummate the transactions
contemplated hereby are subject to the requirements that:
(a) Stockholder Approval. This Agreement shall have been approved and
--------------------
adopted by the requisite vote of the stockholders of the Company in accordance
with the DGCL and the Certificate of Incorporation and Bylaws of the Company.
(b) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition shall have been issued and be in effect (i) restraining or
prohibiting the consummation of the Merger or any of the transactions
contemplated hereby or (ii) prohibiting or limiting the ownership, operation or
control by the Company, Parent or any of their respective Subsidiaries of any
portion of the business or assets of the Company, Parent or any of their
respective Subsidiaries, or compelling the Company, Parent or any of their
respective Subsidiaries to dispose of, grant rights in respect of, or hold
separate any portion of the business or assets of the Company, parent or any of
their respective Subsidiaries (except as contemplated by Section 4.8(b) hereof);
nor shall any action have been taken by a Governmental Entity or any federal,
state or foreign statute, rule, regulation, executive order, decree or
injunction shall have been enacted, entered, promulgated or enforced by any
Governmental Entity or arbitrator, which is in effect and has the effect of
making the Merger illegal or otherwise prohibiting the consummation of the
Merger.
(c) HSR Act. Any waiting period applicable to the consummation of the
-------
Merger under the HSR Act shall have expired or been terminated.
(d) Registration Statement. The Registration Statement shall have
----------------------
been declared effective under the Securities Act and no stop orders with respect
thereto shall have been issued, or threatened to be issued, and Parent shall
have received all requisite authorizations under all applicable state securities
or blue sky laws necessary to consummate the transaction, copies of which shall
have been provided to the Company.
(e) Nasdaq National Market. Approval for listing by the NMS upon
----------------------
official notice of issuance of Parent Common Stock to be issued in the Merger
shall have been received by Parent and remain in full force and effect.
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(f) Permitted Distribution. The Company shall have made the Permitted
----------------------
Distribution. For purposes hereof, "Permitted Distribution" means the total
----------------------
cash and cash equivalents of the Company minus the total liabilities (each as
calculated in accordance with GAAP, consistently applied) of the Company, each
as of the closing of business on the day prior to the Closing Date. The Company
shall provide Parent with the opporunity to review its preliminary calculation
of the Permitted Distribution not less than five business days prior to any
payment of the Permitted Distribution and will provide Parent with advance
notice of any material changes from such preliminary calculation prior to any
payment thereof.
SECTION 5.2. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The
obligations of the Company to consummate the transactions contemplated hereby
are subject to the further requirements that:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Parent and Merger Sub contained in this Agreement or in any other
document delivered pursuant hereto shall be true and correct in all material
respects on and as of the Closing Date with the same effect as if made on and as
of the Closing Date and at the Closing Parent shall have delivered to the
Company a certificate to that effect.
(b) Performance of Obligations. Each of the obligations of Parent and
--------------------------
the Merger Sub to be performed on or before the Closing Date pursuant to the
terms of this Agreement shall have been duly performed in all material respects
on or before the Closing Date and at the Closing Parent shall have delivered to
the Company a certificate to that effect.
(c) Absence of Material Adverse Effect. No Parent Material Adverse
----------------------------------
Effect shall have occurred, and no fact or circumstance shall exist which could
reasonably be expected to result in a Parent Material Adverse Effect.
(d) Litigation. There shall not be any litigation or other
----------
proceeding pending or threatened to restrain or invalidate the transactions
contemplated by this Agreement, which in the reasonable judgment of the Company
would make the consummation of the Merger imprudent or inadvisable in light of
applicable law.
(e) Fairness Opinion. The fairness opinion issued by the Company
----------------
Financial Advisor shall not have been rescinded by such Advisor.
(f) Tax Opinion. The opinion of Arthur Andersen LLP dated on or
-----------
prior to the Closing Date in form and substance reasonably satisfactory to the
Company (the "Tax Opinion") shall be in full force and effect and shall not have
-----------
been withdrawn.
SECTION 5.3. CONDITIONS TO THE OBLIGATIONS OF PARENT AND MERGER SUB. The
obligations of Parent and Merger Sub to consummate the transactions contemplated
hereby are subject to the further requirements that:
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in this Agreement or in any other document
delivered pursuant hereto shall be true and correct in all material respects on
and as of the Closing Date with the same effect as if made on and
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as of the Closing Date and at the Closing the Company shall have delivered to
Parent a certificate to that effect.
(b) Performance of Obligations. Each of the obligations of the
--------------------------
Company to be performed on or before the Closing Date pursuant to the terms of
this Agreement shall have been duly performed in all material respects on or
before the Closing Date and at the Closing the Company shall have delivered to
Parent a certificate to that effect.
(c) Sale of CMC. The Company shall have consummated the sale of all
-----------
of its capital stock of CMC pursuant to the terms of an agreement that imposes
no continuing indemnification obligation or other liability on the Company that
survives the closing of such transactions.
(d) Absence of Material Adverse Effect. No Company Material Adverse
----------------------------------
Effect shall have occurred, and no fact or circumstance shall exist which could
reasonably be expected to result in a Company Material Adverse Effect.
(e) No Litigation. There shall not be any proceeding pending or
-------------
threatened to restrain or invalidate the transactions contemplated by this
Agreement, which in the reasonable judgment of Parent would make the
consummation of the Merger imprudent or inadvisable in light of applicable law
or the defense of which would involve material expense.
(f) No Equity Rights in Surviving Corporation. There shall not be any
-----------------------------------------
securities, rights, warrants, options, or other instruments outstanding which,
after consummation of the Merger, would be convertible into or exercisable for
securities of the Surviving Corporation, and Parent shall be satisfied that all
outstanding options, warrants and convertible securities of the Company will
become options, warrants and convertible securities solely with respect to
Parent Common Stock on the terms described in Section 1.5 hereof;
(g) Appraisal Shares. The Appraisal Shares, if any, shall not
----------------
represent more than 10% of the aggregate outstanding shares of Company Common
Stock;
(h) Consents. All authorizations, consents, orders or approvals of,
--------
or declarations or filings with, and all expirations of waiting periods imposed
by, any governmental body, agency or official (all of the foregoing, "Consents")
--------
which are necessary for the consummation of the transactions contemplated
hereby, other than Consents the failure to obtain which would not have (i) a
material adverse effect on the consummation of the transactions contemplated
hereby or (ii) a Company Material Adverse Effect, shall have been filed, have
occurred or have been obtained (all such permits, approvals, filings and
consents and the lapse of all such waiting periods being referred to as the
"Requisite Regulatory Approvals") and all such Requisite Regulatory Approvals
------------------------------
shall be in full force and effect, provided, however, that a Requisite
Regulatory Approval shall not be deemed to have been obtained if in connection
with the grant thereof there shall have been an imposition by any state or
federal governmental body, agency or official of any condition, requirement,
restriction or change of regulation, or any other action directly or indirectly
related to such grant taken by such governmental body, which would reasonably be
expected to either have a Company Material Adverse Effect or prevent Parent from
exercising authority and control over the shares of Parent Common Stock owned by
the Company expected to be acquired by Parent by virtue of the Merger.
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ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
SECTION 6.1. TERMINATION. This Agreement may be terminated (by written
notice by the terminating party to the other party effective on the date such
notice is deemed to have been given) and the transactions contemplated hereby
may be abandoned at any time prior to the Closing Date:
(a) By mutual written consent of each of Parent and the Company;
(b) By either Parent or the Company if the Merger shall not have been
consummated on or before December 31, 1998 (the "Termination Date"); provided,
----------------
however, that the right to terminate this Agreement under this Section 6.1(b)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before the Termination Date;
(c) By either Parent or the Company if a Governmental Entity or
arbitrator shall have issued an order, decree or ruling or taken any other
action (which order, decree or ruling the parties shall use their commercially
reasonable efforts to lift), in each case permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement, and such
order, decree, ruling or other action shall have become final and nonappealable;
(d) By (i) Parent if the Company shall have breached, or failed to
comply with, in any material respect any of its obligations under this Agreement
or any representation or warranty made by the Company shall have been incorrect
in any material respect when made or shall have since ceased to be true and
correct in any material respect, and such breach, failure or misrepresentation
is not cured within thirty (30) days after notice thereof or (ii) by the Company
if the Parent shall have breached, or failed to comply with, in any material
respect any of its obligations under this Agreement or any representation or
warranty made by the Parent shall have been incorrect in any material respect
when made or shall have since ceased to be true and correct in any material
respect, and such breach, failure or misrepresentation is not cured within
thirty (30) days after notice thereof;
(e) By Parent if the Board of Directors of the Company or any
committee of the Board of Directors of the Company (i) shall withdraw or modify
in any adverse manner its approval and recommendation of this Agreement to its
stockholders, (ii) within ten (10 ) days after Parent's request, shall fail to
reaffirm such approval or recommendation referred to in clause (i), (iii) shall
approve or recommend any acquisition of the shares of Parent Common Stock owned
by it (other than pursuant to the TLSP/CRW Warrants) or any tender offer for
shares of its capital stock, in each case, other than by Parent or an affiliate
thereof, (iv) shall have recommended that the stockholders of the Company tender
their shares or publicly announced its intention to take no position with
respect to a tender offer or exchange offer for any of the outstanding shares of
the Company Common Stock that shall have been commenced or a registration
statement with respect thereto shall have been filed (other than by Parent or an
affiliate thereof), or (v) shall resolve to take any of the actions specified in
this clause (e);
(f) By either Parent or the Company if the Required Company
Stockholder Approval shall not have been obtained at the Stockholders Meeting,
including any adjournments thereof;
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(g) By the Company, prior to the approval of this Agreement by the
stockholders of the Company, upon five (5) days' prior notice to Parent, if, as
a result of a Superior Proposal by a party other than Parent or any of its
affiliates, the Board of Directors of the Company determines in good faith that
their fiduciary obligations under applicable law require that such Superior
Proposal be accepted provided, however, that the Company has fully complied with
its obligations under Section 4.14 hereof and with all the applicable
requirements of Section 6.2(b) hereof, including the payment of the Termination
Fee and the Parent Expenses.
SECTION 6.2. EFFECT OF TERMINATION.
(a) In the event of termination of this Agreement as provided in
Section 6.1 hereof, this Agreement shall forthwith become void and there shall
be no liability on the part of any of the parties, except (i) as set forth in
the last sentence of Section 4.3, the provisions of Section 4.6 hereof and the
provisions of 6.2(b), and (ii) nothing herein shall relieve any party from
liability for any willful breach hereof.
(b) (i) If this Agreement (A) is terminated by the Parent pursuant to
Section 6.1(e) or (f) hereof or by the Company pursuant to Section 6.1(g)
hereof, or (B) is terminated as a result of the Company's breach of Section 4.14
hereof which is not cured within 10 days after notice thereof to the Company,
and (ii) either (A) at the time of such termination or prior to the Stockholders
Meeting there shall have been an Acquisition Proposal (whether or not such
offer shall have been rejected or shall have been withdrawn prior to the time of
such termination or of the Stockholders Meeting) or (B) within one (1) year
after termination of the Agreement the Company shall have entered into an
agreement with respect to, or consummated, an Acquisition Proposal, the Company
shall pay to Parent an amount equal to (x) a cash termination fee of $1,800,000
(the "Termination Fee"), and (y) all expenses incurred by Parent in connection
---------------
with the negotiation, execution and performance of the transactions contemplated
hereby (including without limitation all fees and expenses payable to Parent's
financial advisors, auditor and counsel) not to exceed $150,000 ("Parent
------
Expenses") within one (1) business day after such termination or, in the case of
- --------
(ii)(B), entering into an agreement with respect to, or consummating an
Acquisition Proposal.
(c) If the Company fails to promptly pay to Parent any Termination
Fee or Parent Expenses due under Section 6.2(b), the Company shall pay the costs
and expenses (including legal fees and expenses) in connection with any action,
including the filing of any lawsuit or other legal action, taken to collect
payment, together with interest on the amount of any unpaid fee at the publicly
announced prime rate of Citibank, N.A. from the date such fee was required to be
paid.
SECTION 6.3. AMENDMENT. This Agreement may be amended by Parent and the
Company pursuant to a writing adopted by action taken by Parent and the Company
at any time before the Effective Time; provided, however, that, after approval
of this Agreement by the stockholders of the Company, no amendment may be made
which would alter or change the amount or kinds of consideration to be received
by the holders of Company Common Stock upon consummation of the Merger or which
would materially and adversely affect the holders of Company Common Stock. This
Agreement may not be amended except by an instrument in writing signed by the
parties to this Agreement.
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SECTION 6.4. WAIVER. At any time before the Effective Time, any party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party to any such
extension or waiver shall be valid only as against such party and only if set
forth in an instrument in writing signed by such party.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties contained herein shall not survive beyond the
Closing Date. This Section 7.1 shall not limit any covenant or agreement of the
parties hereto which by its terms requires performance after the Closing Date.
SECTION 7.2. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all prior written and oral and all contemporaneous oral agreements
and understandings with respect to the subject matter hereof.
SECTION 7.3. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given when delivered
in person, by telecopy or by overnight courier service to the respective parties
as follows:
if to Parent or Merger Sub:
TeleSpectrum Worldwide Inc.
443 S. Gulph Road
King of Prussia, PA 19406
Telecopy: (610) 878-7475
Attention: Mr. Keith E. Alessi
with copies to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
Telecopy: (215) 963-5299
Attention: Stephen M. Goodman, Esq.
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if to the Company:
CRW Financial, Inc.
200 Four Falls Corporate
Suite 415
W. Conshohocken, PA 19428
Telecopy: (610) 878-7466
Attention: Mr. Jonathan P. Robinson
with a copy to:
Pepper Hamilton LLP
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, PA 19103
Telecopy: (215) 981-4750
Attention: Barry M. Abelson, Esq.
or to such other address as the party to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
Any notice or communication delivered in person shall be deemed effective on
delivery. Any notice or communication sent by telecopy shall be deemed
effective on the first business day at the place of which such notice or
communication is received following the day on which such notice or
communication was sent.
SECTION 7.4. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware regardless of the
laws that might otherwise govern under principles of conflicts of laws
applicable thereto.
SECTION 7.5. DESCRIPTIVE HEADINGS. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 7.6. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person
(including without limitation any employee of the Company or any Subsidiary) any
rights or remedies of any nature whatsoever under or by reason of this Agreement
except for Section 1.5 and Section 4.10 (which are intended to be for the
benefit of the persons provided for therein, and may be enforced by such
persons.)
SECTION 7.7. COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may be
executed in counterparts, each of which shall be deemed to be an original, but
all of which shall constitute one and the same agreement. This Agreement may be
executed by facsimile signature which, for all purposes, shall be deemed to be
an original signature.
SECTION 7.8. EXPENSES. Except as otherwise provided herein, all costs
and expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses except that Parent
and the Company shall share equally (i) the filing fees payable with respect to
the required filings under the HSR Act, (ii) the registration fees payable with
respect to filing
-32-
<PAGE>
the Registration Statement, and (iii) all printing expenses incurred with
respect to the Proxy Statement and the Registration Statement.
SECTION 7.9. PERSONAL LIABILITY. This Agreement shall not create or be
deemed to create or permit any personal liability or obligation on the part of
any direct or indirect stockholder of any party hereto or any officer, director,
employee, agent, representative or investor of any party hereto.
SECTION 7.10. BINDING EFFECT; ASSIGNMENT. This Agreement shall inure to
the benefit of be binding upon the parties hereto and their respective legal
representatives and successors. This Agreement may not be assigned by any party
hereto without the prior written consent of the other party.
SECTION 7.11. SEVERABILITY. If any provision of this Agreement or the
application thereof to any person or circumstance is held invalid or
unenforceable in any jurisdiction, the remainder hereof, and the application of
such provision to such person or circumstance in any other jurisdiction or to
other persons or circumstances in any jurisdiction, shall not be affected
thereby, and to this end the provisions of this Agreement shall be severable.
-33-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized on the day and
year first above written.
TELESPECTRUM WORLDWIDE INC.
By: /s/ Keith Alessi
-------------------------------
Name: Keith Alessi
Title: President
CRW ACQUISITION CORP.
By: /s/ Keith Alessi
--------------------------------
Name: Keith Alessi
Title: President
CRW FINANCIAL, INC.
By: /s/ Jonathan P. Robinson
--------------------------------
Name: Jonathan P. Robinson
Title: Vice President
-34-
<PAGE>
TABLE OF DEFINED TERMS
<TABLE>
<CAPTION>
Page
Defined Term No.
---------------- ---
<S> <C>
Acquisition Proposal..................................... 25
Agreement................................................ 1
Appraisal Shares......................................... 3
Authorizations........................................... 11
Balance Sheet Date....................................... 9
Certificate of Merger.................................... 2
Certificates............................................. 3
Closing.................................................. 2
Closing Date............................................. 2
CMC...................................................... 14
CMC Merger............................................... 20
Code..................................................... 1
Company.................................................. 1
Company 1997 Form 10-K................................... 9
Company Audit Date....................................... 10
Company Balance Sheet.................................... 10
Company Common Stock..................................... 1
Company Financial Advisor................................ 16
Company Form S-3......................................... 6
Company Forms 10-Q....................................... 9
Company Material Adverse Effect.......................... 6
Company Preferred Stock.................................. 7
Company Schedule......................................... 6
Company Stock Plans...................................... 7
Company Tax Certificate.................................. 25
Company's SEC Reports.................................... 9
Company's Auditors....................................... 9
Confidentiality Agreement................................ 21
Consents................................................. 28
Contract................................................. 11
DGCL..................................................... 1
Effective Time........................................... 2
Employee Plans........................................... 12
ERISA.................................................... 12
ERISA Affiliate.......................................... 12
Exchange Act............................................. 6
Exchange Agent........................................... 3
Exchange Ratio........................................... 2
Fully-Diluted Common Stock............................... 2
GAAP..................................................... 9
Governmental Entity...................................... 9
HSR Act.................................................. 9
</TABLE>
-35-
<PAGE>
<TABLE>
<S> <C>
IRS...................................................... 13
ISO...................................................... 14
Joint Venture............................................ 6
Liens.................................................... 7
Merger................................................... 1
Merger Consideration..................................... 2
Merger Stock............................................. 3
Merger Sub............................................... 1
Merger Sub Common Stock.................................. 3
NMS...................................................... 21
Other Filings............................................ 22
Parent................................................... 1
Parent Common Stock...................................... 1
Parent Expenses.......................................... 30
Parent Form S-3.......................................... 6
Parent Material Adverse Effect........................... 16
Parent Preferred Stock................................... 17
Parent Stock Plan........................................ 17
Parent Schedule.......................................... 16
Parent Tax Certificate................................... 25
Parent's SEC Reports..................................... 17
Parent's Auditors........................................ 18
Permitted Distribution................................... 27
Permitted Liens.......................................... 11
Proxy Statement.......................................... 15
Registration Statement................................... 14
Replacement Options...................................... 19
Representatives.......................................... 25
Required Company Stockholder Approval.................... 8
Requisite Regulatory Approvals........................... 28
SEC...................................................... 9
SEC Transaction Filings.................................. 22
Securities Act........................................... 9
Stockholders Meeting..................................... 15
Subsidiary............................................... 6
Superior Proposal........................................ 25
Surviving Corporation.................................... 1
Surviving Corporation Common Stock....................... 3
Tax Opinion.............................................. 27
Tax Returns.............................................. 11
Taxes.................................................... 12
Termination Date......................................... 29
Termination Fee.......................................... 30
TLSP/CRW Warrants........................................ 5
</TABLE>
-36-
<PAGE>
AMENDMENT NO. 1 TO
------------------
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
-----------------------------------------------
This Amendment No. 1 to the Agreement and Plan of Merger and Reorganization
(this "Amendment No. 1") is made and entered into as of December 30, 1998, by
and among, CRW Financial, Inc., a Delaware corporation (the "Company"),
TeleSpectrum Worldwide Inc., a Delaware corporation (the "Parent") and CRW
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Parent
(the "Merger Sub"). The Company, the Parent and the Merger Sub are referred to
collectively herein as the "Parties."
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Parties previously entered into an Agreement and Plan of
Merger and Reorganization dated as of September 3, 1998 (the "Agreement");
WHEREAS, the Parties wish to amend certain provisions of the Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the Parties agree
as follows:
1. Each of the references to the date December 31, 1998 in Sections 4.5 and
6.1(b) of the Agreement is hereby changed to July 31, 1999.
2. Except as expressly provided for in this Amendment No. 1, all terms and
conditions contained in the Agreement are hereby confirmed and shall
remain unchanged and in full force and effect.
3. This Amendment No. 1 shall be governed by, and construed in accordance
with, the laws of the State of Delaware, and may be executed in any
number of counterparts (including by facsimile signature), each of which
shall be an original and all of which, taken together, shall be deemed
one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Amendment No. 1 to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
CRW FINANCIAL, INC.
By: /s/ J. Brian O'Neill
-------------------------------------
Name: J. Brian O'Neill
Title: President and Chief Executive Officer
TELESPECTRUM WORLDWIDE INC.
By: /s/ Keith E. Alessi
-------------------------------------
Name: Keith E. Alessi
Title: Chief Executive Officer
CRW ACQUISITION CORP.
By: /s/ Keith E. Alessi
-------------------------------------
Name: Keith E. Alessi
Title: Chief Executive Officer
2
<PAGE>
AMENDMENT NO. 1 TO
------------------
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
-----------------------------------------------
This Amendment No. 1 to the Agreement and Plan of Merger and Reorganization
(this "Amendment No. 1") is made and entered into as of December 30, 1998, by
and among CRW Financial, Inc., a Delaware corporation (the "Company"),
TeleSpectrum Worldwide Inc., a Delaware corporation (the "Parent") and CRW
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Parent
(the "Merger Sub"). The Company, the Parent and the Merger Sub are referred to
collectively herein as the "Parties."
W I N E S S E T H:
- - - - - - - - -
WHEREAS, the Parties previously entered into an Agreement and Plan of
Merger and Reorganization dated as of September 3, 1998 (the "Agreement");
WHEREAS, the Parties wish to amend certain provisions of the Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the Parties agree
as follows:
1. Each of the references to the date December 31, 1998 in Sections 4.5 and
6.1(b) of the Agreement is hereby changed to July 31, 1999.
2. Except as expressly provided for in this Amendment No. 1, all terms and
conditions contained in the Agreement are hereby confirmed and shall
remain unchanged and in full force and effect.
3. This Amendment No. 1 shall be governed by, and construed in accordance
with, the laws of the State of Delaware, and may be executed in any
number of counterparts (including by facsimile signature), each of which
shall be an original and all of which, taken together, shall be deemed
one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Amendment No. 1 to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
CRW FINANCIAL, INC.
By: /s/ J. Brian O'Neill
---------------------------
Name: J. Brian O'Neill
Title: President and Chief Executive Officer
TELESPECTRUM WORLDWIDE INC.
By: /s/ Keith E. Alessi
---------------------------
Name: Keith E. Alessi
Title: Chief Executive Officer
CRW ACQUISITION CORP.
By: /s/ Keith E. Alessi
---------------------------
Name: Keith E. Alessi
Title: Chief Executive Officer
2
<PAGE>
APPENDIX III:
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW -- APPRAISAL RIGHTS
<PAGE>
DELAWARE GENERAL CORPORATION LAW
SECTION 262 OF SUBCHAPTER IX
APPRAISAL RIGHTS
(S) 262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S) 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S) 251,
252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
1
<PAGE>
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under (S) 253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228
or 253 of this title, the surviving or resulting corporation, either before the
effective date of the merger or consolidation or within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal rights of the
effective date of the merger or consolidation and that appraisal rights are
available for any or all of the shares of the constituent corporation, and shall
include in such notice a copy of this section. The notice shall be sent by
certified or registered mail, return receipt requested, addressed to the
stockholder at his address as it appears on the records of the corporation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of the notice, demand in writing from the surviving or resulting
corporation the appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time Within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
2
<PAGE>
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a
3
<PAGE>
portion of the expenses incurred by any stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable attorney's fees
and the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(1) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
4
<PAGE>
APPENDIX IV:
OPINION OF J.P. MORGAN SECURITIES, INC.
<PAGE>
JP Morgan
J.P. Morgan Securities Inc.
60 Wall Street
New York NY
10260-0060
January l1, 1999
The Board of Directors
TeleSpectrum Worldwide Inc.
443 South Gulph Road
King of Prussia, PA 19406
Attention: Keith Alessi
Chairman, Chief Executive Officer and President
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to TeleSpectrum Worldwide Inc. (the "Company") of the consideration
proposed to be paid by the Company in connection with the proposed merger (the
"Merger') of the Company with International Data Response Corp. (the "Seller").
Pursuant to the draft of the Agreement and Plan of Merger, that was furnished to
the Board of Directors of the Company on January 11, 1999 (the "Agreement"),
among the Company, the Seller and certain stockholders of the Seller, the Seller
will be merged with and into the Company and the separate existence of the
Seller will terminate , and the Company will pay for all shares of common stock
of the Seller, and options and warrants exercisable for the Seller's common
stock, consideration equal to 9,200,000 shares of common stock of the Company
and warrants exercisable for 3,000,000 shares of common stock of the Company.
In arriving at our opinion, we have reviewed (i) the Agreement; (ii) certain
publicly available information concerning the business of the Company and the
Seller and of certain other companies engaged in businesses comparable to those
of the Company and the Seller, and the reported market prices for certain other
companies' securities deemed comparable; (iii) current and historical market
prices of the common stock of the Company; (iv) the audited financial statements
of the Company for the fiscal year ended December 31, 1997, and the unaudited
financial statements of the Company for the quarter ended September 30, 1998;
(v) certain agreements with respect to outstanding indebtedness or obligations
of the Company and the Seller; (vi) certain internal financial analyses and
forecasts concerning the Company and the Seller prepared by the management of
each of the Company and the Seller, respectively; and (vii) the terms of other
business combinations that we deemed relevant.
In addition, we have held discussions with certain members of the management of
the Company and the Seller with respect to certain aspects of the Merger, the
past and current business operations of the Company and the Seller, the
financial condition and future prospects and operations of the Company and the
Seller, the effects of the Merger on the financial condition and future
prospects of the Company, and certain other matters we believed necessary or
appropriate to our inquiry. We have visited certain representative
<PAGE>
JP Morgan
-2-
facilities of the Company and the Seller, and reviewed such other financial
studies and analyses and considered such other information as we deemed
appropriate for the purposes of this opinion.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or was furnished to us by the Company and the Seller or otherwise
reviewed by us, and we have not assumed any responsibility or liability
therefor. We have not conducted any valuation or appraisal of any assets or
liabilities, nor have any such valuations or appraisals been provided to us. In
relying on financial analyses and forecasts provided to us by each of the
Company and the Seller, we have assumed that they have been reasonably prepared
based on assumptions reflecting the best currently available estimates and
judgments by management as to the expected future results of operations,
synergies and financial condition of the Company and the Seller to which such
analyses or forecasts relate, and we have assumed that such expected future
results of operations and synergies will be realized as described by management.
We have also considered the substantial strategic benefits that management of
the Company believes should accrue to the Company as a result of the Merger. The
Company or the Seller's inability to realize such expected future results of
operations, synergies and strategic benefits could affect the opinion herein,
and we express no view as to whether such future results of operations,
synergies and strategic benefits will be realized. We have also assumed that the
Merger will have the tax consequences described in discussions with, and
materials furnished to us by, representatives of the Company, and that the other
transactions contemplated by the Agreement will be consummated as described in
the Agreement. We have relied as to all legal matters relevant to rendering our
opinion upon the advice of counsel.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof. It
should be understood that subsequent developments (including, without
limitation, any changes to the terms or conditions of the Merger as expressed in
the Agreement) may affect this opinion and that we do not have any obligation to
update, revise, or reaffirm this opinion. We are expressing no opinion herein as
to the price at which the Company's stock will trade at any future time.
In addition, we were not requested to and did not provide advice concerning the
structure, the specific amount of the consideration, or any other aspects of the
Merger, or to provide services other than the delivery of this opinion. We did
not participate in negotiations with respect to the terms of the Merger and
related transactions. Consequently, we have assumed that such terms are the most
beneficial terms from the Company's perspective that could under the
circumstances be negotiated among the parties to such transactions.
We will receive a fee from the Company for the delivery of this opinion. Please
be advised that we have no other financial advisory or other relationships with
the Company (other than potential assignments related to other matters) or the
Seller. In the ordinary course of their businesses, J.P. Morgan Securities Inc.
and its affiliates may actively trade the debt and equity securities of the
Company for their own account or for the accounts of customers and, accordingly,
they may at any time hold long or short positions in such securities.
<PAGE>
-3-
JP Morgan
On the basis of and subject to the foregoing, it is our opinion as of the date
hereof that the consideration to be by the Company in the proposed Merger is
fair, from a financial point of view, to the Company.
This letter is provided to the Board of Directors of the Company in connection
with and for the purposes of its evaluation of the Merger. This opinion does not
constitute a recommendation to any stockholder of the Company as to how such
stockholder should vote with respect to the Merger. This opinion may be
reproduced in full in any proxy or information statement mailed to stockholders
of the Company.
Very truly yours,
J.P. MORGAN SECURITIES INC.
By: /s/ Jacques Aigrain
-----------------------
Name: Jacques Aigrain
Title: Managing Director
<PAGE>
APPENDIX V:
OPINION OF HOULIHAN LAKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
<PAGE>
HOULIHAN LOKEY HOWARD & ZUKIN
----------------------------
FINANCIAL ADVISORS
January 14, 1999
To The Board of Directors of
International Data Response Corporation
Gentlemen:
We understand that TeleSpectrum Worldwide, Inc. ("TLSP") and International Data
Response Corporation (the "Company") are considering a business combination in
which the Company will be merged with and into TLSP and that TLSP will be the
surviving entity (the "Merger") In consideration for the Merger, the holders of
outstanding shares of the Company's common stock and holders of options or
warrants to purchase common stock will receive 9.2 million shares of newly
issued common stock of TLSP and warrants to receive 3.0 million shares of common
stock. In addition, any outstanding shares of the Company's Series A Preferred
stock will be redeemed as provided in the Company's Restated Certificate of
Incorporation. The Merger and other related transactions disclosed to Houlihan
Lokey Howard & Zukin Financial Advisors ("Houlihan Lokey") are referred to
collectively herein as the "Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Company's underlying business decision
to effect the Transaction. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the Company.
Furthermore, at your request, we have not negotiated the Transaction or advised
you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessity and appropriate under the circumstances
Among other things, we have:
1. reviewed the Company's audited financial statements to shareholders
for the three fiscal years ended December 31, 1997 and internally-
prepared interim financial statements for the ten month period
ended October 31. 1998, which the Company's management has
identified as being the most current financial statements
available;
2. reviewed TLSP's Form 10-K for the two fiscal years ended December
31, 1997 and internally-prepared interim financial statements for
the ten month period ended October 31,1998, which TLSP's management
has identified as being the most current financial statements
available;
3. reviewed a copy of the following agreements: Agreement and Plan of
Merger Among TeleSpectrum Worldwide, Inc., International Data
Response Corporation and Certain Stockholders of International Data
Response Corporation dated January 14, 1999, Warrant To Purchase
Common Stock of TeleSpectrum Worldwide, Inc., Indemnity Escrow
Agreement, TeleSpectrum Stockholders Support Agreement dated
January 14, 1999, IDRC Stockholder Support Agreement dated January
14, 1999 and CRW Voting Agreement dated January 14, 1999;
[LETERHEAD OF HOULIHAN LOKEY HOWARD & ZUKIN APPEARS HERE]
<PAGE>
Board of Directors
International Data Response Corporation
January 14, 1999
4. met with certain members of the senior management of the Company to
discuss the operations. financial condition, future prospects and
projected operations and performance of the Company;
5. met with certain members of the senior management of TLSP to discuss
the operations, financial condition, future prospects and projected
operations and performance of TLSP;
6. visited certain facilities and business offices of the Company and
TLSP;
7. reviewed forecasts and projections prepared by the Company's
management with respect to the Company for the years ending December
31, 1998 through 2003;
8. reviewed budget prepared by TLSP's management with respect to TLSP
for the year ending December 31, 1999;
9. reviewed the historical market prices and trading volume for TLSP's
publicly traded securities;
10. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Company, and publicly
available prices and premiums paid in other transactions that we
considered similar to the Transaction;
11. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Company; and
12. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company and TLSP, and that there has been no
material change in the assets, financial condition, business or prospects of the
Company and TLSP since the date of the most recent financial statements made
available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and TLSP and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of the
Company or TLSP. Our opinion is necessarily based on business, economic, market
and other conditions as they exist and can be evaluated by us at the date of
this letter. Unanticipated events and circumstances may occur and actual results
may vary from those assumed. The variations may be material.
Based upon the foregoing and in reliance thereon, it is our opinion that the
consideration to be received by the stockholders of the Company in connection
with the Transaction is fair to them from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
/s/ Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
<PAGE>
APPENDIX VI:
OPINION OF JANNEY MONTGOMERY SCOTT INC.
<PAGE>
JANNEY MONTGOMERY SCOTT
INVESTMENT BANKING
Established 1832
September 2, 1998
Board of Directors
CRW Financial, Inc.
200 Four Falls Corporate Center
Suite 415
West Conshohocken, PA 19428
Gentlemen:
You have requested our opinion with respect to the fairness, from a
financial point of view, to the stockholders of CRW Financial, Inc. ("CRW") of
the consideration to be received by such stockholders under the Agreement and
Plan of Merger and Reorganization (the "Agreement") to be executed by and among
TeleSpectrum Worldwide Inc. ("TeleSpectrum"), CRW Acquisition Corp. (a
wholly-owned subsidiary of TeleSpectrum defined hereinafter as "Merger Sub") and
CRW. This letter is provided to the Board of Directors for its confidential use.
Pursuant to the Agreement, the Merger Sub shall be merged with and into CRW
(the "Merger") and the separate existence of the Merger Sub shall cease on the
date of the closing of the Merger (the "Closing Date"). CRW, as the surviving
corporation in the Merger, shall be a wholly-owned subsidiary of TeleSpectrum.
Each outstanding share of common stock of CRW, par value $0.01 per share ("CRW
Common Stock"), shall be converted into the right to receive 0.709 (the
"Exchange Ratio") shares of common stock of TeleSpectrum, par value $0.01 per
share ("TeleSpectrum Common Stock") and the holders of CRW Common Stock
immediately prior to the effective time of the Merger will be entitled to
receive a pre-closing distribution of the Cash Dividend. For the purposes
hereof, "Cash Dividend" means the total cash and cash equivalents of CRW minus
the total liabilities of CRW, each as of the closing of business on the Closing
Date, divided by the number of shares of Fully Diluted Common Stock of CRW. For
purposes hereof, Fully Diluted Common Stock means the number of outstanding
shares of CRW Common Stock (other than those shares of CRW Common Stock
beneficially owned by TeleSpectrum or any of its subsidiaries) as adjusted to
reflect the exercise of all outstanding options and warrants exercisable for CRW
Common Stock and the conversion of all notes convertible into CRW Common Stock.
The terms and conditions of the Merger are more fully set forth in the
Agreement.
In rendering our opinion, we have among other things:
1. Reviewed the draft of the Agreement received August 24, 1998,
including the exhibits thereto;
2. Investigated the business, financial condition, results of operations
and prospects of TeleSpectrum;
3. Investigated the business, financial condition, results of operations
and prospects of CRW;
<PAGE>
JANNEY MONTGOMERY SCOTT
INVESTMENT BANKING
CRW Financial, Inc.
September 2, 1998
Page 2
4. Reviewed selected financial and stock market data for certain publicly
traded companies comparable to TeleSpectrum and CRW;
5. Investigated the financial terms of similar business combinations and
sales of significant blocks of common stock;
6. Participated in certain discussions and negotiations among
representatives of CRW and TeleSpectrum; and
7. Reviewed other financial studies and analyses, as we deemed necessary.
In connection with our review, we have relied upon, without independent
verification, the accuracy and completeness of the financial and other
information provided to us by TeleSpectrum, CRW and their representatives. We
have not independently verified any of the financial and other information
provided to us. We did not have access to TeleSpectrum's internally prepared
budgets or financial projections. We have not made an independent valuation or
appraisal of TeleSpectrum's assets or liabilities, nor were we furnished with
any such valuations or appraisals. Our opinion is necessarily based upon
economic, market and other conditions as they exist on, and can be reasonably
evaluated as of, the date of this letter. We are expressing no opinion as to the
prices at which TeleSpectrum will actually trade at any time. Our opinion does
not address the relative merits of the Merger and the other business strategies
being considered by CRW's Board of Directors, nor does it address the Board's
decision to proceed with the Merger. Our opinion does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed transaction.
Janney Montgomery Scott Inc. ("JMS") is acting as the financial advisor to
CRW in connection with the Merger and will receive customary fees upon the
completion of the Merger, In addition, CRW has agreed to indemnify JMS against
certain liabilities arising out of the rendering of this opinion. JMS is a
nationally recognized investment banking firm and, as part of its investment
banking services, is regularly engaged in the valuation of businesses and
securities in connection with mergers, acquisitions, underwritings, private
placements and valuations for corporate and other purposes.
We understand that this opinion may be included in the proxy statement of
CRW relating to the Merger, subject to the approval in form and substance by JMS
and its legal counsel, such approval not to be unreasonably withheld. Such
approval shall extend to any description of or reference to JMS, any summary of
this opinion or any presentation of JMS included in such proxy statement.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion, as of the date of this letter, that the consideration to be
received by the stockholders of CRW in the Merger is fair from a financial point
of view.
Very truly yours,
/s/ Janney Montgomery Scott Inc.
JANNEY MONTGOMERY SCOTT INC.
<PAGE>
APPENDIX VII:
AMENDMENT TO TELESPECTRUM'S 1996 EQUITY COMPENSATION PLAN
<PAGE>
TELESPECTRUM WORLDWIDE INC.
1996 EQUITY COMPENSATION PLAN
-----------------------------
The purpose of the Telespectrum Worldwide Inc. 1996 Equity Compensation
Plan (the "Plan") is to provide (i) designated key employees (including
employees who are also officers or directors) of Telespectrum Worldwide Inc.
(the "Company") and its subsidiaries, (ii) independent contractors and
consultants who perform valuable services for the Company or its subsidiaries
and (iii) non-employee members of the Board of Directors of the Company (the
"Board") with the opportunity to receive grants of incentive stock options,
nonqualified stock options, stock appreciation rights, restricted stock and
performance units. The Company believes that the Plan will cause the
participants to contribute materially to the growth of the Company, thereby
benefitting the Company's shareholders, and will align the economic interests of
the participants with those of the shareholders.
Effective May 12, 1999, the Plan is amended and restated to (i)
increase the number of shares authorized by the Plan subject to shareholder
approval; (ii) provide for discretionary grants of non-qualified stock options
to non-employee directors in lieu of formula grants for grants made after
September 4, 1998; (iii) expand the types of awards that may be granted for
substituted stock options to include other equity awards such as warrants; (iv)
ensure that treatment for qualified performance-based compensation pursuant to
section 162(m) of the Code is available for certain awards under the Plan; (v)
modify the amendment provision of the Plan to reflect current statutory
shareholder approval requirements; and (vi) make other necessary and conforming
changes to the Plan.
1. Administration
--------------
(a) The Plan shall be administered and interpreted by a committee (the
"Committee"), which shall consist of not less than two persons appointed by the
Board. Prior to the Effective Date specified in Section 23(b), the Board
may exercise any power or authority of the Committee under the Plan and, in such
case, any reference to the Committee hereunder shall be deemed to include the
Board as a whole.
On and after the Effective Date set forth in Section 23(b), the
Committee shall consist of two or more persons appointed by the Board, all of
whom shall be "non-employee directors" as defined under Rule 16b-3 under the
Securities Exchange Act of 1934 (the "Exchange Act") and "outside directors" as
defined under section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code") and related Treasury regulations.
(b) Except as provided in Section 6, the Committee shall have the sole
authority to (i) determine the individuals to whom grants shall be made under
the Plan, (ii) determine the type, size and terms of the grants to be made to
each such individual, (iii) determine the time when the grants will be made and
the duration of any applicable exercise or restriction
1
<PAGE>
period, including the criteria for exercisability and the acceleration of
exercisability and (iv) deal with any other matters arising under the Plan.
(c) The Committee shall have full power and authority to administer and
interpret the Plan, to make factual determinations and to adopt or amend such
rules, regulations, agreements and instruments for implementing the Plan and for
the conduct of its business as it deems necessary or advisable, in its sole
discretion. The Committee's interpretations of the Plan and all determinations
made by the Committee pursuant to the powers vested in it hereunder shall be
conclusive and binding on all persons having any interest in the Plan or in any
awards granted hereunder. All powers of the Committee shall be executed in its
sole discretion, in the best interest of the Company, not as a fiduciary, and in
keeping with the objectives of the Plan and need not be uniform as to similarly
situated individuals.
2. Grants
------
Awards under the Plan may consist of grants of incentive stock options as
described in Section 5 ("Incentive Stock Options"), nonqualified stock options
as described in Section 5 and Section 6 ("Nonqualified Stock Options")(Incentive
Stock Options and Nonqualified Stock Options are collectively referred to as
"Options"), restricted stock as described in Section 7 ("Restricted Stock"),
stock appreciation rights as described in Section 8 ("SARs"), and performance
units as described in Section 9 ("Performance Units") (hereinafter collectively
referred to as "Grants"). All Grants shall be subject to the terms and
conditions set forth herein and to such other terms and conditions consistent
with this Plan as the Committee deems appropriate and as are specified in
writing by the Committee to the individual in a grant instrument (the "Grant
Instrument") or an amendment to the Grant Instrument. The Committee shall
approve the form and provisions of each Grant Instrument. Grants under a
particular Section of the Plan need not be uniform as among the grantees.
3. Shares Subject to the Plan
--------------------------
(a) Subject to the adjustment specified below, the aggregate number of
shares of common stock of the Company ("Company Stock") that may be issued under
the Plan is 10,000,000 shares, and the maximum aggregate number of shares of
Company Stock that shall be subject to Grants made under the Plan to any
individual during any calendar year shall be 500,000 shares. The shares may be
authorized but unissued shares of Company Stock or reacquired shares of Company
Stock, including shares purchased by the Company on the open market for purposes
of the Plan. If and to the extent Options or SARs granted under the Plan
terminate, expire, or are canceled, forfeited, exchanged or surrendered without
having been exercised or if any shares of Restricted Stock or Performance Units
are forfeited, the shares subject to such Grants shall again be available for
purposes of the Plan.
2
<PAGE>
(b) If there is any change in the number or kind of shares of Company
Stock outstanding (i) by reason of a stock dividend, spin off, recapitalization,
stock split, or combination or exchange of shares, (ii) by reason of a merger,
reorganization or consolidation in which the Company is the surviving
corporation, (iii) by reason of a reclassification or change in par value, or
(iv) by reason of any other extraordinary or unusual event affecting the
outstanding Company Stock as a class without the Company's receipt of
consideration, or if the value of outstanding shares of Company Stock is
substantially reduced as a result of a spinoff or the Company's payment of an
extraordinary dividend or distribution, the maximum number of shares of Company
Stock available for Grants, the maximum number of shares of Company Stock that
any individual participating in the Plan may be granted in any year, the number
of shares covered by outstanding Grants, the kind of shares issued under the
Plan, and the price per share or the applicable market value of such Grants may
appropriately adjusted by the Committee to reflect any increase or decrease in
the number of, or change in the kind or value of, [of] issued shares of Company
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. Any adjustments determined by the Committee
shall be final, binding and conclusive.
4. Eligibility for Participation
-----------------------------
(a) Prior to the Effective Date specified in Section 23(b), members of
the Board who are not employees of the Company or any of its subsidiaries ("Non-
Employee Directors") shall be eligible to participate in the Plan, but shall not
be eligible to receive Incentive Stock Options. After the Effective Date
specified in Section 23(b), Non-Employee Directors shall be eligible to receive
Grants only under Section 6 of the Plan. Any independent contractors or
consultants who perform valuable services to the Company or any of its
subsidiaries ("Consultants") shall be eligible to participate in the Plan, but
shall not be eligible to receive Incentive Stock Options.
(b) The Committee shall select the Employees, Non-Employee Directors
and Consultants to receive Grants and shall determine the number of shares of
Company Stock subject to a particular Grant in such manner as the Committee
determines. Employees, Consultants and Non-Employee Directors who receive Grants
under this Plan shall hereinafter be referred to as "Grantees".
5. Granting of Options
-------------------
(a) Number of Shares. The Committee shall determine the number of
----------------
shares of Company Stock that will be subject to each Grant of Options.
(b) Type of Option and Price.
-------------------------
3
<PAGE>
(i) The Committee may grant Incentive Stock Options that are
intended to qualify as "incentive stock options" within the meaning of section
422 of the Code or Nonqualified Stock Options that are not intended so to
qualify or any combination of Incentive Stock Options and Nonqualified Stock
Options, all in accordance with the terms and conditions set forth herein.
(ii) The purchase price (the "Exercise Price") of Company Stock
subject to an Option shall be determined by the Committee and may be equal to,
greater than, or less than the Fair Market Value (as defined below) of a share
of such Stock on the date the Option is granted; provided, however, that (x) the
Exercise Price of an Incentive Stock Option shall be equal to, or greater than,
the Fair Market Value of a share of Company Stock on the date the Incentive
Stock Option is granted and (y) an Incentive Stock Option may not be granted to
an Employee who, at the time of grant, owns stock possessing more than 10
percent of the total combined voting power of all classes of stock of the
Company or any parent or subsidiary of the Company, unless the Exercise Price
per share is not less than 110% of the Fair Market Value of Company Stock on the
date of grant.
(iii) If the Company Stock is traded in a public market, then
the Fair Market Value per share shall be determined as follows: (x) if the
principal trading market for the Company Stock is a national securities exchange
or the Nasdaq National Market, the last reported sale price thereof on the
relevant date or (if there were no trades on that date) the latest preceding
date upon which a sale was reported, or (y) if the Company Stock is not
principally traded on such exchange or market, the mean between the last
reported "bid" and "asked" prices of Company Stock on the relevant date, as
reported on Nasdaq or, if not so reported, as reported by the National Daily
Quotation Bureau, Inc. or as reported in a customary financial reporting
service, as applicable and as the Committee determines. If the Company Stock is
not traded in a public market or subject to reported transactions or "bid" or
"ask" quotations as set forth above, the Fair Market Value per share shall be as
determined by the Committee.
(c) Option Term. The Committee shall determine the term of each Option.
-----------
The term of any Option shall not exceed ten years from the date of grant.
However, an Incentive Stock Option that is granted to an Employee who, at the
time of grant, owns stock possessing more than 10 percent of the total combined
voting power of all classes of stock of the Company, or any parent or subsidiary
of the Company, may not have a term that exceeds five years from the date of
grant.
(d) Exercisability of Options. Options shall become exercisable in
-------------------------
accordance with such terms and conditions, consistent with the Plan, as may be
determined by the Committee and specified in the Grant Instrument. The Committee
may accelerate the exercisability of any or all outstanding Options at any time
for any reason.
(e) Termination of Employment, Disability or Death.
----------------------------------------------
4
<PAGE>
(i) Except as provided below, an Option may only be exercised
while the Grantee is employed by the Company as an Employee, Consultant or
member of the Board. In the event that a Grantee ceases to be employed by the
Company for any reason other than a "disability", death, or "termination for
cause", any Option which is otherwise exercisable by the Grantee shall terminate
unless exercised within 90 days of the date on which the Grantee ceases to be
employed by the Company (or within such other period of time as may be specified
by the Committee), but in any event no later than the date of expiration of the
Option term. Any of the Grantee's Options that are not otherwise exercisable as
of the date on which the Grantee ceases to be employed by the Company shall
terminate as of such date.
(ii) In the event the Grantee ceases to be employed by the
Company on account of a "termination for cause" by the Company, any Option held
by the Grantee shall terminate as of the date the Grantee ceases to be employed
by the Company.
(iii) In the event the Grantee ceases to be employed by the
Company because the Grantee is "disabled", any Option which is otherwise
exercisable by the Grantee shall terminate unless exercised within one year
after the date on which the Grantee ceases to be employed by the Company (or
within such other period of time as may be specified by the Committee, but in
any event no later than the date of expiration of the Option term. Any of the
Grantee's Options which are not otherwise exercisable as of the date on which
the Grantee ceases to be employed by the Company shall terminate as of such
date.
(iv) If the Grantee dies while employed by the Company or
within 90 days after the date on which the Grantee ceases to be employed on
account of a termination of employment specified in Section 5(e)(i) above (or
within such other period of time as may be specified by the Committee), any
Option that is otherwise exercisable by the Grantee shall terminate unless
exercised within one year after the date on which the Grantee ceases to be
employed by the Company (or within such other period of time as may be specified
by the Committee), but in any event no later than the date of expiration of the
Option term. Any of the Grantee's Options that are not otherwise exercisable as
of the date on which the Grantee ceases to be employed by the Company shall
terminate as of such date.
(v) For purposes of this Section 5(e) and Sections 6, 7, 8
and 9:
(A) The term "Company" shall mean the Company and its parent
and subsidiary corporations.
(B) "Employed by the Company" shall mean employment as an
Employee, Consultant or member of the Board (so that, for purposes of
exercising Options and SARs and satisfying conditions with respect to
Restricted Stock and Performance Units, a Grantee shall not be
considered to have terminated employment until the Grantee ceases to be
an Employee, Consultant and member of the Board), unless the Committee
determines otherwise.
5
<PAGE>
(C) "Disability" shall mean a Grantee's becoming disabled within
the meaning of section 22(e)(3) of the Code.
(D) "Termination for cause" shall mean, except to the extent
specified otherwise by the Committee, a finding by the Committee that
the Grantee has breached his or her employment or service contract with
the Company, or has been engaged in disloyalty to the Company,
including, without limitation, fraud, embezzlement, theft, commission
of a felony or proven dishonesty in the course of his or her employment
or service, or has disclosed trade secrets or confidential information
of the Company to persons not entitled to receive such information. In
the event a Grantee's employment is terminated for cause, in addition
to the immediate termination of all Grants, the Grantee shall
automatically forfeit all Option shares for any exercised portion of an
Option for which the Company has not yet delivered the share
certificates, upon refund by the Company of the Exercise Price paid by
the Grantee for such shares.
(f) Exercise of Options. A Grantee may exercise an Option that has
-------------------
become exercisable, in whole or in part, by delivering a notice of exercise to
the Company with payment of the Exercise Price. The Grantee shall pay the
Exercise Price for an Option as specified by the Committee (x) in cash, (y) with
the approval of the Committee, by delivering shares of Company Stock owned by
the Grantee owned by the Grantee for the period necessary to avoid a charge to
the Company's earnings for financial reporting purposes []](including Company
Stock acquired in connection with the exercise of an Option, subject to such
restrictions as the Committee deems appropriate) and having a Fair Market Value
on the date of exercise equal to the Exercise Price or (z) except with respect
to Options granted under Section 6 and held by persons who are then Non-Employee
Directors by such other method as the Committee may approve, including payment
through a broker in accordance with procedures permitted by Regulation T of the
Federal Reserve Board or any successor regulation of the agency than responsible
for administering margin regulations pertaining to securities brokers.
Non-Employee Directors who hold Options granted under Section 6 may make payment
through a broker in accordance with procedures permitted by Regulation T. The
Grantee shall pay the Exercise Price and the amount of any withholding tax due
(pursuant to Section 11) at the time of exercise. Shares of Company Stock
shall not be issued upon exercise of an Option until the Exercise Price is fully
paid and any required withholding is made.
(g) Limits on Incentive Stock Options. Each Incentive Stock Option
---------------------------------
shall provide that, if the aggregate Fair Market Value of the stock on the date
of the grant with respect to which Incentive Stock Options are exercisable for
the first time by a Grantee during any calendar year, under the Plan or any
other stock option plan of the Company or a parent or subsidiary, exceeds
$100,000, then the option, as to the excess, shall be treated as a Nonqualified
Stock Option. An Incentive Stock Option shall not be granted to any person
6
<PAGE>
who is not an Employee of the Company or a parent or subsidiary (within the
meaning of section 424(f) of the Code).
6. Option Grants to Non-Employee Directors
This Section 6 shall apply to any grant of an Option to a Non-Employee
Director after the Effective Date specified in Section 23(b).
(a) Initial Grant. Each Non-Employee Director who first becomes a
-------------
member of the Board after the Effective Date specified in Section 23(b)
shall receive a grant of a Nonqualified Stock Option to purchase 2,500 shares of
Company Stock on the date as of which he or she first becomes a member of the
Board.
(b) Annual Grants. On each date that the Company holds its annual
-------------
meeting of shareholders, commencing with the 1997 annual meeting, each
Non-Employee Director who is in office immediately after the annual election of
directors (other than a director who is first elected to the Board at such
meeting) shall receive a grant of a Nonqualified Stock Option to purchase 2,500
shares of Company Stock. The date of grant of each such annual Grant shall be
the date of the annual meeting of the Company's shareholders.
(c) Exercise Price. The Exercise Price per share of Company Stock
--------------
subject to an Option granted under this Section 6 shall be equal to the Fair
Market Value of a share of Company Stock on the date of grant.
(d) Option Term and Exercisability. The term of each Option granted
------------------------------
pursuant to this Section 6 shall be ten years. Options granted under this
Section 6 shall be fully exercisable as of the date of grant.
(e) Payment of Exercise Price.
-------------------------
(i) The Exercise Price for an Option granted under this Section 6
shall be paid in cash. The Grantee shall pay the Exercise Price and the amount
of any withholding tax due at the time of exercise. Shares of Company Stock
shall not be issued upon exercise of an Option until the Exercise Price is fully
paid and any required withholding is made.
(ii) A Grantee may exercise an Option granted under this Section 6
by delivering to the Committee a notice of exercise as described below, with
accompanying payment of the Exercise Price in accordance with Subsection (i)
above. The notice of exercise may instruct the Company to deliver shares of
Company Stock due upon the exercise of the Option to any registered broker or
dealer designated by the Committee in lieu of delivery to the Grantee. Such
instructions shall designate the account into which the shares are to be
deposited.
7
<PAGE>
(f) Applicability of Plan Provisions. Except as otherwise provided in
--------------------------------
this Section 6, Nonqualified Stock Options granted to Non-Employee Directors
shall be subject to the provisions of this Plan applicable to Nonqualified Stock
Options granted to other persons, provided however that (i) if an event
described in Section 3(b) occurs, appropriate adjustments, as described in that
Section, shall be made automatically, (ii) with respect to the provisions of
Section 5(e), the Committee shall not have discretion to modify the terms of
such provisions in the Grant Instrument, and (iii) in the event of a Change of
Control (as defined in Section 15), the provisions of Section 16
shall apply to Options granted pursuant to this Section 6, except that the
Committee shall not have discretion under Section 16(c) to modify the
automatic provisions of that Section.
(g) Administration. The provisions of this Section 6 are intended to
--------------
operate automatically and not require administration. To the extent that any
administrative determinations are required, any determinations with respect to
the provisions of this Section 6 shall be made by the members of the Board who
are not eligible to receive Grants under this Section 6, but in no event shall
such determinations affect the eligibility of Grantees, the determination of the
Exercise Price, the timing of the Grants or the number of shares subject to
Options granted hereunder. If at any time there are not sufficient shares
available under the Plan to permit an automatic Grant as described in this
Section 6, the Grant shall be reduced pro rata (to zero, if necessary) so as not
to exceed the number of shares then available under the Plan.
(h) Discretionary Grants. Effective September 4, 1998, the Board may
--------------------
make discretionary Grants of Nonqualified Stock Options to Non-Employee
Directors in accordance with the terms of the Plan, and effective September 5,
1998, the provisions of Sections 6(a) through 6(d) shall no longer apply. The
provisions of Section 6(g) shall not apply to such discretionary Grants and the
Board shall have the full power and authority reserved for the Committee under
the Plan to administer the Grants. Options granted pursuant to Sections 6(a) and
6(b) shall continue to be administered in accordance with the terms of the
applicable Grant Instrument. Options granted pursuant to this Section 6(h) shall
become exercisable in accordance with such terms and conditions, consistent with
the Plan, as may be determined by the Board and specified in the Grant
Instrument or an amendment to the Grant Instrument. The Board may accelerate the
exercisability of any or all outstanding Options granted pursuant to this
Section 6(h) at any time for any reason.
7. Restricted Stock Grants
-----------------------
The Committee may issue shares of Company Stock to an Employee,
Non-Employee Director (but only before the Effective Date specified in Section
23(b) or Consultant under a Grant of Restricted Stock, upon such terms
as the Committee deems appropriate. The following provisions are applicable to
Restricted Stock:
8
<PAGE>
(a) General Requirements. Shares of Company Stock issued pursuant to
--------------------
Restricted Stock Grants may be issued for consideration or for no consideration
as determined by the Committee. The Committee may establish conditions under
which restrictions on shares of Restricted Stock shall lapse over a period of
time or according to such other criteria as the Committee deems appropriate. The
period of time during which the Restricted Stock will remain subject to
restrictions will be designated in the Grant Instrument as the "Restriction
Period."
(b) Number of Shares. The Committee shall determine the number of
----------------
shares of Company Stock to be issued pursuant to a Restricted Stock Grant and
the restrictions applicable to such shares.
(c) Requirement of Employment. If the Grantee ceases to be employed by
-------------------------
the Company (as defined in Section 5(e)) during a period designated in the Grant
Instrument as the Restriction Period, or if other specified conditions are not
met, the Restricted Stock Grant shall terminate as to all shares covered by the
Grant as to which the restrictions have not lapsed, and those shares of Company
Stock must be immediately returned to the Company. The Committee may, however,
provide for complete or partial exceptions to this requirement as it deems
appropriate.
(d) Restrictions on Transfer and Legend on Stock Certificate. During
--------------------------------------------------------
the Restriction Period, a Grantee may not sell, assign, transfer, pledge or
otherwise dispose of the shares of Restricted Stock except to a Successor
Grantee under Section [11(a)] 12(a). Each certificate for a share of Restricted
Stock shall contain a legend giving appropriate notice of the restrictions in
the Grant. The Grantee shall be entitled to have the legend removed from the
stock certificate covering the shares subject to restrictions when all
restrictions on such shares have lapsed. The Committee, in its sole discretion,
may determine that the Company will not issue certificates for shares of
Restricted Stock until all restrictions on such shares have lapsed, or that the
Company will retain possession of certificates for shares of Restricted Stock
until all restrictions on such shares have lapsed.
(e) Right to Vote and to Receive Dividends. Unless the Committee
--------------------------------------
determines otherwise, during the Restriction Period, the Grantee shall have the
right to vote shares of Restricted Stock and to receive any dividends or other
distributions paid on such shares, subject to any restrictions deemed
appropriate by the Committee.
(f) Lapse of Restrictions. All restrictions imposed on Restricted Stock
---------------------
shall lapse upon the expiration of the applicable Restriction Period and the
satisfaction of all conditions imposed by the Committee. The Committee may
determine, as to any or all Restricted Stock Grants, that the restrictions shall
lapse without regard to any Restriction Period.
9
<PAGE>
8. Stock Appreciation Rights
-------------------------
(a) General Requirements. The Committee may grant stock appreciation
--------------------
rights ("SARs") to any Grantee separately or in tandem with any Option (for all
or a portion of the applicable Option). Tandem SARs may be granted either at the
time the Option is granted or at any time thereafter while the Option remains
outstanding; provided, however, that, in the case of an Incentive Stock Option,
SARs may be granted only at the time of the Grant of the Incentive Stock Option.
The Committee shall establish the base amount of the SAR at the time the SAR is
granted. Unless the Committee determines otherwise, the base amount of each SAR
shall be equal to the per share Exercise Price of the related Option or, if
there is no related Option, the Fair Market Value of a share of Company Stock as
of the date of Grant of the SAR.
(b) Tandem SARs. In the case of tandem SARs, the number of SARs granted
-----------
to a Grantee that shall be exercisable during a specified period shall not
exceed the number of shares of Company Stock that the Grantee may purchase upon
the exercise of the related Option during such period. Upon the exercise of an
Option, the SARs relating to the Company Stock covered by such Option shall
terminate. Upon the exercise of SARs, the related Option shall terminate to the
extent of an equal number of shares of Company Stock.
(c) Exercisability. An SAR shall be exercisable during the period
--------------
specified by the Committee in the Grant Instrument and shall be subject to such
vesting and other restrictions as may be specified in the Grant Instrument. The
Committee, in its sole discretion, may accelerate the exercisability of any or
all outstanding SARs at any time for any reason. SARs may only be exercised
while the Grantee is employed by the Company or during the applicable period
after termination of employment as described in Section 5(e). A tandem SAR shall
be exercisable only during the period when the Option to which it is related is
also exercisable. After the Effective Date specified in Section 23(b),
no SAR may be exercised for cash by an officer or director of the Company who is
subject to Section 16 of the Exchange Act, except in accordance with Rule 16b-3
under the Exchange Act.
(d) Value of SARs. When a Grantee exercises SARs, the Grantee shall
-------------
receive in settlement of such SARs an amount equal to the value of the stock
appreciation for the number of SARs exercised, payable in cash, Company Stock or
a combination thereof. The stock appreciation for an SAR is the amount by which
the Fair Market Value of the underlying Company Stock on the date of exercise of
the SAR exceeds the base amount of the SAR as described in Subsection (a).
(e) Form of Payment. The Committee shall determine whether the
---------------
appreciation in an SAR shall be paid in the form of cash, shares of Company
Stock, or a combination of the two, in such proportion as the Committee deems
appropriate. For purposes of calculating the number of shares of Company Stock
to be received, shares of Company Stock shall be valued
10
<PAGE>
at their Fair Market Value on the date of exercise of the SAR. If shares of
Company Stock are to be received upon exercise of an SAR, cash shall be
delivered in lieu of any fractional share.
9. Performance Units
-----------------
(a) General Requirements. The Committee may grant performance units
--------------------
("Performance Units") to a Grantee. Each Performance Unit shall represent the
right of the Grantee to receive an amount based on the value of the Performance
Unit, if performance goals established by the Committee are met. A Performance
Unit shall be based on the Fair Market Value of a share of Company Stock or on
such other measurement base as the Committee deems appropriate. The Committee
shall determine the number of Performance Units to be granted and the
requirements applicable to such Units.
(b) Performance Period and Performance Goals. When Performance Units
----------------------------------------
are granted, the Committee shall establish the performance period during which
performance shall be measured (the "Performance Period"), performance goals
applicable to the Units ("Performance Goals") and such other conditions of the
Grant as the Committee deems appropriate. Performance Goals may relate to the
financial performance of the Company or its operating units, the performance of
Company Stock, individual performance, or such other criteria as the Committee
deems appropriate.
(c) Payment with respect to Performance Units. At the end of each
-----------------------------------------
Performance Period, the Committee shall determine to what extent the Performance
Goals and other conditions of the Performance Units are met and the amount, if
any, to be paid with respect to the Performance Units. Payments with respect to
Performance Units shall be made in cash, in Company Stock, or in a combination
of the two, as determined by the Committee.
(d) Requirement of Employment. If the Grantee ceases to be employed by
-------------------------
the Company (as defined in Section 5(e)) during a Performance Period, or if
other conditions established by the Committee are not met, the Grantee's
Performance Units shall be forfeited. The Committee may, however, provide for
complete or partial exceptions to this requirement as it deems appropriate.
10. Qualified Performance-Based Compensation.
----------------------------------------
(a) Designation as Qualified Performance-Based Compensation. The
-------------------------------------------------------
Committee may determine that Performance Units, Nonqualified Stock Options with
an exercise price that is less than Fair Market Value ("Discounted Options") or
Restricted Stock granted to an Employee shall be considered "qualified
performance-based compensation" under section 162(m) of the Code. The provisions
of this Section 10 shall apply to Grants of Discounted Options, Performance
Units and Restricted Stock that are to be considered "qualified
performance-based compensation" under section 162(m) of the Code.
11
<PAGE>
(b) Performance Goals. When Discounted Options, Performance Units or
-----------------
Restricted Stock that are to be considered "qualified performance-based
compensation" are granted, the Committee shall establish in writing (i) the
objective performance goals that must be met in order for Discounted Options to
be granted, restrictions on the Restricted Stock to lapse or amounts to be paid
under the Performance Units, (ii) the Performance Period during which the
performance goals must be met, (iii) the threshold, target and maximum amounts
that may be paid if the performance goals are met, and (iv) any other
conditions, including without limitation provisions relating to death,
disability, other termination of employment or Change of Control, that the
Committee deems appropriate and consistent with the Plan and section 162(m) of
the Code. The performance goals may relate to the Employee's business unit or
the performance of the Company and its subsidiaries as a whole, or any
combination of the foregoing. The Committee shall use objectively determinable
performance goals based on one or more of the following criteria: stock price,
earnings per share, net earnings, operating earnings, return on assets,
shareholder return, return on equity, growth in assets, unit volume, sales,
market share, or strategic business criteria consisting of one or more
objectives based on meeting specified revenue goals, market penetration goals,
geographic business expansion goals, cost targets or goals relating to
acquisitions or divestitures.
(c) Establishment of Goals. The Committee shall establish the
----------------------
performance goals in writing either before the beginning of the Performance
Period or during a period ending no later than the earlier of (i) 90 days after
the beginning of the Performance Period or (ii) the date on which 25% of the
Performance Period has been completed, or such other date as may be required or
permitted under applicable regulations under section 162(m) of the Code. The
performance goals shall satisfy the requirements for "qualified
performance-based compensation," including the requirement that the achievement
of the goals be substantially uncertain at the time they are established and
that the goals be established in such a way that a third party with knowledge of
the relevant facts could determine whether and to what extent the performance
goals have been met. The Committee shall not have discretion to increase the
amount of compensation that is payable upon achievement of the designated
performance goals.
(d) Maximum Payment. Subject to the limitations of Section 3(a), if
---------------
Discounted Options, Restricted Stock, or Performance Units measured with respect
to the fair market value of Company Stock, are granted, not more than 500,000
shares of Company Stock may be granted to an Employee under the Discounted
Options, Performance Units or Restricted Stock for any Performance Period. If
Performance Units are measured with respect to other criteria, the maximum
amount that may be paid to an Employee with respect to a Performance Period is
$1 million.
(e) Announcement of Grants. The Committee shall certify and announce
----------------------
the results for each Performance Period to all Grantees immediately following
the announcement of the Company's financial results for the Performance Period.
If and to the
12
<PAGE>
extent that the Committee does not certify that the performance goals have been
met, the grants of Discounted Options, Restricted Stock and Performance Units
for the Performance Period shall be forfeited.
11. Withholding of Taxes
--------------------
(a) Required Withholding. All Grants under the Plan shall be subject to
--------------------
applicable federal (including FICA), state and local tax withholding
requirements. The Company shall have the right to deduct from all Grants paid in
cash, or from other wages paid to the Grantee, any federal, state or local taxes
required by law to be withheld with respect to such Grants. In the case of
Options and other Grants paid in Company Stock, the Company may require the
Grantee or other person receiving such shares to pay to the Company the amount
of any such taxes that the Company is required to withhold with respect to such
Grants, or the Company may deduct from other wages paid by the Company the
amount of any withholding taxes due with respect to such Grants.
(b) Election to Withhold Shares. A Grantee may elect to satisfy the
---------------------------
Company's income tax withholding obligation with respect to an Option, SAR,
Restricted Stock or Performance Units paid in Company Stock by having shares
withheld up to an amount that does not exceed the Grantee's maximum marginal tax
rate for federal (including FICA), state and local tax liabilities. The election
must be in a form and manner prescribed by the Committee and shall be subject to
the prior approval of the Committee. If the Grantee is a director or officer who
is subject to Section 16 of the Exchange Act, the election must be made in
compliance with Rule 16b-3 under the Exchange Act.
12. Transferability of Grants
-------------------------
(a) Only the Grantee or his or her authorized representative may
exercise rights under a Grant. Such persons may not transfer those rights except
by will or by the laws of descent and distribution or, with respect to Grants
other than Incentive Stock Options, if permitted under Rule 16b-3 of the
Exchange Act (to the extent applicable) and if permitted in any specific case by
the Committee in its sole discretion, pursuant to a qualified domestic relations
order (as defined under the Code or Title I of the ERISA or the regulations
thereunder). When a Grantee dies, the representative or other person entitled to
succeed to the rights of the Grantee ("Successor Grantee") may exercise such
rights. A Successor Grantee must furnish proof satisfactory to the Company of
his or her right to receive the Grant under the Grantee's will or under the
applicable laws of descent and distribution.
(b) Notwithstanding the foregoing, the Committee may provide, in a
Grant Instrument, that a Grantee may transfer Nonqualified Stock Options to his
or her children, grandchildren or spouse or to one or more trusts for the
benefit of such family members or to partnerships in which such family members
are the only partners (a "Family Transfer"), provided that the Grantee receives
no consideration for a Family Transfer and the
13
<PAGE>
Nonqualified Stock Options transferred in a Family Transfer continue to be
subject to the same terms and conditions that were applicable to such
Nonqualified Stock Options immediately prior to the Family Transfer.
13. Right of First Refusal
----------------------
Prior to the Effective Date specified in Section 23(b), if at any time
an individual desires to sell, encumber, or otherwise dispose of shares of
Company Stock distributed to him under this Plan, the individual shall first
offer the shares to the Company by giving the Company written notice disclosing:
(a) the name of the proposed transferee of the Company Stock; (b) the
certificate number and number of shares of Company Stock proposed to be
transferred or encumbered; (c) the proposed price; (d) all other terms of the
proposed transfer; and (e) a written copy of the proposed offer. Within 60 days
after receipt of such notice, the Company shall have the option to purchase all
or part of such Company Stock at the then current Fair Market Value (as defined
in Section 5(b)) and may pay such price in installments over a period not to
exceed four years, at the discretion of the Committee.
In the event the Company does not exercise the option to purchase
Company Stock, as provided above, the individual shall have the right to sell,
encumber, or otherwise dispose of his shares of Company Stock on the terms of
the transfer set forth in the written notice to the Company, provided such
transfer is effected within 15 days after the expiration of the option period.
If the transfer is not effected within such period, the Company must again be
given an option to purchase, as provided above.
On and after the Effective Date specified in Section 23(b), the
Company shall have no further right to purchase shares of Company Stock under
this Section, and its limitations shall be null and void.
Notwithstanding the foregoing, the Committee may require that a Grantee
execute a stockholder's agreement, with such terms as the Committee deems
appropriate, with respect to any Company Stock distributed pursuant to this
Plan, in which case the provisions of this Section 13 and Section 14 below shall
not apply to such Company Stock.
14. Purchase by the Company
-----------------------
Prior to the Effective Date specified in Section 23(b), if a
Grantee ceases to be employed by the Company, the Company shall have the right
to purchase all or part of any Company Stock distributed to him under this Plan
at its then current Fair Market Value (as defined in Section 5(b)); provided,
however, that such repurchase shall be made in accordance with applicable
accounting rules to avoid adverse accounting treatment.
15. Change of Control of the Company
--------------------------------
14
<PAGE>
As used herein, a "Change of Control" shall be deemed to have occurred
if:
(a) As a result of any transaction, any one stockholder, other
than an existing stockholder as of the effective date of the Plan (or his
beneficiary or estate), becomes a beneficial owner, directly or indirectly, of
securities of the Company representing more than 40% of the common stock of the
Company or the combined voting power of the Company's then outstanding
securities;
(b) A liquidation or dissolution of the Company or sale (other
than a transfer to a subsidiary) of all or substantially all of the Company's
assets occurs;
(c) On or after the Effective Date specified in Section
23(b), any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3
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;
(d) The shareholders of the Company approve (or, if
shareholder approval is not required, the Board approves) an agreement providing
for (i) the merger or consolidation of the Company with another corporation
where the shareholders of the Company, immediately prior to the merger or
consolidation, will not beneficially own, immediately after the merger or
consolidation, shares entitling such shareholders to 50% or more of all votes to
which all shareholders of the surviving corporation would be entitled in the
election of directors (without consideration of the rights of any class of stock
to elect directors by a separate class vote), or where the members of the Board,
immediately prior to the merger or consolidation, would not, immediately after
the merger or consolidation, constitute a majority of the board of directors of
the surviving corporation, (ii) the sale or other disposition of all or
substantially all of the assets of the Company, or (iii) a liquidation or
dissolution of the Company;
(e) Any person has commenced a tender offer or exchange offer
for 50% or more of the voting power of the then outstanding shares of the
Company; or
(f) At least a majority of the Board does not consist of
individuals who were elected, or nominated for election, by the directors in
office at the time of such election or nomination.
16. Consequences of a Change of Control
-----------------------------------
(a) Upon a Change of Control (i) the Company shall provide each Grantee
with outstanding Grants written notice of such Change of Control, (ii) all
outstanding Options and SARs shall automatically accelerate and become fully
exercisable, (iii) the restrictions and conditions on all outstanding Restricted
Stock shall immediately lapse, and (iv) Grantees
15
<PAGE>
holding Performance Units shall receive a payment in settlement of such
Performance Units, in an amount determined by the Committee, based on the
Grantee's target payment for the Performance Period and the portion of the
Performance Period that precedes the Change of Control.
(b) In addition, upon a Change of Control described in Section
15(d)(i) where the Company is not the surviving corporation (or
survives only as a subsidiary of another corporation), all outstanding Options
and SARs shall be assumed by, or replaced with comparable options or rights by,
the surviving corporation.
(c) Notwithstanding the foregoing, subject to subsection (d) below, in
the event of a Change of Control, the Committee may take one or both of the
following actions: the Committee may (i) require that Grantees surrender their
outstanding Options and SARs in exchange for a payment by the Company, in cash
or Company Stock as determined by the Committee, in an amount equal to the
amount by which the then Fair Market Value of the shares of Company Stock
subject to the Grantee's outstanding Options and SARs exceeds the Exercise Price
of the Options or the base amount of the SARs, as applicable, and (ii) terminate
any or all outstanding Options and SARs at such time as the Committee deems
appropriate. Such surrender shall take place as of the date of the Change of
Control or such other date as the Committee may specify, and, in the case of an
Option or SAR held by a Grantee who is subject to Section 16(b) of the Exchange
Act, any such surrender or payment shall be made on such date as the Committee
shall determine consistent with Rule 16b-3 under the Exchange Act.
(d) Notwithstanding anything in the Plan to the contrary, in the event
of a Change of Control, the Committee shall not have the right to take actions
described in the Plan (including without limitation actions described in
Subsection (c) above) that would make the Change of Control ineligible for
pooling of interest accounting treatment or that would make the Change of
Control ineligible for desired tax treatment if, in the absence of such right,
the Change of Control would qualify for such treatment and the Company intends
to use such treatment with respect to the Change of Control.
17. Amendment and Termination of the Plan
-------------------------------------
(a) Amendment. The Board may amend or terminate the Plan at any time;
---------
provided, however, that the Board shall not amend the Plan without shareholder
approval if such approval is required in order for Incentive Stock Options
granted or to be granted under the Plan to meet the requirements
16
<PAGE>
of section 422 of the Code or such approval is required in order to exempt
compensation under the Plan from the deduction limit under section 162(m) of the
Code.
(b) Termination of Plan. The Plan shall terminate on the day
-------------------
immediately preceding the tenth anniversary of its effective date unless
terminated earlier by the Board or unless extended by the Board with the
approval of the shareholders.
(c) Termination and Amendment of Outstanding Grants. A termination or
-----------------------------------------------
amendment of the Plan that occurs after a Grant is made shall not materially
impair the rights of a Grantee unless the Grantee consents or unless the
Committee acts under Section 24(b). The termination of the Plan shall not impair
the power and authority of the Committee with respect to an outstanding Grant.
Whether or not the Plan has terminated, an outstanding Grant may be terminated
or amended under Section 24(b) or may be amended by agreement of the Company and
the Grantee consistent with the Plan.
(d) Governing Document. The Plan shall be the controlling document. No
------------------
other statements, representations, explanatory materials or examples, oral or
written, may amend the Plan in any manner. The Plan shall be binding upon and
enforceable against the Company and its successors and assigns.
18. Funding of the Plan
-------------------
This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Grants under this Plan. In no event shall
interest be paid or accrued on any Grant, including unpaid installments of
Grants.
19. Rights of Participants
----------------------
Nothing in this Plan shall entitle any Employee, Consultant or other
person to any claim or right to be granted a Grant under this Plan, except as
provided in Section 6. Neither this Plan nor any action taken hereunder shall be
construed as giving any individual any rights to be retained by or in the employ
of the Company or any other employment rights.
20. No Fractional Shares
--------------------
No fractional shares of Company Stock shall be issued or delivered
pursuant to the Plan or any Grant. The Committee shall determine whether cash,
other awards or other property shall be issued or paid in lieu of such
fractional shares or whether such fractional shares or any rights thereto shall
be forfeited or otherwise eliminated.
21. Requirements for Issuance of Shares
-----------------------------------
17
<PAGE>
No Company Stock shall be issued or transferred in connection with any
Grant hereunder unless and until all legal requirements applicable to the
issuance or transfer of such Company Stock have been complied with to the
satisfaction of the Committee. The Committee shall have the right to condition
any Grant made to any Grantee hereunder on such Grantee's undertaking in writing
to comply with such restrictions on his or her subsequent disposition of such
shares of Company Stock as the Committee shall deem necessary or advisable as a
result of any applicable law, regulation or official interpretation thereof and
certificates representing such shares may be legended to reflect any such
restrictions. Certificates representing shares of Company Stock issued under the
Plan will be subject to such stop-transfer orders and other restrictions as may
be applicable under such laws, regulations and other obligations of the Company,
including any requirement that a legend or legends be placed thereon.
22. Headings
--------
Section headings are for reference only. In the event of a conflict
between a title and the content of a Section, the content of the Section shall
control.
23. Effective Date of the Plan.
---------------------------
(a) Plan Effective Date. Subject to the approval of the Company's
-------------------
shareholders, this Plan shall be effective on May 17, 1996.
(b) Effective Date of Section 16 and Section 162(m) Provisions. The
----------------------------------------------------------
provisions of the Plan that refer to, or are applicable to persons subject to,
Section 16 of the Exchange Act or Section 162(m) of the Code shall be effective,
if at all, upon the initial registration of the Company Stock under Section
12(g) of the Exchange Act, and shall remain effective thereafter for so long as
such stock is so registered.
24. Miscellaneous
-------------
(a) Substitute Grants. The Committee may make a Grant or other equity
-----------------
award to an employee of another corporation who becomes an Employee by reason of
a corporate merger, consolidation, acquisition of stock or property,
reorganization or liquidation involving the Company or any of its subsidiaries
in substitution for a stock option or restricted stock grant made by such
corporation ("Substituted Stock Incentives"). The terms and conditions of the
substitute grant may vary from the terms and conditions required by the Plan and
from those of the Substituted Stock Incentives. The Committee shall prescribe
the provisions of the substitute grants.
(b) Compliance with Law. The Plan, the exercise of Options and SARs and
-------------------
the obligations of the Company to issue or transfer shares of Company Stock
under Grants shall be subject to all applicable laws and to approvals by any
governmental or regulatory agency
18
<PAGE>
as may be required. With respect to persons subject to Section 16 of the
Exchange Act, it is the intent of the Company that the Plan and all transactions
under the Plan comply with all applicable provisions of Rule 16b-3 or its
successors under the Exchange Act. The Committee may revoke any Grant if it is
contrary to law or modify a Grant to bring it into compliance with any valid and
mandatory government regulation. The Committee may also adopt rules regarding
the withholding of taxes on payments to Grantees. The Committee may, in its sole
discretion, agree to limit its authority under this Section.
(c) Ownership of Stock. A Grantee or Successor Grantee shall have no
------------------
rights as a shareholder with respect to any shares of Company Stock covered by a
Grant until the shares are issued or transferred to the Grantee or Successor
Grantee on the stock transfer records of the Company.
(d) Governing Law. The validity, construction, interpretation and
-------------
effect of the Plan and Grant Instruments issued under the Plan shall exclusively
be governed by and determined in accordance with the law of the Commonwealth of
Pennsylvania.
19
<PAGE>
- ------------------ COMPARISON OF FOOTERS ------------------
- -FOOTER 1-
[PH06/115977.4] 1-PH/938115.6
20
<PAGE>
APPENDIX VIII:
INDEMNITY ESCROW AGREEMENT
<PAGE>
FORM OF INDEMNITY ESCROW AGREEMENT
THIS INDEMNITY ESCROW AGREEMENT ("Agreement") is made and entered into this
______ day of _____, 1999 by and among (i) TeleSpectrum Worldwide Inc., a
Delaware corporation ("TeleSpectrum"), (ii) Glenn McKenzie, as representative of
the stockholders of International Data Response Corporation, a Delaware
corporation ("IDRC"), and the holders of certain options to purchase common
stock of IDRC (the "Stockholders' Representative"), and (iii) Chase Manhattan
Trust Company, National Association (the "Indemnity Escrow Agent"). Capitalized
terms used herein and not otherwise defined shall have the meanings given to
such terms in the Merger Agreement (as defined below).
B A C K G R O U N D :
WHEREAS, pursuant to that certain Agreement and Plan of Merger (the "Merger
Agreement"), dated as of January 14, 1999, as amended, by and among
TeleSpectrum, IDRC and the MDC Entities (as defined in the Merger Agreement),
two escrow funds are to be established to secure the indemnification obligations
of the stockholders of IDRC and the IDRC Optionholders to TeleSpectrum as set
forth in Article VII of the Merger Agreement (the "Indemnity Funds"); and
WHEREAS, the Indemnity Funds are to secure indemnification obligations of
the Stockholders of IDRC and the IDRC Optionholders to TeleSpectrum of $12
million in amount, $9 million of which is available to satisfy indemnification
obligations under Section 7.2 of the Merger Agreement and $3 million of which is
available to satisfy indemnification obligations under Section 7.3 of the Merger
Agreement; and
WHEREAS, on the Closing Date there shall be deposited into escrow in
accordance with Section 1.6 of the Merger Agreement by TeleSpectrum's delivery
to the Indemnity Escrow Agent ______ shares of the common stock of TeleSpectrum,
par value $.01 per share ("Common Stock") and ____ option agreements evidencing
the Escrow Options (the "Escrowed Option Agreements") (collectively, the
"Section 7.2 Escrow Securities", and together with all other property at any
time received or otherwise distributed on, in respect of or in exchange for any
or all of the Section 7.2 Escrow Securities (other than cash dividends), all
securities hereafter issued in substitution for any of the foregoing, all
certificates and instruments representing or evidencing such securities, all
cash and non-cash proceeds of all of the foregoing property and all rights,
titles, interests, privileges (other than right to vote the Section 7.2 Escrow
Securities as set forth in Section 7(b) of this Agreement, which right shall at
all times remain with the stockholders of IDRC and the IDRC Optionholders to the
extent such optionholders exercise their Escrow Options) and preferences
appertaining or incident to the foregoing property, the "Section 7.2 Escrow
Property");
WHEREAS, on the Closing Date there shall be deposited into escrow in
accordance with Section 1.6 of the Merger Agreement by TeleSpectrum's delivery
to the Indemnity Escrow Agent ______ shares of the Common Stock and Escrowed
Option Agreements representing the right to
<PAGE>
purchase _____ shares of Common Stock (collectively, the "Section 7.3 Escrow
Securities" and together with all other property at any time received or
otherwise distributed on, in respect of or in exchange for any or all of the
Section 7.3 Escrow Securities (other than cash dividends), all securities
hereafter issued in substitution for any of the foregoing, all certificates and
instruments representing or evidencing such securities, all cash and non-cash
proceeds of all of the foregoing property and all rights, titles, interests,
privileges (other than right to vote the Section 7.3 Escrow Securities as set
forth in Section 7(b) of this Agreement, which right shall at all times remain
with the stockholders of IDRC and the IDRC Optionholders to the extent such
optionholders exercise their Escrow Options) and preferences appertaining or
incident to the foregoing property, the "Section 7.3 Escrow Property"); and
WHEREAS, the Section 7.2 Escrow Securities and the Section 7.3 Escrow
Securities are collectively referred to as the "Escrow Securities" and the
Section 7.2 Escrow Property and the Section 7.3 Escrow Property are collectively
referred to as the "Escrow Property."
NOW, THEREFORE, in consideration of the promises and of the covenants and
agreements set forth herein and in the Merger Agreement, and intending to be
legally bound hereby, the parties agree as follows:
1. Deposit.
-------
(a) On the Closing Date there shall be deposited with the
Indemnity Escrow Agent stock certificates representing the Escrow Shares and the
Escrowed Option Agreements, and upon such deposit the Indemnity Escrow Agent
shall acknowledge receipt of such stock certificates and Escrowed Option
Agreements bearing a restrictive legend providing that the shares represented by
such certificates may not be offered, sold, exchanged, transferred or otherwise
disposed of (other than by operation of law) prior to the Expiration Date, or
such later date as provided herein. The Indemnity Escrow Agent shall hold the
Escrow Securities and shall administer the same in accordance with the terms of
this Agreement. Except as expressly set forth in this Agreement, the Section 7.2
Escrow Property and the Section 7.3 Escrow Property shall be held as trust funds
and shall not be subject to any lien, attachment, trustee process or any other
judicial process of any creditor of any party hereto or of any stockholder of
IDRC or any IDRC Optionholder.
(b) Additional Terms Relating to Escrow Options. In the event an
-------------------------------------------
IDRC Optionholder elects to exercise any Escrow Options, the IDRC Optionholder
shall send a notice of exercise along with a copy of the Escrowed Option
Agreement and the exercise price therefor to TeleSpectrum and shall send a copy
of such correspondence to the Indemnity Escrow Agent. TeleSpectrum shall deliver
stock certificates representing the shares of TeleSpectrum Common Stock
underlying the Escrowed Option Agreement (or part thereof) being exercised to
the Indemnity Escrow Agent, whom will then surrender to TeleSpectrum the related
Escrowed Option Agreement to be canceled by TeleSpectrum. In the event an Escrow
Option is exercised in part, TeleSpectrum shall, along with the shares of Common
Stock of TeleSpectrum to be delivered to the Indemnity
2
<PAGE>
Escrow Agent, deliver to the Indemnity Escrow Agent a new Escrowed Option
Agreement representing that portion of the Escrow Option not yet exercised. Any
shares represented by the stock certificates (and any Escrowed Option Agreement
representing Escrow Options not yet exercised) delivered to the Indemnity Escrow
Agent upon the exercise of Escrow Options shall become a part of the Escrow
Property and shall be available to satisfy the indemnification obligations of
the stockholders of IDRC and the IDRC Optionholders in accordance with the terms
of this Agreement. All such Option Shares received upon exercise shall be deemed
"Escrow Shares" for all purposes hereunder. TeleSpectrum and the Stockholders'
Representative shall provide an update to Schedule A to the Indemnity Escrow
Agent which shall be signed by both TeleSpectrum and the Stockholders'
Representative reflecting any changes made to Schedule A as a result of the
exercise of Escrow Options.
2. Appointment of Stockholders' Representative. By virtue of the
-------------------------------------------
affirmative vote of the stockholders of IDRC required to approve the Merger and
the agreement of the IDRC Optionholders, the Merger Agreement and this
Agreement, the stockholders of IDRC and the IDRC Optionholders irrevocably
appoint Glenn McKenzie (the "Stockholders' Representative") to act as attorney-
in-fact of said stockholders and Optionholders with authority to make all
decisions on behalf of said stockholders and Optionholders with respect to any
matters arising from the indemnification obligations of the stockholders of IDRC
and the IDRC Optionholders (including matters arising under Article VII of the
Merger Agreement); and any decisions made by the Stockholders' Representative
with respect to any matter thereof shall be final and binding on such
stockholders and Optionholders. Without limiting the foregoing, the
Stockholders' Representative is authorized on behalf of the stockholders of IDRC
and IDRC Optionholders to (i) object to any claim for indemnification against
the Escrow Property or the stockholders of IDRC or the IDRC Optionholders under
Article VII of the Merger Agreement, (ii) settle or compromise any claim for
such indemnification, (iii) assume responsibility for administering all matters
arising under Article VII of the Merger Agreement, (iv) interpret on behalf of
the stockholders of IDRC and the IDRC Optionholders all of the provisions of
this Agreement and of Article VII of the Merger Agreement, and (v) generally to
represent all stockholders of IDRC and the IDRC Optionholders and their heirs,
personal representatives, successors and assigns with respect to all matters
arising under this Agreement and Article VII of the Merger Agreement. The
Stockholders' Representative is authorized to retain counsel to assist him in
matters relating to this Agreement and Article VII of the Merger Agreement and
his obligations hereunder or thereunder, including the dispute of any claims.
With respect to all matters set forth on Schedule 7.3 to the Merger Agreement,
TeleSpectrum shall consult with the Stockholders' Representative regarding
material developments relating to these matters and will not settle or reach a
final resolution with regard to those matters without the approval of the
Stockholders' Representative, which approval will not unreasonably be withheld.
TeleSpectrum will continue to retain the counsel previously retained by IDRC
relating to the matters set forth on Schedule 7.3 to the Merger Agreement unless
(i) the board of directors of TeleSpectrum shall otherwise determine and (ii)
the Stockholders' Representative agrees with any such determination of the
TeleSpectrum Board, which agreement shall not unreasonably be withheld.
3
<PAGE>
3. Substitution of Stockholders' Representative. The
--------------------------------------------
Stockholders' Representative shall have the right to resign upon providing 15
business days written notice to TeleSpectrum and the Indemnity Escrow Agent.
Prior to such resignation, the Stockholders' Representative shall appoint a
successor stockholders' representative, reasonably acceptable to TeleSpectrum,
to assume the rights and responsibilities of the Stockholders' Representative
hereunder. TeleSpectrum shall notify the Escrow Agent in writing of the name of
any successor stockholder's representative appointed pursuant to this Agreement.
All of the terms and conditions of this Agreement shall apply to any successor
stockholders' representative, and after such appointment the term "Stockholders'
Representative" as used herein shall refer to any such successor stockholders'
representative.
4. Indemnification of Stockholders' Representative. The
-----------------------------------------------
Stockholders' Representative shall not be personally liable for any actions or
decisions taken or made in good faith in managing or discharging its duties
hereunder in accordance with the terms hereof, except in the case of gross
negligence or willful misconduct. The stockholders of IDRC and the IDRC
Optionholders shall indemnify and hold harmless the Stockholders' Representative
against any and all Damages suffered or incurred by the Stockholders'
Representative in managing or discharging his duties hereunder.
5. Transfers from the Indemnity Funds.
----------------------------------
(a) TeleSpectrum may, by giving written notice (an
"Indemnity Notice") to the Stockholders' Representative and the Indemnity Escrow
Agent, make a claim against the Escrow Property for any amounts claimed by it
under Article VII of the Merger Agreement at any time prior to the Expiration
Date. Such Indemnity Notice shall contain such facts and information as are then
reasonably available and the specific basis for indemnification including
whether the claim is made under Section 7.2 or 7.3 of the Merger Agreement. If
such amount is liquidated in amount, the Indemnity Notice shall so state and
such amount shall be deemed the amount of the claim against the Escrow Property.
If the amount is not liquidated, then the Indemnity Notice shall so state and,
in such event, a claim shall be deemed asserted against the Escrow Property, but
no transfer shall be made on account thereof until the amount of such claim is
liquidated and such transfer is to be made in accordance with (b) or (c) below.
(b) Unless the Stockholders' Representative shall give
written notice to TeleSpectrum and the Indemnity Escrow Agent that it objects to
any claim made in an Indemnity Notice within 15 business days following the date
on which it receives the Indemnity Notice, at the end of such period the
Indemnity Escrow Agent shall promptly transfer to TeleSpectrum as directed by
such Indemnity Notice from the Escrow Property (to the extent that the Escrow
Property is sufficient therefor) an amount that has an aggregate value equal to
the final amount of the claim. Each amount so transferred shall be drawn pro
---
rata from the Escrow Securities between the Escrow Shares and Shares of
- ----
TeleSpectrum Common Stock (the "Option Shares") underlying the Escrow Options
and any other property included in the Escrow Property, with each Escrow Share
and each Option Share valued at the Trading Value regardless of the actual
market value at such time. The
4
<PAGE>
Escrow Property transferred by the Indemnity Escrow Agent is hereinafter
referred to as "Claim Property." Upon the transfer of the Claim Property to the
Escrow Agent, each Option Agreement shall automatically and without the need of
any further action by any person be modified to become exercisable for such
lesser number of Option Shares to fully reflect the Optionholders pro rata
--- ----
contribution to Claim Property. In the event that the Stockholders'
Representative timely objects to a transfer of the Escrow Property, then
TeleSpectrum and the Stockholders' Representative shall endeavor to settle and
compromise the claims that are the subject of the Indemnity Notice. If
TeleSpectrum and the Stockholders' Representative are unable to agree on any
settlement or compromise, then the Indemnity Escrow Agent shall not make any
transfers of Escrow Property except upon receipt of a written statement executed
by TeleSpectrum and the Stockholders' Representative evidencing their agreement
to the amounts claimed in the Indemnity Notice or pursuant to a final Decision.
The Indemnity Escrow Agent shall take the action specified in notices that are
mutually signed by, and received from, TeleSpectrum and the Stockholders'
Representative as soon as practical after its receipt thereof.
(c) Except as set forth in this subsection (c), all Escrow Property
remaining in escrow hereunder shall be transferred to the stockholders of IDRC
and the IDRC Optionholders within 5 business days following the Expiration Date
in accordance with their respective interests therein in accordance with the
Stockholder's Representative's written direction delivered to the Escrow Agent
on the Expiration Date if (i) all Claim Property has been transferred to
TeleSpectrum in accordance with Section 5(b) hereof with respect to each
Indemnity Notice which has been given by TeleSpectrum as of the Expiration Date
or (ii) no Indemnity Notice has been given by TeleSpectrum as of the Expiration
Date. If TeleSpectrum has made any claim against the Escrow Property to which
the Stockholders' Representative has timely objected and which remains
outstanding as of the Expiration Date, no Escrow Property shall be transferred
to the stockholders of IDRC or the IDRC Optionholders until such time as any
such claim has been resolved in accordance with the provisions of this Section
5. Notwithstanding the foregoing, any "Excess Escrow Property" shall be
transferred to the stockholders of IDRC and the IDRC Optionholders in accordance
with the percentages set forth opposite such stockholders' or Optionholders'
respective names on Schedule A attached hereto within five business days
following the Expiration Date. Such distributions shall be made by mailing the
Escrow Property due to each stockholder and Optionholder to such stockholder's
or Optionholder's address as set forth on Schedule A. As used herein, the terms
"Excess Escrow Property" means that amount of Escrow Property, if any,
equal to the "Remaining Amount of Escrow Property" on the Expiration Date
less the "Maximum Amount."
"Remaining Amount of Escrow Property" means the aggregate Trading Value of
the Escrow Shares and Option Shares remaining in escrow plus the fair
market value of any other Escrow Property remaining in escrow.
5
<PAGE>
"Maximum Amount" means (i) the aggregate amount of all disputed claims on
the Expiration Date that are liquidated in amount plus (ii) the "Estimated
Amount."
"Estimated Amount" means the reasonably estimated maximum aggregate amount
of damages represented by outstanding disputed claims on the Expiration
Date that are not liquidated in amount, which shall be determined in a
writing executed by each of TeleSpectrum and the Stockholders'
Representative that makes specific reference to this Section.
The provisions set forth in this Section 5(c) shall apply to both Section 7.2
Escrow Property and Section 7.3 Escrow Property, and with respect to Section 7.2
Escrow Property, shall take into account the Maximum Amount associated with
Section 7.3 Escrow Property.
(d) Notwithstanding the other provisions of this Section 5, (i)
indemnification obligations under Section 7.2 of the Merger Agreement may only
be satisfied by Section 7.2 Escrow Property and (ii) indemnification obligations
under Section 7.3 of the Merger Agreement must first be satisfied by Section 7.3
Escrow Property until such escrow property is exhausted, and any remaining
indemnification obligations under Section 7.3 of the Merger Agreement may then
be satisfied by Section 7.2 Escrow Property.
(e) Arbitration. The parties shall submit the resolution of any
-----------
claim, cause of action or dispute between the parties arising under this
Agreement or Article VII of the Merger Agreement to expedited, binding
arbitration pursuant to this Section. Any claim, cause of action or dispute
between the parties arising under this Agreement submitted to arbitration under
this Section ("Arbitrated Disputes") shall be resolved by binding arbitration
administered by the American Arbitration Association ("AAA") in Wilmington,
Delaware, and, except as expressly provided in this Agreement, shall be
conducted in accordance with the Expedited Procedures under the Commercial
Arbitration Rules of the AAA, as such rules may be amended from time to time
(the "Rules"). The hearing locale shall be Wilmington, Delaware. The hearing
shall be before a panel of three arbitrators (the "Arbitrators"), one of whom
shall be selected by the Stockholders' Representative, one of whom shall be
selected by TeleSpectrum, and the third of whom shall be selected by the other
two arbitrators. The Arbitrators' decision (the "Decision") shall be binding,
and the prevailing party may enforce the Decision in any court of competent
jurisdiction. The parties shall use their best efforts to cooperate with each
other in causing the arbitration to be held in as efficient and expeditious a
manner as practicable, including, but not limited to, providing such documents
and making available such of their personnel as the Arbitrators may request, so
that the Decision may be reached timely. The Arbitrators shall take into
account the parties' stated goal of expedited proceedings in determining whether
to authorize discovery and, if so, the scope of permissible discovery and other
hearing and pre-hearing procedures. The authority of the Arbitrators shall be
limited to deciding liability for, and the proper amount of, any such claim,
cause of action or dispute, and the Arbitrators shall have no authority to award
punitive damages. The Arbitrators shall have such powers and establish such
procedures as are provided for in the Rules, so long as such powers and
procedures are consistent with this Section and are necessary to resolve the
Arbitrated Dispute
6
<PAGE>
within the time periods specified in this Agreement. The Arbitrators shall
render a Decision within 30 business days (15 business days with respect to any
disputes regarding Section 5(c) hereof) after being appointed to serve as
Arbitrators unless the parties otherwise agree in writing or the Arbitrators
make a finding that a party has carried the burden of showing good cause for a
longer period. The stockholders of IDRC, on the one hand, and TeleSpectrum on
the other hand, shall pay its own expenses of arbitration and the expenses of
the Arbitrators shall be equally shared; provided, however, that if in the
opinion of the Arbitrators any claim or defense or objection thereto by either
party is unreasonable, the Arbitrators may assess, as part of the award, all or
any part of the arbitration expenses (including reasonable attorneys' fees) of
the other party and of the Arbitrators against the party raising such
unreasonable claim, defense or objection. Any amounts due from the stockholders
of IDRC under this Section 5(e) shall be satisfied out of the Escrow Property;
provided, however, that the Indemnity Escrow Agent must notify the Stockholders'
Representative in writing at least 5 business days prior to the payment to the
Arbitrators of any Escrow Property and, if requested, must provide the
Stockholders' Representative with evidence of the total fees and expenses
incurred with respect to arbitration.
6. Escrow Earnings.
---------------
(a) Treatment of Earnings. All income earned on the Escrow Property,
---------------------
after payment of expenses incurred or taxes incurred in connection therewith,
shall be deemed to be a part of the Escrow Property for any and all purposes
hereunder.
(b) Permissible Investments. The Indemnity Escrow Agent shall invest
-----------------------
any cash constituting the Escrow Property at the written direction of
TeleSpectrum and the Stockholders' Representative in United States Treasury
obligations or in one or more mutual funds invested solely in United States
Treasury obligations, including without limitation, the Chase Vista (TM) Money
Market Mutual Funds or any other mutual fund for which the Indemnity Escrow
Agent or an affiliate of the Indemnity Escrow Agent serves as investment
manager, administrator, shareholder servicing agent, and/or custodian or
subcustodian, notwithstanding that (i) the Indemnity Escrow Agent or an
affiliate of the Indemnity Escrow Agent receives fees for services rendered,
(ii) the Indemnity Escrow Agent charges and collects fees for services rendered
pursuant to this Agreement which fees are separate from the fees received from
such funds, and (iii) services performed for such funds and pursuant to this
Agreement may at times duplicate those provided to such funds by the Indemnity
Escrow Agent or its affiliates.
(c) The Indemnity Escrow Agent shall have the right to liquidate any
investments held, in order to provide funds necessary to make required payments
under this Agreement. The Indemnity Escrow Agent shall not incur any liability
for any losses arising as a result of any investment made pursuant to the
instructions of the parties hereto or as a result of any liquidation of any
investment prior to its maturity or for the failure of the parties to give the
Indemnity Escrow Agent instructions to invest or reinvest the Escrow Property or
any earnings thereon.
7
<PAGE>
7. Dividends; Voting.
-----------------
(a) Dividends. Any dividends declared and paid, and any distributions
---------
made with respect to, the Escrow Shares shall be delivered to the Escrow Agent
and shall be held and transferred by the Escrow Agent in the same manner that
the Escrow Shares are held and transferred hereunder. All such dividends and
distributions made in shares of Common Stock of TeleSpectrum shall be deemed to
be Escrow Shares for any and all purposes hereunder.
(b) Voting. The stockholders of IDRC shall vote the Escrow Shares in
------
accordance with their respective interests therein on all matters submitted to a
vote of the stockholders of TeleSpectrum during the term of this Agreement. The
Escrow Agent shall have no responsibility for voting Escrow Shares or in
assisting in the voting of Escrow Shares.
8. Fees of Indemnity Escrow Agent. The stockholders of IDRC and IDRC
------------------------------
Optionholders, on the one hand, and TeleSpectrum on the other, shall each be
responsible for 50% of the reasonable fees and expenses of or incurred by the
Indemnity Escrow Agent in connection with carrying out its duties hereunder. Any
amounts due from the stockholders of IDRC and the IDRC Optionholders under this
Section 8 shall be satisfied by the Escrow Agent after compliance with this
Section 8 out of the Escrow Property; provided, however, that the Indemnity
Escrow Agent must notify the Stockholders Representative in writing at least 5
business days prior to the withdrawal of any Escrow Property and, if requested,
must provide the Stockholders' Representative with evidence of such fees and
expenses incurred.
9. Rights and Duties of the Indemnity Escrow Agent.
-----------------------------------------------
(a) The Indemnity Escrow Agent shall have and may exercise such powers
hereunder as are specifically delegated to the Indemnity Escrow Agent by the
terms hereof (including the power to surrender to TeleSpectrum option agreements
representing Escrow Options so that such agreements may be canceled and
exchanged for new option agreements as appropriate), together with such powers
as are reasonably incidental thereto, including the power to hire attorneys to
represent the Indemnity Escrow Agent with respect to matters arising from this
Agreement and the power to file actions as it deems necessary in a court of
appropriate jurisdiction. The duties and responsibilities of the Escrow Agent
shall be determined solely by the express terms of this Agreement. The Escrow
Agent shall not have any liability under nor duty to inquire into the terms or
provisions of any other Agreement, including the Merger Agreement except for the
definition of capitalized terms not defined herein. The Indemnity Escrow Agent
shall have no implied duties and no obligation to take any action hereunder
except for any action specifically provided by this Agreement to be taken by the
Indemnity Escrow Agent. The Indemnity Escrow Agent shall have no responsibility
or obligation of any kind in connection with this Agreement or the Escrow
Property, and shall not be required to deliver the same or any part thereof or
take any action with respect to any matters that might arise in connection
therewith, other than to administer the Escrow Property as herein provided or by
reason of any order of a court of competent jurisdiction from which no appeal
may timely be taken. The Indemnity Escrow Agent shall not be liable to any
party
8
<PAGE>
for any action taken or omitted to be taken hereunder or in connection herewith
unless a court of competent jurisdiction determines that its own gross
negligence or willful misconduct or breach of the specific provisions of this
Agreement resulted in a loss to TeleSpectrum or the stockholders of IDRC or IDRC
optionholders. TeleSpectrum hereby agrees to indemnify and hold harmless and
defend the Indemnity Escrow Agent and its directors, officers, agents and
employees (collectively, the "Indemnitees") from and against any and all claims,
liabilities, losses, damages, fines, penalties and expenses, including out-of-
pocket and incidental expenses and legal fees and expenses ("Losses"), that may
be imposed on, incurred by or asserted against, the Indemnitees or any of them
for following any instructions or other directions upon which they are
authorized to rely pursuant to the terms of this Agreement. In addition to and
not in limitation of the immediately preceding sentence, TeleSpectrum also
agrees to indemnify and hold the Indemnitees and each of them harmless from and
against any and all Losses that may be imposed on, incurred by or asserted
against the Indemnitees or any of them in connection with or arising out of the
Indemnity Escrow Agent's performance under this Agreement, provided the
Indemnitees have not acted with gross negligence or engaged in willful
misconduct. Anything in this Agreement to the contrary notwithstanding, in no
event shall the Indemnity Escrow Agent be liable for special, indirect or
consequential loss or damage of any kind whatsoever (including but not limited
to lost profits), even if the Indemnity Escrow Agent has been advised of the
likelihood of such loss or damage and regardless of the form of action. The
provisions of this Section 9(a) shall survive the termination of this Agreement
and the resignation or removal of the Indemnity Escrow Agent for any reason. The
Indemnity Escrow Agent shall be fully justified in failing or refusing to take
any action under this Agreement unless it shall first be indemnified to its
reasonable satisfaction against any and all liability and expense which may be
incurred by it by reason of taking or continuing to take any such action. The
Indemnity Escrow Agent may execute any of its duties hereunder by or through
employees, agents and attorneys-in-fact.
(b) The Indemnity Escrow Agent shall have the right to resign after
first having given TeleSpectrum and the Stockholders' Representative notice in
writing of its intent to resign at least 15 business days in advance. At the
expiration of such 15 business days, the Indemnity Escrow Agent shall deliver
the remaining Escrow Property to a successor Indemnity Escrow Agent designated
in writing by TeleSpectrum and the Stockholders' Representative. If
TeleSpectrum and the Stockholders' Representative fail to designate a successor
to the Indemnity Escrow Agent within such 15 business day period, the Indemnity
Escrow Agent shall institute a bill of interpleader as contemplated by Section
9(e) hereof. Any corporation or association into which the Indemnity Escrow
Agent in its individual capacity may be merged or converted or with which it may
be consolidated, or any corporation or association resulting from any merger,
conversion or consolidation to which the Indemnity Escrow Agent in its
individual capacity shall be a party, or any corporation or association to which
all or substantially all the corporate trust business of the Indemnity Escrow
Agent in its individual capacity may be sold or otherwise transferred, shall be
the Indemnity Escrow Agent under this Agreement without further act.
(c) If (i) any Escrow Property is at any time attached, garnished or
levied upon under any
9
<PAGE>
court order, or (ii) the payment, assignment, transfer, conveyance or delivery
of any such property shall be stayed or enjoined by any court order, or (iii)
any order, judgment or decree shall be made or entered by any court of competent
jurisdiction from which no appeal may timely be taken affecting such property or
any part thereof, then in any of such events the Indemnity Escrow Agent is
authorized, in its sole discretion, to rely upon and comply with any such order,
judgment or decree which it is advised by legal counsel of its own choosing is
binding upon it, and if it complies with any such order, judgment or decree it
shall not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, even though such order, judgment or
decree may be subsequently reversed, modified, annulled, set aside or vacated.
(d) The Indemnity Escrow Agent shall be entitled to rely upon the
accuracy, act in reliance upon the contents and assume the genuineness of any
notice which is given to the Indemnity Escrow Agent in proper form pursuant to
this Agreement and reasonably believed by it to be genuine and correct and to
have been signed or sent by the proper person, without the necessity of the
Indemnity Escrow Agent verifying the truth or accuracy thereof. The Indemnity
Escrow Agent shall not be obligated to investigate or in any way determine
whether TeleSpectrum is entitled to indemnification under the Merger Agreement
or the proper amount of any such indemnification.
(e) Should any controversy arise between or among TeleSpectrum and the
Stockholders' Representative or any other person, firm or entity with respect to
this Agreement, the Escrow Property or any part thereof, or the right of any
party or other person to receive the Escrow Property, or should TeleSpectrum and
the Stockholders' Representative fail to designate another Indemnity Escrow
Agent as provided in Section 9(b) hereof, or if the Indemnity Escrow Agent
should be in doubt as to what action to take, the Indemnity Escrow Agent shall
have the right (but not the obligation) to (i) withhold delivery of the Escrow
Property until the controversy is resolved and/or (ii) institute a bill of
interpleader in any court of competent jurisdiction to determine the rights of
the parties hereto (the right of the Escrow Property to institute such bill of
interpleader shall not, however, be deemed to modify the manner in which
Indemnity Escrow Agent is entitled to make transfers from the Escrow Property as
hereinabove set forth other than to tender the Escrow Property into the
possession and control of such court). The expense and cost of any proceeding
under this Section 9(e) shall be payable from the Escrow Property.
10. Term. This Agreement shall continue in full force and effect until
----
all Escrow Property has been transferred in accordance with Section 5 hereof.
11. Miscellaneous.
-------------
(a) Time Periods. All references to "business days" means days
------------
when national banks in Philadelphia, Pennsylvania are open for business.
Whenever under the terms hereof the time for giving a notice or performing an
act falls upon a Saturday, Sunday or bank holiday, such time shall be extended
to the next business day.
10
<PAGE>
(b) Legal Counsel. The Indemnity Escrow Agent may consult with its
-------------
counsel or other counsel satisfactory to it with respect to any question
relating to its duties or responsibilities hereunder or otherwise in connection
herewith and shall not be liable for any action taken, suffered or omitted by
the Indemnity Escrow Agent in good faith upon the advice of such counsel.
(c) Severability. If any provision of this Agreement or the
------------
application thereof to any person or circumstance is held invalid or
unenforceable in any jurisdiction, the remainder hereof, and the application of
such provision to such person or circumstance in any other jurisdiction or to
other persons or circumstances in any jurisdiction, shall not be affected
thereby, and to this end the provisions of this Agreement shall be severable.
(d) Default. Waiver of any default shall not constitute waiver of
-------
any other or subsequent default.
(e) Notices. All notices and other communications hereunder shall be
-------
in writing and shall be deemed to have been duly given when delivered in person,
by telecopy, or by registered or certified mail (postage prepaid, return receipt
requested) or by overnight courier service to the respective parties as follows:
if to TeleSpectrum :
443 S. Gulph Road
King of Prussia, PA 19406
Telecopy: (610) 878-7480
Attention: President
with copies to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Telecopy: (215) 963-5299
Attention: Stephen M. Goodman, Esq.
if to the Stockholders' Representative:
Glenn McKenzie
24 Beach Palm
Hampton, NH 03842
Telecopy: (603) 929-0876
11
<PAGE>
with a copy to:
Cooley Godward LLP
4365 Executive Drive- Suite 100
San Diego, CA 92121
Telecopy: (619) 453-3555
Attention: Lance W. Bridges, Esq.
International Data Response Corporation
PO Box 7130
Rancho Santa Fe, CA 92067-7130
Telecopy: (619) 759-3350
Attention: Paul Grinberg
if to the Indemnity Escrow Agent:
Chase Manhattan Trust Company, National Association
One Liberty Place, Suite 5210
1650 Market Street
Philadelphia PA 19103
Telecopy: 215-972-8372
Attention: Capital Markets Fiduciary Services; John Sohier
or to such other address or facsimile number as the party to whom notice is
given may have previously furnished to the others in writing in the manner set
forth above. Any notice or communication delivered in person shall be deemed
effective on delivery. Any notice or communication sent by telecopy shall be
deemed effective on the first business day at the place of which such notice or
communication is received following the day on which such notice or
communication was sent.
(f) Counterparts; facsimile signatures. This Agreement may be
----------------------------------
executed in counterparts, each of which shall be deemed to be an original, but
all of which shall constitute one and the same agreement. This Agreement may be
executed by facsimile signature which, for all purposes, shall be deemed to be
an original signature.
(g) Amendment. This Agreement may not be amended or modified except
---------
by a written agreement signed by each of the parties hereto which agreement
makes express reference to this Section.
(h) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Delaware regardless of the laws that
might otherwise govern under principles of conflicts of laws applicable thereto.
In any action between or among any of the parties to this Agreement: (i) each of
the parties irrevocably and unconditionally consents and
12
<PAGE>
submits to the exclusive jurisdiction and venue of the state courts located in
the State of Delaware; (ii) each of the parties irrevocably waives the right to
trial by jury; and (iii) 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 11(e) herein.
(i) Entire Agreement. This Agreement constitutes the entire agreement
----------------
among the parties with respect to the subject matter hereof and supersedes all
prior written and oral and all contemporaneous oral agreements and
understandings with respect to the subject matter hereof.
(j) TIN Numbers. Each party hereto, except the Indemnity Escrow
-----------
Agent, shall, in the notice section of this Agreement, provide the Indemnity
Escrow Agent with their Tax Identification Number (TIN) as assigned by the
Internal Revenue Service. Schedule A shall list the TIN for each IDRC
stockholder and Optionholder.
(k) Funds Transfer. In the event funds transfer instructions are
--------------
given (other than in writing at the time of execution of this Agreement),
whether in writing, by telecopier or otherwise, the Indemnity Escrow Agent is
authorized to seek confirmation or such instructions by telephone call-back to
the person or persons designated on Schedule B hereto, and the Indemnity Escrow
Agent may rely upon the confirmation of anyone purporting to be the person or
persons so designated. The persons and telephone numbers for call-backs may be
changed only in a writing actually received and acknowledged by the Indemnity
Escrow Agent. The parties to this Agreement acknowledge that such security
procedure is commercially reasonable.
It is understood that the Indemnity Escrow Agent and the
beneficiary's bank in any funds transfer may rely solely upon any account
numbers or similar identifying number provided by either of the other parties
hereto identify (i) the beneficiary, (ii) the beneficiary's bank, or (iii) an
intermediary bank. The Indemnity Escrow Agent may apply any of the escrowed
funds for any payment order it executes using any such identifying number, even
where its use may result in a person other than the beneficiary being paid, or
the transfer or funds to bank other than the beneficiary's bank, or any
intermediary bank designated.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties as of
the date first above written.
TELESPECTRUM WORLDWIDE INC.
By:
----------------------------------
Name:
Title:
STOCKHOLDERS' REPRESENTATIVE
By:
----------------------------------
Glenn McKenzie
CHASE MANHATTAN TRUST COMPANY,
NATIONAL ASSOCIATION,
as Indemnity Escrow Agent
By:
----------------------------------
14
<PAGE>
SCHEDULE A
Name of Stockholder No. of Escrow Shares % of Total Shares* TIN Number
- ------------------- -------------------- ------------------ --------------
Name and Address
of Optionholder No. of Option Shares % of Total Shares* TIN Number
- ------------------- -------------------- ------------------ --------------
*Total Shares means the sum of the Escrow Shares and Option Shares.
15
<PAGE>
Schedule B
Telephone Number(s) for Call-Backs and
Person(s) Designated to Confirm Funds Transfer Instructions
-----------------------------------------------------------
If to TeleSpectrum:
Name Telephone Number
---- ----------------
1.
--------------------------- --------------------------
2.
--------------------------- --------------------------
3.
--------------------------- --------------------------
If to Stockholders' Representative:
Name Telephone Number
---- ----------------
1.
--------------------------- --------------------------
2.
--------------------------- --------------------------
3.
--------------------------- --------------------------
Telephone call-backs shall be made to each of TeleSpectrum and Stockholders'
Representative if joint instructions are required pursuant to the Escrow
Agreement.
16
<PAGE>
ANNEX I:
ANNUAL REPORT ON FORM 10K OF TELESPECTRUM WORLDWIDE INC.
FOR THE YEAR ENDED DECEMBER 31, 1998
<PAGE>
ANNEX I
================================================================================
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, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File No. 0-21107
______________
TELESPECTRUM WORLDWIDE INC.
---------------------------
(Exact Name Of Registrant As Specified In Its Charter)
Delaware 23-2845501
-------- ----------
(State Or Other Jurisdiction Of (I.R.S. Employer
Incorporation Or Organization) Identification Number)
443 South Gulph Road, King of Prussia, PA 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:
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
--------------------------------------
(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 February 24, 1999, the aggregate market value of the common Stock
held by non-affiliates of the registrant was $100,579,738. Such aggregate market
value was computed by reference to the closing sale price of the common Stock as
reported on The Nasdaq National Market 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 registrant.
As of February 24, 1999, there were 25,835,948 shares of the registrant's
common Stock outstanding.
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C> <C>
Item 1. Business................................................................................... 1
Item 2. Properties................................................................................. 4
Item 3. Legal Proceedings.......................................................................... 5
Item 4. Submission of Matters to a Vote of Security Holders........................................ 6
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................. 6
Item 6. Selected Financial Data.................................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 10
Item 8. Financial Statements and Supplementary Data................................................ 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 28
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 29
Item 11. Executive Compensation..................................................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 34
Item 13. Certain Relationships and Related Transactions............................................. 35
PART IV
Item 14. Exhibits, Financial Statement Schedule and Report on Form 8-K.............................. 36
Index to Financial Statements and Schedule................................................. F-1
</TABLE>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this Form 10-K including the
information concerning possible or assumed future results of our operations and
those preceded by, followed by or that include the words "anticipates,"
"believes," "expects," "intends" or similar expressions. For those statements,
we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. You should
understand that the following important factors, in addition to those discussed
elsewhere in this document, particularly under "Risk Factors", could affect our
future results and could cause those results to differ materially from those
expressed in our forward-looking statements:
. competitive factors;
. projected capital expenditures;
. liquidity;
. possible business relationships;
. dependence on key personnel;
. exposure to Year 2000 issues; and
. growth in future periods.
Our actual future results may differ materially from those expressed in our
forward-looking statements set forth in this Form 10-K for a number of reasons,
including the inability to:
. integrate our operations with those of IDRC in a prompt and effective
manner;
. meet greater debt service requirements following the assumption by us of
the IDRC senior debt;
. obtain financing or pursue other business objectives due to the mentioned
assumed debt;
. develop or implement a successful new business strategy for the combined
company;
. manage the combined company effectively and implement its business
strategies;
. avoid unknown material liabilities after our mergers are completed;
. avoid losing customers as a result of our mergers; and
. maintain sufficient call center utilization at favorable rates.
<PAGE>
TELESPECTRUM WORLDWIDE INC.
PART I
ITEM 1. BUSINESS
We provide services to our clients through our two business segments,
telemarketing and customer care. We began our material operations when we
completed our initial public offering and on the same day acquired our six
initial operating businesses. These businesses were engaged in telemarketing,
customer care, market research and direct mail and fulfillment services. We
acquired our customer care consulting business in October 1996. We sold our
market research business in January 1998 and our direct mail and fulfillment
business in March 1998.
SERVICES OVERVIEW
Telemarketing Segment
We provide business to consumer and business to business telemarketing services.
Telemarketing services involve the placing of telephone calls on behalf of our
clients, normally as part of our clients' efforts to sell their products or
services, or to obtain new customers. Our clients provide us with the list of
customers or prospective customers to be called. These lists consist of
individuals or businesses that have characteristics that would indicate that
they are potential purchasers of a client's products or services. Our
telemarketing sales representatives (TSRs) use prepared scripts when making the
calls. This script is either prepared by us or our client and contains written
questions and answers that are designed to assist the TSR in handling these
calls. We use our computerized call management systems to make these calls.
These systems have predictive dialers that automatically dial telephone numbers,
determine if live connections have been made and present connected calls to our
TSRs.
Customer Care Segment
Our customer care services are provided on behalf of our clients' customer
service activities. Our services include responding to customer calls via
customer service representatives (CSRs), interactive voice response services,
consulting services and call center management. Responding to customer calls
involves processing of customer inquiries by CSRs. The customer will typically
call a toll-free "800" or "888" number which is routed to one of our call
centers. The incoming call is identified by the number dialed and linked to the
CSR that is best trained and available to handle the call. At the same time,
relevant customer and/or product information is delivered to the CSRs computer
screen, complete with prompts and response text necessary to handle the inquiry.
When the call is completed, information gathered is stored and delivered back to
the client's central data files. Our interactive voice response services
involve responding to incoming customer calls via automated systems. Where
required, these calls are transferred to a CSR. Our consulting services
involve conducting research surveys that assess the effectiveness of a clients'
customer service efforts. We have also developed customer service software that
we license to our clients and is used to measure the effectiveness of customer
service and improve customer service performance. Our call center management
services involve running most aspects of a client's call center, including
recruiting and staffing the CSRs, managing the operations and providing reports
that analyze the performance of the client's call center.
INDUSTRY OVERVIEW
Telemarketing involves the direct communication of information to current or
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. This delivers a marketing message directly to a specific
current or prospective customer and elicits immediate customer response. Many
businesses have combined traditional indirect marketing methods such as
advertising with direct marketing methods such as telemarketing to obtain
greater returns from their investments in marketing activities.
We believe that currently there is overcapacity in the telemarketing industry.
This overcapacity has resulted in increased price competition for new
telemarketing contracts. While we believe that there will be continued growth
in the telemarketing industry, we do not expect that prior growth rates will
resume in the near future.
1
<PAGE>
Customer care services include telephone based direct communication of
information with customers relating to customer support and related value-added
services such as training, consulting, call center management and interactive
voice response. In the customer care industry, a significant portion of
customer care services are currently performed by prospective clients' in-house
operations. This provides a significant outsourcing opportunity for customer
care service providers.
Advances in computer and telecommunications technology have assisted
telemarketing and customer care companies to more accurately identify and
contact current and prospective customers, as well as provide more accurate,
timely and complete customer and product information to the TSR or CSR.
Providers of telemarketing and customer care services 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 operations, while at the same time
better matching available capacity to fluctuating client demand.
COMPETITION
The telemarketing industry is intensely competitive. We compete with numerous
independent telemarketing and customer care firms, as well as the in-house
operations of many of our existing or prospective clients. We compete for
telemarketing and customer care services based on:
quality;
technological expertise;
customer service;
price;
value;
range of service offerings; and
available capacity.
Most businesses that are significant consumers of telemarketing services utilize
more than one telemarketing firm and often reallocate work among various firms
from time to time. Clients often request telemarketing on an individual project
basis and we frequently are required to compete for each individual project as
they are initiated.
SALES AND MARKETING
As of December 31, 1998, we employed 15 sales personnel. Sales personnel are
compensated by salary and commissions based on sales performance.
We generally operate under short-term cancelable contractual relationships with
our telemarketing clients. Our customer care client contracts are generally for
one to three years. Our prices often include an initial fee, a base service
charge and separate charges for ancillary services. Service charges for
telemarketing and customer care services are based upon hourly rates, minute
rates or a performance payment based on successful results. Charges for other
services are normally assessed on a fee-for-service basis.
TARGETED INDUSTRIES
We target our marketing efforts toward clients in the following principal
industries:
Telecommunications
We provide telemarketing services for major telecommunications companies for
their long distance, cellular and cable products and services. We also provide
telemarketing services for regional telecommunications companies for their
advanced telephone features. We offer these clients telemarketing services for
their consumer and business customers. In addition, we answer incoming customer
service calls and provide customer care consulting services for the
telecommunications industry. The telecommunications industry provided 27% of
our total revenues in 1998.
2
<PAGE>
Financial Services
We provide banks and other financial services clients with a wide range of
services, including:
acquiring new customers;
encouraging product use;
encouraging balance transfers;
regaining customers; and
customer service.
The financial services industry provided 23% of our total revenues in 1998.
Insurance
We work with large consumer insurance companies and their agents, complementing
their sales efforts by telemarketing products such as life and accidental death
and dismemberment insurance. In addition, we answer incoming customer service
and sales calls. As of December 31, 1998, we employed 340 licensed insurance
agents collectively holding state insurance licenses from 48 states. These
agents provide telemarketing services for our clients. The insurance industry
provided 10% of our total revenues in 1998.
Pharmaceutical and Health Care
We provide our pharmaceutical clients with product support and customer service
for their business and consumer customers. We also perform customer care
consulting for clients in the health care industry.
Utilities
We provide large public and private utilities with the following services:
deregulation education for consumers;
customer service;
consumer affairs services;
collection efforts; and
customer service surveys.
Consumer Products
We provide consumer products clients with customer service, order entry and new
customer acquisition services.
Technology
We provide product support and customer service for clients in the computer
hardware and software industry. We also provide business-to-business
telemarketing such as product sales, lead generation and customer qualification
and provide call center management services for technology clients.
PERSONNEL AND TRAINING
As of December 31, 1998, we employed approximately 4,250 individuals on a full-
time basis and 250 individuals on a part-time basis. TSRs and CSRs account for
approximately 3,700 employees of our total workforce of 4,500. Our ability to
hire, train and manage qualified employees is critical to our ability to provide
high quality services to our clients. From the third quarter of 1997 through
the second quarter of 1998 we restructured our telemarketing segment. In
connection with the restructuring, we laid-off employees and closed call
centers.
GOVERNMENT REGULATION
Our sales practices are regulated at both the federal and state level. The
Federal Telephone Consumer Protection Act of 1991, 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.
3
<PAGE>
The Federal Trade Commission regulates both general sales practices and
telemarketing specifically. Under the Federal Trade Commission 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. 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 and the nature of the goods or services offered. The
regulations also require that telemarketers maintain records on various aspects
of their business.
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.
We are also affected by laws applicable to our client's businesses. For
example, "anti-slamming" legislation requires telecommunication carriers to
provide substantial verification from their customers that they have authorized
a change in the carrier of their telephone service. This legislation places
penalties on telecommunications carriers that do not obtain the required
verification. In addition, our 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 we currently
provide.
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. We believe we are in compliance with applicable rules and
regulations.
4
<PAGE>
ITEM 2. PROPERTIES
Our corporate headquarters are located in 21,000 square feet of rented office
space in King of Prussia, Pennsylvania. We sublease this space from CRW
Financial, Inc., an affiliate that owns approximately 6.9 million shares of our
common stock. CRW Financial, Inc. subleases this facility from Cendant
Corporation, which in turn, leases this space from Health and Retirement
Properties Trust.
As of December 31, 1998 we operated the following material facilities:
<TABLE>
<CAPTION>
NUMBER OF
WORKSTATIONS
------------
TELEMARKETING CENTERS
---------------------
<S> <C>
Beckley, WV 176
Charleston, WV 240
Endicott, NY 240
Fayetteville, NC 119
Huntington, WV 240
Salisbury, NC 103
Scranton, PA 240
Steubenville, OH 173
Wheeling, WV 240
Winnipeg, Manitoba 240
-----
2,011
-----
CUSTOMER CARE CENTERS
---------------------
Annapolis, MD 123
Arlington, VA N/A
Linthicum, MD 136
London, U.K. N/A
Baltimore, MD 312
-----
571
-----
CUSTOMER CARE MANAGED CENTERS
-----------------------------
Armonk, NY 24
Littleton, MA 20
-----
44
-----
Total 2,626
=====
</TABLE>
The customer care managed centers are not owned or leased by us, but are
operated as managed call centers for our clients.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in the following legal proceedings:
In July 1998, we commenced litigation in Federal court against Parcel
Consultants Incorporation d/b/a NTC. We filed suit as part of our efforts to
collect approximately $4.7 million of accounts receivable from telemarketing
services performed on behalf of NTC. NTC filed a counter suit against us
alleging breach of contract and fraud. We believe that NTC's claims against us
are without merit. On February 26, 1999, NTC filed for reorganization under
Chapter 11 of the Federal Bankruptcy Code. We have reserved approximately $2.1
million of the accounts receivable due from NTC. We believe that our reserve is
adequate, however, we cannot assure that we will be successful in collecting
this receivable from NTC.
We are also from time to time involved in litigation incidental to our business.
We do not believe that the resolution of any existing litigation will result in
a material adverse effect on our business, results of operations, or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the fourth
quarter of 1998.
5
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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 our common stock, as reported on the NASDAQ
national market, since 1997.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
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 11.000 5.813
Third Quarter 9.125 3.625
Fourth Quarter 10.688 7.250
1999
First Quarter (through February 24, 1999) 11.813 8.375
</TABLE>
On February 24, 1999, the closing price for a share of common stock as reported
by The NASDAQ national stock market was $8.375. We have not paid any dividends
since our 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 our earnings, financial condition and capital requirements.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data was derived in part from our consolidated
financial statements and notes thereto, as well as the predecessor financial
information of our initial operating businesses, included elsewhere in this Form
10-K.
In our opinion, the financial statements of our 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. However,
classification of expenses between cost of services and selling, general and
administrative expenses of the initial operating businesses may be inconsistent
with our classification of such expenses. Selected Financial Data of our
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 exception of
one business, which operated on a 52/53 week fiscal year ending on the last
Friday of the calendar year.
6
<PAGE>
TELESPECTRUM WORLDWIDE INC.
SELECTED FINANCIAL DATA
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, APRIL 26, 1996
------------
(INCEPTION) TO
DECEMBER 31,
1998 1997 1996
---- ---- ----
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS:
REVENUES $167,428 $ 178,922 $ 53,154
-------- --------- --------
OPERATING EXPENSES:
Cost of services 154,316 177,565 37,942
Selling, general and administrative 17,875 19,074 9,126
Amortization of goodwill (includes goodwill impairment charge of
$139,072 in 1997) 1,178 146,321 2,147
-------- --------- --------
Total operating expenses 173,369 342,960 49,215
-------- --------- --------
Operating income (loss) (5,941) (164,038) 3,939
Interest income (expense), net (1,246) (1,876) 433
Investment gain -- 1,760 --
-------- --------- --------
Income (loss) from continuing operations before taxes (7,187) (164,154) 4,372
Income tax benefit (expense) 247 2,310 (1,693)
-------- --------- --------
Income (loss) from continuing operations $ (6,940) $(161,844) $ 2,679
======== ========= ========
Basic and diluted earnings (loss) per share from continuing operations $ (0.27) $ (6.42) $ 0.15
======== ========= ========
Weighted average number of common and common equivalent
shares outstanding 25,528 25,213 17,898
======== ========= ========
<CAPTION>
DECEMBER 31,
------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 794 $ 774 $ 28,171
Working capital, including net assets of discontinued operations 16,702 20,655 49,373
Total assets 103,689 144,721 296,539
Long-term debt, including capital lease obligations, less current 2,876 3,800 4,199
portion
Stockholders' equity 76,568 80,377 240,511
</TABLE>
___________
TeleSpectrum Worldwide Inc. was incorporated on April 26, 1996; accordingly,
there were no historical results prior to that date.
7
<PAGE>
TELESPECTRUM WORLDWIDE INC.
SELECTED FINANCIAL DATA
(CONTINUED)
PREDECESSOR COMPANIES (INITIAL OPERATING BUSINESSES)
----------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1996
TO AUGUST 12, FISCAL YEAR ENDED
-----------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS:
SOMAR
Revenues $26,421 $31,900 $20,785
Cost of services 21,406 25,048 15,623
Selling, general and administrative 3,817 5,162 4,115
Operating income 1,198 1,690 1,047
Net income 637 979 627
NBG
Revenues 11,311 12,829 5,778
Cost of services 7,686 8,572 4,259
Selling, general and administrative 1,645 2,115 1,443
Operating income 1,980 2,142 76
Net income 1,868 2,106 33
REICH
Revenues 14,558 12,253 5,424
Cost of services 8,550 7,836 4,225
Selling, general and administrative 1,466 2,534 976
Operating income 4,542 1,883 223
Net income 4,511 1,840 199
TELESPECTRUM MARYLAND
Revenues 10,529 11,854 9,386
Cost of services 6,974 8,338 6,754
Selling, general and administrative 2,929 3,072 2,636
Operating income (loss) 626 444 (4)
Net income (loss) 497 278 (154)
</TABLE>
8
<PAGE>
TELESPECTRUM WORLDWIDE INC.
SELECTED FINANCIAL DATA
(CONTINUED)
PREDECESSOR COMPANIES (INITIAL OPERATING BUSINESSES)
----------------------------------------------------
<TABLE>
<CAPTION>
AT FISCAL YEAR END
------------------
1995 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
SOMAR
Cash and cash equivalents $ 25 $ 2
Working capital (deficit) (1,990) (242)
Total assets 10,792 5,526
Long-term debt, including capital lease obligations, less current
portion 1,639 1,145
Stockholders' equity 771 478
NBG
Cash and cash equivalents 700 --
Working capital (deficit) 1,270 (238)
Total assets 4,234 1,483
Long-term debt, including capital lease obligations, less current
portion 454 277
Stockholders' equity 2,254 396
REICH
Cash and cash equivalents 220 31
Working capital (deficit) 821 (59)
Total assets 4,318 1,111
Long-term debt, including capital lease obligations, less current
portion 371 273
Stockholders' equity (deficit) 1,668 (272)
TELESPECTRUM MARYLAND
Cash and cash equivalents 15 163
Working capital (deficit) 37 (241)
Total assets 3,549 3,182
Long-term debt, including capital lease obligations, less current
portion 57 217
Stockholders' equity 687 409
</TABLE>
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this Form 10-K including the
information concerning possible or assumed future results of our operations and
those preceded by, followed by or that include the words "anticipates,"
"believes," "expects," "intends" or similar expressions. For those statements,
we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. You should
understand that the following important factors, in addition to those discussed
elsewhere in this document, particularly under "Risk Factors", could affect our
future results and could cause those results to differ materially from those
expressed in our forward-looking statements:
. competitive factors;
. projected capital expenditures;
. liquidity;
. possible business relationships;
. dependence on key personnel;
. exposure to Year 2000 issues; and
. growth in future periods.
Our actual future results may differ materially from those expressed in our
forward-looking statements set forth in this Form 10-K for a number of reasons,
including the inability to:
. integrate our operations with those of IDRC in a prompt and effective
manner;
. meet greater debt service requirements following the assumption by us of
the IDRC senior debt;
. obtain financing or pursue other business objectives due to the mentioned
assumed debt;
. develop or implement a successful new business strategy for the combined
company;
. manage the combined company effectively and implement its business
strategies;
. avoid unknown material liabilities after our mergers are completed;
. avoid losing customers as a result of our mergers; and
. maintain sufficient call center utilization at favorable rates.
RECENT DEVELOPMENTS
OVERVIEW
IDRC Merger Agreement
On January 14, 1999, we entered into a merger agreement with International Data
Response Corporation and its majority stockholders. This agreement was amended
on February 26, 1999. Under this agreement, the holders of outstanding IDRC
common stock and options will be entitled to receive their pro rata portion of
an aggregate of 9.2 million shares and warrants exercisable for 3.0 million
shares of our common stock. These warrants would be exercisable during the
period between the first and seventh anniversaries of the completion of the
merger at an exercise price of $8.988 per share. In addition, the IDRC
preferred stock will be exchanged for $6.0 million in cash, plus all accrued and
unpaid dividends. The majority stockholder of IDRC, McCown De Leeuw & Co. will
be required to invest all of their proceeds from the exchange of their IDRC
preferred stock, estimated at approximately $4.9 million, to purchase a term
note from us. This note will be payable in one year and bear interest at 10.0%.
We will account for the IDRC merger as a purchase by us pursuant to Accounting
Principles Board Opinion No. 16 "Business Combinations." We received a
financing commitment for a new $135.0 million senior debt facility which will be
used to replace our current facility and to refinance IDRC's current maturities
of long-term debt, long-term debt and seller notes. If the IDRC merger is
completed, we will incur debt issuance costs associated with this facility of
approximately $4.2 million. We would amortize these costs over four years.
This debt facility will consist of three term notes in the aggregate of $86.0
million with maturities between 32 and 56 months and a revolving credit facility
of $49.0 million due in 32 months. The debt facility allows for alternative
interest rates. After three months, we can elect LIBOR plus a margin of 3.25%
to 4.25%. The debt facility contains various financial and non-financial
covenants, including minimum interest coverage, fixed charge coverage, minimum
EBITDA, maximum leverage ratio and limitations on capital expenditures. We
expect to complete the merger in the second quarter of 1999.
10
<PAGE>
CRW Merger Agreement
On September 3, 1998, we entered into a merger agreement with CRW. This
agreement was amended December 30, 1998. Under this agreement each outstanding
share of CRW common stock will be exchanged for .709 of a share of TeleSpectrum
common stock. In addition, each outstanding option to purchase shares of CRW
common stock will be exchanged for an option to purchase .709 of a share of
TeleSpectrum common stock. The warrants issued by CRW to purchase 0.7 million
shares of our common stock owned by CRW will be unaffected by this merger. CRW
does not have any continuing business operations and its only significant asset
is 6.9 million shares of our common stock. For financial reporting purposes,
we will treat the exchange of our shares of common stock for shares of CRW
common stock as a treasury stock transaction. The transaction will not have an
effect on our net income or loss, but will have an effect on our net income or
loss per share. We expect to complete the merger in the second quarter of 1999.
Litigation with NTC
In July 1998, we commenced litigation in Federal court against Parcel
Consultants Incorporation d/b/a NTC. We filed suit as part of our efforts to
collect approximately $4.7 million of accounts receivable from telemarketing
services performed on behalf of NTC. NTC filed a counter suit against us
alleging breach of contract and fraud. We believe that NTC's claims against us
are without merit. In February 1999, NTC filed for reorganization under Chapter
11 of the Federal Bankruptcy Code. We have reserved approximately $2.1 million
of the accounts receivable due from NTC. We believe that our reserve is
adequate, however, we cannot assure that we will be successful in collecting
this receivable from NTC.
1998 Net Loss
We incurred a net loss of $6.5 million for 1998. We incurred net losses of
$12.7 million in the first six months of 1998. We primarily attribute these
losses to the costs associated with reducing our excess capacity in the first
six months of 1998. We achieved net income of $6.2 million for the last six
months of 1998, which we primarily attribute to reduced costs and higher
capacity utilization at our call centers.
Discontinued Operations
In the first quarter of 1998, we sold substantially all of the assets and
liabilities of our market research segment and our direct mail and fulfillment
segment for approximately $38.0 million in cash. These dispositions resulted in
a loss of approximately $0.9 million which we recorded as of December 31, 1997.
We used the proceeds from these sales to repay all outstanding borrowings on our
secured credit facility.
Goodwill Impairment
In the fourth quarter of 1997, as a result of our operating performance and the
overall significant changes in our industry outlook, we performed an in-depth
evaluation of the carrying value of our goodwill. As a result of this
evaluation, we recorded a goodwill impairment charge of $139.1 million, which
represented the goodwill associated with our telemarketing segment. As of
December 31, 1998, our remaining goodwill of $26.8 million relates exclusively
to our customer care segment, which we believe is realizable. See note 2 to our
consolidated financial statements.
RESULTS OF OPERATIONS
Background
We were formed in April 1996 and commenced operations within the teleservices
industry in August 1996 when we acquired our 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.
To properly understand our operations and their relation to our initial
operating businesses, we are presenting the following results of operation:
. Comparison of results of operations for the year ended December 31, 1998
to the results of operations for the year ended December 31, 1997.
. Comparison of 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.
11
<PAGE>
. Actual results of operations for the period from April 26, 1996 (Inception)
to December 31, 1996.
Certain prior period amounts have been reclassified to conform to the current
year presentation of cost of services and selling, general and administrative
expenses.
The following discussions should be read in conjunction with the Consolidated
Financial Statements contained within this report on Form 10-K.
Comparison of the results of operations for 1998 to 1997.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
-------------------------------
YEAR ENDED AS A YEAR ENDED AS A
DECEMBER 31, PERCENTAGE OF DECEMBER 31, PERCENTAGE OF
1998 REVENUES 1997 REVENUES
---------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Telemarketing $121.5 73% $ 141.5 79%
Customer care 45.9 27 37.4 21
------ --- ------- ---
Total revenues 167.4 100 178.9 100
Cost of services:
Telemarketing 114.2 68 140.5 78
Customer care 40.0 23 37.1 21
------ --- ------- ---
Total cost of services 154.2 91 177.6 99
Selling, general and administrative 17.9 11 19.1 11
Amortization of goodwill 1.2 1 146.3 82
------ --- ------- ---
Total operating expenses 173.3 103 343.0 192
------ --- ------- ---
Operating loss (5.9) (3) (164.1) (92)
Investment gain -- -- 1.8 1
Interest expense, net (1.3) (1) (1.9) (1)
------ --- ------- ---
Loss before taxes (7.2) (4) (164.2) (92)
Income tax benefit 0.2 -- 2.3 1
------ --- ------- ---
Loss from continuing operations $ (7.0) (4) $(161.9) (91)
====== === ======= ===
</TABLE>
___________
Our amortization of goodwill in 1997 includes a goodwill impairment charge of
$139.1 million. See note 2 to our consolidated financial statements.
REVENUES
Our total revenues for 1998 were $167.4 million, representing a decrease of 6%
from 1997. This decrease is largely a result of decreased calling hours.
Telemarketing Segment
Our telemarketing revenues were $121.5 million for 1998. These revenues
accounted for 73% of our total revenues for 1998 and represents a decrease of
$20.0 million or 14% from telemarketing revenues of $141.5 million for 1997.
The decrease in telemarketing revenues is principally attributable to the loss
of a large financial services client in 1997. Services initiated for new
clients totaled $28.8 million. The net decrease in revenues for 1998 was
primarily the result of a 20% reduction in calling hours in 1998 from 1997.
Approximately 14% of 1998 telemarketing revenue was generated by services
provided on behalf of a client in the telecommunications industry.
CUSTOMER CARE SEGMENT
Our customer care segment revenues were $45.9 million for 1998. These revenues
accounted for 27% of our total revenues for 1998 and increased by $8.5 million
or 23% from 1997. Of this increase, $3.2 million was the result of services
initiated for new clients. The remaining increase in revenues for 1998 was
primarily attributable to increased volume of customer service calls.
12
<PAGE>
COST OF SERVICES
Our cost of services were $154.2 million for 1998, a decrease of $23.4 million
or 13% from cost of services of $177.6 million for 1997. As a percentage of
total revenues, cost of services were 91% and 99% for 1998 and 1997,
respectively.
Telemarketing Segment
Our telemarketing segment cost of services for 1998 were 94% of telemarketing
revenues and decreased by $26.3 million or 19% from 1997. Cost of services for
1998 and 1997 include $1.3 million and $9.3 million, respectively, of charges
related to call center closings. Excluding these call center closing charges,
our cost of services were 93% of telemarketing revenues for 1998 and 1997. The
aggregate decrease in cost of services for 1998 was primarily attributable to
reduced volumes of calling hours.
Customer Care Segment
Our customer care segment cost of services accounted for 87% of our customer
care revenues for 1998 and increased by $2.9 million or 8% from 1997. Cost of
services for 1997 included $1.0 million related to the write-down of property
and equipment to fair value. Excluding charges relating to the write-down of
property and equipment to fair value, cost of services increased $3.9 million or
11% and as a percentage of customer care revenues decreased from 97% in 1997 to
87% in 1998. The increase in cost of services for 1998 was primarily
attributable to increased volume of customer service calls.
SELLING, GENERAL AND ADMINISTRATIVE
SG&A expenses were $17.9 million for 1998, a decrease of $1.2 million or 6% from
1997. As a percentage of total revenue, SG&A expenses were 11% in 1998 and
1997. SG&A expenses for 1998 and 1997 included $1.3 million of charges related
to corporate overhead reductions. Excluding these charges, SG&A expenses as a
percentage of total revenues would have been 10% in both 1998 and 1997.
AMORTIZATION OF GOODWILL
Our goodwill amortization was $1.2 million for 1998 compared to $146.3 million
in 1997. We recorded a goodwill impairment charge of $139.1 million in the
fourth quarter of 1997. This charge represented all of the goodwill associated
with our telemarketing segment. Our amortization in 1998 consisted of the
amortization of goodwill associated with our customer care segment. Our
remaining goodwill balance of $26.8 million relates entirely to our customer
care segment. See note 2 to our consolidated financial statements.
INVESTMENT GAIN
In June 1997, we purchased the business of a product sampling company called FX
Direct, Inc. We realized a pre-tax gain of approximately $1.8 million when we
sold this business in October 1997 for $6.3 million. See note 3 to our
consolidated financial statements.
INTEREST EXPENSE
We incurred interest expense of $1.3 million for 1998 which represented a
decrease of $0.6 million from 1997. This decrease is due to reduced borrowings
under our credit facility during 1998.
13
<PAGE>
INCOME TAX BENEFIT
The 1998 income tax benefit from continuing operations represents the offset of
the provision for income taxes for discontinued operations. The 1997 income tax
benefit is primarily a result of a tax refund for federal income taxes paid in
1996. As of December 31, 1998, we had a net operating loss carryforward of
approximately $22.5 million. Also, as of December 31, 1998, we had
approximately $117.9 million of future income tax deductible amounts related to
our 1997 goodwill impairment charge. The goodwill impairment becomes deductible
for income tax purposes over the next 13 years. Due to the uncertain
realization of these deferred tax assets, we have recorded a full valuation of
allowance as of December 31, 1998.
INCOME FROM DISCONTINUED OPERATIONS
We developed a plan in 1997 to sell our market research segment and our direct
mail and fulfillment segment. For 1998 and 1997, we have 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 1998 and 1997 were $0.5 million and $1.4 million, net of tax,
respectively. Revenues for 1998 were $4.2 million, a decrease of $17.1 million
or 80% compared from 1997. Operating expenses for 1998 were $3.5 million a
decrease of $15.5 million or 82% from 1997.
Comparison of results of operations for 1997 to 1996.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
-------------------------------
SUPPLEMENTAL
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 $ 141.5 79% $ 92.6 80%
Customer care 37.4 21 23.4 20
------- --- ------ ---
Total revenues 178.9 100 116.0 100
Cost of services:
Telemarketing 140.5 78 67.6 58
Customer care 37.1 21 15.6 13
------- --- ------ ---
Total cost of services 177.6 99 83.2 71
Selling, general and administrative 19.1 11 18.1 16
Amortization of goodwill 146.3 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 1 -- --
Interest income (expense), net (1.9) (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
======= === ====== ===
</TABLE>
__________
Our supplemental pro forma results of operations include the results for our
initial operating businesses for all of 1996. Our supplemental pro forma
results of operations also include the results of operations of two businesses
that we acquired in the fourth quarter of 1996, effective on the date each
business was acquired. Our amortization of goodwill in 1997 includes a goodwill
impairment charge of $139.1 million. See note 2 to our consolidated financial
statements.
REVENUES
Our total revenues for 1997 amounted to $178.9 million, representing an increase
of $62.9 million or 54% from revenues of $116.0 million for 1996. This increase
in aggregate revenue was driven by increased calling hours.
14
<PAGE>
Telemarketing Segment
Our telemarketing revenues of $141.5 million for 1997 accounted for 79% of total
revenues and represented an increase of $48.9 million or 53% from revenues of
$92.6 million for 1996. The increase in telemarketing revenues was principally
attributable to increased calling hours. Of this increase, 19% was attributable
to services initiated for new clients, 5% was attributable to acquired
businesses and 76% was attributable to services for existing clients.
Approximately 24% of telemarketing revenues in 1997 were generated by services
provided on behalf of a client in the financial services industry.
Customer Care Segment
Our customer care revenues of $37.4 million accounted for 21% of total revenues
for 1997 and represented an increase of $14.0 million or 60% from revenues of
$23.4 million in 1996. Of this increase, 16% was attributable to services
initiated for new clients. The Company acquired its customer care consulting
business in October 1996 and the results of operations include the revenues of
our customer care consulting business for the last quarter of 1996.
COST OF SERVICES
Our cost of services amounted to $177.6 million for 1997, representing an
increase of $94.4 million or 113% from $83.2 million for 1996. As a percentage
of total revenues, cost of services were 99% and 71% for 1997 and 1996,
respectively.
Telemarketing Segment
Our telemarketing cost of services were 99% of telemarketing revenues for 1997
and represented an increase of $72.9 million or 108% when compared to
telemarketing cost of services of $67.6 million for 1996. Cost of services for
1997 includes $9.3 million related to call center closing charges. Excluding
these costs relating to call center closings, our costs of services increased
from 73% for 1996 to 93% for 1997 as a percentage of total telemarketing
revenues. We attribute this increase in cost of services as a percentage of
revenues primarily to increased capacity, which resulted in the lower
utilization of our telemarketing personnel and facilities. In addition, as a
result of industry pricing pressures and in an effort to fill some excess
capacity, we accepted less profitable telemarketing contracts to utilize some of
our capacity.
Customer Care Segment
Our customer care cost of services were 99% of customer care revenues for 1997
and represented an increase of $21.5 million or 138% when compared to customer
care cost of services of $15.6 million for 1996. This increase was primarily the
result of increased volumes of customer calls and the full year impact of our
customer care consulting business. Cost of services for 1997 includes $1.0
million related to the write-down of certain property and equipment to fair
value. Excluding the write-down of certain property and equipment to fair value,
costs of services as a percentage of customer care revenues increased from 67%
for 1996 to 97% for 1997.
SELLING, GENERAL AND ADMINISTRATIVE
SG&A expenses were $19.1 million for 1997, representing an increase of $1.0
million or 6% from 1996. As a percentage of total revenues, SG&A expenses were
11% and 16% for 1997 and 1996, respectively. SG&A for 1997 include a $1.3
million charge related to corporate overhead reduction. Excluding the charge of
$1.3 million, SG&A was 10% of total revenues in 1997. The decrease in SG&A
expenses for 1997, as a percentage of revenue, as compared to 1996, resulted
primarily from cost reductions in our administrative infrastructure during our
consolidation and growth.
15
<PAGE>
AMORTIZATION OF GOODWILL
In the fourth quarter of 1997 we 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, we purchased substantially all of the assets and assumed certain
liabilities of a product sampling company, FX Direct, Inc. We realized a pre-tax
gain of approximately $1.8 million when we sold this business in October 1997
for $6.3 million.
INTEREST INCOME (EXPENSE)
We incurred interest expense of $1.9 million for 1997 which represented an
increase of $2.3 million from 1996. This increase is due to borrowings under the
credit facility during 1997.
INCOME TAX BENEFIT (EXPENSE)
The 1997 income tax benefit is a result of a tax refund for federal income taxes
paid in 1996. As of December 31, 1997, we have a net operating loss carryforward
of approximately $9.0 million. Also, as of December 31, 1997, we have
approximately $125.0 million of future income tax deductible amounts related to
the 1997 goodwill impairment charge. The goodwill impairment becomes deductible
for income tax purposes over the next 14 years. Due to the uncertain
realization of these deferred tax assets, we have recorded a full valuation
allowance as of December 31, 1997.
INCOME FROM DISCONTINUED OPERATIONS
In December 1997, we committed to a plan to sell our market research segment and
direct mail and fulfillment segment. For 1997 and 1996, we accounted for the
results of operations of the market research segment and direct mail and
fulfillment segment as discontinued operations. Income from discontinued
operations in 1997 and 1996 was $1.4 million (net of tax). Revenues for 1997
were $21.3 million an increase of $2.7 million or 15% when compared to revenues
of $18.6 million for 1996. Operating expenses for 1997 amounted to $19.0
million, an increase of $2.8 million or 17% when compared to operating expenses
of $16.2 million for 1996.
Results of operations for the period from April 26, 1996 (Inception) to December
31, 1996
We 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 from August 13, 1996 and for the customer care
consulting business from October 1, 1996.
Actual results, as a percentage of revenues were as follows (dollars in
millions):
<TABLE>
<CAPTION>
PERIOD
FROM APRIL 26,
1996 (INCEPTION) AS A
TO DECEMBER 31, PERCENTAGE
1996 OF REVENUES
----------------- --------------
<S> <C> <C>
Revenues $53.2 100%
----- ---
Cost of services 37.9 72
Selling, general and administrative 9.1 17
Amortization of goodwill 2.2 4
----- ---
Total operating expenses 49.2 93
----- ---
Operating income 4.0 7
Interest income, net 0.4 1
----- ---
Income before taxes 4.4 8
Income tax expense (1.7) (3)
----- ---
Income from continuing operations $ 2.7 5
===== ===
</TABLE>
16
<PAGE>
REVENUES
Our 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 two
businesses that were acquired in the fourth quarter of 1996. Our revenues
increased steadily from August 13, 1996 due to the addition of new call centers
and development of new business.
COST OF SERVICES
Our 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 two businesses that were acquired in the fourth quarter of 1996.
Our cost of services decreased 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 1996.
SELLING, GENERAL AND ADMINISTRATIVE
SG&A 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 two
businesses that were acquired in the fourth quarter of 1996. As a percentage of
revenues, SG&A expenses decreased since our inception due to increasing revenues
from the initial operating businesses and businesses acquired in the fourth
quarter of 1996. Included in our results for 1996 are certain overhead costs
incurred prior to the acquisitions of the initial operating businesses. These
costs were approximately $0.6 million.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 26, 1996
YEAR ENDED (INCEPTION) TO
Dollars in Millions DECEMBER 31, DECEMBER 31,
----------------------------------- ----------------
Cash Flows Provided By (Used In): 1998 1997 1996
- --------------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Operating Activities $ (1.5) $ 4.8 $ (4.7)
Investing Activities 28.1 (60.1) (117.6)
Financing Activities (26.6) 28.0 150.4
</TABLE>
Year Ended December 31, 1998
The $1.5 million of cash used in operating activities consisted of $0.1 million
used in continuing operations and $1.4 million used in discontinued operations.
Our net loss of $6.5 million was reduced by significant non-cash items including
depreciation and amortization.
The $28.1 million of cash provided by investing activities primarily consisted
of $37.8 million of proceeds from the sale of the market research segment and
direct mail and fulfillment segment, primarily offset by $9.1 million of
purchases of property and equipment. We do not expect to make any significant
investment in telemarketing call center expansion in 1999. Instead, we intend
to continue to invest in maintaining and enhancing our technology platforms.
The $26.6 million of net cash used in financing activities primarily consisted
of $29.0 million of net payments under our secured credit facility. In
addition, we received $2.0 million of proceeds from the exercise of stock
options and sale of common stock.
On April 14, 1998, we entered into a four-year Loan and Security Agreement with
Mellon Bank N.A. ("Mellon"), which provides for a $20.0 million credit facility
(the "Credit Facility"). Under the terms of the Credit Facility, we can borrow
up to the lesser of $20.0 million or an amount that is determined as 80% of the
net eligible accounts receivable. We can elect at the time of our borrowings to
pay interest at prime plus 0.50% or at LIBOR plus 2.50% and will pay a
commitment fee of 0.375% on the unused borrowing capacity. The Credit Facility
also makes available letters of credit at a fee of 1% per annum on the face
amount of each letter of credit and in an aggregate amount not to exceed the
lower of $1.5 million or the amount available under the Credit Facility.
Borrowings under
17
<PAGE>
the Credit Facility are collaterlized by substantially all of our assets. The
Credit Facility also contains various financial and non-financial covenants. At
December 31, 1998, we had no outstanding borrowings and $18.1 million of
available borrowings under the Credit Facility.
We believe that our existing cash balances, and borrowings available under our
Credit Facility will be sufficient to meet our operating and capital needs into
2000. The amount of future capital expenditures will be highly dependent on
future revenue growth.
On January 14, 1999, we entered into a merger agreement with IDRC. In
connection with the merger agreement, we received a financing commitment for a
new $135 million senior debt facility which will be used to replace our current
credit facility and to refinance IDRC's debt. Should the merger close, we
believe that our existing cash balances and borrowings available under the new
$135 million senior debt facility will be sufficient to meet our combined
operating and capital needs into 2000.
Year Ended December 31, 1997
The $4.8 million of cash provided by operating activities consisted of $0.1
million generated from continuing operations and $4.7 million generated from
discontinued operations. Our net loss of $160.5 million was offset by
significant non-cash items including amortization of goodwill, which was
primarily comprised of a $139.1 million goodwill impairment charge. 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 purchases of property and equipment and $29.1 million used to
repay notes payable to sellers and other acquisition related liabilities.
Purchases 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, and $1.9 million related to capital investments associated with
development and enhancement of production and administrative infrastructure
projects. In addition, we 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, we
recorded an impairment charge of $11.6 million of which $5.0 million related to
these 1997 additions. Other investing activities included $5.3 million for the
acquisition of an interactive voice response company. In addition, in June 1997
we used $4.5 million to invest in an ownership of a 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 $29.0
million of net proceeds from borrowing under our Credit Facility dated January
24, 1997, as amended. In addition, we received $0.7 million of proceeds from
other long term debt and made payments on debt and capital lease obligations
totaling approximately $1.7 million.
Throughout 1997, we amended the Credit Facility several times as a result of
non-compliance due to our 1997 operating performance. On March 25, 1998, we were
notified by our primary lending institution, Mellon, that we were in default of
certain loan covenants of our Credit Facility. We repaid this facility on April
1, 1998, with the proceeds from the sale of our direct mail and fulfillment
segment.
Period From April 26, 1996 (Inception) to December 31, 1996
At December 31, 1996 we had cash of $28.2 million. This cash was primarily
generated through financing activities which generated $150.4 million. We raised
$162.0 million related to its August 1996 initial public offering and $2.1
million related to proceeds of the initial capitalization. We used $13.7
million to repay other debt and capital lease obligations.
We used $117.6 million for investing activities. We used $94.4 million to fund
the cash portion of our acquisition of the initial operating businesses and
$12.6 million to fund the cash portion of the two businesses we acquired in the
fourth quarter of 1996. We used $10.6 million for the purchase of property and
equipment associated with the commencement of our call center expansion and
centralization initiatives.
We used $4.7 million for operating activities, primarily to fund our working
capital requirements during this period of high growth.
18
<PAGE>
YEAR 2000
Year 2000 Issue. The Year 2000 issue results from the writing of computer
programs using two digits rather than four to define the applicable year.
Because of this programming convention, computer software, hardware or firmware
may recognize a date using "00" as the year 1900 rather than year 2000. This
could result in system failures, miscalculations or errors causing disruptions
of operations or other business problems, including, among others, a temporary
inability to process transactions or engage in other normal business activities.
State of Readiness. We have undertaken a comprehensive program, including the
hiring of an outside consulting firm, to address the Year 2000 issue with
respect to the following:
. our information technology and operating systems, which include call
processing, network, server, security and application systems;
. our non-information technology systems that may contain embedded microchip
technology, which include buildings, plant, equipment and other
infrastructure systems; and
. the systems of our major vendors and telecommunication service providers
insofar as they relate to our business.
Our core business systems are in the process of receiving Year 2000 compliant
upgrades furnished by our vendors, being replaced by our TeleSpectrum Enterprise
System Solution (TESS), or being rewritten to be Year 2000 compliant. We are
developing TESS to replace many of our current data processing systems. We
believe that the TESS product will be Year 2000 compliant and that our core
business systems will be ready to successfully recognize years beginning with
2000. Although we have received compliance information from many suppliers, we
are unable to predict the extent to which our suppliers will be affected by the
Year 2000 issue. We are also unable to predict the extent to which we may be
vulnerable to a supplier's inability to remedy any issues in a timely manner.
This matter is most prevalent with our telecommunications service suppliers.
Costs to Address the Year 2000 Issue. Our current cost estimate to become Year
2000 compliant is $1,500,000 in 1999, of which approximately 40% will be for
outside consultants and 60% will be for internal resource which have been or
will be reallocated from other projects. Many of our systems that require Year
2000 remediation or replacement are also simultaneously receiving performance
upgrades or feature enhancements. Our current cost estimate does not include
costs related to these upgrades or enhancements. To date, the financial impact
of remediation expenses has not been material, and we do not expect future
remediation costs to be material to our consolidated financial position or
results of operations.
Risks Presented by Year 2000 Problems. Our reasonably anticipated worst case
scenario involves Year 2000 problems experienced by our suppliers. If our
telecommunications vendors do not appropriately address their Year 2000 issues
and alternative telecommunications providers are not able to provide us with
adequate telecommunications services, we will not be able to provide our
services to our clients. If there is widespread and continued shortage in
telecommunications services available from telecommunications vendors, we will
be materially adversely affected. In addition, our computer systems are linked
to many of our clients' computer systems. Through these links, clients furnish
us with information that is necessary for us to provide our services and we
provide our clients with feedback regarding their services. While we have made
inquiries regarding their state of readiness for the Year 2000, we may not be
able to accurately predict whether our clients' systems will be Year 2000
compliant. We will likely experience service disruptions and may be materially
adversely affected if our clients' systems are not Year 2000 compliant.
Contingency Plans. Our Year 2000 plan calls for the development of contingency
plans for areas of our business that are susceptible to a substantive risk of a
disruption resulting from a Year 2000 related event. For our internal systems,
we are developing remediation plans for our existing systems, including as a
contingency to the timely implementation of TESS. For vendor supplied services,
we are evaluating alternative vendors for backup services. However, we may not
be able to obtain backup services if there is a widespread and continued
shortage in telecommunications services available from telecommunications
vendors. For client computer links, we will seek to exchange information on a
manual basis until such time as the necessary corrections have been made.
Consistent with our Year 2000 plan, we will develop specific Year 2000
contingency plans for any other areas of our business as the need is identified.
19
<PAGE>
OTHER INFORMATION--RISK FACTORS
Risk Factors
You should carefully consider the following factors and other information in
this Form 10-K.
Keep these risk factors in mind when you read "forward-looking" statements
elsewhere in this document. These are statements that relate to future events
and time periods or our expectations. Generally, the words "anticipates,"
"expects," "intends" and similar expressions identify forward-looking
statements. Forward-looking statements involve risks and uncertainties, and
future events and circumstances could differ significantly from those
anticipated in the forward-looking statements.
OPERATING LOSSES
While we have had net income of $6.2 million for the six months ended December
31, 1998, we had a net loss of $6.5 million for the year ended December 31, 1998
and a net loss of $12.7 million for the six months ended June 30, 1998. To be
profitable, we must maintain a sufficient level of capacity utilization at
acceptable rates. During the past two years we have periodically found
difficulties in achieving consistent levels of profitability, particularly in
our telemarketing segment. Revenues from our telemarketing segment represented
73% of our total revenues in 1998.
Telemarketing agreements generally do not assure specific levels of revenue and
are often terminable by clients on short notice. The amount of revenue we
generate from a particular client is dependent upon a number of factors,
including, our ability to achieve marketing and sales results required by the
client and the results we achieve as compared to both the clients' in-house
operations and other telemarketing providers. In addition to these factors,
numerous agreements with our clients are also based on actual sales achieved.
Accordingly, our ability to achieve our desired results of operations is also
contingent upon our TSRs being able to effectively and efficiently market the
clients' products and the quality of the lists of prospective customers provided
by our clients. Our telemarketing segment is also affected by seasonal trends
that mirror our client's marketing plans. These trends include reduced
activities during the months of August and December. If we are unable to
maintain a sufficient level of capacity utilization at acceptable rates, we will
be materially and adversely affected.
RELIANCE ON MAJOR CLIENTS
Approximately 10% of our revenues in 1998 were generated from one client, in the
telecommunications industry. In 1997, approximately 19% of our revenues were
generated from one client in the financial services industry. The significant
reduction in the amount of business provided by this client in the financial
services industry was a significant factor in our lower capacity utilization and
operating performance during the last two fiscal quarters in 1997. We 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, we will be vulnerable to
any unexpected termination or non-renewal of such a relationship.
DIFFICULTIES OF MANAGING GROWTH
We have experienced growth over the past several years. We will not be able to
achieve future growth if we do not:
. initiate, develop and maintain new client relationships and expand its
existing client programs;
. recruit, motivate and retain qualified management, staff, TSRs and CSRs;
. 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
. maintain the high quality of the services and products that we provide to
our clients.
CAPACITY UTILIZATION
Our profitability is substantially dependent upon our ability to use our call
center capacity at favorable rates. We have in the past experienced periods of
low capacity utilization and we have sometimes accepted less profitable client
engagements to fill this capacity. We have also experienced, and in the future
may experience, at least short-term, excess peak period capacity when we open a
new call center or terminate or complete a large client program. If we do not
maintain sufficient levels of capacity utilization at acceptable rates, we will
be materially adversely affected.
20
<PAGE>
RELIANCE ON TECHNOLOGY
We have made significant investments in technology and we anticipate that we
will need to continue making significant additional technology investments to
remain competitive. We may not be successful in anticipating continuing
technological changes or in implementing new or enhanced technology. If we are
unable to do so, we will be materially adversely affected.
DEPENDENCE ON OUR LABOR FORCE
Our industry is very labor intensive and has experienced high personnel
turnover. Many of our employees receive modest hourly wages. A higher turnover
rate among our employees would increase our recruiting and training costs and
decrease our productivity. Our insurance product sales and technology-based
customer care services require specifically trained employees. We may not be
able to continue to hire, train and retain a sufficient labor force of qualified
employees. If we are unable to do so, we will be materially adversely affected.
ADDITIONAL FINANCING
Should the merger with IDRC close, we will have significant outstanding
borrowings under our new $135.0 million senior debt facility. There can be no
assurance, that existing cash and available borrowings, after the close of the
merger, will be sufficient to meet our financing needs and satisfy our debt
obligations. If these sources are not sufficient, we will be required to seek
additional debt or equity financing and there can be no assurance that any such
financing will be available on acceptable terms. If we are unable to meet our
debt obligations as they become due, we will be materially and adversely
affected.
DEPENDENCE ON TELECOMMUNICATIONS PROVIDERS
Our business is heavily dependent on service provided by various local and long
distance telephone companies. We would be materially adversely affected by a
significant increase in the cost of telephone services that is not recoverable
through an increase in the price of our services, or any significant
interruption in telephone services.
YEAR 2000 ISSUE
The Year 2000 issue results from the writing of computer programs using two
digits rather than four to define the applicable year. Because of this
programming convention, computer software, hardware or firmware may recognize a
date using as the year 1900 rather than the year 2000. This could result in
system failures, miscalculations or errors causing disruptions of operations or
other business problems, including, among others, a temporary inability to
process transactions or engage in other normal business activities.
As a result of the Year 2000 issue, possible consequences to our business
include the inability to engage in normal business activities resulting from one
or more of the following:
. failure of our telecommunications services
. failure of third parties to provide us with Year 2000 compliant products or
services;
. failure of our information systems; or
. the inability of our customers to process telemarketing and customer care
transactions.
Not all of our information systems are Year 2000 compliant and not all of the
third parties with whom we conduct our business have indicated that their
information systems are Year 2000 compliant. We are in the process of making
changes to, or replacing, our core business systems to make them Year 2000
compliant. We have been notified by our third parties with whom we conduct our
business that they are in the process of becoming Year 2000 compliant. However,
if we and these third parties do not complete this work effectively or on time,
we will be materially adversely affected. We discuss the impact that the Year
2000 issue may have on our business, our expected costs to address our Year 2000
issues and our contingency plans earlier in this Management Discussion and
Analysis of Financial Condition and Results of Operations section of this Form
10-K.
21
<PAGE>
POTENTIAL FLUCTUATION IN QUARTERLY OPERATING RESULTS
We expect that our quarterly operating results will fluctuate due to many
factors, a number of which are beyond our control. We believe that period-to-
period comparisons of our historical results may not be meaningful. You should
not rely on these historical results as an indication of future results. Our
results of operations in future periods may not meet the expectations of
analysts and investors, in which case the price of our common stock would likely
be materially adversely affected. Factors, which may also have an impact on our
operating results:
. our ability to retain existing clients and attract new clients;
. timing of our clients' marketing campaigns and customer service programs;
. the timing of additional selling, general and administrative expenses
incurred to acquire and support such new business;
. changes in our revenue mix among our various service offerings;
. the introduction of new or enhanced services and products;
. price competition;
. our ability to upgrade and develop our information technology systems;
. technical difficulties, system downtime or internet brownouts;
. government regulation;
. general economic conditions and economic conditions specific to our
industry; and
. seasonality in our business, particularly during the months of August and
December.
POSSIBLE VOLATILITY OF STOCK PRICES
The market prices of our common stock have been highly volatile. This
volatility may adversely affect the price of our common stock in the future.
Factors that could cause such volatility include:
. volume of trading in our stock;
. our quarterly operating results;
. deviations in results of operations from estimates of changes in general
conditions in the economy or our industry; and
. other developments affecting us or our competitors.
RISKS RELATING TO THE PENDING MERGERS
We have entered into merger agreements providing for the mergers with IDRC and
CRW. We have incurred considerable expense in negotiating these merger
agreements and in working to complete these mergers. In addition, if we
complete the IDRC merger, we will incur approximately $135.0 million of
additional senior debt. If we complete these mergers, we will need to address a
number of matters to be successful. These matters will include:
. integrating the operations of the companies;
. meeting increased debt service obligations;
. developing and implementing new business strategies;
. operating effectively with a new management team; and
. avoiding incurring any unknown liabilities.
We can not assure that we will be able to complete either merger. Because we
have committed substantial resources to these mergers, we will be adversely
affected if we are unable to complete these mergers.
22
<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.
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.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1996 YEAR ENDED
TO AUGUST 12, DECEMBER 31,
1996 1995
----------------------- ------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues $26,421 100.0% $31,900 100.0%
------- ----- ------- -----
Cost of services 21,406 81.0 25,048 78.5
Selling, general and administrative 3,817 14.5 5,162 16.2
------- ----- ------- -----
Total operating expenses 25,223 95.5 30,210 94.7
------- ----- ------- -----
Operating income 1,198 4.5 1,690 5.3
Interest expense, net 561 2.1 711 2.2
------- ----- ------- -----
Pre-tax income $ 637 2.4 $ 979 3.1
======= ===== ======= =====
</TABLE>
PERIOD FROM JANUARY 1, 1996 TO 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 in March
1996. Start-up costs included recruiting and education of new call center
management and staff.
Selling, General and Administrative--Selling general and administrative
expenses, 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.
23
<PAGE>
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:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1996 YEAR ENDED
TO AUGUST 12, DECEMBER 31,
1996 1995
------------------ ------------------
(dollars in thousands)
<S> <C> <C>
Net cash provided by operating activities $ 2,124 $ 441
Net cash used in investment activities (1,923) (2,870)
Net cash provided by (used in) financing activities (221) 2,452
</TABLE>
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.
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.
NBG
Founded in 1991, and prior to its acquisition by TeleSpectrum, NBG Services,
Inc. ("NBG") provided telemarketing services to clients in the financial
services, telecommunications and 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.
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 30, 1995 YEAR ENDED
TO AUGUST 12, DECEMBER 29,
1996 1995
--------------------------- ---------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues $11,311 100.0% $12,829 100.0%
------- ----- ------- -----
Cost of services 7,686 68.0 8,572 66.8
Selling, general and administrative 1,645 14.5 2,115 16.5
------- ----- ------- -----
Total operating expenses 9,331 82.5 10,687 83.3
------- ----- ------- -----
Operating income 1,980 17.5 2,142 16.7
Interest expense, net 33 0.3 36 0.3
------- ----- ------- -----
Pre-tax income $ 1,947 17.2 $ 2,106 16.4
======= ===== ======= =====
</TABLE>
Period from December 30, 1995 to 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 increases in revenues
from two of NBG's most significant clients.
24
<PAGE>
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.
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.
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 30, 1995 YEAR ENDED
TO AUGUST 12, DECEMBER 29,
1996 1995
------------------ ------------------
(dollars in thousands)
<S> <C> <C>
Net cash provided by operating activities $1,334 $1,383
Net cash used in investment activities (81) (594)
Net cash used in financing activities (880) (89)
</TABLE>
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.
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.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1996 YEAR ENDED
TO AUGUST 12, DECEMBER 31,
1996 1995
------------------------- -------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues $14,558 100.0% $12,253 100.0%
------- ----- ------- -----
Cost of services 8,550 58.7 7,836 63.9
Selling, general and administrative 1,466 10.1 2,534 20.7
------- ----- ------- -----
Total operating expenses 10,016 68.8 10,370 84.6
------- ----- ------- -----
Operating income 4,542 31.2 1,883 15.4
Interest expense, net 31 0.2 43 0.4
------- ----- ------- -----
Pre-tax income $ 4,511 31.0 $ 1,840 15.0
======= ===== ======= =====
</TABLE>
25
<PAGE>
Period from January 1, 1996 to 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.
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
expenses, 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.
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.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1996 YEAR ENDED
TO AUGUST 12, DECEMBER 31,
1996 1995
------------------ ------------------
(dollars in thousands)
<S> <C> <C>
Net cash provided by operating activities $ 2,535 $ 745
Net cash used in investment activities (935) (1,212)
Net cash provided by (used in) financing activities (1,703) 656
</TABLE>
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 Virginia 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.
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 customer
care services to the high technology, pharmaceutical and health care and
consumer products industries. TeleSpectrum Maryland was typically paid on an
hourly basis for customer care 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.
26
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected financial data and data as a percentage
of revenues for the periods indicated.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1996 YEAR ENDED
TO AUGUST 12, DECEMBER 31,
1996 1995
--------------------------- ---------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues $10,529 100.0% $11,854 100.0%
------- ----- ------- -----
Cost of services 6,974 66.3 8,338 70.2
Selling, general and administrative 2,929 27.8 3,072 26.0
------- ----- ------- -----
Total operating expenses 9,903 94.1 11,410 96.2
------- ----- ------- -----
Operating income 626 5.9 444 3.8
Interest expense, net 129 1.2 184 1.6
------- ----- ------- -----
Pre-tax income $ 497 4.7 $ 260 2.2
======= ===== ======= =====
</TABLE>
Period from January 1, 1996 to 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 clients and the
addition of new clients, principally in the pharmaceutical 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.
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:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1996 TO YEAR ENDED
AUGUST 12, DECEMBER 31,
1996 1995
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Net cash provided by (used in) operating activities................ $ 969 $ (4)
Net cash used in investment activities............................. (2,044) (99)
Net cash provided by (used in) financing activities................ 1,716 (45)
</TABLE>
Net cash used in operating activities in 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.
27
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market risk for changes in interest rates, relates primarily to
our long-term debt obligations. We do not believe that we have exposure to
market risks associated with changing interest rates as of December 31, 1998
because we do not have variable rate interest debt outstanding and all of our
outstanding debt consists of term notes with state and regional development
authorities and capital lease obligations. We do not use derivative financial
instruments in our operations.
Foreign Currency Risk
We do not use foreign currency exchange contracts or purchase currency options
to hedge local currency cash flows. We have subsidiaries in Canada and the
United Kingdom, which are subject to foreign currency fluctuations. As currency
rates change, translation of income statements of these subsidiaries from local
currencies to U.S. dollars affects year-over-year comparability of our operating
results. The foreign subsidiaries are limited in their operations and the level
of investment by the parent company so that the risk of foreign currency
fluctuations is not expected to be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to pages F-1
through F-63 and page S-2 of this document.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
28
<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 44 Chairman of the Board, Chief Executive Officer and President
Richard C. Schwenk, Jr. 48 Senior Vice President and Chief Financial Officer
Joseph V. Del Raso 46 Director
Michael E. Julian 48 Director
David L. Kriegel 53 Director
J. Brian O'Neill 39 Director
Richard W. Virtue 54 Director
Kevin W. Walsh 44 Director
</TABLE>
_________
Keith E. Alessi has been Chairman of the Board, Chief Executive Officer and
President since March 1998. Mr. Alessi had been Chairman of the Board, Chief
Executive Officer and President of Jackson Hewitt, Inc., the nation's second
largest tax preparation service company, since 1996. From 1988 to 1996 Mr.
Alessi served in several executive positions with Farm Fresh, Inc. and was Vice
Chairman upon his departure.
Richard C. Schwenk, Jr. has served as Senior Vice President and Chief Financial
Officer of the Company since May 1996. Mr. Schwenk served as Executive Vice
President and Chief Financial Officer of Electronic Payment Services, Inc., a
provider of automated teller machine and point-of-sale transaction processing
services, from November 1992 to January 1996.
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.
Michael E. Julian has been a director of the Company since September 1998. Mr.
Julian has served Jitney-Jungle Stores of America as Chief Executive Officer
since March 1997 and as Chairman of the Board since August 1998. From 1988
until March 1997 Mr. Julian served as Chairman of the Board and Chief Executive
Officer of Farm Fresh, Inc. In January of 1998 Farm Fresh, Inc. petitioned for
a prepackaged Chapter 11 bankruptcy and emerged in May 1998.
David L. Kriegel has been a director of the Company since September 1998. Mr.
Kriegel has been Chairman, Chief Executive Officer and President of Drug
Emporium, Inc. since January 1993.
J. Brian O'Neill was Chairman of the Board and Chief Executive Officer of the
Company from April 1996 to March 1998. Mr. O'Neill has been the Chairman of the
Board and Chief Executive Officer of CRW Financial, Inc. since May 1995. From
July 1992 to May 1995, Mr. O'Neill was Chairman and Chief Executive Officer of
Casino and Credit Services, Inc.
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.
29
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to compensation
paid or earned during the fiscal years ended December 31, 1998, 1997 and 1996 to
the Company's chief executive officers and the other executive officer of the
Company who in 1998 earned more than $100,000 in total annual compensation
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation (1)
---------------------------------------------------------------------------
Long-Term
Compensation
Name and Position Year Salary($) Bonus($) Awards(#)(2)
- ----------------- ------ ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Keith E. Alessi.................................. 1998 195,000(3) -- 2,000,000
Chairman of the Board, Chief Executive Officer
and President
Richard C. Schwenk, Jr........................... 1998 200,000 -- 40,000
Senior Vice President and 1997 200,000 40,000(4) 200,000
Chief Financial Officer 1996 122,000(5) -- 100,000
J. Brian O'Neill (6)............................. 1998 171,000(7) -- 2,500
Former Chairman of the Board 1997 130,000 -- 500,000
and Chief Executive Officer 1996 51,000(8) -- 500,000
</TABLE>
_________
(1) Excludes prerequisites and other personal benefits, securities or property
which are, in the aggregate, less than 10% of the total annual salary and
bonus.
(2) Represent shares of common stock underlying stock options granted by the
Company in 1998, 1997 and 1996.
(3) Represents compensation for the period from date of employment until
December 31, 1998.
(4) Bonus was accrued in 1997 and paid in 1998.
(5) Represents compensation for the period from date of employment until
December 31, 1996.
(6) Mr. O'Neill resigned from his position with the Company in March 1998.
(7) Includes $117,000 of severance payments.
(8) Represents compensation for the period from date of employment until
December 31, 1996.
EMPLOYMENT AGREEMENTS
Each of Messrs. Alessi and Schwenk has an employment agreement with
TeleSpectrum. Mr. Alessi's agreement provides that he is to be employed by
TeleSpectrum through March 19, 2001 at an annual salary of $200,000, plus any
bonuses as determined annually by the compensation committee. Pursuant to his
agreement, Mr. Alessi was granted three stock options exercisable for an
aggregate of 2,000,000 shares of common stock at an exercise price of $3.29 per
share provided Mr. Alessi is employed by TeleSpectrum on such dates. One of
these stock options which is exercisable for an aggregate 500,000 shares was
granted under the 1996 Equity Compensation Plan and the remaining options were
not granted under the plan. This option vests on the earlier of the date that
the TeleSpectrum common stock reaches certain closing prices, or March 2003.
The vesting schedule is as follows: 166,667 shares become vested if the closing
price of the common stock reaches $12.00 per share prior to June 18, 2000 and
166,666 shares become vested if the closing price of the common stock reaches
$18.00 per share prior to March 18, 2001. The first 166,667 of these shares
vested in 1998 after the closing price of the common stock reached $8.00 per
share. Two of these options, exercisable for an aggregate of 1,500,000 shares
vest in three equal amounts on each of March 18, 1999, 2000 and 2001.
30
<PAGE>
Mr. Schwenk's employment agreement provides that he is to be employed by
TeleSpectrum through May 5, 2000 at an annual salary of $200,000, plus an annual
bonus of up to $187,500 based in part on his performance and in part upon the
operating performance of TeleSpectrum. Pursuant to his agreement, Mr. Schwenk
was granted a stock option exercisable for 100,000 shares of common stock. This
option became fully vested on March 18, 1998 upon the hiring of Mr. Alessi and
is exercisable at an exercise price of $6.25 per share. If Mr. Schwenk is
terminated without cause or if he terminates his employment for good reason, Mr.
Schwenk is entitled to receive $275,000 payable over a one-year period.
Mr. Virtue has a consulting agreement with the Company which provides for the
payment of an annual consulting fee of $150,000. Mr. Virtue's agreement expires
on August 13, 1999.
The following table sets forth certain information concerning options granted
to the Named Executive Officers in 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(2)
------------------------------------------------------------------- -----------------------------------
NUMBER OF
SECURITIES PERCENTAGE OF
UNDERLYING TOTAL OPTIONS EXERCISE
OPTIONS GRANTED AVAILABLE (1) PRICE EXPIRATION DATE 5% 10%
---------------- --------------- ----------- ---------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Keith E. Alessi............ 2,000,000 30.8% $3.29 3/18/08 $4,138,000 $10,486,000
Richard C. Schwenk, Jr..... 40,000 0.6 3.31 2/25/08 83,000 211,000
</TABLE>
__________
(1) Based on aggregate of 5,000,000 options currently available under the Plan
and 1,500,000 Alessi Options.
(2) Represents the hypothetical gains or "option spreads" that would exist for
the options at the end of their ten year term. These gains are based on
assumed rates of annual compound stock price appreciation of 5% and 10%
from the date the option was granted to the end of the option term and are
calculated based on the exercise price per share on the date of grant.
Such 5% and 10% assumed annual compound rates of stock price appreciation
are mandated by the rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of the future common
stock price.
The following table sets forth certain information concerning the number and
value of unexercised options held by each of the Named Executive Officers on
December 31, 1998.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING Value of Unexercised
UNEXERCISED OPTIONS(#) IN-THE-MONEY OPTIONS($)
------------------------------------------ -------------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(1)
--------------- ---------------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Keith E. Alessi................ -- 1,833,000 -- 11,959,000
Richard C. Schwenk, Jr......... 300,000 40,000 1,429,000 260,000
J. Brian O'Neill............... 1,003,000 -- 4,365,000 --
</TABLE>
_________
(1) Based on the difference between $9.813, which was the closing price per
share of the Company's common stock as listed on the Nasdaq National Market
System on December 31, 1998, and the exercise price of each option.
31
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
The compensation committee of TeleSpectrum's Board is comprised of
directors who are not employees of TeleSpectrum. The committee is responsible
for the establishment and administration of TeleSpectrum's annual executive
compensation and its stock ownership programs. The committee evaluates the
performance and determines the compensation of the chief executive officer and
the other executive officers of the Company based upon the written employment
agreements these persons have with TeleSpectrum. The committee also considers
other factors including the achievement of company financial goals and
individual performance goals and comparisons with other public companies.
The committee's policy is to offer compensation opportunities that will
enable TeleSpectrum to attract, motivate and retain individuals of outstanding
ability capable of enhancing stockholder value. The committee relies on a
combination of salary, bonus and stock options. Each of TeleSpectrum's
executive officers in 1998 have employment agreements that were signed when they
were hired by TeleSpectrum. These agreements establish their annual salary and
fringe benefits. The employment agreements of TeleSpectrum's chief executive
officer and chief financial officer have bonus provisions, although no bonus was
paid in 1998 under these provisions.
It is the committee's philosophy that employees who have a significant
opportunity to share in TeleSpectrum's long-term economic success are more
likely to promote long-term shareholder value. The committee intends to
consider the awarding of additional stock options in order to emphasize the link
between executive incentives and the creation of stockholder value. In
considering these awards, the committee intends to consider individual
performance, overall contribution to TeleSpectrum, differences in the number of
shares underlying stock options among executive officers and the total number of
stock options to be awarded.
Section 162(m) of the Internal Revenue Code generally denies a federal
income tax deduction for certain compensation exceeding $1,000,000 paid to the
Chief Executive Officer or any of the four other highest paid executive
officers, excluding (among other things) certain performance-based compensation.
Through December 31, 1998, this provision has not affected the Company's tax
deductions, but the Committee will continue to monitor the potential impact of
Section 162(m) on the Company's ability to deduct executive compensation.
COMPENSATION COMMITTEE -- February 23, 1999
David L. Kriegel
Kevin W. Walsh
32
<PAGE>
PERFORMANCE GRAPH
The following line graph compares the percentage change in the cumulative
total stockholder return on our common stock for the twenty-eight months since
our common stock first started trading on the Nasdaq National Market on August
8, 1996, with the cumulative total return of the Nasdaq market index and a peer
group index described more fully below. Dividend reinvestment has been assumed.
<TABLE>
<CAPTION>
Index (1) 8/8/96 12/31/96 12/31/97 12/31/98
- ------ ------- --------- --------- ---------
<S> <C> <C> <C> <C>
TeleSpectrum Worldwide Inc. $ 100 $ 97 $ 22 $ 60
Nasdaq market index $ 100 $ 118 $ 144 $ 203
Peer group index $ 100 $ 100 $ 44 $ 21
</TABLE>
_______________
(1) Assumes $100 invested on August 8, 1996.
The peer group index is comprised of APAC TELESERVICES, ICT GROUP INC.,
SITEL CORP. AND TELETECH HOLDINGS INC., which like us, provides telemarketing
and customer care services. We were incorporated on April 26, 1996 and our
operations commenced on August 8, 1996, the date on which we completed the
acquisitions of our initial operating businesses. The chart above presents a
comparison among us, the NASDAQ market index and our peer group index from the
date of these acquisitions to December 31, 1998.
33
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the common stock as of February 24, 1999, except as otherwise
indicated in the relevant footnote, by (i) each person or group who is known by
the Company to own beneficially more than 5% of the common stock, (ii) each of
the Company's directors, (iii) each of the executive officers and (iv) all
current executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED (1)
- ---------------- ------------------------- -------------------------
<S> <C> <C>
J. Brian O'Neill (2)...................................... 8,351,704 31.1%
200 Four Falls Corporate Center, Suite 415
West Conshohocken, PA 19428
CRW Financial, Inc........................................ 6,946,583 26.9
200 Four Falls Corporate Center, Suite 415
West Conshohocken, PA 19428
Alliance Capital Management, L.P. (3)..................... 3,396,200 13.1
1290 Avenue of the Americas
New York, NY 10104
Highfields Group (4). .................................... 1,740,500 6.7
200 Clarendon Street, 51st Floor
Boston, MA 02117
Keith E. Alessi (5)....................................... 894,631 3.4
443 South Gulph Road
King of Prussia, PA 19406
Richard W. Virtue (6)..................................... 885,392 3.4
0132 Divide Drive
Snowmass Village, CO 81615
Richard C. Schwenk, Jr. (7)............................... 313,333 1.2
443 South Gulph Road
King of Prussia, PA 19406
Michael E. Julian (8)..................................... 87,500 *
David L. Kriegel (8)...................................... 12,500 *
Kevin W. Walsh (9)........................................ 7,500 *
Joseph Del Raso (9)....................................... 5,000 *
All directors and executive officers as a group (8
persons)................................................. 10,557,560 40.9
</TABLE>
___________
* Less than one percent.
34
<PAGE>
(1) Based on 25,835,948 shares of common stock outstanding as of February 24,
1999. In accordance with the rules of the Securities and Exchange
Commission, shares underlying options or warrants to purchase common stock
that are exercisable as of February 24, 1999 or within 60 days thereafter
are deemed outstanding and to be beneficially owned by the person holding
such option or warrant for purposes of computing such person's percentage
ownership, but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person.
(2) Includes 6,946,583 shares of common stock held by CRW Financial, Inc. Mr.
O'Neill is Chairman of the Board and Chief Executive Officer, and a
principal stockholder of CRW Financial, and may be deemed to have shared
voting and investment power over the shares held by CRW Financial. Mr.
O'Neill disclaims beneficial ownership of all such shares. Includes
610,160 shares of common stock owned by CRW Financial which are obtainable
by Mr. O'Neill upon the exercise of a warrant and 1,002,500 shares of
common stock issuable upon the exercise of stock options.
(3) These shares are held by Alliance Capital Management L.P., an investment
advisor registered under the Investment Advisors Act of 1940. Alliance has
sole investment power with respect to 3,396,260 shares, sole voting power
as to 75,200 of the shares and shared voting power as to 3,321,000 shares.
Alliance is a subsidiary of The Equitable Companies Incorporated, a
Delaware corporation. The Mutuelles AXA as a group controls AXA, which
beneficially owns a majority interest in Equitable. The foregoing
information was derived from Amendment No. 1 to a Schedule 13G filed by
Equitable and various entities in the AXA group on February 16, 1999.
(4) Of the shares listed, 107,238 are beneficially owned by Highfields Capital
I, LP, a Delaware Limited Partnership, and 208,918 shares are beneficially
owned by Highfields Capital II, LP, a Delaware limited partnership.
Highfields Associates LLC, a Delaware limited liability company, is the
general partner of these partnerships. Messrs. Richard L. Grubman and
Jonathan S. Jacobson are the managing members of Highfield Associates LLP
and direct the operations in that capacity. The remaining 1,424,344 shares
are beneficially owned by Highfields Capital Management, LP, a Delaware
limited partnership, which serves as investment manager to Highfields
Capital Ltd, a Cayman Islands company, with respect to shares directly
owned by Highfields, Ltd. Messrs. Grubman and Jacobson are managing members
of Highfields GP LLC, a Delaware limited liability company, which is a
general partner of Highfields Capital Management, LP and directs its
operations in that capacity. Highfields Ltd, the client of Highfields
Capital Management, LP has the power to direct the receipt of dividends and
proceeds from the sale of these shares. The foregoing information is
derived from a Schedule 13G filed by Highfield Associates LLC, Highfield
Capital Management, LP and Messrs. Grubman and Jacobson on February 16,
1999.
(5) Excludes 1,333,333 shares of common stock issuable upon the exercise of
non-vested stock options.
(6) Includes 129,500 shares of common stock issuable upon the exercise of a
warrant and 5,000 shares of common stock issuable upon the exercise of
stock options.
(7) Includes 313,333 shares of common stock issuable upon the exercise of stock
options. Excludes 26,667 shares of common stock issuable upon the exercise
of non-vested options.
(8) Includes 2,500 shares of common stock issuable upon the exercise of stock
options. Excludes 7,500 shares of common stock issuable upon the exercise
of non-vested stock options.
(9) Represents shares of common stock issuable upon the exercise of stock
options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
HEADQUARTERS LEASE
We sublease our headquarters, representing an aggregate of approximately
21,000 square feet, from CRW Financial, Inc. CRW has subleased the facility
from Cendant Corporation, which in turn, leases this space from Health and
Retirement Properties Trust. We are required to pay annual rental payments of
approximately $420,000 under this sublease.
PURCHASE OF COMMON STOCK BY KEITH E. ALESSI
Keith E. Alessi became our Chairman, Chief Executive Officer and President
in March 1998. Mr. Alessi purchased 227,964 shares of our common stock for an
aggregate price of $500,000, or $2.19 per share, at the time of his hiring.
TRANSACTIONS WITH MR. O'NEILL
In March 1998, J. Brian O'Neill resigned as our Chairman, Chief Executive
Officer and President. Pursuant to the terms of an employment agreement we have
with Mr. O'Neill, (1) Mr. O'Neill is entitled to the continuation of his salary
at an annual rate equal to $150,000 until May 20, 2000 and (ii) all of Mr.
O'Neill's stock options became fully vested and exercisable.
35
<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 Table of Contents 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 Table of Contents 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 disclosed in the Financial Statements or notes
thereto.
3. Exhibits. (See (c) below)
(b) Report on Form 8-K
We filed current reports on Form 8-K with the Commission on March 24, 1998, June
15, 1998, September 10, 1998 and January 26, 1999.
(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 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).
10.02 Employment Agreement, dated as of March 18, 1998, between
TeleSpectrum Worldwide Inc. and Keith E. Alessi is incorporated by
reference to exhibit 10.08 to our 1997 Annual Report on Form 10-K.
10.03 Subscription Agreement dated as of March 18, 1998 between
TeleSpectrum Worldwide Inc. and Keith E. Alessi is incorporated by
reference to exhibit 10.09 for our 1997 Annual Report on Form 10-
K.
10.04 Stock Option Agreement dated as of March 18, 1998 between
TeleSpectrum Worldwide Inc. and Keith E. Alessi is incorporated by
reference to exhibit 10.10 (a) to our 1997 Annual Report on Form
10-K.
10.05 Stock Option Agreement dated as of March 18, 1998 between
TeleSpectrum Worldwide Inc. and Keith E. Alessi is incorporated by
reference to exhibit 10.10 (b) to our 1997 Annual Report on Form
10-K.
10.06 Amended and Restated Employment Agreement, dated as of February
25, 1998 between TeleSpectrum Worldwide Inc. and Brian J. O'Neill
is incorporated by reference to exhibit 10.11 to our 1997 Annual
Report on Form 10-K.
10.07 Employment Agreement, dated as of May 6, 1996, between
TeleSpectrum Worldwide Inc. and Richard C. Schwenk, Jr. is
incorporated by reference to exhibit 10.17 of the Company's
Registration Statement on Form S-1 (File No. 333-04349).
10.08 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).
36
<PAGE>
10.09 Amendment No. 1 to 1996 Equity Compensation Plan is incorporated
by reference to exhibit 10.15 of our 1997 Annual Report on Form
10-K.
10.10 Asset Purchase Agreement dated as of March 6, 1998 by and among
TeleSpectrum Worldwide Inc., First Service Corporation, DDS Dyment
Distribution Service, Ltd., DDS Harris Limited and DDS Harris
Fulfillment, Limited is incorporated by reference to exhibit 10.17
of our 1997 Annual Report on Form 10-K.
10.11 Asset Acquisition Agreement dated as of January 16, 1998 by and
among TeleSpectrum Worldwide, Inc., NCO Group, Inc. and NCO
Teleservices, Inc. is incorporated by reference to exhibit 10.18
of our 1997 Annual Report on Form 10-K.
10.12 Agreement and Plan of Merger dated as of January 14, 1999 by and
among TeleSpectrum Worldwide Inc., International Data Response
Corporation, McCown De Leeuw & Co. III, L.P., McCown De Leeuw &
Co. Offshore (Europe) III, L.P., McCown De Leeuw & Co. III, (Asia)
L.P. and The Gamma Fund LLC is incorporated by reference to
Exhibit 2.1 of the Registrant's Current Report on Form 8-K filed
on January 26, 1999.
10.13 Amendment No. 1 to Agreement and Plan of Merger dated as of
February 26, 1999 by and among TeleSpectrum Worldwide Inc.,
International Data Response Corporation, McCown De Leeuw & Co.
III, L.P., McCown De Leeuw & Co. Offshore (Europe) III, L.P.,
McCown De Leeuw & Co. III, (Asia) L.P. and The Gamma Fund LLC. *
10.14 Agreement and Plan of Merger and Reorganization, dated as of
September 3, 1998 by and among CRW Financial, Inc., TeleSpectrum
Worldwide Inc., and CRW Acquisition Corp. *
10.15 Amendment No. 1 to Agreement and Plan of Merger and
Reorganization, dated as of December 30, 1998 by and among CRW
Financial, Inc., TeleSpectrum Worldwide Inc., and CRW Acquisition
Corp. *
23.01 Consent of Arthur Andersen LLP.*
24.01 Power of Attorney (included as part of the Signature Page)
27.01 Financial Data Schedule.*
_____________
* Filed herewith
37
<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.
Date: March 3, 1999 By: /s/ Richard C. Schwenk, Jr.
-------------------------------------------
RICHARD C. SCHWENK, JR.
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
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, Chief Executive Officer and President 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 an
stead, to execute and cause to be filed with the Securities and Exchange
Commission any or all amendments to the report.
NAME CAPACITY DATE
---- -------- ----
/s/ Keith E. Alessi Chairman of the Board, Chief March 3, 1999
- ----------------------------------
KEITH E. ALESSI Executive Officer,
President and Director
(Principal Executive
Officer)
/s/ Richard C. Schwenk, Jr Senior Vice President and March 3, 1999
- ----------------------------------
RICHARD C. SCHWENK, JR Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Joseph V. Del Raso Director March 3, 1999
- ----------------------------------
JOSEPH V. DEL RASO
/s/ Michael E. Julian Director March 3, 1999
- ----------------------------------
MICHAEL E. JULIAN
/s/ David L. Kriegel Director March 3, 1999
- ----------------------------------
DAVID L. KRIEGEL
/s/ J. Brian O'Neill Director March 3, 1999
- ----------------------------------
J. BRIAN O'NEILL
/s/ Richard W. Virtue Director March 3, 1999
- ----------------------------------
RICHARD W. VIRTUE
/s/ Kevin W. Walsh Director March 3, 1999
- ----------------------------------
KEVIN W. WALSH
38
<PAGE>
TELESPECTRUM WORLDWIDE INC.
TABLE OF CONTENTS
PART II--FINANCIAL INFORMATION
ITEM 8. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
REGISTRANT
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
Report of Independent Public Accountants ................................................................. F-3
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997 ................................ F-4
Consolidated Statements of Operations for the Years Ended December 31, 1998 and 1997 and for the
Period from April 26, 1996 (Inception) to December 31, 1996 ............................................ F-5
Consolidated Statements of Stockholders' Equity for the Period from April 26, 1996 (Inception) to
December 31, 1998 ...................................................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 and for the
Period from April 26, 1996 (Inception) to December 31, 1996 ............................................ F-7
Notes to Consolidated Financial Statements ............................................................... F-8
PREDECESSOR COMPANIES
SOMAR, INC. (SOMAR)
Report of Independent Public Accountants ................................................................. F-25
Balance Sheet as of December 31, 1995 .................................................................... F-26
Statements of Income for the Period from January 1, 1996 to August 12, 1996 and for the
Years Ended December 31, 1995 and 1994 ................................................................. F-27
Statements of Stockholders' Equity (Deficit) for the Period from January 1, 1996 to
August 12, 1996 and for the Years Ended December 31, 1995 and 1994 ..................................... F-28
Statements of Cash Flows for the Period from January 1, 1996 to August 12, 1996 and for the
Years Ended December 31, 1995 and 1994 ................................................................. F-29
Notes to Financial Statements ............................................................................ F-30
NBG SERVICES, INC. (NBG)
Report of Independent Public Accountants ................................................................. F-36
Balance Sheet as of December 29, 1995 .................................................................... F-37
Statements of Income the Period from December 30, 1995 to August 12, 1996 and for the
Years Ended December 29, 1995 and December 30, 1994 .................................................... F-38
Statements of Shareholders' Equity for the Period from December 30, 1995 to August 12, 1996 and
Years Ended December 29, 1995 and December 30, 1994 .................................................... F-39
Statements of Cash Flows for Period from December 30, 1995 to August 12, 1996 and the
Years Ended December 29, 1995 and December 30, 1994 .................................................... F-40
Notes to Financial Statements ............................................................................ F-41
THE REICH GROUP COMPANIES (REICH)
Report of Independent Public Accountants ................................................................. F-45
Combined Balance Sheet as of December 31, 1995 ........................................................... F-46
Combined Statements of Income for the Period from January 1, 1996 to August 12, 1996 and for the
Years Ended December 31, 1995 and 1994 ................................................................. F-47
Combined Statements of Shareholder's Equity (Deficit) for the Period from January 1, 1996 to
August 12, 1996 and for the Years Ended December 31, 1995 and 1994 ..................................... F-48
Combined Statements of Cash Flows for the Period from January 1, 1996 to August 12, 1996 and
for the Years Ended December 31, 1995 and 1994 ......................................................... F-49
Notes to Combined Financial Statements ................................................................... F-50
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
(TELESPECTRUM MARYLAND)
Report of Independent Public Accountants ................................................................. F-55
Combined Balance Sheet as of December 31, 1995 ........................................................... F-56
Combined Statements of Income for the Period from January 1, 1996 to August 12, 1996 and
for the Year Ended December 31, 1995 ................................................................... F-57
Combined Statements of Stockholders' Equity for the Period from January 1, 1996 to August 12, 1996
and for the Year Ended December 31, 1995 ............................................................... F-58
Combined Statements of Cash Flows for the Period from January 1, 1996 to August 12, 1996 and
for the Year Ended December 31, 1995 ................................................................... F-59
Notes to Combined Financial Statements ................................................................... F-60
FINANCIAL STATEMENT SCHEDULES:
Report of Independent Public Accountants ................................................................. S-1
Schedule II--Valuation and Qualifying Accounts for the Period from April 26, 1996 (Inception) to
December 31, 1998 ...................................................................................... S-2
</TABLE>
F-2
<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, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for the two years ended December 31, 1998 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, 1998 and 1997, and the results of their
operations and their cash flows for the two years ended December 31, 1998 and
for the period from April 26, 1996 (Inception) to December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 5, 1999
(except with respect to the
NTC matter discussed in Note 9,
as to which the date is
February 26, 1999)
F-3
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS--EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 794 $ 774
Accounts receivable, net of allowance for doubtful accounts of $2,851 and $969...... 36,859 37,360
Income tax refund receivable........................................................ -- 2,912
Prepaid expenses and other.......................................................... 2,307 1,539
Net assets of discontinued operations (see Note 3).................................. -- 36,399
--------- ---------
Total current assets............................................................. 39,960 78,984
PROPERTY AND EQUIPMENT, net........................................................... 35,430 36,731
GOODWILL, net of accumulated amortization of $2,703 and $1,525 (see Note 2)........... 26,786 27,964
OTHER ASSETS.......................................................................... 1,513 1,042
--------- ---------
Total assets..................................................................... $ 103,689 $ 144,721
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Secured credit facility............................................................. $ -- $ 29,000
Current maturities of long-term debt................................................ 820 1,160
Cash overdraft...................................................................... 1,658 --
Accounts payable.................................................................... 7,058 4,718
Accrued expenses.................................................................... 3,784 9,125
Accrued compensation................................................................ 5,081 9,074
Deferred revenue.................................................................... 2,512 1,347
Other current liabilities........................................................... 2,345 3,905
--------- ---------
Total current liabilities........................................................ 23,258 58,329
--------- ---------
LONG-TERM DEBT........................................................................ 2,876 3,800
--------- ---------
OTHER NONCURRENT LIABILITIES.......................................................... 987 2,215
--------- ---------
COMMITMENTS AND CONTINGENCIES (see Note 9)
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, 25,771,449 and
25,213,074 shares issued and outstanding.......................................... 258 252
Additional paid-in capital.......................................................... 240,176 237,186
Deferred compensation............................................................... (363) --
Accumulated deficit................................................................. (163,286) (156,825)
Cumulative currency translation adjustment.......................................... (217) (236)
--------- ---------
Total stockholders' equity....................................................... 76,568 80,377
--------- ---------
Total liabilities and stockholders' equity....................................... $ 103,689 $ 144,721
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS--EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 26, 1996
(INCEPTION) TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
----------------------- ------------
1998 1997 1996
---- ---- -----
<S> <C> <C> <C>
REVENUES.............................................................. $ 167,428 $ 178,922 $ 53,154
--------- --------- --------
OPERATING EXPENSES:
Cost of services.................................................... 154,316 177,565 37,942
Selling, general and administrative................................. 17,875 19,074 9,126
Amortization of goodwill (includes goodwill impairment charge of
$139,072 in 1997 - see Note 2).................................... 1,178 146,321 2,147
--------- --------- --------
Total operating expenses......................................... 173,369 342,960 49,215
--------- --------- --------
Operating income (loss).......................................... (5,941) (164,038) 3,939
INTEREST INCOME....................................................... 71 414 877
INTEREST EXPENSE...................................................... (1,317) (2,290) (444)
INVESTMENT GAIN (see Note 3).......................................... -- 1,760 --
--------- --------- --------
Income (loss) from continuing operations before income taxes........ (7,187) (164,154) 4,372
INCOME TAX BENEFIT (EXPENSE).......................................... 247 2,310 (1,693)
--------- --------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS.............................. (6,940) (161,844) 2,679
INCOME FROM DISCONTINUED OPERATIONS
(net of income taxes of $247, $910 and $613 - see Note 3)............ 479 1,369 971
--------- --------- --------
NET INCOME (LOSS)..................................................... $ (6,461) $(160,475) $ 3,650
========= ========= ========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
CONTINUING OPERATIONS................................................. $ (0.27) $ (6.42) $ 0.15
DISCONTINUED OPERATIONS............................................... 0.02 0.06 0.05
--------- --------- --------
NET INCOME (LOSS)..................................................... $ (0.25) $ (6.36) $ 0.20
========= ========= ========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (see Note 10).......................... 25,528 25,213 17,898
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS -- EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL DEFICIT
PAID-IN DEFERRED RETAINED
COMMON STOCK CAPITAL COMPENSATION EARNINGS
------------ ----------- ------------ ------------
SHARES AMOUNT
------ ------
<S> <C> <C> <C> <C> <C>
Incorporation on April 26, 1996................... 8,510,137 $ 85 $ (75) $ -- $ --
Capital contribution.............................. -- -- 2,100 -- --
Issuance of equity owned by CRW................... -- -- 18,749 -- --
Issuance of common stock upon public offering,
net of offering costs......................... 11,879,000 119 161,847 -- --
Issuance of common stock to the sellers of the
Initial Operating Businesses.................. 4,403,863 44 44,647 -- --
Issuance of options and warrants to purchase
common stock to the sellers of the Initial
Operating Businesses........................... -- -- 4,827 -- --
Issuance of common stock to the sellers of Fourth
Quarter Acquisitions........................... 420,074 4 4,583 -- --
Comprehensive income (loss): --
Net income................................... -- -- -- 3,650
Cumulative currency translation adjustment... -- -- -- -- --
Total comprehensive income...................
---------- --- ------- ----- ---------
Balance, December 31, 1996........................ 25,213,074 252 236,678 -- 3,650
Issuance of options to purchase common stock...... -- -- 508 -- --
Comprehensive income (loss):
Net loss..................................... -- -- -- -- (160,475)
Cumulative currency translation adjustment... -- -- -- -- --
Total comprehensive income (loss)............
---------- --- ------- ----- ---------
Balance, December 31, 1997........................ 25,213,074 252 237,186 -- (156,825)
Exercise of common stock options.................. 330,411 4 1,496 -- --
Issuance of common stock below fair market
value.......................................... 227,964 2 824 -- --
Issuance of options to purchase common stock
below fair market value........................ -- 670 (670) --
Amortization of deferred compensation............. -- -- -- 307 --
Comprehensive income (loss): -- -- -- (6,461)
Net loss...................................... --
Cumulative currency translation adjustment.... -- -- -- -- --
Total comprehensive income (loss).............
---------- ---- -------- ----- ---------
Balance, December 31, 1998........................ 25,771,449 $258 $240,176 $(363) $(163,286)
========== ==== ======== ===== =========
<CAPTION>
CUMULATIVE
CURRENCY TOTAL
TRANSLATION STOCKHOLDERS'
ADJUSTMENT EQUITY
----------- -------------
<S> <C> <C>
Incorporation on April 26, 1996................... $ -- $ 10
Capital contribution.............................. -- 2,100
Issuance of equity owned by CRW................... -- 18,749
Issuance of common stock upon public offering,
net of offering costs......................... -- 161,966
Issuance of common stock to the sellers of the
Initial Operating Businesses.................. -- 44,691
Issuance of options and warrants to purchase
common stock to the sellers of the Initial
Operating Businesses........................... -- 4,827
Issuance of common stock to the sellers of Fourth
Quarter Acquisitions........................... -- 4,587
Comprehensive income (loss):
Net income................................... --
Cumulative currency translation adjustment... (69)
Total comprehensive income................... 3,581
------ ---------
Balance, December 31, 1996........................ (69) 240,511
Issuance of options to purchase common stock...... -- 508
Comprehensive income (loss):
Net loss..................................... --
Cumulative currency translation adjustment... (167)
Total comprehensive income (loss)............ (160,642)
------ ---------
Balance, December 31, 1997........................ (236) 80,377
Exercise of common stock options.................. -- 1,500
Issuance of common stock below fair market
value.......................................... -- 826
Issuance of options to purchase common stock
below fair market value........................ -- --
Amortization of deferred compensation............. -- 307
Comprehensive income (loss):
Net loss...................................... --
Cumulative currency translation adjustment.... 19
Total comprehensive income (loss)............. (6,442)
------ ---------
Balance, December 31, 1998........................ $ (217) $ 76,568
====== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 26, 1996
(INCEPTION) TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
----------------------- ---------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................................................. $ (6,461) $(160,475) $ 3,650
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization.............................................. 8,532 8,183 1,667
Amortization of goodwill (includes impairment charge of $139,072........... 1,178
in 1997 -- see Note 2).................................................... 146,321 2,147
Provision for call center closings......................................... -- 10,275 --
Investment gain............................................................ -- (1,760) --
Provision for bad debts.................................................... 2,325 881 542
Provision for deferred taxes (benefit)..................................... -- (2,268) 220
Issuance of options to purchase common stock for services.................. -- 508 --
Non-cash compensation...................................................... 633 -- --
Loss on sale of assets..................................................... 468 529 --
Changes in operating assets and liabilities--
Accounts receivable..................................................... (1,824) (9,976) (9,262)
Income tax receivable................................................... 2,912 532 --
Prepaid expenses and other.............................................. (739) 1,371 1,081
Accounts payable........................................................ 1,832 (1,829) (789)
Accrued expenses........................................................ (5,341) 3,778 (1,726)
Accrued compensation.................................................... (3,833) 4,264 3,579
Deferred revenue........................................................ 1,165 (638) 1,680
Other liabilities....................................................... (999) 371 (5,878)
Net operating activities of discontinued operations..................... (1,351) 4,702 (1,591)
-------- --------- ---------
Net cash provided by (used in) operating activities.................. (1,503) 4,769 (4,680)
-------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment........................................... (9,099) (26,297) (10,558)
Business acquisitions......................................................... -- (5,327) (106,993)
Payments of notes payable to sellers and acquisition liabilities.............. (1,930) (29,100) --
Proceeds from sale of investment.............................................. -- 6,262 --
Proceeds from sale of assets.................................................. 1,908 -- --
Proceeds from sale of discontinued operations................................. 37,750 -- --
Purchase of investment........................................................ (500) (4,502) --
Net investing activities of discontinued operations........................... -- (1,165) (9)
-------- --------- ---------
Net cash provided by (used in) investing activities.............. 28,129 (60,129) (117,560)
-------- --------- ---------
FINANCING ACTIVITIES:
Capital contribution received................................................. -- -- 2,110
Proceeds of public offering, net of offering costs............................ -- -- 162,016
Proceeds from exercise of stock options....................................... 1,500 -- --
Proceeds from sale of common stock............................................ 500 -- --
Net borrowings (payments) on secured credit facility.......................... (29,000) 29,000 --
Cash overdraft................................................................ 1,658 -- --
Borrowings from debt.......................................................... -- 720 --
Payments of debt.............................................................. (349) (445) (9,403)
Payments of capital lease obligations......................................... (915) (1,312) (2,637)
Net financing activities of discontinued operations........................... -- -- (1,675)
-------- --------- ---------
Net cash provided by (used in) financing activities.................. (26,606) 27,963 150,411
-------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ 20 (27,397) 28,171
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 774 28,171 --
-------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $ 794 $ 774 $ 28,171
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. NATURE OF BUSINESS
TeleSpectrum Worldwide Inc. and subsidiaries (the "Company") was incorporated
in Delaware on April 26, 1996 (see Note 12) 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 net
assets of a number of businesses (see Note 3). In December 1997, the Company
committed to a plan to dispose of its Market Research Segment and Direct Mail
and Fulfillment Segment. The results of operations of the Market Research
Segment and Direct Mail and Fulfillment Segment have been accounted for as
discontinued operations (see Note 3).
2. 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 on telemarketing programs as services are
performed, generally based on hours incurred. For certain of these programs,
revenues are reduced for estimated customer cancellations. Customer care
revenue is recognized on a per hour basis or at the time calls are answered on a
per minute basis. The Company recognizes all other revenues as the services are
performed.
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, 1998
and 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.
F-8
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
Capitalized Software Development Costs
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The
Company capitalizes software development costs subsequent to the establishment
of technological feasibility and until the product is available for general
release. Costs incurred prior to the establishment of technological feasibility
are charged to product development expense. Development costs associated with
product enhancements that extend the original product's life or significantly
improve the original product's marketability are also capitalized once
technological feasibility has been established. Software development costs are
amortized over the greater of the ratio of current revenues to total anticipated
revenues or on a straight-line basis over the estimated useful lives of the
products (three years), beginning with the initial release to customers. The
Company continually evaluates whether events or circumstances have occurred that
indicate that the remaining useful life of the capitalized software development
costs should be revised or that the remaining balance of such assets may not be
recoverable. The Company evaluates the recoverability of capitalized software
based on the estimated future revenues of each product. As of December 31,
1998, the Company believes that no revisions to the remaining useful life or
write-downs are required for capitalized software development costs. At
December 31, 1998, the Company has $649,000 of capitalized software development
costs. General release is expected during 1999.
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. The Company recognizes valuation allowances for a deferred tax asset
if the realizability of some portion or all of the deferred tax asset is
uncertain.
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 were no material
transaction gains or losses for the periods presented.
Goodwill Impairment
The Company elected to change its method of measuring goodwill impairment
under Accounting Principles Board ("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-9
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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 flow 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. In the fourth quarter of 1997, the Company 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 the goodwill
associated with the Telemarketing Segment had occurred and a goodwill impairment
charge of $139,072,000 was recorded. As of December 31, 1998, the remaining
goodwill of $26,786,000 relates entirely to the Customer Care Segment and is
being amortized on a straight-line basis over 25 years.
Impairment of Long Lived Assets
The Company accounts for possible impairments of long-lived assets in
accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-
lived assets to be held and used by the Company be reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If changes in circumstances
indicate that the carrying amount of an asset that an entity expects to hold and
use may not be recoverable, future cash flows expected to result from the use of
the asset and its disposition must be estimated. If the undiscounted value of
the future cash flows is less than the carrying amount of the asset, an
impairment will be recognized. Based on these evaluations, there were no
adjustments to the carrying value of the long-lived assets in 1998 (see Note 5).
Earnings Per Share ("EPS")
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
statements of operations. 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. For the years ended December 31, 1998 and
1997, diluted loss per share has not been presented, since the impact is anti-
dilutive. For the period from April 26, 1996 (Inception) to December 31, 1996,
the weighted average number of common shares outstanding for purposes of
computing diluted EPS was 17,898,000. Diluted EPS was not materially different
than basic EPS for the period from April 26, 1996 (Inception) to December 31,
1996.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the accompanying financial statements at the fair value due to the
short-term nature of those instruments. The carrying amount of the secured
credit facility, long-term debt and capitalized lease obligations approximates
fair value at the balance sheet dates.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current year presentation.
F-10
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
3. INITIAL PUBLIC OFFERING, ACQUISITIONS AND DIVESTITURES
Initial Public Offering
In August 1996, the Company sold 11,879,000 shares of its common stock in a
public offering (the "Offering") at $15.00 per share which raised net proceeds
of $161,966,000, net of offering costs of $3,746,000.
Acquisitions
In May 1996, 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 Business was
$199,955,000. The $181,811,000 excess of the total purchase price over the
estimated fair value of the net assets acquired was recorded as goodwill (see
Note 2 regarding the goodwill impairment charge of $139,072,000 recorded in
1997). In addition, the Company entered into employment agreements with the
selling shareholders.
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 was
$21,802,000. The $20,944,000 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). In addition, the Company entered into employment
agreements with the selling shareholders.
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 year ended December 31, 1996, assuming that the
Initial Operating Businesses and the acquisition of TARP had occurred on January
1, 1996 (for purposes of this disclosure the acquisition of PR Response and FX
(IVR) are not deemed material--in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
--------------------
<S> <C>
Revenue..................................................... $124,257
Operating income............................................ 11,430
Net income.................................................. 5,976
Basic and diluted earnings per share........................ $ 0.26
</TABLE>
F-11
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
Divestitures
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.
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.
In January 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 7).
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, beginning in 1999. The sale of this segment did 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 7).
The following table summarizes the operating results of the discontinued
operations (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 26, 1996
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
------------ -------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues........................................................ $4,189 $21,304 $8,320
Operating expenses.............................................. 3,463 19,025 6,736
------ ------- ------
Income before income taxes...................................... 726 2,279 1,584
Income tax provision............................................ 247 910 613
------ ------- ------
Income from discontinued operations............................. $ 479 $ 1,369 $ 971
====== ======= ======
</TABLE>
4. SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended December 31, 1998 and 1997 and the period from April 26,
1996 (Inception) to December 31, 1996, the Company paid interest and income
taxes and financed equipment purchases with capital leases as follows (in
thousands):
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 26, 1996
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
------------ -------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest paid................................................... $1,018 $1,933 $ 188
Taxes paid...................................................... -- $1,180 $2,447
Capital leases.................................................. -- -- $1,917
</TABLE>
F-12
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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 $25,000,000
in March 1997 and agreed to pay $600,000 over a two year period in equal
installments, of which, the Company has paid $300,000 and $200,000 in 1998 and
1997, respectively.
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
3 (in thousands):
<TABLE>
<CAPTION>
1997 1996
ACQUISITION ACQUISITIONS
------------- -------------
<S> <C> <C>
Non-cash 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>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
USEFUL LIVES 1998 1997
------------ -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Telemarketing and computer equipment........................................ 3 - 5 years $ 30,373 $30,400
Furniture and fixtures...................................................... 5 - 7 years 10,433 9,209
Software.................................................................... 3 years 5,645 1,588
Building.................................................................... 40 years 2,402 2,402
Leasehold improvement....................................................... 3 - 7 years 4,038 2,574
Land........................................................................ 406 406
-------- -------
53,297 46,579
Less--Accumulated depreciation and amortization............................. (17,867) (9,848)
-------- -------
$ 35,430 $36,731
======== =======
</TABLE>
The carrying value of property and equipment under capital lease obligations
included above amounted to $3,558,000 and $4,160,000 at December 31, 1998 and
1997, respectively. Assets under capitalized leases are generally collateralized
by the equipment under lease.
F-13
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
In the third and fourth quarters of 1997, the Company closed or committed to a
plan to close fifteen call centers and recorded 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." 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 expenses and are included as a reduction of the
carrying value of property and equipment in the accompanying consolidated
balance sheets. The impaired assets include telemarketing and computer
equipment, furniture and fixtures and leasehold improvements.
6. INCOME TAXES
The components of income (loss) from continuing operations before income taxes
are as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 26, 1996
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
-------------------------------- ---------------
1998 1997 1996
-------------- ---------------- ---------------
<S> <C> <C> <C>
Domestic.................................................... $(5,435) $(157,385) $3,840
Foreign..................................................... (1,752) (6,769) 532
------- --------- ------
$(7,187) $(164,154) $4,372
======= ========= ======
</TABLE>
The components of the income tax benefit (provision) are as follows (in
thousands):
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 26, 1996
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
-------------------------------- ----------------
1998 1997 1996
-------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal...................................................... $ -- $1,600 $(1,736)
State........................................................ -- -- (130)
Foreign...................................................... -- (200) (220)
---------- ------ -------
-- 1,400 (2,086)
---------- ------ -------
Deferred:
Federal...................................................... -- -- (209)
State........................................................ -- -- (11)
Foreign...................................................... -- -- --
---------- ------ -------
-- -- (220)
---------- ------ -------
Total benefit (provision)...................................... $ -- $1,400 $(2,306)
========== ====== =======
</TABLE>
The 1997 income tax benefit is a result of a tax refund, for federal income
taxes paid in 1996, resulting from 1997 operating losses (see deferred tax asset
valuation allowance, below).
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 26, 1996
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
--------------------------------- ----------------
1998 1997 1996
--------------- ---------------- ----------------
<S> <C> <C> <C>
Continuing Operations.......................................... $ 247 $2,310 $(1,693)
Discontinued Operations........................................ (247) (910) (613)
----- ------ -------
$ -- $1,400 $(2,306)
===== ====== =======
</TABLE>
F-14
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
The reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for continuing operations is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 26, 1996
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
-------------------------------- ----------------
1998 1997 1996
-------------- ---------------- ----------------
<S> <C> <C> <C>
Statutory federal income tax rate (benefit)................. (34.0)% (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 and other items not currently
deductible, not tax benefited........................... 28.5 28.0 --
Nondeductible expenses...................................... 2.1 4.5 2.4
------ ------ ----
(3.4)% (1.4)% 38.7%
====== ====== ====
</TABLE>
Deferred taxes are determined based upon the estimated future tax effects of
differences between the financial statement and income tax bases of assets and
liabilities given the provisions of the enacted tax laws. The tax effect of
temporary differences that give rise to deferred taxes at December 31, 1998 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................................ $ 7,636 $ 3,086
Goodwill impairment.................................................... 40,090 37,532
Accruals and reserves not currently deductible......................... 4,467 5,184
Book/tax difference of property and equipment.......................... -- 288
Other....................................................... 164 --
-------- --------
52,357 46,090
-------- --------
Deferred tax liabilities:
Book/tax difference of property and equipment....................... (3,735) --
Other............................................................... (36) (246)
-------- --------
(3,771) (246)
-------- --------
48,586 45,844
Less-Valuation allowance.................................................. (48,586) (45,844)
-------- --------
Net deferred tax asset.................................................... $ -- $ --
======== ========
</TABLE>
Due to the uncertain realization of the deferred tax asset, the Company has
provided a full valuation allowance at December 31, 1998 and 1997. The Company
has a net operating loss carryforward of approximately $22,500,000, which begins
to expire in 2012.
F-15
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
7. SECURED CREDIT FACILITY
On April 14, 1998, the Company entered into a four-year Loan and Security
Agreement, which provides for a $20,000,000 credit facility (the "Credit
Facility"). Under the terms of the Credit Facility, the Company can borrow up to
the lesser of $20,000,000 or an amount that is determined as 80% of the net
eligible accounts receivable. The Company can elect at the time it makes
borrowings to pay interest at prime plus 0.50% or at LIBOR plus 2.50% and pays a
commitment fee of 0.375% on the unused borrowing capacity. The Credit Facility
also makes available to the Company letters of credit at a fee of 1% per annum
on the face amount of each letter of credit and in an aggregate amount not to
exceed the lower of $1.5 million or the amount available under the credit
facility. 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, including limitations on
purchases of property and equipment, minimum working capital, net worth and
current ratio requirements. At December 31, 1998, the Company had no outstanding
borrowings and $18,104,000 of available borrowings under the Credit Facility.
The weighted average interest rate on borrowings under the Credit Facility
during 1998 was 8.8% and the Company recorded interest expense during 1998 under
this facility of $159,000. The Credit Facility will be refinanced with the debt
financing obtained in connection with the Company's merger with International
Data Response Corporation ("IDRC") (see Note 15).
At December 31, 1997, the Company had outstanding borrowings of $29,000,000 on
its secured credit facility. Throughout 1997, the Company amended the secured
credit facility several times as a result of non-compliance due to its 1997
operating performance. The Company used the proceeds from the sale of its Market
Research Segment to partially repay this 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 on this facility.
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
The West Virginia Economic Development Authority; the notes are secured by certain
assets of the Company and are payable in monthly installments of $21,262
including interest, through July 1999, at an interest rate of 4.00%.................. $ 149 $ 391
Note payable to lessor in monthly installments of $8,533 including interest,
through March 2008, at an interest rate of 8.50%..................................... 650 695
Other notes payable...................................................................... 57 119
Capital lease obligations (see Note 9)................................................... 2,840 3,755
------ -------
3,696 4,960
Less--current maturities................................................................. (820) (1,160)
------ -------
$2,876 $ 3,800
====== =======
</TABLE>
Minimum principal repayments of long-term debt as of December 31, 1998,
excluding capitalized lease obligations (see Note 9), are as follows (in
thousands):
<TABLE>
<S> <C>
1999............................................................................... $226
2000............................................................................... 77
2001............................................................................... 58
2002............................................................................... 63
2003............................................................................... 68
Thereafter......................................................................... 364
----
$856
====
</TABLE>
F-16
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
9. COMMITMENTS AND CONTINGENCIES
The Company leases facilities and equipment under capital and non-cancellable
operating leases through November 2007. Interest rates on the capital leases
range from 4% to 13%. Rent expense under operating leases for the years ended
December 31, 1998 and 1997 and for the period from April 26, 1996 (Inception) to
December 31, 1996 was $4,078,000, $4,835,000 and $1,161,000, respectively.
Future minimum lease payments as of December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- ---------
<S> <C> <C>
1999................................................................................... $ 3,992 $ 724
2000................................................................................... 3,606 629
2001................................................................................... 3,500 372
2002................................................................................... 3,261 352
2003................................................................................... 2,895 352
Thereafter............................................................................. 6,331 867
------- ------
Total minimum lease payments........................................................... $23,585 3,296
=======
Less--amount representing interest..................................................... (456)
------
Present value of future minimum lease payments......................................... 2,840
Less--current portion of principal payments............................................ (594)
------
$2,246
======
</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 10).
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 a potential
for a bonus. 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 five years with accelerated vesting
for 500,000 options based on the achievement of certain performance objectives,
as defined. The Company recorded 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
vesting period of 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.
In July 1998, the Company commenced litigation in Federal court against Parcel
Consultants Incorporated d/b/a/ NTC ("NTC"). The Company filed suit as part of
its efforts to collect approximately $4,742,000 of accounts receivable for
telemarketing services performed on behalf of NTC. NTC filed a counter suit
against the Company alleging breach of contract and fraud. The Company believes
that NTC's claims against the Company are without merit. On February 26, 1999,
NTC filed for reorganization under Chapter 11 of the Federal Bankruptcy Code.
The Company has reserved approximately $2,100,000 of the accounts receivable
amount due from NTC. Based on current facts and circumstances, the Company
believes that this reserve is adequate, however, the Company cannot be certain
that it will be successful in collecting the accounts receivable due from NTC.
F-17
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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.
10. 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.
In March 1998, the Company granted options to purchase 500,000 shares of
common stock under the Plan and options to purchase 1,500,000 shares of common
stock outside of the plan to its new Chairman of the Board, CEO and President
(see Note 9).
The following table summarizes the option activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE EXERCISE PRICE
SHARES PER SHARE PER SHARE
-------------- --------------- ---------------
<S> <C> <C> <C>
Balance outstanding at Inception................................ -- $ -- $ --
Granted at fair market value.............................. 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 at fair market value.............................. 2,050,510 4.25-14.38 8.70
Granted above fair market value........................... 2,310,490 6.25 6.25
Cancelled................................................. (2,582,657) 4.25-15.00 13.84
---------- ----------- ------
Balance outstanding, December 31, 1997.......................... 3,187,833 4.25-6.25 5.55
Granted at fair market value.............................. 723,500 3.31-9.81 4.53
Granted above fair market value........................... 75,000 6.25 6.25
Granted below fair market value........................... 2,000,000 3.29 3.29
Exercised................................................. (330,411) 3.29-6.25 4.54
Cancelled................................................. (432,816) 3.31-8.94 4.89
---------- ----------- ------
Balance outstanding, December 31, 1998.......................... 5,223,106 $ 3.29-9.81 $ 4.67
========== =========== ======
</TABLE>
Summary information about the Company's stock options outstanding at December
31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
RANGE OF EXERCISE BALANCE OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISABLE AT EXERCISE
PRICE DECEMBER 31, 1998 EXERCISE PRICE LIFE IN YEARS DECEMBER 31, 1998 PRICE
----------------- ---------------------- ------------------- ----------------- --------------------- -------------
<S> <C> <C> <C> <C> <C>
$3 - $5 3,191,904 $3.56 9.1 917,004 $4.11
5 - 7 1,911,702 6.25 7.9 1,603,858 6.25
7 - 9 94,500 8.94 9.4 12,500 8.94
9 - 11 25,000 9.91 9.8 -- --
--------- ----- --- --------- -----
5,223,106 $4.67 8.6 2,533,362 $5.49
========= ===== === ========= =====
</TABLE>
F-18
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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 one to four years.
In September 1997, the Company exchanged new options for options which were
granted in August 1996 and February 1997. The exercise price for the new options
was $6.25 per share. The exercise price for the new options was less than the
exercise price of the previously granted options, but exceeded the market price
of the stock on the date of grant of the new options.
In September 1997, the Company granted options to purchase 150,000 shares
of the Company's common stock at $6.25 per share under the Plan 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 addition, 50,000 shares are issuable upon the exercise of options that
the Company has committed to grant over the next two years pursuant to an
employment agreement with one of its senior executives.
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations in accounting for its employee
stock options because 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, if 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 years ended December 31, 1998 and 1997 and
for the period from April 26, 1996 (Inception) to December 31, 1996: risk free
interest rate of 5.7%, 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%, 75% and 65%, respectively, and an expected life of the options of six
years.
The weighted average fair value of employee stock options granted during the
periods presented is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE FAIR VALUE
-----------------------------------------------------------------
PERIOD FROM
APRIL 26, 1996
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
------------------------------------------ -----------
------------------------------------------
1998 1997 1996
------------------ ------------------- ------------------
<S> <C> <C> <C>
Granted at fair market value $ 3.14 $ 3.00 $ 9.84
Granted above fair market value $ 1.95 $ 2.77 $ --
Granted below fair market value $ 2.60 $ -- $ --
</TABLE>
F-19
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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>
PERIOD FROM
APRIL 26, 1996
(INCEPTION) TO
YEAR ENDED DECEMBER 31,
-----------
DECEMBER 31,
-----------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss)..................................... $(11,455) $(162,021) $2,237
Pro forma basic and diluted earnings (loss) per share........... $ (0.45) $ (6.43) $ 0.12
</TABLE>
In April 1997, the Company granted warrants to purchase 1,500,000 shares of
the Company's common stock at a price of $12.25 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 warrants were cancelled as certain vesting
criteria, as defined, were not met.
The Company issued warrants to purchase 593,400 shares of common stock to
the former principals of the Initial Operating Businesses at $15.00 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,
1998.
11. 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, 1998
and 1997 under the Plan was $171,000 and $290,000, respectively.
12. RELATED-PARTY TRANSACTIONS
CRW Financial, Inc.
On May 22, 1996, CRW Financial, Inc. ("CRW"), made an initial capital
contribution of $2,100,000 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 1,433,000 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 75,000
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 839,000 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 229,000 shares
of the Company's common stock.
F-20
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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 $18,749,000 is treated as additional
purchase price consideration of the acquisitions of the Initial Operating
Businesses (see Note 3).
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, 1998 and 1997 and
for the period April 26, 1996 (Inception) to December 31, 1996 was $430,000,
$444,000 and $106,000, respectively.
AffiniCorp USA, Inc.
On September 25, 1998, the Company purchased 19.4% of the outstanding
common stock of AffiniCorp USA, Inc. for $500,000. AffiniCorp develops and
manages enhancement products for credit card issuers. The Company has entered
into a relationship with AffiniCorp whereby the Company provides telemarketing
services at its normal rates with six month extended payment terms. Outstanding
balances for telemarketing services under the six month extended terms are
capped at $1,500,000. The Company has a security interest in the accounts
receivable and certain other assets of AffiniCorp. As of December 31, 1998, the
Company has $1,098,000 of accounts receivable from AffiniCorp recorded in
current assets and a $500,000 investment recorded in other assets.
13. 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 number of customers comprising the Company's customer base and their
dispersion across 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,
1998. The Company had one client in the telecommunications industry which
accounted for approximately 10% of total revenues for the year ended December
31, 1998 and one client in the financial services industry, which accounted for
approximately 19% of total revenues for the year ended December 31, 1997. The
Company had two clients in the telecommunications industry which accounted for
approximately 23% and 13% of accounts receivable as of December 31, 1998 and no
clients accounted for more than 10% of accounts receivable as of December 31,
1997. For the year ended December 31, 1998, 23% and 27% of the Company's
revenues were from customers in the financial services and telecommunications
industries, respectively. 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 revenues, while 38% and 11% of the Company's revenues
during this period were from customers in the financial services and insurance
industries, respectively.
14. SEGMENTS
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Company classifies its continuing
operations into two segments: Telemarketing and Customer Care. The operating
segments are managed separately because each operating segment represents a
strategic business unit that offers different services. The accounting policies
of the operating segments are the same as described in the summary of
significant accounting policies (see Note 2). The business segments are
described in further detail below. Segment assets include amounts specifically
identified to Telemarketing and Customer Care Segments. Corporate assets consist
primarily of property and equipment.
F-21
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
The Telemarketing Segment provides both business-to-consumer and business-
to-business 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 customer care
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.
Corporate operations include the selling, general and administrative
functions of the Company.
The results of operations of the Market Research Segment and Direct Mail
and Fulfillment Segment have been accounted for as discontinued operations (see
Note 3).
Business segment information is as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 26, 1996
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
----------- -----------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Telemarketing............................................. $ 121,553 $ 141,454 $ 40,321
Customer Care............................................. 45,875 37,468 12,833
----------- ----------- ----------
Total................................................... $ 167,428 $ 178,922 $ 53,154
=========== =========== ==========
OPERATING INCOME (LOSS)
Telemarketing (includes goodwill impairment charge of
$139,072 in 1997)....................................... $ 7,251 $ (144,021) $ 9,224
Customer Care............................................. 4,683 (943) 3,841
Corporate................................................. (17,875) (19,074) (9,126)
----------- ----------- ----------
Total................................................... $ (5,941) $ (164,038) $ 3,939
=========== =========== ==========
TOTAL ASSETS
Telemarketing............................................. $ 45,995 $ 53,779 $ 179,508
Customer Care............................................. 47,499 47,718 40,104
Corporate................................................. 10,195 6,825 40,565
----------- ----------- ----------
Total continuing operations............................. 103,689 108,322 260,177
Discontinued Operations................................... -- 36,399 36,362
----------- ----------- ----------
Total................................................... $ 103,689 $ 144,721 $ 296,539
=========== =========== ==========
DEPRECIATION AND AMORTIZATION
Telemarketing (includes goodwill impairment charge of
$139,072 in 1997)....................................... $ 4,995 $ 150,679 $ 2,990
Customer Care............................................. 3,634 3,244 807
Corporate................................................. 1,081 581 17
----------- ----------- ----------
Total................................................... $ 9,710 $ 154,504 $ 3,814
=========== =========== ==========
CAPITAL EXPENDITURES
Telemarketing............................................. $ 2,401 $ 18,206 $ 7,446
Customer Care............................................. 3,093 6,057 2,246
Corporate................................................. 3,605 2,034 866
----------- ----------- ----------
Total................................................... $ 9,099 $ 26,297 $ 10,558
=========== =========== ==========
</TABLE>
F-22
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
15. SUBSEQUENT EVENTS
On September 3, 1998, TeleSpectrum and CRW entered into a merger agreement
whereby each outstanding share of CRW common stock (6,918,000 shares as of
December 31, 1998) will be exchanged for .709 of a share of TeleSpectrum common
stock. In addition, each outstanding option (1,536,000 as of December 31, 1998)
to purchase shares of CRW common stock will be exchanged for an option to
purchase .709 of a share of TeleSpectrum common stock and the 678,000 warrants
to purchase shares of TeleSpectrum common stock, owned by CRW, will be exchanged
for 678,000 warrants to purchase TeleSpectrum common stock. The merger is
expected to close in the second quarter of 1999. Immediately prior to the
merger, CRW will not have any continuing business operations and its only asset
will be 6,947,000 shares of TeleSpectrum common stock. For financial reporting
purposes, TeleSpectrum will treat the exchange of shares of TeleSpectrum common
stock for shares of CRW common stock as a treasury stock transaction. The
transaction will not have an effect on TeleSpectrum's net income (loss) but will
have an effect on its net income (loss) per share.
On January 14, 1999, TeleSpectrum and IDRC entered into a merger agreement and
on February 26, 1999 they amended the agreement. Under this agreement each of
the holders of outstanding shares of IDRC common stock, options and warrants
will be entitled to receive their pro rata portion of an aggregate of 9,200,000
shares of TeleSpectrum common stock and options and warrants exercisable for
3,000,000 shares of TeleSpectrum common stock. In addition, the IDRC preferred
stock will be exchanged for $6,000,000 of cash, plus all accrued and unpaid
dividends. The majority stockholders of IDRC will be required to invest their
proceeds from the exchange of their IDRC preferred stock of $4,900,000 in a term
note with the Company. This note will be payable in one year and bear interest
at 10.0%. The excess of the total estimated purchase price over the fair market
value of the net liabilities acquired will be amortized on a straight line basis
over a period not to exceed 25 years. The merger will be accounted for as a
purchase by TeleSpectrum pursuant to APB Opinion No. 16 "Business Combinations."
In connection with the IDRC merger, the Company received a financing
commitment for $135,000,000 senior debt facility, which will be used to
refinance IDRC's current maturities of long-term debt, long-term debt and seller
notes. The Company will incur debt issuance costs, in connection with this
senior facility, of approximately $4,200,000, which will be amortized on a
straight-line basis over four years. This new facility will consist of three
term notes in the aggregate of $86,000,000 with maturities between 32 and 56
months and a revolving credit facility of $49,000,000 due in 32 months. The
facility allows for alternative interest rates. After three months, the Company
can elect LIBOR plus a margin of 3.25% to 4.25%. The senior debt facility
contains various financial and non-financial covenants, including minimum
interest coverage, fixed charge coverage, minimum EBITDA, maximum leverage ratio
and limitations on capital expenditures. The merger is expected to close in the
second quarter of 1999.
F-23
<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.
F-24
<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-25
<PAGE>
SOMAR, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
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-26
<PAGE>
SOMAR, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JANUARY 1,
1996 TO FOR THE YEAR ENDED
AUGUST 12, DECEMBER 31
--------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
REVENUES.................................................................. $26,421 $31,900 $20,785
------- ------- -------
OPERATING EXPENSES:
Cost of services........................................................ 21,406 25,048 15,623
Selling, general and administrative expenses............................ 3,817 5,162 4,115
------- ------- -------
Operating income........................................................ 1,198 1,690 1,047
Total operating expenses................................................ 25,223 30,210 19,738
------- ------- -------
INTEREST INCOME........................................................... 11 45 12
INTEREST EXPENSE.......................................................... (572) (756) (432)
------- ------- -------
NET INCOME................................................................ $ 637 $ 979 $ 627
======= ======= =======
PRO FORMA DATA (UNAUDITED):
Historical net income................................................... $ 637 $ 979 $ 627
Pro forma provision for income taxes.................................... 237 414 261
------- ------- -------
Pro forma net income.................................................... $ 400 $ 565 $ 366
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<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 stockholder
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-28
<PAGE>
SOMAR, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JANUARY 1,
1996 TO FOR THE YEAR ENDED
AUGUST 12, DECEMBER 31
--------------------
1996 1995 1994
------------ --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income...................................................................... $ 637 $ 979 $ 627
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization................................................... 749 775 288
Stock option compensation expense............................................... -- 17 298
Changes in operating assets and liabilities--
Accounts receivable............................................................. (1,705) (2,003) (1,987)
Prepaid expenses and other...................................................... (85) (144) (123)
Accounts payable................................................................ 1,706 614 559
Accrued expenses................................................................ 822 203 395
------- ------- -------
Net cash provided by operating activities.................................... 2,124 441 57
------- ------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment............................................. (828) (2,309) (174)
Advances to stockholder......................................................... (847) (352) (103)
Advances to affiliates.......................................................... (248) (209) (2)
Repayments of advances to affiliates............................................ -- -- 13
Repayment of stockholder loan................................................... -- -- 612
------- ------- -------
Net cash (used in) provided by investing activities.......................... (1,923) (2,870) 346
------- ------- -------
FINANCING ACTIVITIES:
Borrowings on long-term debt.................................................... 1,286 2,824 25
Repayments on long-term debt.................................................... (1,498) (257) (31)
Borrowings (repayments) on note payable--Bank................................... (1,000) 1,000 --
Borrowings (repayments) from affiliates......................................... (102) 458 (491)
Distributions paid to shareholders.............................................. (535) (703) (669)
Payments on capital lease obligations........................................... (641) (623) (297)
Net (repayments) borrowings on line of credit agreement......................... 2,269 (247) 1,046
------- ------- -------
Net cash provided by (used in) financing activities.......................... (221) 2,452 (417)
------- ------- -------
NET INCREASE (DECREASE) IN CASH................................................... (20) 23 (14)
CASH, BEGINNING OF PERIOD......................................................... 25 2 16
------- ------- -------
CASH, END OF PERIOD............................................................... $ 5 $ 25 $ 2
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<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-30
<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.
F-31
<PAGE>
SOMAR, 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 relate to state and local income taxes and expenses not deductible for
tax purposes.
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 amortization................................... (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-32
<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.
5. COMMITMENTS AND CONTINGENCIES:
The Company is party to various claims and other matters arising in the
normal course of business. In the opinion of management, the outcome of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
F-33
<PAGE>
SOMAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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-34
<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):
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JANUARY 1,
1996 TO FOR THE YEAR ENDED
AUGUST 12, DECEMBER 31,
--------------------------------
1996 1995 1994
------------- -------------- ----------------
<S> <C> <C> <C>
Southern Alloy of America, Inc......................... $ (57) $ (94) $ (99)
Southern Investments................................... -- -- 12
----- ----- -----
$ (57) $ (94) $ (87)
===== ===== =====
</TABLE>
F-35
<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-36
<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-37
<PAGE>
NBG SERVICES, INC.
BALANCE SHEET
AS OF DECEMBER 29, 1995
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
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 issued 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-38
<PAGE>
NBG SERVICES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
DECEMBER 30,
1995 TO FOR THE FISCAL YEAR ENDED
-------------------------
AUGUST 12, DECEMBER 29, DECEMBER 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES..................................................................... $11,311 $12,829 $5,778
------- ------- ------
OPERATING EXPENSES:
Cost of services........................................................... 7,686 8,572 4,259
Selling, general and administrative expenses............................... 1,645 2,115 1,443
------- ------- ------
Total operating expenses................................................ 9,331 10,687 5,702
------- ------- ------
Operating income........................................................ 1,980 2,142 76
INTEREST INCOME.............................................................. 37 19 17
INTEREST EXPENSE............................................................. (70) (55) (60)
------- ------- ------
Income before income taxes.............................................. 1,947 2,106 33
INCOME TAXES................................................................. (79) -- --
------- ------- ------
NET INCOME................................................................... $ 1,868 $ 2,106 $ 33
======= ======= ======
PRO FORMA DATA (unaudited):
Historical net income...................................................... $ 1,868 $ 2,106 $ 33
Pro forma provision for income taxes....................................... 765 864 25
------- ------- ------
Pro forma net income....................................................... $ 1,103 $ 1,242 $ 8
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<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 investments....................... -- -- 20 20
--- ------ -------- ------
BALANCE, AUGUST 12, 1996.............................................. 100 $ -- $ 3,247 $3,247
=== ====== ======== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
NBG SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
DECEMBER 30,
1995 TO FOR THE FISCAL YEAR ENDED
-------------------------
AUGUST 12, DECEMBER 29, DECEMBER 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $1,868 $ 2,106 $ 33
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization............................................... 273 319 205
Provision for loss on accounts receivable................................... -- 113 37
Changes in operating assets and liabilities--
Accounts receivable........................................................ (952) (1,343) (182)
Due from TeleSpectrum Worldwide Inc........................................ (62) -- --
Prepaid expenses and other................................................. (91) (106) (46)
Accounts payable........................................................... 184 16 93
Accrued expenses........................................................... 114 278 75
------ ------- -----
Net cash provided by operating activities............................... 1,334 1,383 215
------ ------- -----
INVESTING ACTIVITIES:
Purchase of short-term investments............................................ -- (205) (35)
Proceeds from short-term investments.......................................... 45 9 62
Purchases of property and equipment........................................... (126) (398) (69)
------ ------- -----
Net cash used in investing activities................................... (81) (594) (42)
------ ------- -----
FINANCING ACTIVITIES:
Bank overdraft................................................................ -- (82) 82
Repayment of capital lease obligations........................................ (260) (259) (264)
Proceeds from demand note..................................................... -- 500 --
Repayment of demand note...................................................... (500) -- --
Distributions to shareholders................................................. (120) (248) --
------ ------- -----
Net cash used in financing activities................................... (880) (89) (182)
------ ------- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................................................... 373 700 (9)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 700 -- 9
------ ------- -----
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $1,073 $ 700 $ --
====== ======= =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<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.
F-42
<PAGE>
NBG SERVICES, INC
NOTES TO FINANCIAL STATEMENTS----(CONTINUED)
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 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-43
<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>
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>
F-44
<PAGE>
NBG SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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 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-45
<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-46
<PAGE>
THE REICH GROUP COMPANIES
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
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
======
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
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-47
<PAGE>
THE REICH GROUP COMPANIES
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JANUARY 1, FOR THE
1996 TO YEAR ENDED
AUGUST 12, DECEMBER 31
--------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
REVENUES........................................................... $14,558 $12,253 $5,424
------- ------- ------
OPERATING EXPENSES:
Cost of services................................................. 8,550 7,836 4,225
Selling, general and administrative expenses..................... 1,466 2,534 976
------- ------- ------
Total operating expenses...................................... 10,016 10,370 5,201
------- ------- ------
Operating income.............................................. 4,542 1,883 223
INTEREST INCOME.................................................... 19 14 13
INTEREST EXPENSE................................................... (50) (57) (37)
------- ------- ------
NET INCOME......................................................... $ 4,511 $ 1,840 $ 199
======= ======= ======
PRO FORMA DATA (UNAUDITED):
Historical net income............................................ $ 4,511 $ 1,840 $ 199
Pro forma provision for income taxes............................. 1,840 746 97
------- ------- ------
Pro forma net income............................................. $ 2,671 $ 1,094 $ 102
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<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-
GROUP, INC. DIALDIRECT, INC. MARKETING, LTD. CATIONS, INC.
COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK
-------------- ---------------- ---------------- --------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994.......................... 100 $ -- 100 $ -- 100 $ -- 150 $2
Net income....................................... -- -- -- -- -- -- -- --
--- ------ --- ------- --- ------- --- --
BALANCE, DECEMBER 31, 1994........................ 100 -- 100 -- 100 -- 150 2
Capital contribution to DialDirect
Telemarketing, Ltd. by shareholder.............. -- -- -- -- -- -- -- --
Net income....................................... -- -- -- -- -- -- -- --
--- ------ --- ------- --- ------- --- --
BALANCE, DECEMBER 31, 1995........................ 100 -- 100 -- 100 -- 150 2
Net income....................................... -- -- -- -- -- -- -- --
Distribution to shareholder...................... -- -- -- -- -- -- -- --
--- ------ --- ------- --- ------- --- --
BALANCE, AUGUST 12, 1996.......................... 100 $ -- 100 $ -- 100 $ -- 150 $2
=== ====== === ======= === ======= === ==
<CAPTION>
INSUREDIRECT TOTAL
AGENCY INC. ADDITIONAL RETAINED SHAREHOLDER'S
COMMON STOCK PAID-IN EARNINGS TREASURY EQUITY
--------------
SHARES AMOUNT CAPITAL (DEFICIT) STOCK (DEFICIT)
------ ------ ---------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994.......................... 100 $ -- $350 $ (584) $(239) $ (471)
Net income....................................... -- -- -- 199 -- 199
--- ------ ---- ------- ----- -------
BALANCE, DECEMBER 31, 1994........................ 100 -- 350 (385) (239) (272)
Capital contribution to DialDirect
Telemarketing, Ltd. by shareholder.............. -- -- 100 -- -- 100
Net income....................................... -- -- -- 1,840 -- 1,840
--- ------ ---- ------- ----- -------
BALANCE, DECEMBER 31, 1995........................ 100 -- 450 1,455 (239) 1,668
Net income....................................... -- -- -- 4,511 -- 4,511
Distribution to shareholder...................... -- -- -- (1,770) -- (1,770)
--- ------ ---- ------- ----- -------
BALANCE, AUGUST 12, 1996.......................... 100 $ -- $450 $ 4,196 $(239) $ 4,409
=== ====== ==== ======= ===== =======
</TABLE>
F-49
<PAGE>
THE REICH GROUP COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JANUARY 1, FOR THE
1996 TO YEAR ENDED
AUGUST 12, DECEMBER 31,
--------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................................... $ 4,511 $ 1,840 $ 199
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization............................................. 279 220 143
Amortization of deferred rent............................................. (40) (68) (68)
Loss on disposal of property.............................................. -- 7 1
Changes in operating assets and liabilities--
Accounts receivable.................................................... (2,025) (1,853) (193)
Due from shareholder................................................... (5) (83) (40)
Prepaid expenses and other assets...................................... (81) (2) (33)
Accounts payable....................................................... (264) 560 88
Accrued salaries and wages............................................. 196 235 37
Other current liabilities.............................................. (36) (111) 85
------- ------- -----
Net cash provided by operating activities........................... 2,535 745 219
------- ------- -----
INVESTING ACTIVITIES:
Purchase of property and equipment, net of capital lease
obligations of $95 in 1995 and $250 in 1996................................ (935) (1,212) (138)
------- ------- -----
Net cash used in investing activities............................... (935) (1,212) (138)
------- ------- -----
FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit................................ 700 (70) 10
Repayment of long-term debt.................................................. (133) (109) (88)
Proceeds from long-term debt................................................. -- 165 --
Capital contribution to DialDirect TeleMarketing, Ltd. from
shareholder................................................................ -- 100 --
Proceeds from (repayment of) notes payable to shareholder.................... (500) 570 --
Distribution to shareholder.................................................. (1,770) -- --
------- ------- -----
Net cash provided by (used in) financing
activities......................................................... (1,703) 656 (78)
------- ------- -----
NET INCREASE (DECREASE) IN CASH.............................................. (103) 189 3
CASH, BEGINNING OF PERIOD.................................................... 220 31 28
------- ------- -----
CASH, END OF PERIOD.......................................................... $ 117 $ 220 $ 31
======= ======= =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<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.
F-51
<PAGE>
THE REICH GROUP COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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-52
<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-53
<PAGE>
THE REICH GROUP COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995
---------------
(IN THOUSANDS)
<S> <C>
Note payable to bank, interest payable monthly at the bank's rate plus 1/2% (11% on
December 31, 1995); principal due in monthly installments of $4,000 through August
1998; collateralized by accounts receivable, equipment and other assets of the Com-
pany 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%; princi-
pal and interest due in monthly installments of $3,000 through August 2000; collateral-
ized 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
=====
Minimum principal repayments of long-term debt as of December 31, 1995, excluding capitalized lease
obligations (see Note 6), are as follows (in thousands):
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.
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-54
<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%.
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-55
<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-56
<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-57
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JANUARY 1, FOR THE
1996 TO YEAR ENDED
AUGUST 12, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
REVENUES................................................................................ $10,529 $11,854
OPERATING EXPENSES:
Cost of services...................................................................... 6,974 8,338
Selling, general and administrative expenses.......................................... 2,929 3,072
------- -------
Total operating expenses........................................................... 9,903 11,410
------- -------
Operating income................................................................... 626 444
INTEREST EXPENSE........................................................................ (129) (184)
------- -------
Income before income taxes......................................................... 497 260
INCOME TAX BENEFIT...................................................................... -- 18
------- -------
NET INCOME.............................................................................. $ 497 $ 278
------- -------
PRO FORMA DATA (UNAUDITED):
Historical net income................................................................. $ 497 $ 278
Pro forma provision for income taxes.................................................. 196 112
------- -------
Pro forma net income.................................................................. $ 301 $ 166
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-58
<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-59
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR
THE PERIOD
FROM
JANUARY 1, FOR THE
1996 TO YEAR ENDED
AUGUST 12, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................................... $ 497 $ 278
Adjustments to reconcile net income to net cash provided by (used in)
operating activities--
Depreciation and amortization.......................................................... 127 343
Changes in operating assets and liabilities--
Accounts receivable................................................................... (1,193) (679)
Due from stockholder/officer.......................................................... -- 1
Prepaid expenses and other............................................................ (257) (2)
Other, net............................................................................ -- (114)
Deferred revenue...................................................................... -- (205)
Accounts payable and accrued liabilities.............................................. 1,795 374
------- -----
Net cash provided by (used in) operating activities................................. 969 (4)
------- -----
INVESTING ACTIVITIES:
Purchases of property and equipment...................................................... (2,044) (99)
------- -----
Net cash used in investing activities............................................... (2,044) (99)
------- -----
FINANCING ACTIVITIES:
Net borrowings on line of credit......................................................... 3,060 807
Proceeds from notes payable.............................................................. 500 --
Principal payments on long-term debt and capital leases.................................. (1,844) (852)
------- -----
Net cash provided by (used in) financing activities................................. $ 1,716 (45)
------- -----
NET (DECREASE) INCREASE IN CASH............................................................ 641 (148)
CASH, BEGINNING OF PERIOD.................................................................. 15 163
------- -----
CASH, END OF PERIOD........................................................................ $ 656 $ 15
------- -----
CASH PAID FOR:
Interest................................................................................. $ 120 $ 182
------- -----
Taxes.................................................................................... $ -- $ 36
======= =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-60
<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 depreciation and amortization are removed from the
respective accounts, and the resulting gain or loss, if any, is included in
income.
F-61
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
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-62
<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 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......................................................................... 38
Note payable, interest at 15%, monthly principal and interest payments of $2,000, maturing
October 1997, guaranteed by an officer of the Company........................................................ 126
-----
Capitalized lease obligations (Note 5)........................................................................ 255
Less--Current portion........................................................................................ (198)
-----
$ 57
=====
</TABLE>
F-63
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Minimum principal repayments of long-term debt as of December 31, 1995,
excluding capitalized lease obligations, are as follows (in thousands):
<TABLE>
<S> <C>
1996.................................................................. $110
1997.................................................................. 19
----
$129
====
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
The Company is party to various claims and other matters arising in the
normal course of business. In the opinion of management, the outcome of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
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-64
<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 February 5, 1999. 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.,
February 5, 1999
S-1
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND FOR THE PERIOD FROM APRIL 26,
1996 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Balance at April Charged to Charged to Balance at
26, 1996 Cost and Other December 31,
Description (Inception) Expenses Accounts Deductions 1996
----------- ----------- --------- --------- ---------- ----
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ -- $ 542 $ -- $ (23)/1/ $ 519
</TABLE>
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
December 31, Cost and Other December 31,
Description 1996 Expenses Accounts Deductions 1997
----------- ---- -------- -------- ---------- ----
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 519 $ 881 $ -- $ (431)/1/ $ 969
Closed call center minimum lease
commitment reserve $ -- $1,939 $ 0 $1,939
Closed call center severance reserve $ -- $1,293 $ -- $(1,030)/2/ $ 263
</TABLE>
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
December 31, Cost and Other December 31,
Description 1997 Expenses Accounts Deductions 1998
----------- ---- -------- --------- ---------- ----
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 969 $2,325 $ -- $ (443)/1/ $2,851
Closed call center minimum lease $ --
commitment reserve $1,939 $ 360 $(1,490)/2/ $ 809
Closed call center severance reserve $ 263 $ 994 $ -- $(1,257)/2/ $ --
</TABLE>
/1/ Write-off of amounts previously reserved.
/2/ Cash payments related to minimum lease commitments and employee severance
for closed call centers
S-2
<PAGE>
ANNEX II:
QUARTERLY REPORT ON FORM 10-Q OF TELESPECTRUM WORLDWIDE INC.
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<PAGE>
ANNEX II
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO __________________
COMMISSION FILE NO. 0-21107
---------------------------
TELESPECTRUM WORLDWIDE INC.
---------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-2845501
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
443 SOUTH GULPH ROAD
King of Prussia, Pennsylvania 19406
----------------------------- -----
(Address of principal executive offices) (ZIP Code)
610-878-7400
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No _____
-----
The number of outstanding shares of the Registrant's Common Stock, par value
$.01 per share, on May 4, 1999 was 25,843,248.
================================================================================
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
Table of Contents
-----------------
<TABLE>
<CAPTION>
Item No. Page
- -------- ----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
1. Financial Statements (unaudited):
Condensed Consolidated Results of Operations
For the Three Months Ended March 31, 1999 and
For the Three Months Ended March 31, 1998 3
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and
For the Three Months Ended March 31, 1998 5
Notes to Condensed Consolidated Financial Statements 6
2. Management's Discussion and Analysis of Results of Operations 12
and Financial Condition
PART II - OTHER INFORMATION 20
</TABLE>
2
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
Condensed Consolidated Results of Operations
(Unaudited)
(Dollars in Thousands -- Except Per Share Amounts)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
REVENUES $ 47,925 $ 39,634
-------------- --------------
Operating Expenses:
Cost of services 38,787 42,764
Selling, general and administrative 3,929 6,565
Amortization of goodwill 295 295
-------------- --------------
Total operating expenses 43,011 49,624
-------------- --------------
Operating income (loss) 4,914 (9,990)
INTEREST EXPENSE, net (172) (805)
-------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 4,742 (10,795)
INCOME TAX BENEFIT - 247
-------------- --------------
Income (loss) from Continuing Operations 4,742 (10,548)
INCOME FROM DISCONTINUED OPERATIONS
- 479
-------------- --------------
NET INCOME (LOSS) $ 4,742 $ $(10,069)
============== ==============
BASIC EARNINGS (LOSS) PER SHARE (Note 4):
CONTINUING OPERATIONS $ 0.18 $ $ (0.42)
DISCONTINUED OPERATIONS - 0.02
-------------- --------------
NET INCOME (LOSS) $ 0.18 $ $ (0.40)
============== ==============
DILUTED EARNINGS (LOSS) PER SHARE (NOTE 4):
CONTINUING OPERATIONS $ 0.17 $ (0.42)
DISCONTINUED OPERATIONS - $ 0.02
-------------- --------------
NET INCOME (LOSS) $ 0.17 $ (0.40)
============== ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Dollars in Thousands -- Except Share Amounts)
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 520 $ 794
Accounts receivable, net 47,949 36,859
Prepaid expenses and other 2,760 2,307
--------- ---------
Total current assets 51,229 39,960
PROPERTY AND EQUIPMENT, net 36,255 35,430
GOODWILL, net 26,491 26,786
OTHER ASSETS 4,376 1,513
--------- ---------
Total assets $ 118,351 $ 103,689
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Secured credit facility $ 6,665 $ --
Current maturities of long-term debt 747 820
Cash overdraft 3,581 1,658
Accounts payable 6,653 7,058
Accrued expenses 5,016 3,784
Accrued compensation 6,184 5,081
Deferred revenue 2,299 2,512
Other current liabilities 1,985 2,345
--------- ---------
Total current liabilities 33,130 23,258
--------- ---------
Long-term Debt 2,824 2,876
--------- ---------
Other Noncurrent Liabilities 746 987
--------- ---------
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,
25,842,948 and 25,771,449 shares issued and outstanding, respectively 259 258
Additional paid-in capital 240,525 240,176
Deferred compensation (316) (363)
Accumulated deficit (158,544) (163,286)
Cumulative currency translation adjustment (273) (217)
--------- ---------
Total stockholders' equity 81,651 76,568
--------- ---------
Total liabilities and stockholders' equity $ 118,351 $ 103,689
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 4,742 $(10,069)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 2,238 1,981
Amortization of goodwill 295 295
Provision for bad debts 300 --
Non-cash compensation 47 327
Other items, net -- 79
Changes in operating assets and liabilities-
Accounts receivable (11,390) 2,683
Income tax receivable 1,180
Prepaid expenses and other (732) 218
Accounts payable 1,073 (2,346)
Accrued expenses 1,232 (485)
Accrued compensation 1,103 (183)
Deferred revenue (213) (153)
Other liabilities (400) 1,267
Net operating activities of discontinued operations -- (775)
-------- --------
Net cash used in operating activities (1,705) (5,981)
-------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment (4,541) (914)
Payments of notes payable to seller and acquisition liabilities (257) (228)
Proceeds from sale of discontinued operations -- 15,000
Payments of deferred transaction costs (2,584)
Net investing activities of discontinued operations -- (275)
-------- --------
Net cash provided by (used in) investing activities (7,382) 13,583
-------- --------
Cash Flows From Financing Activities:
Net borrowings (payments) on secured credit facility 6,665 (7,115)
Cash overdraft 1,923 --
Borrowings of debt 117 --
Payments of debt (83) (83)
Payments of capital lease obligations (159) (323)
Proceeds from exercise of stock options and sale of common stock 350 --
-------- --------------
Net cash provided by (used in) financing activities 8,813 (7,521)
-------- --------
Net increase (decrease) in cash and cash equivalents (274) 81
Cash and cash equivalents, beginning of period 794 774
-------- --------
Cash and cash equivalents, end of period $ 520 $ 855
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited and have been prepared by
TeleSpectrum Worldwide Inc. and subsidiaries ("TeleSpectrum" or the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). The December 31, 1998 balance sheet was derived from audited financial
statements, however, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations. The Company believes that the financial statements include all
adjustments of a normal and recurring nature necessary to present fairly the
results of operations, financial position and cash flows for the periods
presented. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1998.
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. All material intercompany balances and
transactions have been eliminated. There have been no material changes in
accounting policies from those stated in the Company's Form 10-K for the year
ended December 31, 1998. Certain prior period amounts have been reclassified to
conform with the current year presentation.
2. COMPANY BACKGROUND
The Company was incorporated in Delaware on April 26, 1996 and on August 12,
1996 completed its initial public offering. Concurrent with the offering, the
Company began material operations with the acquisition of the assets of a number
of businesses. The Company provides services to its customers through its two
business segments, Telemarketing and Customer Care. The results of operations of
the Market Research Segment and Direct Mail and Fulfillment Segment have been
accounted for as discontinued operations (see Note 5).
3. RECENT DEVELOPMENTS
IDRC MERGER
On January 14, 1999, TeleSpectrum and International Data Response Corporation
("IDRC") entered into a merger agreement and on February 26, 1999 they amended
the agreement. Under this agreement each of the holders of outstanding shares of
IDRC common stock, options and warrants will be entitled to receive their pro
rata portion of an aggregate of 9,200,000 shares of TeleSpectrum common stock
and options and warrants exercisable for 3,000,000 shares of TeleSpectrum common
stock. In addition, the IDRC preferred stock will be exchanged for $6,000,000 of
cash, plus all accrued and unpaid dividends. The majority stockholders of IDRC
will be required to invest their proceeds from the exchange of their IDRC
preferred stock of $4,900,000 in a term note with the Company. This note will be
payable in one year and bear interest at 10.0%. The excess of the total
estimated purchase price over the fair market value of the net liabilities
acquired will be amortized on a straight line basis over a period not to exceed
25 years. The merger will be accounted for as a purchase by TeleSpectrum
pursuant to APB Opinion No. 16 "Business Combinations."
In connection with the IDRC merger, the Company received a financing commitment
for $135,000,000 senior debt facility, which will be used to refinance IDRC's
current maturities of long-term debt, long-term debt and seller notes. The
Company will incur debt issuance costs, in connection with this senior facility,
of approximately $4,200,000, which will be amortized on a straight-line basis
over four years. This new facility will consist of three term notes in the
aggregate of $86,000,000 with maturities between 32 and 56 months and a
revolving credit facility of $49,000,000 due in 32 months. The facility allows
for alternative interest rates. After three months, the Company can elect LIBOR
plus a margin of 3.25% to 4.25%. The senior debt facility contains various
financial and non-financial covenants, including minimum interest coverage,
fixed charge coverage, minimum EBITDA, maximum leverage ratio and limitations on
capital expenditures. The merger is expected to close in the second quarter of
1999.
6
<PAGE>
CRW MERGER
On September 3, 1998, TeleSpectrum and CRW entered into a merger agreement
whereby each outstanding share of CRW common stock (6,917,521 shares as of March
31, 1999) will be exchanged for .709 of a share of TeleSpectrum common stock. In
addition, each outstanding option (1,536,433 as of March 31, 1999) to purchase
shares of CRW common stock will be exchanged for an option to purchase .709 of a
share of TeleSpectrum common stock and the 678,000 warrants to purchase shares
of TeleSpectrum common stock, owned by CRW, will be exchanged for 678,000
warrants to purchase TeleSpectrum common stock. The merger is expected to close
in the second quarter of 1999. Immediately prior to the merger, CRW will not
have any continuing business operations and its only asset will be 6,946,583
shares of TeleSpectrum common stock. For financial reporting purposes,
TeleSpectrum will treat the exchange of shares of TeleSpectrum common stock for
shares of CRW common stock as a treasury stock transaction. The transaction will
not have an effect on TeleSpectrum's net income (loss) but will have an effect
on its net income (loss) per share.
4. EARNINGS PER SHARE
The Company has adopted SFAS No. 128 "Earnings Per Share." SFAS No. 128 requires
a dual presentation of "basic" and "diluted" EPS on the face of the income
statement. Basic EPS is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding for the period. Diluted EPS
includes the effect, if any, from the potential exercise or conversion of
securities, such as stock options, which would result in the issuance of shares
of common stock.
The table below sets forth the reconciliation of the weighted average number of
shares outstanding used to compute basic and diluted earnings (loss) per share
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
1999 1998
---- ----
<S> <C> <C>
Shares used in computing basic earnings (loss)
Per share.................................... 25,820 25,249
Dilutive effect of options........................ 2,720 -
------ ------
Shares used in computing diluted earnings
(loss) per share............................. 28,540 25,249
====== ======
</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
three months ended March 31, 1998, and the net assets at March 31, 1998 have
been restated to reflect discontinued operations.
In the first quarter of 1998, the Company sold substantially all of the assets
and liabilities of the Market Research segment and the Direct Mail and
Fulfillment segment for approximately $38,000,000 in cash, which resulted in a
loss of approximately $907,000, which was recorded as of December 31, 1997. The
Company used the proceeds from these sales to repay outstanding borrowings on
the secured credit facility.
7
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table summarizes the operating results of the discontinued
operations (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
1999 1998
---- ----
<S> <C> <C>
Revenues........................................ $ - $4,189
Operating expenses.............................. - 3,463
------
Income before income taxes...................... - 726
Income tax provision............................ - 247
------ ------
Income from discontinued operations............. - $ 479
====== ======
</TABLE>
6. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." The Company capitalizes software development costs
subsequent to the establishment of technological feasibility and until the
product is available for general release. Costs incurred prior to the
establishment of technological feasibility are charged to product development
expense. Development costs associated with product enhancements that extend the
original product's life or significantly improve the original product's
marketability are also capitalized once technological feasibility has been
established. Software development costs are amortized over the greater of the
ratio of current revenues to total anticipated revenues or on a straight-line
basis over the estimated useful lives of the products (three years), beginning
with the initial release to customers. The Company continually evaluates whether
events or circumstances have occurred that indicate that the remaining useful
life of the capitalized software development costs should be revised or that the
remaining balance of such assets may not be recoverable. The Company evaluates
the recoverability of capitalized software based on the estimated future
revenues of each product. As of March 31, 1999, the Company believes that no
revisions to the remaining useful life or write-downs are required for
capitalized software development costs. At March 31, 1999, the Company has
$943,000 of capitalized software development costs. General release is expected
during the third quarter of 1999.
7. SECURED CREDIT FACILITY
On April 14, 1998, the Company entered into a four-year Loan and Security
Agreement, which provides for a $20,000,000 credit facility (the "Credit
Facility"). Under the terms of the Credit Facility, the Company can borrow up to
the lesser of $20,000,000 or an amount that is determined as 80% of the net
eligible accounts receivable. The Company can elect at the time it makes
borrowings to pay interest at prime plus 0.50% or at LIBOR plus 2.50% and pays a
commitment fee of 0.375% on the unused borrowing capacity. The Credit Facility
also makes available to the Company letters of credit at a fee of 1% per annum
on the face amount of each letter of credit and in an aggregate amount not to
exceed the lower of $1,500,000 or the amount available under the credit
facility. 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, including limitations on
purchases of property and equipment, minimum working capital, net worth and
current ratio requirements. At March 31, 1999 and December 31, 1998, the Company
had $6,665,000 and no outstanding borrowings and $13,335,000 and $18,104,000 of
available borrowings under the Credit Facility, respectively. For the three
months ended March 31, 1999 and 1998, the weighted average interest rate on
borrowings under the Credit Facility was 8.25% and 8.75% and the Company
recorded interest expense under this facility of $90,000 and $504,000,
respectively. The Credit Facility will be refinanced with the debt financing
obtained in connection with the Company's merger with IDRC (see Note 3).
8
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. SUPPLEMENTAL CASH FLOWS INFORMATION
The Company paid $118,000 and $545,000 of interest expense for the three months
ended March 31, 1999 and 1998, respectively. The Company did not pay any income
taxes during the three months ended March 31, 1999 and 1998.
9. COMMITMENTS AND CONTINGENCIES
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 potential
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 five years with accelerated vesting
for 500,000 options based on the achievement of certain performance objectives,
as defined. The Company recorded 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
vesting period of 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.
In July 1998, the Company commenced litigation in Federal court against Parcel
Consultants Incorporated d/b/a/ NTC ("NTC"). The Company filed suit as part of
its efforts to collect approximately $4,742,000 of accounts receivable for
telemarketing services performed on behalf of NTC. NTC filed a counter suit
against the Company alleging breach of contract and fraud. The Company believes
that NTC's claims against the Company are without merit. On February 26, 1999,
NTC filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. In
1998, the Company established a reserve of approximately $2,100,000 of the
accounts receivable amount due from NTC. Based on current facts and
circumstances, the Company believes that this reserve is adequate, however, the
Company cannot be certain that it will be successful in collecting the accounts
receivable due from NTC.
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.
10. CONCENTRATIONS OF RISK
The financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
Concentrations of credit risk with respect to accounts receivable are limited
due to the large number of customers comprising the Company's customer base, and
their dispersion across many different industries and geographies. The Company
does not require collateral or other securities to support customer accounts
receivable. The Company performs periodic reviews of its clients' condition to
reduce the collection risk.
The Company does not believe a significant credit risk exists at March 31, 1999.
The Company had one client in the telecommunications industry which accounted
for approximately 16% and 10% of total revenues for the three months ended March
31, 1999 and 1998, respectively, and 21% and 23% of total accounts receivable at
March 31, 1999 and December 31, 1998, respectively. In addition, the Company
had another client in the telecommunications industry which accounted for
approximately 13% of total accounts receivable at December 31, 1998.
9
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which is
effective for financial statements issued for fiscal years beginning after
December 15, 1997. The Company's comprehensive income includes net income (loss)
and unrealized gains and losses from foreign currency translation. Total
comprehensive income (loss) for the three months ended March 31, 1999 and 1998
was $4,686,000 and $(10,046,000), respectively.
12. RELATED-PARTY TRANSACTIONS
CRW FINANCIAL, INC.
On May 22, 1996, CRW Financial, Inc. ("CRW"), made an initial capital
contribution of $2,100,000 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 1,433,000 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 75,000
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 839,000 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 229,000 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 $18,749,000 is treated as additional
purchase price consideration of the acquisitions of the Initial Operating
Businesses.
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 three months ended March 31, 1999 and 1998 was
$120,000 and $112,000, respectively.
AFFINICORP USA, INC.
On September 25, 1998, the Company purchased 19.4% of the outstanding common
stock of AffiniCorp USA, Inc. for $500,000. AffiniCorp develops and manages
enhancement products for credit card issuers. The Company has entered into a
relationship with AffiniCorp whereby the Company provides telemarketing services
at its normal rates with six month extended payment terms. In addition, the
Company provides telemarketing services at its normal rates and normal payment
terms. Outstanding balances for telemarketing services under the six month
extended terms are capped at $1,500,000. The Company has a security interest in
the accounts receivable and certain other assets of AffiniCorp. As of March 31,
1999, the Company has $2,099,000 of accounts receivable from AffiniCorp recorded
in current assets and a $500,000 investment recorded in other assets.
10
<PAGE>
13. SEGMENTS
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Company classifies its continuing
operations into two segments: Telemarketing and Customer Care. The operating
segments are managed separately because each operating segment represents a
strategic business unit that offers different services. The business segments
are described in further detail below. Segment assets include amounts
specifically identified to Telemarketing and Customer Care Segments. Corporate
assets consist primarily of property and equipment.
The Telemarketing Segment provides both business-to-consumer and business-to-
business 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 customer care 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.
Corporate operations include the selling, general and administrative functions
of the Company.
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>
MARCH 31,
---------
1999 1998
--------- ---------
<S> <C> <C>
REVENUES
Telemarketing................................................... $ 34,986 $ 28,131
Customer Care................................................... 12,939 11,503
-------- --------
Total......................................................... $ 47,925 $ 39,634
======== ========
OPERATING INCOME (LOSS)
Telemarketing................................................... $ 6,398 $ (3,827)
Customer Care................................................... 2,445 402
Corporate....................................................... (3,929) (6,565)
-------- --------
Total......................................................... $ 4,914 $ (9,990)
======== ========
TOTAL ASSETS
Telemarketing................................................. $ 55,101 $ 47,832
Customer Care................................................. 49,080 49,658
Corporate..................................................... 14,170 6,889
-------- --------
Total continuing operations.................................. 118,351 104,379
Discontinued operations....................................... - 23,093
-------- --------
Total........................................................ $118,351 $127,472
======== ========
</TABLE>
11
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other sections of this Quarterly Report contain forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995.These statements address, among other things, the Company's
business strategy, including its use of cash and cash equivalents; reliance on
certain customers; projected capital expenditures; liquidity; Year 2000
disclosure, including statements regarding readiness, remediation, consequences
and contingency plans; increased sales in future periods; the continuation of
fluctuations in results of operations, as well as information contained
elsewhere in this Report where statements are preceded by, followed by or
include the words "believes," "expects," "anticipates," "plans" or similar
expressions. These statements are based on a number of assumptions concerning
future events, and are subject to a number of uncertainties and other factors,
many of which are outside the Company's control, that could cause actual results
to differ materially from such statements. The Company undertakes no obligation
to update or revise forward-looking statements, whether as a result of new
information, future events or otherwise.
RECENT DEVELOPMENTS
OVERVIEW
IDRC Merger Agreement
On January 14, 1999, we entered into a merger agreement with International Data
Response Corporation ("IDRC") and its majority stockholders. This agreement was
amended on February 26, 1999. Under this agreement, the holders of outstanding
IDRC common stock and options will be entitled to receive their pro rata portion
of an aggregate of 9.2 million shares and warrants exercisable for 3.0 million
shares of our common stock. These warrants would be exercisable during the
period between the first and seventh anniversaries of the completion of the
merger at an exercise price of $8.988 per share. In addition, the IDRC
preferred stock will be exchanged for $6.0 million in cash, plus all accrued and
unpaid dividends. The majority stockholder of IDRC, McCown De Leeuw & Co. will
be required to invest all of their proceeds from the exchange of their IDRC
preferred stock, estimated at approximately $4.9 million, to purchase a term
note from us. This note will be payable in one year and bear interest at 10.0%.
We will account for the IDRC merger as a purchase by us pursuant to Accounting
Principles Board Opinion No. 16 "Business Combinations." We received a
financing commitment for a new $135.0 million senior debt facility which will be
used to replace our current facility and to refinance IDRC's current maturities
of long-term debt, long-term debt and seller notes. If the IDRC merger is
completed, we will incur debt issuance costs associated with this facility of
approximately $4.2 million. We would amortize these costs over four years.
This debt facility will consist of three term notes in the aggregate of $86.0
million with maturities between 32 and 56 months and a revolving credit facility
of $49.0 million due in 32 months. The debt facility allows for alternative
interest rates. After three months, we can elect LIBOR plus a margin of 3.25%
to 4.25%. The debt facility contains various financial and non-financial
covenants, including minimum interest coverage, fixed charge coverage, minimum
EBITDA, maximum leverage ratio and limitations on capital expenditures. We
expect to complete the merger in the second quarter of 1999.
12
<PAGE>
CRW Merger Agreement
On September 3, 1998, we entered into a merger agreement with CRW Financial,
Inc. ("CRW"). This agreement was amended December 30, 1998. Under this
agreement each outstanding share of CRW common stock will be exchanged for .709
of a share of TeleSpectrum common stock. In addition, each outstanding option
to purchase shares of CRW common stock will be exchanged for an option to
purchase .709 of a share of TeleSpectrum common stock. The warrants issued by
CRW to purchase 0.7 million shares of our common stock owned by CRW will be
unaffected by this merger. CRW does not have any continuing business operations
and its only significant asset is 6.9 million shares of our common stock. For
financial reporting purposes, we will treat the exchange of our shares of
common stock for shares of CRW common stock as a treasury stock transaction.
The transaction will not have an effect on our net income or loss, but will have
an effect on our net income or loss per share. We expect to complete the merger
in the second quarter of 1999.
Litigation with NTC
In July 1998, we commenced litigation in Federal court against Parcel
Consultants Incorporated d/b/a NTC. We filed suit as part of our efforts to
collect approximately $4.7 million of accounts receivable from telemarketing
services performed on behalf of NTC. NTC filed a counter suit against us
alleging breach of contract and fraud. We believe that NTC's claims against us
are without merit. In February 1999, NTC filed for reorganization under Chapter
11 of the Federal Bankruptcy Code. We have reserved approximately $2.1 million
of the accounts receivable due from NTC. We believe that our reserve is
adequate, however, we cannot assure that we will be successful in collecting
this receivable from NTC.
13
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Certain prior period amounts have been reclassified to conform to the current
year presentation.
The following discussions should be read in connection with the Consolidated
Financial Statements contained within this report on Form 10Q.
Comparison of the results of operations for the three months ended March 31,
1999 to the three months ended March 31, 1998.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
------------------------------------------------------------------------
THREE MONTHS AS A THREE MONTHS AS A
ENDED PERCENTAGE OF ENDED PERCENTAGE OF
MARCH 31, 1999 REVENUES MARCH 31, 1998 REVENUES
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Telemarketing................................ $35.0 73% $ 28.1 71%
Customer care................................ 12.9 27 11.5 29
----- --- ------ ---
Total revenue.................................. 47.9 100 39.6 100
Cost of services:
Telemarketing................................ 28.6 60 31.9 81
Customer care................................ 10.2 21 10.8 27
----- --- ------ ---
Total cost of services......................... 38.8 81 42.7 108
Total selling, general and administrative...... 3.9 8 6.6 16
Amortization of goodwill....................... 0.3 1 0.3 1
----- --- ------ ---
Total operating expenses....................... 43.0 90 49.6 125
Operating income (loss)........................ 4.9 10 (10.0) (25)
Interest expense............................... (0.2) -- (0.8) (2)
----- --- ------ ---
Income (loss) before taxes..................... 4.7 10 (10.8) (27)
Income tax benefit............................. -- -- 0.2 --
----- --- ------ ---
Income (loss) from continuing operations....... $ 4.7 10 $(10.6) (27)
===== === ====== ===
</TABLE>
14
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
REVENUES
Our total revenues for the three months ended March 31, 1999 were $47.9 million,
representing an increase of 21% from $39.6 million for the three months ended
March 31, 1998. This increase is primarily the result of increased fulfillment
revenues and higher revenue per hour. Fulfillment services involve filling
orders received through telemarketing.
Telemarketing Segment
Our telemarketing segment revenues were $35.0 million for the three months ended
March 31, 1999. These revenues accounted for 73% of our total revenues and
represent an increase of $6.9 million or 25% from telemarketing revenues of
$28.1 million for the three months ended March 31, 1998. The increase in
telemarketing revenues is primarily attributable to an increase in fulfillment
revenues of $3.6 million provided via a third party, an increase in revenue per
hour of $2.3 million and increased volume of $1.0 million. Services initiated
for new clients totaled $7.4 million, and net new services totaled $5.0 million
offset by lost clients of $9.1 million. Approximately 22% of telemarketing
revenues for the three months ended March 31, 1999 was generated by services
provided on behalf of a client in the telecommunications industry.
Customer Care Segment
Our customer care segment revenues were $12.9 million for the three months ended
March 31, 1999. These revenues accounted for 27% of our total revenues and
increased by $1.4 million or 12% from the three months ended March 31, 1998. Of
this increase, $1.9 million was the result of services initiated for new
clients, offset by $0.5 million for lost clients.
COST OF SERVICES
Our cost of services were $38.8 million for the three months ended March 31,
1999, a decrease of $3.9 million or 9% from cost of services of $42.7 million
for the three months ended March 31, 1998. As a percentage of total revenues,
cost of services were 81% and 108% for the three months ended March 31, 1999 and
1998, respectively.
Telemarketing Segment
Our telemarketing segment cost of services for the three months ended March 31,
1999 were 82% of telemarketing revenues and decreased by $3.3 million or 10%
from the three months ended March 31, 1998. Cost of services for the three
months ended March 31, 1998 were 114% of telemarketing revenues. The decrease
in cost of services is attributable to higher capacity utilization, operational
efficiencies and increased revenue per hour.
Customer Care Segment
Our customer care segment cost of services accounted for 79% of our customer
care revenues for the three months ended March 31, 1999 and decreased by $0.6
million or 6% from the three months ended March 31, 1998. The decrease in cost
of services is attributable to operational efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE
SG&A expenses were $3.9 million for the three months ended March 31, 1999, a
decrease of $2.7 million or 41% from the three months ended March 31, 1998. As
of percentage of total revenue, SG&A expenses were 8% and 16% for the three
months ended March 31, 1999 and 1998, respectively. The decrease in SG&A
expenses is attributable to severance and other one time expenses included in
the three months ended March 31, 1998 and continuing corporate overhead
reductions.
15
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
AMORTIZATION OF GOODWILL
Our goodwill amortization was $0.3 million, representing 1% of total revenues
for the three months ended March 31, 1999 and 1998.
INTEREST EXPENSE
We incurred interest expense of $0.2 million for the three months ended March
31, 1999 which represented a decrease of $0.6 million from the three months
ended March 31, 1998. This decrease in interest expense is due to reduced
borrowings under our credit facility during the three months ended March 31,
1999 as compared to the three months ended March 31, 1998.
INCOME TAX BENEFIT
The income tax benefit from continuing operations for the three months ended
March 31, 1998 represents the offset of the provision for income taxes for
discontinued operations.
INCOME FROM DISCONTINUED OPERATIONS
In January 1998 the Company sold its former Market Research Segment business and
in March 1998 the Company consummated the sale of its former Direct Mail and
Fulfillment Segment business. For the three months ended March 31, 1998, the
Company has accounted for the results of operations of the Market Research
Segment and Direct Mail and Fulfillment Segment as discontinued operations.
Income from discontinued operations for the three months ended March 31, 1998
amounted to $0.5 million (net of tax).
16
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS THREE MONTHS ENDED THREE MONTHS ENDED
CASH FLOWS PROVIDED BY (USED IN): MARCH 31, 1999 MARCH 31, 1998
- --------------------------------- -------------------- --------------------
<S> <C> <C>
Operating Activities.................................................... (1,705) (5,981)
Investing Activities.................................................... (7,382) 13,583
Financing Activities.................................................... 8,813 (7,521)
</TABLE>
For the three months ended March 31, 1999
The $1.7 million of cash used in operating activities consisted of $4.7 million
of net income and non cash items including depreciation and amortization of $2.9
million, offset by working capital requirements including a significant increase
in accounts receivable of $11.4 million.
The $7.4 million of cash used in investing activities primarily consisted of
$4.5 million of purchases of property and equipment attributed to maintaining
and enhancing our technology platforms. In addition, $2.6 million consisted of
deferred transaction cost payments related to the IDRC and CRW mergers.
The $8.8 million of net cash provided by financing activities primarily
consisted of $6.7 million of net borrowings under our secured credit facility.
In addition, our cash overdraft increased $1.9 million.
On April 14, 1998, we entered into a four-year Loan and Security Agreement with
Mellon Bank N.A. ("Mellon"), which provides for a $20.0 million credit facility
(the "Credit Facility"). Under the terms of the Credit Facility, we can borrow
up to the lesser of $20.0 million or an amount that is determined as 80% of the
net eligible accounts receivable. We can elect at the time of our borrowings to
pay interest at prime plus 0.50% or at LIBOR plus 2.50% and will pay a
commitment fee of 0.375% on the unused borrowing capacity. The Credit Facility
also makes available letters of credit at a fee of 1% per annum on the face
amount of each letter of credit and in an aggregate amount not to exceed the
lower of $1.5 million or the amount available under the Credit Facility.
Borrowings under the Credit Facility are collaterlized by substantially all of
our assets. The Credit Facility also contains various financial and non-
financial covenants. At March 31, 1999, we had $6.7 million outstanding and
$13.3 million available under the Credit Facility.
We believe that our existing cash balances, and borrowings available under our
Credit Facility will be sufficient to meet our operating and capital needs into
2000. The amount of future capital expenditures will be highly dependent on
future revenue growth.
On January 14, 1999, we entered into a merger agreement with IDRC. In
connection with the merger agreement, we received a financing commitment for a
new $135.0 million senior debt facility which will be used to replace our
current credit facility and to refinance IDRC's debt. Should the merger close,
we believe that our existing cash balances and borrowings available under the
new $135.0 million senior debt facility will be sufficient to meet our combined
operating and capital needs into 2000.
For the three months ended March 31, 1998
The $6.0 million of cash used in operating activities consisted of $5.2 million
used in continuing operations and $0.8 million used in discontinued operations.
Our net loss of $10.1 million was reduced by non-cash items including
depreciation and amortization, and a decrease in working capital requirements.
17
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
The $13.6 million of cash provided by investing activities primarily consisted
of $15.0 million of proceeds from the sale of the Market Research Segment,
primarily offset by $0.9 million of purchases of property and equipment.
The $7.5 million of net cash used in financing activities primarily consisted of
$7.1 million of net payments under our secured credit facility and $0.4 million
of other debt payments.
18
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
YEAR 2000 ISSUE
Year 2000 Issue. The Year 2000 issue results from the writing of computer
programs using two digits rather than four to define the applicable year.
Because of this programming convention, computer software, hardware or firmware
may recognize a date using "00" as the year 1900 rather than year 2000. This
could result in system failures, miscalculations or errors causing disruptions
of operations or other business problems, including, among others, a temporary
inability to process transactions or engage in other normal business activities.
State of Readiness. We have undertaken a comprehensive program, including the
hiring of an outside consulting firm, to address the Year 2000 issue with
respect to the following:
. our information technology and operating systems, which include call
processing, network, server, security and application systems;
. our non-information technology systems that may contain embedded
microchip technology, which include buildings, plant, equipment and
other infrastructure systems; and
. the systems of our major vendors and telecommunication service
providers insofar as they relate to our business.
Our core business systems are in the process of receiving Year 2000 compliant
upgrades furnished by our vendors, being replaced by our TeleSpectrum Enterprise
System Solution (TESS), or being rewritten to be Year 2000 compliant. We are
developing TESS to replace many of our current data processing systems. We
believe that the TESS product will be Year 2000 compliant and that our core
business systems will be ready to successfully recognize years beginning with
2000. Although we have received compliance information from many suppliers, we
are unable to predict the extent to which our suppliers will be affected by the
Year 2000 issue. We are also unable to predict the extent to which we may be
vulnerable to a supplier's inability to remedy any issues in a timely manner.
This matter is most prevalent with our telecommunications service suppliers.
Costs to Address the Year 2000 Issue. Our current cost estimate to become Year
2000 compliant is $1,500,000 in 1999, of which approximately 40% will be for
outside consultants and 60% will be for internal resources which have been or
will be reallocated from other projects. Many of our systems that require Year
2000 remediation or replacement are also simultaneously receiving performance
upgrades or feature enhancements. Our current cost estimate does not include
costs related to these upgrades or enhancements, as the decision to upgrade or
enhance these systems was not based on Year 2000 compliance and the timing of
these upgrades and enhancements has not been accelerated as a result of becoming
Year 2000 compliant. Our policy is to expense the costs incurred to become Year
2000 compliant in accordance with EIFT 96-14. To date, the financial impact of
remediation expenses has not been material, and we do not expect future
remediation costs to be material to our consolidated financial position or
results of operations.
Risks Presented by Year 2000 Problems. Our reasonably anticipated worst case
scenario involves Year 2000 problems experienced by our suppliers. If our
telecommunications vendors do not appropriately address their Year 2000 issues
and alternative telecommunications providers are not able to provide us with
adequate telecommunications services, we will not be able to provide our
services to our clients. If there is widespread and continued shortage in
telecommunications services available from telecommunications vendors, we will
be materially adversely affected. In addition, our computer systems are linked
to many of our clients' computer systems. Through these links, clients furnish
us with information that is necessary for us to provide our services and we
provide our clients with feedback regarding their services. While we have made
inquiries regarding their state of readiness for the Year 2000, we may not be
able to accurately predict whether our clients' systems will be Year 2000
compliant. We will likely experience service disruptions and may be materially
adversely affected if our clients' systems are not Year 2000 compliant.
19
<PAGE>
Contingency Plans. Our Year 2000 plan calls for the development of contingency
plans for areas of our business that are susceptible to a substantive risk of a
disruption resulting from a Year 2000 related event. For our internal systems,
we are developing remediation plans for our existing systems, including as a
contingency to the timely implementation of TESS. For vendor supplied services,
we are evaluating alternative vendors for backup services. However, we may not
be able to obtain backup services if there is a widespread and continued
shortage in telecommunications services available from telecommunications
vendors. For client computer links, we will seek to exchange information on a
manual basis until such time as the necessary corrections have been made.
Consistent with our Year 2000 plan, we will develop specific Year 2000
contingency plans for any other areas of our business as the need is identified.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to
borrowings under our secured credit facility. The secured credit facility bears
interest at prime plus 0.50% or of LIBOR plus 2.50% (8.25% and 7.44% at March
31, 1999, respectively). We typically use available cash in excess of amounts
required for operating activities to pay amounts due under the secured credit
facility. Accordingly, we have not had a significant level of funds available
for investment purposes. Interest rate fluctuations have not had a significant
effect on our results of operations. We do not use derivative financial
instruments in our operations.
Foreign Currency Risk
We do not use foreign currency exchange contracts or purchase currency options
to hedge local currency cash flows. We have subsidiaries in Canada and the
United Kingdom, which are subject to foreign currency fluctuations. As currency
rates change, translation of income statements of these subsidiaries from local
currencies to U.S. dollars affects year-over-year comparability of our operating
results. Gains and losses on translation are recorded as a separate component
of stockholders' equity. The foreign subsidiaries are limited in their
operations and the level of investment by the parent company so that the risk of
foreign currency fluctuations is not expected to be material.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1998, the Company commenced litigation in Federal court
against Parcel Consultants Incorporated d/b/a/ NTC ("NTC"). The
Company filed suit as part of its efforts to collect approximately
$4,742,000 of accounts receivable for telemarketing services
performed on behalf of NTC. NTC filed a counter suit against the
Company alleging breach of contract and fraud. The Company
believes that NTC's claims against the Company are without merit.
On February 26, 1999, NTC filed for reorganization under Chapter
11 of the Federal Bankruptcy Code. The Company has reserved
approximately $2,100,000 of the accounts receivable amount due
from NTC. Based on current facts and circumstances, the Company
believes that this reserve is adequate, however, the Company
cannot be certain that it will be successful in collecting the
accounts receivable due from NTC.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
20
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. OTHER INFORMATION
On April 15, 1999, our Chief Financial Officer, Richard C.
Schwenk, Jr. resigned from his employment with TeleSpectrum. As
previously announced, upon completion of the IDRC merger, Paul J.
Grinberg is expected to become our Chief Financial Officer. Keith
E. Alessi, our Chairman, President and Chief Executive Officer
will also serve as Interim Chief Financial Officer until such
time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following is a list of exhibits filed as part of this
quarterly report on Form 10-Q. Where so indicated by
footnote, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by
reference, the location of the exhibit in the previous
filing is indicated in parentheses.
3.01 Restated Certificate of Incorporation of TeleSpectrum
Worldwide Inc. is incorporated by reference to
exhibit 3.01 of the Company's Registration Statement
on Form S-1 (File No. 333-04349).
3.02 Bylaws of TeleSpectrum Worldwide Inc. are
incorporated by reference to exhibit 3.02 of the
Company's Registration Statement on Form S-1 (File
No. 333-04349).
27.01 Financial Data Schedule.
(b) FORM 8-K
The Company filed a Current Report on Form 8-K with the
Commission on January 26,1999.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TeleSpectrum Worldwide Inc.
---------------------------------------------
(Registrant)
Date: May 4, 1999 /s/ Keith E. Alessi
----------- ---------------------------------------------
Keith E. Alessi
TeleSpectrum Worldwide Inc.
Chairman, President & Chief Financial Officer
21
<PAGE>
ANNEX III:
ANNUAL REPORT ON FORM 10-K OF CRW FINANCIAL, INC.
FOR THE YEAR ENDED DECEMBER 31, 1998
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(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, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission File Number 0-26014
CRW FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2691986
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Four Falls Corporate Center
Suite 415
West Conshohocken, PA 19428
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 878-7429
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
--------------------------------------
(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 the 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. /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant is approximately $15,437,000. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the NASDAQ Small Cap Market on March 26, 1999. For purposes of making this
calculation only, the Registrant has excluded shares held by all directors,
executive officers and beneficial owners of more than ten percent of the Common
Stock of the Company.
The number of shares of the Registrant's Common Stock outstanding as of April
27, 1999 was 6,917,521 shares.
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The board of directors of CRW Financial, Inc. ("CRW" or the "Company") consists
of five persons, each of whom has been elected for a term expiring at the annual
meeting of CRW stockholders indicated below and until his successor shall have
been elected and qualified. The following table sets forth information
concerning the individuals who are serving as directors of CRW.
<TABLE>
<CAPTION>
Term Expires at
Name Age Annual Meeting in
- ---- --- -----------------
<S> <C> <C>
J. Brian O'Neill.......................................................... 39 2001
Eustace W. Mita........................................................... 45 2000
Mark DeNino............................................................... 45 2001
Bernard Morgan............................................................ 62 2000
Robert N. Verratti........................................................ 55 1999
</TABLE>
J. Brian O'Neill has been the Chairman of the Board of Directors and Chief
Executive Officer of CRW since May 1995 and held the same positions with Casino
& Credit Services, Inc. ("CCS"), CRW's former parent company, from July 1992 to
May 1995. Mr. O'Neill was also Chairman and CEO of TeleSpectrum Worldwide Inc.
("TLSP") from April 1996 to March 1998. Mr. O'Neill is no longer employed by
TLSP, but continues to be a member of TLSP's Board of Directors.
Eustace W. Mita has been a director of the Company since August 1996 and has
served as Chief Operating Officer of HAC Group, Inc., an automobile leasing
training company, since 1990. In 1984, Mr. Mita founded Mita Leasing, an
automobile retail leasing company, and served as its President until the company
was sold in 1992. Mr. Mita is also currently a director of First Republic Bank
in Philadelphia, Pennsylvania.
Mark DeNino has been a director of the Company since February 1996 and has been
a general partner and managing director of Technology Leaders II Management,
L.P., the general partner of Technology Leaders II, L.P., which is a venture
capital firm and a significant shareholder of the Company, since 1994. For more
than three years prior to that, Mr. DeNino was President of Crossroads Capital,
Inc., an investment banking firm. Mr. DeNino is also currently a director of
Integrated Systems Consulting Group, Inc. and Aloette Cosmetics, Inc. Mr. DeNino
graduated from the Graduate School of Business Administration of Harvard
University with an M.B.A. degree and from Boston College with a B.S. degree in
finance and accounting.
Bernard Morgan has been a director of the Company since February 1996 and, prior
to retiring in 1989, worked for First Fidelity Bancorporation and Fidelcor for
20 years in various positions including Vice Chairman, Chief Executive Officer,
Deputy Chairman, Chief Operating Officer, President and Executive Vice
President. Mr. Morgan is also currently a director of Atlantic Electric, Inc.
Mr. Morgan received his B.A. degree from St. Joseph's University and his M.B.A.
degree from the Wharton School, University of Pennsylvania.
Robert N. Verratti has been a director of the Company since March 1996 and has
been Chief Executive Officer of National Media Corporation since May 1997 and
CEO of Charlestown Investments, Ltd., an investment company, since 1985. Prior
to 1985, Mr. Verratti served as acting President of Great Western Cities, Inc.,
also an investment company. He is a graduate of the U.S. Naval Academy and
served in the nuclear submarine service.
<PAGE>
CRW's Restated Certificate of Incorporation divides the CRW Board into three
classes, with three-year staggered terms for each of the Class I, Class II and
Class III directors, respectively. Accordingly, Mr. Verratti will hold office
until the annual meeting of stockholders to be held in 1999, Mr. O'Neill and Mr.
DeNino will hold office until the annual meeting of stockholders to be held in
1998 and Mr. Mita and Mr. Morgan will hold office until the annual meeting of
stockholders to be held in 2000.
Committees of the Board of Directors
The CRW Board has established a Special Committee of its independent Board
Members to consider various alternatives to enhance shareholder value, an Audit
Committee which, among other things, considers the overall scope and approach of
the annual audit and recommendations of the audit performed by CRW's independent
accountants; recommends the appointment of independent accountants; considers
significant accounting methods adopted or proposed to be adopted; and considers
procedures for internal controls. The Audit Committee is comprised of Mr. DeNino
and Mr. Mita. The CRW Board has also established a Compensation Committee which
evaluates and establishes all executive compensation arrangements. The
Compensation Committee is comprised of Mr. DeNino, Mr. Mita and Mr. Verratti.
Executive Officers (Other than Directors)
Jonathan P. Robinson, 34, has been the Vice President, Treasurer, Secretary and
Chief Financial Officer of the Company since May 1995 and held the same
positions with CCS from April 1993 to May 1995. Mr. Robinson was also interim
Chief Operating Officer for TLSP from September 1997 to April 17, 1998 and
Director of Acquisitions for TLSP from April 1996 to April 17, 1998. >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.
CRW knows of no family relationships between any director or executive officer
other than the fact that Messrs. O'Neill and Mita are cousins.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors and persons who own more than ten percent of a registered
class of the Company's equity securities (collectively the "Reporting Persons")
to file reports of ownership and changes in ownership of the Company's
securities with the Securities and Exchange Commission and to furnish the
Company with copies of these reports.
Based on the Company's review of the copies of these reports received by it, and
written representations received from Reporting Persons, the Company believes
that all filings required to be made by the Reporting Persons for the fiscal
year ended December 31, 1998 were made on a timely basis.
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth compensation awarded to, earned by or paid to
CRW's Chief Executive Officer and the one other executive officers of CRW
serving at the end of 1997 whose annual cash compensation exceeded $100,000
(collectively, the "Named Executive Officers") during the last three fiscal
years.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
-------------------
Other Annual
Compensation All Other
Name And Principal Position Year Salary ($) Bonus ($) ($)(1)(2) Compensation
- --------------------------- ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
J. Brian O'Neill 1998 $ 115,000 $ 25,000 $14,688 --
Chairman of the Board 1997 275,000 300,000 14,688 --
and Chief Executive Officer 1996 275,000 85,940 14,688 (2)
Jonathan P. Robinson 1998 79,914 11,719 7,440 --
Vice President, Treasurer, 1997 125,000 189,062 7,440 --
Secretary and Chief Financial Officer 1996 125,000 39,060 7,440 (3)
</TABLE>
(1) Each executive officer pays $100 per month toward the lease payments with
respect to his CRW furnished car. The balance of the lease payments consist of
$1,224 per month as to Mr. O'Neill, and $620 per month as to Mr. Robinson.
(2) In May 1996, Mr. O'Neill received a warrant to purchase 610,160 shares of
TeleSpectrum common stock from CRW which was exercisable at $1.50 per share.
(3) In May 1996, Mr. Robinson received a warrant to purchase 76,316 shares of
TeleSpectrum common stock from CRW which was exercisable at $1.50 per share.
Employment Agreements
On May 11, 1995, CRW entered into employment agreements with J. Brian O'Neill as
Chief Executive Officer and Jonathan P. Robinson as Vice President, Treasurer
and Chief Financial Officer, each for a term of three years. These agreements
expired on May 11, 1998. As of May 12, 1998, Mr. O'Neill and Mr. Robinson
continued to be employed at a salary of $1.00 per year. Mr. Robinson's prior
salary was reinstated on December 1, 1998 on a month-to-month basis.
Stock Options Granted to Certain Executive Officers in 1998
No stock options were granted to any named executive officer in 1998.
Compensation of Directors in 1998
During 1998, each of CRW's non-employee Directors received cash payment of
$10,000 in consideration for their service on the Board. Directors who are also
employees of the Board received no compensation in 1998 for their service as
Directors.
<PAGE>
Option Exercises in 1998 and Year End Option Values:
The following table sets forth certain information with regard to the aggregated
options exercised in the fiscal year ended December 31, 1998 and the option
values as of the end of that year for the named executive officers.
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money Options at
Shares Value Options at FY End (#) Fiscal Year End ($)(1)
Acquired Realized Exercisable (E) Exercisable (E)
Name on Exercise ($)(1) Unexercisable (U) Unexercisable (U)
---- ----------- ------ ----------------- -----------------
<S> <C> <C> <C> <C>
J. Brian O'Neill -- -- 900,000 (E) $4,765,500 (E)
</TABLE>
(1) Based upon the fair market value of CRW's common stock of $6.75 per share as
of December 31, 1998 determined by taking the closing price of the common stock
on the Nasdaq SmallCap Market on the last trading date of the year.
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT
The following table sets forth certain information as of April 20, 1999
regarding the beneficial ownership of shares of CRW Common Stock by (i) each
person known by CRW to own beneficially more than five percent of the
outstanding shares of CRW Common Stock, (ii) each director of CRW, (iii) certain
executive officers of CRW and (iv) the directors and executive officers of CRW
as a group.
<TABLE>
<CAPTION>
Number of Percent of
Name and Address (1) Shares Class
- -------------------- --------- ----------
<S> <C> <C>
J. Brian O'Neill (2)(4).............................................. 2,130,454 26.1%
Jeffrey Tannenbaum (3)
1211 Avenue of the Americas
New York, NY 10036............................................ 941,630 13.6%
Fir Tree Value Fund, L.P (3)
1211 Avenue of the Americas
New York, NY 10036............................................. 1,380,803 19.7%
Technology Leaders II, L.P. (4)
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087................................................ 745,413 10.8%
TL Ventures Third Corp.(4)
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087................................................ 592,132 8.6%
Eustace Mita (5)(6).................................................. 183,838 2.6%
Jonathan P. Robinson ............................................... 141,200 2.0%
Mark DeNino (4) (6).................................................. 104,702 1.5%
Robert N. Verratti (7)............................................... 37,500 *
Bernard Morgan ...................................................... 20,000 *
All executive officers and directors as a group (6 persons)(8) 2,617,694 31.2%
*Less than 1%
</TABLE>
(1) Except where otherwise indicated, the address of each beneficial
owner listed is c/o CRW Financial, Inc. 200 Four Falls Corporate Center,
Suite 415, West Conshohocken, PA 19428 and each beneficial owner has sole
voting and investment power over all securities listed.
(2) Includes 900,000 shares issuable upon exercise of stock options,
51,412 shares issuable upon conversion of a convertible subordinated note
and 300,000 shares issuable upon exercise of a warrant.
(3) Jeffrey Tannenbaum is General Partner of Fir Tree Value Fund and has
voting and dispositive authority with respect to shares held by Fir Tree
Value Fund, LP. Number of shares includes 321,013 shares held be Fir Tree
Institutional Value Fund LP and Fir Tree Value Partners LDC for which Mr.
Tannenbaum has voting and dispositive authority.
(4) A total of 1,447,227 shares of Common Stock are beneficially owned
by Technology Leaders II, L.P., TL Ventures Third Corp., Mark DeNino and
certain other related parties (the "TL Group"). Each member of the TL
Group has affirmed that it is a member of a group under Section 13 (d)
(3) of the Exchange Act and thus may be considered to have beneficial
ownership of all securities of the Company held by any member of the TL
Group. The above table, however, only includes securities actually held
of record by the relevant securityholder and is based on a Form 4 filed
on March 19, 1999.
(5) Mr. O'Neill is Mr. Mita's cousin. Together, Mr. O'Neill and Mr. Mita
beneficially own approximately 28.8% of CRW. However, Messrs. O'Neill and
Mita disclaim being part of any group with respect to CRW.
(6) Includes 97,500 shares issuable upon exercise of stock options
(7) Includes 37,500 shares issuable upon exercise of stock options.
(8) Includes 1,122,500 shares issuable upon exercise of stock options,
51,412 shares issuable upon exercise of a convertible subordinated
note and 300,000 shares issuable upon exercise of warrants.
<PAGE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From December 1996 to August 1997, CRW leased an aggregate of 13,000 square feet
in King of Prussia, Pennsylvania from 210 Mall Boulevard Associates, a
partnership which is controlled by J. Brian O'Neill, CRW's Chief Executive
Officer. The lease commenced on December 15, 1996 and requires monthly base rent
payments through December 15, 2001 of $23,478. CRW believes the lease to be at
the prevailing commercial market rate. From February 1997 to July 1997, NCO
Group, Inc. subleased the facility from CRW. In August 1997, the sublease
expired and the lease between CRW and 210 Mall Boulevard Associates was
terminated. In 1996 and 1997, respectively, CRW paid $11,739 and $33,000 in rent
to 210 Mall Boulevard Associates. CRW also subleases a 22,000 square foot
facility in King of Prussia, PA from Cendant Corporation and has subleased the
facility to TLSP. Cendant currently leases the facility from an unrelated party.
However, prior to October 1997, Cendant leased the facility from CRW Building
Limited Partnership, a partnership controlled by Mr. O'Neill. Prior to
subleasing the facility to TLSP, CRW paid approximately $365,000 in rent in 1996
under the sublease from Cendant. In addition, CRW also leased office space in
1996 in Conshohocken, PA, from Lee Park Investors, L.P., a partnership
controlled by Mr. O'Neill. The lease was assumed by NCOG on February 2, 1997.
CRW paid approximately $46,000 and $4,000 in rent in 1996 and 1997, respectively
to Lee Park Investors, L.P.
In November 1995, Mr. O'Neill and his wife (collectively, "Lender") made a $1
million loan (the "Loan") to the Company and the company executed a convertible
subordinated note (the "Note") in favor of Lender. The Note bears interest at
12.5% per annum, is payable in equal monthly installments of $33,454 and matures
in November 1998. The Company also paid Lender a commitment fee equal to one
percent of the amount of the Loan in consideration for making the Loan. The Loan
was used by the Company to purchase certain computer equipment in which Lender
obtained a security interest and for general working capital of the Company. The
Note is convertible at any time during the term thereof and for one year
thereafter into shares of Common Stock at a current conversion rate of $1.625
per share based on the principal then outstanding on the Note. Principal paid by
the Company during the last fiscal year may also be converted into Common Stock
at the same conversion price. As of March 25, 1998, the Note was convertible
into 412,601 shares of Common Stock. The Company also entered into a
Registration Rights Agreement with Lender which provides Lender with certain
piggyback and demand registration rights with respect to the Common Stock which
may be obtained upon conversion of the Note. The piggyback registration rights
remain in effect for five years until November 1, 2000, and the demand
registration rights may only be exercised during the last year of such period.
The Company caused the formation of TeleSpectrum Worldwide Inc. ("TLSP") and
subsequently during May 1996 received 8,510,137 shares of common stock in TLSP,
par value $0.01 per share in consideration of a capital contribution of TLSP of
$1.6 million in cash and the assignment to TLSP of a promissory note in the
amount of $500,000. On August 13, 1996, TLSP completed an initial public
offering of approximately 12.2 million shares of its common stock, at a public
offering price of $15 per share (the "IPO").
The capital contribution made by the Company to TLSP represented proceeds of
borrowings by the Company under subordinated notes (the "Subordinated Notes")
issued to eight individuals, one partnership and one corporation (the "Lenders")
on May 22, 1996. The capital contribution was used by TLSP for professional and
other costs associated with the IPO. Amounts outstanding under the Subordinated
Notes bear interest at 12% per annum. The notes were repaid in September 1996.
As part of the consideration for the Subordinated Notes, the Company issued to
the Lenders warrants (the "Lender Warrants") to purchase a total of 1,433,454
shares of TLSP's common stock held by the Company. The Lender Warrants are
exercisable at any time during a 10 year term at a price of $1.50 per share. In
connection with TLSP's initial capitalization by the Company, TLSP granted the
Lenders the right to have TLSP shares of common stock subject to the Lender
Warrants registered under the Securities Act along with the registration of any
other shares of TLSP common stock and also the right to certain demand
registrations subject to the Lenders' agreement not to sell any TLSP common
stock underlying the Lender Warrants during the 180 days after consummation of
the IPO by TLSP. During 1996 and 1997, 1,365,204 of these warrants were
exercised.
In connection with the sale of the Company's debt collection business on
February 2, 1997, J. Brian O'Neill, CEO and Jonathan P. Robinson, CFO entered
into non-compete, non-solicitation and non-disclosures agreements with NCO
Group, Inc. The agreements have a term of three years and prohibit Messrs.
O'Neill and Robinson from working in the debt collection industry or otherwise
disclosing certain information or soliciting NCO employees during the term of
the agreements. Messrs. O'Neill and Robinson received $500,000 and $250,000,
respectively in exchange for entering into these agreements.
<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.
CRW FINANCIAL, INC.
By: /s/ J. Brian O'Neill
---------------------------
J. Brian O'Neill
Chief Executive Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ J. Brian O'Neill Chief Executive Officer and Director April 30, 1999
- ------------------------- (Principal Executive Officer)
J. Brian O'Neill
/s/ Jonathan P. Robinson Chief Financial Officer and Principal April 30, 1999
- ------------------------- Financial and Accounting Officer
Jonathan P. Robinson
/s/ Robert N. Verratti Director April 30, 1999
- -------------------------
Robert N. Verratti
/s/ Bernard Morgan Director April 30, 1999
- -------------------------
Bernard Morgan
/s/ Mark DeNino Director April 30, 1999
- -------------------------
Mark DeNino
/s/ Eustace W. Mita Director April 30, 1999
- -------------------------
Eustace W. Mita
</TABLE>
<PAGE>
ANNEX III
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission File Number 0-26014
CRW FINANCIAL, INC.
-------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2691986
---------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Four Falls
Corporate Center
Suite 415
West Conshohocken, PA 19428
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 878-7429
Securities registered pursuant to Section 12(b) of
the Act:
Title of each class Name of each exchange
on which registered
---------------------------------------------------------
NONE N/A
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, par value $.01 per share
--------------------------------------
(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 the 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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant is approximately $18,799,000. Such aggregate market value was
computed by reference to the closing price of the common stock as reported on
the NASDAQ Small Cap Market on March 22, 1999. For purposes of making this
calculation only, the Registrant has excluded shares held by all directors,
executive officers and beneficial owners of more than ten percent of its common
stock.
The number of shares of the Registrant's common stock outstanding as of February
19, 1999 was 6,917,521 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for its 1999 Annual
Meeting of Stockholders are incorporated by reference into Part III.
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business 2
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of
Security Holders 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial
Owners and Management 14
Item 13. Certain Relationships and Related Transactions 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 15
In addition to historical information, this Annual Report contains
forward-looking statements relating to matters including our anticipated
financial performance and business prospects. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements. In
order to comply with the terms of the safe harbor, we note that a variety of
factors could cause our actual results and experience to differ materially from
the anticipated results or other expectations expressed in our forward-looking
statements. The risks and uncertainties that may affect the operation,
performance and development and results of our business include, but are not
limited to, those matters discussed herein in the sections entitled "Item 1 -
Business", "Item 3 Legal Proceedings" and "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations." The words "believe,"
"expect," "anticipate," "project" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. We undertake no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof.
Unless the context indicates otherwise, the terms "we", "our" and "CRW" refer to
CRW Financial, Inc.
<PAGE>
PART I
ITEM 1. BUSINESS
Background
We currently own 6.26 million shares of TeleSpectrum Worldwide Inc., a company
that we formed in April 1996. TeleSpectrum is a provider of integrated
teleservices and is listed on the NASDAQ National Market System under the symbol
"TLSP." Our ownership represents approximately 25% of the outstanding common
stock of TeleSpectrum.
We were a subsidiary of Casino & Credit Services, Inc. prior to May 1995 when it
distributed all of the stock of CRW to its shareholders. Casino & Credit
Services was formed in May 1992 and in July 1992, it purchased Receivable
Management Services, Inc. and Central Credit, Inc. from TRW Inc. for
approximately $11.5 million. Casino & Credit Services was capitalized with
approximately $12.1 million of bank and convertible debt and $1 million of
equity. In August 1993, Casino & Credit Services completed an initial public
offering of its common stock, generating net cash proceeds of approximately
$12.7 million and valuing the company at approximately $26 million. Casino &
Credit Services used the proceeds from the offering to repay all of its
outstanding debt and fund the acquisition of Central Credit of New Jersey, Inc.,
its only competitor. During the remainder of 1993 and 1994, Casino & Credit
Services completed the acquisition of five complimentary collection businesses
for an aggregate of approximately $5.5 million in cash and formed Casino Money
Centers, Inc. to complement its business.
In July 1994, Casino & Credit Services began discussions with Hospitality
Franchise Systems, Inc. regarding a sale of Central Credit. In November 1994,
Casino & Credit Services and Hospitality Franchise Systems entered into a merger
and plan of reorganization whereby Casino & Credit Services would merge with
Hospitality Franchise Systems after a distribution of all of the stock of CRW to
the stockholders of Casino & Credit Services. Ultimately, CRW owned Casino &
Credit Services' collection business and its wholly owned subsidiary Casino
Money Centers. In May 1995, the merger and stock distribution were completed
resulting in Casino & Credit Services shareholders receiving approximately $37.2
million in Hospitality Franchise Systems common stock and approximately $3.5
million in CRW common stock. CRW's common stock began trading on the NASDAQ
Small Cap Market under the symbol "CRWF" on May 11, 1995.
In December 1995, our management team began to explore the creation of a
telemarketing subsidiary to capitalize on the rapid growth in demand by large
corporations for large-scale professional telemarketing services. Our management
team concluded that its experience in acquiring and operating call centers for
its collection business would provide the foundation to build a CRW subsidiary
into a leading teleservices company. In April 1996, we formed TeleSpectrum and
in that month signed agreements to acquire four telemarketing businesses, a
market research business and a fulfillment business. These acquisitions were
contingent upon an initial public offering of TeleSpectrum's common stock. In
August 1996, TeleSpectrum completed its initial public offering, generating net
proceeds of approximately $162 million and valuing TeleSpectrum at approximately
$375 million. The total purchase price for the six businesses acquired was
approximately $200 million consisting of approximately $90.9 million in cash,
$49 million in TeleSpectrum common stock and warrants, $25.6 million in notes,
and $34.5 million in assumed liabilities and transaction expenses.
In October 1996, our board of directors approved a plan to divest our collection
business and Casino Money Centers. On February 2, 1997, we completed the sale of
our collection business to NCO Group, Inc. for $3.75 million in cash, 517,767
shares of NCO Group common stock and a warrant to purchase 375,000 shares of NCO
Group common stock for $18.42 per share. We sold our 517,767 shares of NCO Group
common stock in July 1997 for approximately $9.6 million. We used the proceeds
from this sale to retire all of the our outstanding bank debt and for additional
working capital. We sold our warrant to purchase 375,000 shares of NCO Group in
February 1998 for approximately $2.66 million. On October 30, 1998, we sold
Casino Money Centers to Innovative Financial Systems, Inc. for $2.25 million in
cash. We have presented the economic impact of the disposition of our collection
business, Casino Money Centers and Central Credit as discontinued operations in
the accompanying financial statements.
On September 3, 1998, we signed a definitive agreement to merge with
TeleSpectrum. In that merger, each share of CRW common stock will be exchanged
for 0.709 share of TeleSpectrum common stock. Immediately prior to the merger,
we expect to pay a special cash distribution to our shareholders and the holders
of certain warrants issued by us with our cash on hand. We have filed a
preliminary merger proxy with the Securities and Exchange Commission and
currently expect the merger to close in the second quarter of 1999.
<PAGE>
Employees
As of February 25, 1999, we had two employees: J. Brian O'Neill, Chief Executive
Officer, and Jonathan P. Robinson, Chief Financial Officer.
ITEM 2. PROPERTIES
Since April 1998, we have shared office space on a month to month arrangement
with the O'Neill Group, LLC, a company controlled by J. Brian O'Neill. We pay
the O'Neill Group $3,000 a month for rent and other office expenses. In 1998, we
paid the O'Neill Group $27,000 for rent and office expenses.
In June 1998, Casino Money Centers entered into a lease for office space from
Swedesford Road L.P., a partnership controlled by J. Brian O'Neill. Casino Money
Centers paid approximately $30,000 in rent for the office space in 1998.
From December 1996 to August 1997, we leased an aggregate of 13,000 square feet
in King of Prussia, Pennsylvania from 210 Mall Boulevard Associates, a
partnership which is controlled by J. Brian O'Neill. From February 1997 to July
1997, NCO Group, Inc. subleased the facility from CRW. In August 1997, the
sublease expired and the lease between CRW and 210 Mall Boulevard Associates was
terminated. In 1996 and 1997, respectively, we paid $11,739 and $33,000 in rent
to 210 Mall Boulevard Associates.
The aggregate minimum rent due by us on all of the above leases through the end
of their terms, net of commitments for payments under subleases, is zero. We
believe our existing facility is sufficient to support our anticipated needs in
1999.
ITEM 3. LEGAL PROCEEDINGS
We have no litigation that we believe will involve an outcome that will have a
material adverse effect on our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the NASDAQ Small Cap Market under the symbol
"CRWF". The following table sets forth, for the periods indicated, the range of
high and low bid prices as reported on the NASDAQ Small Cap Market.
High Low
---- ---
Fiscal 1997
First Quarter 10 1/4 6 1/4
Second Quarter 9 1/8 3 3/4
Third Quarter 6 1/8 2 7/8
Fourth Quarter 5 3/8 2 9/16
Fiscal 1998
First Quarter 5 9/16 2 1/2
Second Quarter 7 3/4 3 7/8
Third Quarter 6 1/4 2 3/4
Fourth Quarter 6 7/8 4 3/4
As of December 28, 1998 there were 72 holders of record of our common stock.
Because a substantial portion of our common stock is held in street name, we
believe that we have a significantly larger number of beneficial owners of our
common stock.
We have never paid a cash dividend on our common stock. However, we intend to
pay a special cash dividend immediately prior to the merger with TeleSpectrum in
an amount equal to our cash on hand immediately prior to the merger, after
satisfying all of our remaining liabilities.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Our historical consolidated financial statements prior to May 1995 have been
deemed to be those of Casino & Credit Services, Inc., restated to reflect the
classification of the collection business, Casino Money Centers, Inc., and
Central Credit, Inc. as discontinued operations and have been derived from the
audited financial statements of Casino & Credit Services for the year ended
December 31, 1994 and from the audited financial statements of CRW for the
subsequent years. The following information should be read in conjunction with
and is qualified in its entirety by reference to the historical consolidated
financial statements and accompanying notes of CRW included elsewhere in this
Form 10-K. See Notes 1, 2, 3 and 12 to CRW's consolidated financial statements.
<TABLE>
<CAPTION>
Year Ended December 31
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of
Operations Data:
<S> <C> <C> <C> <C> <C>
Net revenues $ -- $ -- $ -- $ -- $ --
Operating expenses, excluding
non-cash and special charges 2,541 1,036 2,292 3,813 530
Special compensation charge -- -- 1,319 -- --
Depreciation and
Amortization -- 22 112 158 9
-------- -------- -------- -------- --------
Operating loss from
continuing operations (2,541) (1,058) (3,723) (3,971) (539)
Other income -- -- 1,136 1,324 1,694
Equity in earnings(loss) of TeleSpectrum -- -- 774 (39,389) (1,655)
Interest (expense) income (263) (655) (825) (421) 17
-------- -------- -------- -------- --------
Loss from continuing operations
before income tax benefit (2,804) (1,713) (2,638) (42,457) (483)
Income tax benefit (622) -- (855) (16,803) (150)
-------- -------- -------- -------- --------
Loss from continuing
operations (2,182) (1,713) (1,783) (25,654) (333)
Income (loss) from
discontinued operations and
gains (loss) from disposition of
$28,176, $1,383, and ($94) in 1996,
1997, and 1998 respectively, net of tax 387 29,776 (1,002) 1,405 136
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item (1,795) 28,063 (2,785) (24,249) (197)
Extraordinary loss on
extinguishment of debt,
net of tax benefit -- -- (1,132) -- --
Net income (loss) (1,795) 28,063 (3,917) (24,249) (197)
Preferred dividends (210) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) applicable
to common stockholders $ (2,005) $ 28,063 ($ 3,917) $(24,249) $ (197)
======== ======== ======== ======== ========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE(1):
Continuing operations $ (0.49) $( 0.47) $ (4.20) $ (0.05)
Discontinued operations and
gain from merger 8.45 (0.26) 0.23 0.02
Extraordinary item -- (0.30) -- --
-------- -------- -------- --------
$ 7.96 $ (1.03) $( 3.97) $ (0.03)
========= ======== ======== ========
DILUTED NET INCOME (LOSS) PER COMMON SHARE(1):
Continuing operations $ (0.36) $ (0.47) $ (4.20) $ (0.05)
Discontinued operations 6.23 (0.26) 0.23 0.02
Extraordinary item -- (0.30) -- --
--------- -------- ------- --------
$ 5.87 $ (1.03) $ (3.97) $ (0.03)
========= ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Net assets of discontinued operations(2) $16,727 $10,929 $ 9,969 $ 1,738 $ --
Total assets 16,727 11,332 67,945 21,631 18,425
Bank and subordinated debt 5,066 7,005 9,185 798 --
Stockholders' equity 11,345 3,186 34,873 12,601 12,034
</TABLE>
(1) Per share information is not presented for 1994 as such information is not
meaningful due to the formation of CRW in May 1995.
(2) The net assets of discontinued operations represent the assets and
liabilities of the collection business sold in February 1997, the merger of the
Central Credit business in May 1995 and the sale of Casino Money Centers in
October 1998. See Notes 2, 3 and 12 to CRW's historical consolidated financial
statements included elsewhere in this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is based upon and should be read in conjunction with
the Selected Historical Financial Information and our Consolidated Financial
Statements, including the accompanying notes included elsewhere in this Form
10-K.
Years Ended December 31, 1998 and 1997
Operating Expenses
Our operating expenses decreased $3,432,000 (86%) to $539,000 in 1998 from
$3,971,000 in 1997 due to a $1,427,000 decrease in compensation expense and a
$1,854,000 decrease in other corporate expenses. The decrease in compensation
expense was due to a substantial reduction in corporate employees due to the
sale of the collection business in February 1997 and Casino Money Centers in
October 1998. The decrease in other corporate expenses was primarily due to
approximately $1,300,000 of expense in 1997 related to litigation with a former
employee.
Other Income
Other income was $1,694,000 in 1998 and was comprised of a $1,914,000 gain from
the sale of our warrant to purchase NCO Group, Inc. stock in February 1998
partially offset by $220,000 of expenses related to the merger with
TeleSpectrum. Other income was $1,324,000 in 1997 and was derived from the sale
of our NCO Group common stock.
Equity in Loss of TeleSpectrum
Equity in loss of TeleSpectrum was $(1,655,000) in 1998 compared to
$(39,389,000) in 1997 due to a decrease in TeleSpectrum's net loss from
$160,475,000 in 1997 to $6,461,000 in 1998. Our equity in TeleSpectrum's loss
was based on our ownership in TeleSpectrum of approximately 25% in both 1997 and
1998.
Interest Income (Expense)
Interest income was $17,000 in 1998 compared to $(421,000) of interest expense
in 1997 due to the repayment of all of our debt in 1998 and interest income on
our cash on hand in the fourth quarter of 1998.
Income Taxes
The income tax benefit of $16,803,000 in 1997 and $150,000 in 1998 represents
the future Federal income tax benefit of our operating loss. The tax benefits
represent an effective tax rate of approximately 40% in 1997 and 31% in 1998.
The 1998 effective tax rate is approximately 9% lower than our effective
statutory rate due to approximately $220,000 of non-deductible expenses in 1998
related to our planned merger with TeleSpectrum.
<PAGE>
Years Ended December 31, 1997 and 1996
Operating Expenses
Our operating expenses increased $248,000 to $3,971,000 in 1997 from $3,723,000
in 1996 due to an increase in other operating expenses of $1,620,000, partially
offset by a $1,420,000 decrease in compensation expense. The increase in other
operating expenses was primarily due to approximately $1,300,000 of expense
related to litigation with a former employee.
<PAGE>
Interest Expense
Interest expense was $421,000 in 1997 compared to $825,000 in 1996 due to lower
borrowings in 1997 and the repayment of all bank debt in July 1997.
Other Income
Other income increased $188,000 to $1,324,000 in 1997 compared to $1,136,000 in
1996 due to the gain on sale of NCO Group common stock of $1,324,000 in 1997
compared to the gain of $1,136,000 from the exercise of warrants to purchase
TeleSpectrum common stock in 1996.
Equity in Earnings (Loss) of TeleSpectrum
Equity in earnings (loss) of TeleSpectrum was $(39,389,000) in 1997 compared to
$774,000 in 1996 due to our equity method of accounting for our share of
TeleSpectrum's net loss of $160,475,000 in 1997 compared to its net income of
$3,650,000 in 1996. TeleSpectrum's net loss of $160,475,000 included a
$139,100,000 write-down of goodwill. The write-down of goodwill was made due to
a conclusion by TeleSpectrum's management that its goodwill had been permanently
impaired by developments in the teleservices industry and TeleSpectrum's
operating performance. Our equity in the earnings (loss) of TeleSpectrum was
based on its ownership in TeleSpectrum of approximately 25% in both 1997 and
1996.
Income Taxes
Our income tax benefit was $16,803,000 in 1997 compared to $855,000 in 1996. The
income tax benefit in 1997 represents a 40% benefit for State and Federal income
taxes on our pre-tax loss representing reduction of its deferred tax liability.
The income tax benefit in 1996 represents a 34% benefit for Federal income taxes
on our pre-tax loss.
Discontinued Operations
Our operating results have been restated to reflect the classification of our
disposition of the collection business, Casino Money Centers, Inc., and Central
Credit, Inc. as discontinued operations. See Note 1 of the notes to the
accompanying consolidated financial statements for a description of the basis of
presentation. Below is a summary of operating results for the discontinued
operations.
YEAR ENDED DECEMBER 31, 1998
----------------------------
Casino
Collection Money
Business Centers TOTAL
---------- ------- -----
Net revenues $ -- $ 4,936 $ 4,936
Operating expenses -- 4,547 4,547
-- ------ -------
Operating income $ $ 389 $ 389
===== ======= =======
<PAGE>
YEAR ENDED DECEMBER 31, 1997
----------------------------
Casino
Collection Money
Business Centers TOTAL
---------- ------- -----
Net revenues $ 2,006 $ 4,989 $ 6,995
Operating expenses 2,101 4,904 7,005
------- -------
Operating income $ (95) $ 85 $ (10)
======= ======= =======
YEAR ENDED DECEMBER 31, 1996
----------------------------
Casino
Collection Money
Business Centers TOTAL
---------- ------- -----
Net revenues $ 27,432 $ 3,412 $ 30,844
Operating expenses 29,329 3,262 32,591
-------- ------- --------
Operating income (loss) $ (1,897) $ 150 $ (1,747)
======== ======= ========
Years Ended December 31, 1998 and 1997
Net revenues decreased $2,059,000 from $6,995,000 in 1997 to $4,936,000 due to
our sale of the collection business in February 1997. Casino Money Centers'
revenues decreased $53,000 due to CRW's sale of Casino Money Centers in October
1998. Casino Money Centers' operating expenses decreased $357,000 due to
severance of $83,000 in 1997 and lower sales and marketing expenses in 1998.
Years Ended December 31, 1997 and 1996
Net revenues, operating expenses, operating loss and net loss all decreased
substantially in 1997 as the collection business was sold on February 2, 1997
and therefore, the operating results above for 1997 consist of Casino Money
Centers and the collection business results for the period from January 1, 1997
to February 2, 1997.
Inflation
Inflation has not had a significant impact on our operations to date.
Year 2000
We believe that we do not have any Year 2000 exposure since our principal assets
now consist of cash and our passive ownership of shares of TeleSpectrum.
Liquidity and Capital Resources
During the year ended December 31, 1998, net cash used in operating activities
decreased $2,632,000 to $2,706,000 in 1998 from 5,338,000 in 1997. The decrease
in net cash used in operating activities was primarily due to the $3,432,000
decrease in our operating loss in 1998.
Net cash provided by investing activities in 1998 was $4,614,000 and consisted
of $2,664,000 of proceeds from the sale of our NCO Group warrant and $1,950,000
of proceeds from the sale of Casino Money Centers. Net cash provided by
investing activities in 1997 was $13,109,000 and consisted primarily of
$3,750,000 of proceeds from the sale of the collection business, $9,624,000 of
proceeds from the sale of the NCO Group common stock, partially offset by
$250,000 of cash used in investing activities for discontinued operations.
Net cash provided by financing activities in 1998 was $95,000 compared to
$7,656,000 of net cash used in financing activities in 1997. Net cash provided
by financing activities in 1998 was generated from $797,000 of proceeds from the
exercise of stock options, partially offset by the repayment of $702,000 of
debt. Net cash used in financing activities in 1997 consisted of $672,000 of
proceeds from loans from stockholders, $9,042,000 of payments on long-term debt,
and $714,000 of proceeds from the exercise of stock options.
We believe that our cash on hand is adequate to meet our needs for the
foreseeable future.
Net Operating Loss Carryforward
We have a June 30 fiscal year end. As of June 30, 1998, we had available
approximately $9,000,000 of net operating loss carryforwards.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See our Consolidated Financial Statements and notes thereto beginning on Page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 will be contained in our definitive proxy
statement for the 1999 annual meeting of stockholders, or in an amendment to
this Form 10-K, to be filed with the Securities and Exchange Commission by April
30, 1999, and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 will be contained in our definitive proxy
statement for the 1999 annual meeting of stockholders, or in an amendment to
this Form 10-K, to be filed with the Securities and Exchange Commission by April
30, 1999, and is hereby incorporated by reference
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 will be contained in our definitive proxy
statement for the 1999 annual meeting of stockholders, or in an amendment to
this Form 10-K, to be filed with the Securities and Exchange Commission by April
30, 1999, and is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 will be contained in our definitive proxy
statement for the 1999 annual meeting of stockholders, or in an amendment to
this Form 10-K, to be filed with the Securities and Exchange Commission by April
30, 1999, and is hereby incorporated by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Attached hereto and filed as part of this report are the financial
statement schedules and exhibits listed below:
1. FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants Consolidated Balance Sheets - December
31, 1997 and 1998 Consolidated Statements of Operations - For the Years ended
December 31, 1996, 1997 and 1998 Consolidated Statements of Stockholders' Equity
- - For the Years ended December 31, 1996, 1997 and 1998 Consolidated Statements
of Cash Flows - For the Years ended December 31, 1996, 1997 and 1998 Notes to
Consolidated Financial Statements
2. EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE
3.1 Restated Certificate of Incorporation of the Registrant
(1)
3.2 Amendment to Restated Certificate of Incorporation of
the Registrant (2)
3.3 Amended Bylaws of the Registrant (3)
4.1 Term Loan Note and Addendum dated November 1, 1995
executed by the Registrant in favor of J. Brian O'Neill
and Miriam P. O'Neill (2)
10.1 Agreement of Lease dated as of July, 1994, between CRW
Building Limited Partnership and Casino and Credit
Services, Inc. (1)
10.2 Sublease Agreement dated May 10, 1995 between Casino &
Credit Services, Inc. and the Registrant (3)
10.3 Sublease Agreement between TeleSpectrum Worldwide Inc.
and the Registrant (2)
10.4 Lease Agreement dated July 1, 1996 between the
Registrant and Lee Park Investors, L.P. (2)
10.5 Lease Agreement dated December 5, 1996 between the
Registrant and 210 Mall Boulevard Associates (2)
10.6 Employment Agreement dated May 11, 1995 between J.
Brian O'Neill and the Registrant (3)
10.7 Employment Agreement dated May 11, 1995 between
Jonathan P. Robinson and the Registrant (3)
10.8 Amended and Restated 1995 Stock Option Plan of the
Registrant (4)
10.9 Asset Acquisition Agreement dated February 2, 1997
among the Registrant, Kaplan & Kaplan, Inc., NCO Group,
Inc., CRWF Acquisition, Inc. and K & K Acquisition,
Inc. (5)
10.10 Merger Agreement between CRW Financial, Inc. and
TeleSpectrum Worldwide Inc. (6)
<PAGE>
23 Consent of Arthur Andersen LLP (6)
27 Financial Data Schedule (Electronic Filing Only)
(1) Filed as an Exhibit to the Form 10-K filed with the Securities and Exchange
Commission on March 29, 1996 and incorporated herein by reference.
(2) Filed as an Exhibit to the Form 10-K filed with the Securities and Exchange
Commission on April 6, 1997 and incorporated herein by reference.
(3) Filed as an Exhibit to the Registration Statement on Form S-1 (No. 33-62700)
and incorporated herein by reference.
(4) Filed as an Exhibit to CRW's definitive proxy statement for its 1996 Annual
Meeting of Stockholders and incorporated herein by reference.
(5) Filed as an Exhibit to CRW's Form 8-K dated February 2, 1997 and
incorporated herein by reference.
(6) Filed herewith.
(b) CRW did not file a Form 8-K with the Securities and Exchange Commission
during the fourth quarter of 1998.
<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets -- December 31, 1997 and 1998 F-3
Consolidated Statements of Operations -- For the Years
ended December 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Stockholders' Equity--
For the Years ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Cash Flows--
For the Years ended December 31, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CRW Financial, Inc.:
We have audited the accompanying consolidated balance sheets of CRW Financial,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
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 consolidated financial position of CRW Financial,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 10, 1999
F-2
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1998
---- ----
ASSET
- -----
CURRENT ASSETS:
(In Thousands, Except Share Amounts)
<S> <C> <C>
Cash ......................................................... $ 115 $ 2,118
Other current assets ........................................ 83 339
Investment in NCO Group, Inc. ................................ 2,013 --
Net assets of discontinued operations ........................ 1,738 --
------- -------
Total current assets .............................. 3,949 2,457
PROPERTY AND EQUIPMENT, net .................................. 44 40
INVESTMENT IN TELESPECTRUM WORLDWIDE INC...................... 15,266 13,611
DEFERRED INCOME TAX ASSET .................................... 2,324 2,317
OTHER ASSETS ................................................. 48 --
................................................. $21,631 $18,425
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long term debt ....................... $ 798 $---
Accounts payable ........................................ 159 63
Accrued expenses ........................................ 2,278 533
-------- --------
Total current liabilities ......................... 3,235 596
-------- --------
DEFERRED INCOME TAXES ........................................ 5,795 5,795
-------- --------
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, 500,000 shares authorized,
no shares issued and outstanding ...................... -- --
Common Stock $.01 par value, 20,000,000 shares authorized
6,435,486 and 6,917,521 shares issued
and outstanding, respectively ......................... 64 69
Additional paid-in capital .............................. 40,390 41,278
Unrealized gain on investment in NCO Group,Inc .......... 1,263 --
Accumulated deficit ..................................... (29,116) (29,313)
-------- --------
Total stockholders' equity ................................. 12,601 12,034
-------- --------
$ 21,631 $ 18,425
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
F-3
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
---- ---- ----
(In Thousands -Except Share Amounts)
<S> <C> <C> <C>
NET REVENUES $ -- $ -- $ --
-------- -------- --------
OPERATING EXPENSES:
Compensation 1,768 1,667 240
Special compensation charge 1,319 -- --
Other operating costs 524 2,144 290
Depreciation and amortization 112 160 9
-------- -------- --------
Operating loss (3,723) (3,971) (539)
INTEREST (EXPENSE) INCOME (825) (421) 17
EQUITY IN EARNINGS (LOSS) OF TELESPECTRUM WORLDWIDE INC 774 (39,389) (1,655)
OTHER INCOME (Notes 2 and 5) 1,136 1,324 1,694
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT (2,638) (42,457) (483)
INCOME TAX BENEFIT (855) (16,803) (150)
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS (1,783) (25,654) (333)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of income
taxes (benefit) of $(754), $(32) and $159 (Note 12) (1,002) 22 230
GAIN (LOSS) ON SALE OF DISCONTINUED OPERATIONS, net of income taxes
of $996 in 1997 (Note 2 and 3) -- 1,383 (94)
-------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEM (2,785) (24,249) (197)
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT (1,132) -- --
-------- -------- --------
NET LOSS $ (3,917) $(24,249) $ (197)
======== ======== ========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ (0.47) $ (4.20) $ (0.05)
Discontinued operations and gain on merger (0.26) 0.23 0.02
Extraordinary item (0.30) -- --
-------- -------- --------
$ (1.03) $ (3.97) $ (0.03)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED TOTAL
PREFERRED COMMON PAID-IN ACCUMULATED GAIN STOCKHOLDERS'
(In Thousands) STOCK STOCK CAPITAL DEFICIT ON INVESTMENT EQUITY
---------- ------ ------- ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ -- $ 34 $ 4,102 $ (950) -- $ 3,186
Sale of Preferred Stock 2,345 -- -- -- -- 2,345
Conversion of Preferred Stock (2,345) 13 2,332 -- -- --
Exercise of Stock Options and
Warrants -- 7 1,121 -- -- 1,128
Adjustment to Investment in
TeleSpectrum Worldwide Inc.
(Note 1) -- -- 32,131 -- -- 32,131
Net Loss -- -- -- (3,917) -- (3,917)
------ -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1996 -- 54 39,686 (4,867) -- 34,873
Unrealized gain on investment in
NCO Group, Inc. -- -- -- -- 1,263 1,263
Exercise of Stock Options and
Convertible Note -- 10 704 -- -- 714
Net Loss -- -- -- -- (24,249)
------ -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 -- 64 40,390 (29,116) 1,263 12,601
Realized Gain on
Investment in NCO Group, Inc. -- -- -- -- (1,263) (1,263)
Exercise of Stock Options and
Convertible Note -- 5 888 -- -- 893
Net Loss -- -- -- (197) -- (197)
------ -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 $ $ 69 $ 41,278 $(29,313) $ -- $ 12,034
====== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES: (In Thousands)
<S> <C> <C> <C>
Net Loss $ (3,917) $(24,249) $ (197)
Adjustments to reconcile net loss to net cash
used in operating activities-
Deferred income taxes (1,609) (16,803) (150)
Non-cash special compensation charge 629 -- --
(Gain) Loss on sale of collection business and Casino Money Centers -- (1,383) 94
Gain on sale of NCO Group, Inc. investment -- (1,324) (1,914)
Discontinued operations--noncash charges and working capital changes 1,010 584 44
Equity in TeleSpectrum Worldwide Inc. (income) loss (774) 39,389 1,655
Extraordinary loss on extinguishment of debt 1,132 -- --
Depreciation and amortization 112 160 9
Changes in operating assets and liabilities -
Other current assets 28 120 (20)
Other assets (179) 32 --
Accounts payable 174 (157) (96)
Accrued expenses and other liabilities 407 (1,707) (2,131)
-------- -------- --------
Net cash used in operating activities (2,987) (5,338) (2,706)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in TeleSpectrum Worldwide Inc. (2,110) -- --
Purchases of property and equipment (32) (15) --
Proceeds from sale of Casino Money Centers, Inc. -- -- 1,950
Proceeds from sale of collection business -- 3,750 --
Proceeds from sale of NCO Group, Inc. investment -- 9,624 2,664
Investing activities of discontinued operations (346) (250) --
-------- -------- --------
Net cash provided by (used in) investing activities (2,488) 13,109 4,614
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt -- 672 --
Repayment of debt (318) (9,042) (702)
Proceeds from (repayments of) line of credit 2,500 -- --
Proceeds from exercise of stock options 1,128 714 797
Financing activities of discontinued operation (180) -- --
Sale of preferred stock 2,345 -- --
-------- -------- --------
Net cash provided by (used in) financing activities 5,475 (7,656) 95
-------- -------- --------
NET INCREASE IN CASH -- 115 2,003
CASH, BEGINNING OF PERIOD
-- -- 115
-------- -------- --------
CASH, END OF PERIOD $ -- $ 115 $ 2,118
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements
F-6
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. Background:
CRW Financial, Inc. was a subsidiary of Casino & Credit Services, Inc. prior to
May 11, 1995, and CRW's operations were a division of CCS from July 1992 to May
11, 1995 when CCS contributed all of its assets and subsidiaries other than
Central Credit, Inc. ("CCI") to a newly formed subsidiary, CRW Financial, Inc.
CCS then spun-off CRW in a distribution of CRW stock to CCS shareholders on May
11, 1995. The historical financial statements of CRW have been deemed to be
those of CCS, restated to present CCI as a discontinued operation.
CRW founded TeleSpectrum Worldwide Inc. in April 1996. TeleSpectrum Worldwide
Inc. ("TLSP") provides teleservices solutions to clients in the
telecommunications, insurance, financial services, pharmaceuticals, and
healthcare, consumer products and high technology industries. CRW formed TLSP in
April 1996 to acquire several teleservices businesses in connection with an
initial public offering of TLSP's common stock. CRW accounts for its investment
in TLSP under the equity method of accounting. In 1996, CRW recorded a $32.1
million increase, net of deferred income taxes, to its investment in TLSP to
reflect the increase in TLSP's equity due to its initial public offering of its
common stock and other issuances of its common stock in connection with the
acquisitions of certain businesses. In 1997, CRW wrote-down its investment in
TLSP by $23.3 million, net of deferred income taxes based on TLSP's net loss of
$160.4 million in 1997. TLSP's net loss included a goodwill write-off of $139.1
million.
In February, 1997, CRW sold the assets of its collection business (see Note 2).
On October 30, 1998, CRW sold its Casino Money Centers, Inc. ("CMC") subsidiary
to Innovative Financial Systems, Inc., an unrelated third party, (see Note 3).
Accordingly, the accompanying financial statements have been restated to present
the collection business and CMC as discontinued operations.
On September 3, 1998, CRW entered into a definitive merger agreement with TLSP
pursuant to which each share of CRW Financial, Inc. will be exchanged for .709
share of TLSP stock. CRW and TLSP have filed a preliminary merger proxy with the
Securities and Exchange Commission and currently expect the merger to close in
the second quarter of 1999.
The continuing operations consist of the CRW's corporate management costs. CRW
has no other operating activities.
2. Sale of the Collection Business
On February 2, 1997, CRW sold the assets of its collection business to NCO
Group, Inc. ("NCOG") for consideration appraised at $12,800,000, consisting of
$3,750,000 in cash, 517,767 shares of NCOG common stock, and a warrant to
purchase 375,000 shares of NCOG stock at $18.42 per share. CRW recorded a gain
of $1,383,000 on the sale of the collection business. The gain on the sale of
the collection business was recorded as follows (in thousands):
Fair Market Value of Consideration Paid by NCOG $ 12,800
Net Assets Sold (7,942)
Retention, Severance Pay and Non-compete Payments (1,339)
Estimated Purchase Price Adjustment (259)
Professional Fees and Accrued Expenses (881)
--------
Gain on sale before income taxes 2,379
Utilization of Net Operating Loss Carryforward (996)
--------
Gain on Sale of Collection Business $ 1,383
========
The appraisal of the consideration paid by NCOG indicated that the fair value of
the 517,767 shares of NCO Group, Inc. common stock received by CRW on February
2, 1997 was $8,300,000, or $16.03 per share, and that the fair value of the
warrant to purchase 375,000 shares of NCO Group, Inc. common stock at $18.42 per
share was $750,000. In July 1997, the Company sold its 517,767 shares of NCO
Group, Inc. common stock for $9,624,000 resulting in a gain of $1,324,000. In
February 1998, the Company sold its warrant to purchase 375,000 shares of NCO
Group, Inc. common stock for $2,664,000 resulting in a gain of $1,914,000.
F-7
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998
The Company accounts for its investment in NCOG in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). At December 31, 1997, the investment
in NCOG was classified as available-for-sale and reported at market value;
therefore, an unrealized holding gain of $1,263,000 was presented as a separate
component of stockholders' equity.
Sale of Casino Money Centers, Inc.
On October 30 1998, CRW sold all of the outstanding stock of CMC to Innovative
Financial Systems, Inc. ("IFS") for $2,250,000 in cash. The purchase price was
payable $1,950,000 on October 30, 1998 and $300,000 in February 1999, subject to
a final purchase price adjustment. The Company recorded a loss of $94,000 on the
sale of CMC. Below is a summary of the loss on the sale of CMC:
Sale proceeds $2,250,000
Net Book Value (1,824,000)
Severance and Transaction Costs (448,000)
Purchase Price Adjustment (72,000)
--------
Loss on Sale of CMC $ (94,000)
==========
4. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of CRW Financial Inc.
As of December 31, 1998, CRW had no operating subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect 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.
Property and Equipment
Property and equipment are stated at cost. CRW provides for depreciation on a
straight-line basis over estimated useful lives of three to five years.
Leasehold improvements are amortized over the lease term. Depreciation expense
for the years ended December 31, 1996, 1997 and 1998 was $33,000, $43,000 and
$9,000, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" (SFAS No. 109). 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.
Statement of Cash Flows
For the years ended December 31, 1996, 1997 and 1998 the Company paid interest
expense of approximately $791,000, $488,000 and $15,000, respectively. The
Company did not pay any income taxes for the years ended December 31, 1996, 1997
and 1998.
F-8
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998
Stock Split
On October 3, 1996, the Company declared a three-for-one stock split payable on
October 24, 1996 to all holders of record on October 14, 1996. All amounts and
per share amounts in the accompanying financial statements have been
retroactively restated to reflect this stock split.
Basic and Diluted Net Income (Loss) Per Common 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. The weighted average number of shares of
common stock outstanding in 1996, 1997 and 1998 for purposes of computing basic
and diluted EPS was 3,793,846, 6,099,118 and 6,549,177 in 1996, 1997 and 1998,
respectively.
5. Investment in TLSP:
On April 29, 1996 CRW formed a wholly owned subsidiary, TeleSpectrum Worldwide
Inc. ("TLSP"). TLSP entered into asset purchase agreements to acquire six
teleservices business contingent upon an initial public offering of its common
stock. CRW made a $2,100,000 capital contribution to TLSP on May 23, 1996 (Note
6). On May 23, 1996, in connection with the acquisitions and initial public
offering, CRW issued warrants to its CEO, CFO, Director of Acquisitions and a
consultant to purchase an aggregate of 839,108 shares of TLSP stock from CRW at
$1.50 per share. The Company obtained an appraisal which indicated that the
warrants had a fair value of $0.75 per warrant on May 23, 1996. Accordingly, the
Company recorded a special non-cash compensation charge of $629,000 on May 23,
1996.
In September 1996, certain subordinated lenders described in Note 6 exercised
warrants to purchase 784,997 shares of TLSP common stock from CRW at $1.50 per
share. As a result, the Company received cash proceeds of $1,177,000 and
recorded a gain on the sale of $1,136,000. In February 1997, certain
subordinated lenders exercised warrants to purchase 809,155 shares of TLSP
common stock from the Company pursuant to the cashless exercise provisions of
the warrants whereby the warrants were canceled in exchange for 732,583 shares
of TLSP stock. In 1998, a warrant holder exercised a warrant to purchase 75,445
shares of TLSP common stock from the Company pursuant to the cashless exercise
provision of the warrant, whereby the warrants were canceled in exchange for
45,974 shares of TLSP common stock. After these exercises, CRW owned 6,946,583
shares of TLSP common stock. If all of the remaining warrants to purchase TLSP
stock are exercised, CRW will receive approximately $1,018,000 of consideration
and would then own 6,238,413 shares of TLSP.
CRW's investment in TLSP has been accounted for on the equity method since
August 1996. The net investment balance at December 31, 1998 and 1997 was
$13,611,000 and $15,266,000, respectively. For the year ended December 31, 1998
and 1997, CRW recorded a $1,655,000 and $39,389,000 loss on its investment in
TLSP, under the equity method, which represented CRW's portion of TLSP's net
loss. These losses were partially offset by a $662,000 and $16,103,000 reduction
in CRW's deferred tax liabilities, respectively. TLSP reported a net loss of
$160,475,000 for the year ended December 31, 1997, primarily due to a goodwill
impairment charge of $139,100,000. At December 31, 1997, TLSP changed it method
of measuring goodwill impairment from an undiscounted cash flow approach to a
discounted cash flow approach because TLSP believes the measurement of the value
of goodwill through a discounted cash flow approach is preferable in that such
method most closely approximates the fair value of goodwill.
F-9
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998
The condensed results of operations for the year ended December 31, 1998 and
financial position as of December 31, 1998 of TLSP, is as follows (in
thousands):
Condensed Statement of Operations Information:
Revenue $ 167,428
Operating Loss (5,941)
Net Loss (6,461)
Condensed Balance Sheet Information:
Current Assets $ 39,960
Non-Current Assets 63,729
Current Liabilities 23,258
Non-Current Liabilities 3,863
Stockholders' Equity 76,568
6. Debt:
December 31,
------------------
1997 1998
---- ----
(In Thousands)
Revolving line of credit with bank $-- $--
Convertible subordinated note to stockholder 126 --
Note payable to All Check Cashing (see Note 6) -- --
Notes payable to stockholders 672 --
---- ----
798 --
Less-Current portion (798) --
---- ----
$-- $--
==== ====
In connection with the Merger and the Distribution discussed in Note 1, CRW
assumed certain bank debt of CCS and refinanced it with proceeds from a
$6,000,000 three-year revolving line of credit. Proceeds from the line of credit
were used to repay all of CCS's bank debt and to provide additional working
capital. In connection with the February 2, 1997 sale of CRW's collection
business, CRW repaid $2,000,000 of the line of credit. In July 1997, CRW repaid
the remaining $6,500,000. In connection with the line of credit, CRW issued to
the bank warrants to purchase an aggregate of 335,554 shares of its common stock
at an average exercise price of $1.95 per share. In 1997, 273,054 of these
warrants were exercised in a cashless exercise whereby the warrants were
canceled in exchange for 241,041 shares of CRW common stock. As a result, the
bank still holds 62,500 warrants with an exercise price of $6.50 per share.
In November 1995, the Company issued a $1,000,000 convertible subordinated note
to J. Brian O'Neill, the Company's CEO. The note bore interest at 12.5% and
requires 36 monthly payments of $33,454. There is no remaining principal balance
due under the note as of December 31, 1998. The note contains a provision which
allows Mr. O'Neill to repay to CRW principal payments made by CRW under the note
during the previous 24 months and convert such repayments into CRW common stock.
During 1996, 1997 and 1998, Mr. O'Neill utilized this provision to repay CRW
$916,455 and convert such amount into 560,989 shares of CRW common stock. As of
December 31, 1998, Mr. O'Neill had the right to repay CRW approximately $83,000
and convert such amount into approximately 51,412 shares of CRW common stock.
Proceeds from the loan were used for capital expenditures and to increase
working capital.
On May 23, 1996, CRW issued $2,100,000 of subordinated notes to certain
directors, shareholders and employees. The subordinated notes were repaid in
September 1996 with proceeds from the bank line. Proceeds from the subordinated
notes were used to capitalize TLSP (see Note 5). In connection with the
subordinated notes, CRW issued warrants ("lender warrants") to the subordinated
lenders and to CRW's bank to purchase 1,433,454 and 74,445 shares of TLSP common
stock, respectively, from CRW for $1.50 per share. The Company obtained an
appraisal which indicated that the lender warrants had a fair value of $0.75 per
warrant on May 23, 1996. Accordingly, the debt was discounted $1,132,000 to
reflect the value of the lender warrants. The repayment of the subordinated debt
in September 1996 resulted in an extraordinary loss of $1,132,000.
F-10
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998
In November 1997, a shareholder and former employee issued a $500,000 demand
note to the Company. The note bears interest at 12% and was repaid in March
1998. Proceeds were used to fund temporary working capital requirements prior to
the sale of the NCO Group, Inc. warrant (Note 2).
In December 1997, a shareholder issued a $172,000 demand note to the Company.
The note is non-interest bearing and was repaid in March 1998. Proceeds were
used to fund temporary working capital requirements prior to the sale of the NGO
Group, Inc. warrant (Note 2).
7. Income Taxes:
The net income tax provision (benefit) consists of the following:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
---- ---- ----
(In Thousands)
Income taxes (benefit) from:
Continuing operations $ (855) $(16,803) $ (150)
Discontinued operation (754) 964 159
-------- -------- --------
Net income taxes (benefit) $ (1,609) $(15,839) $ 9
======== ======== ========
The net income tax benefit in 1996 and 1997 has been allocated to continuing
operations and the discontinued operation by applying CRW's effective income tax
rate to loss from continuing operations and income from the discontinued
operation. The net income tax benefits relate to operating losses incurred
during the periods. The tax benefits result from the reduction of the deferred
tax liabilities. No deferred state tax benefit has been recorded.
The statutory federal income tax rate is different from the effective income tax
rate as indicated below:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
---- ---- ----
Statutory federal income tax rate
(benefit) (34.0)% (34.0)% (34.0)%
Non-deductible
expenses 17.3 -- 9.0
Reduction of deferred tax asset
valuation allowance (17.7) (5.6) (6.0)
----- ----- -----
(34.4)% (39.6)% (31.0)%
===== ===== =====
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and income tax bases of assets and
liabilities given the provisions of tax laws. The net deferred tax asset related
to continuing operations is comprised of the following:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998
---- ----
(In Thousands)
Non-current deferred taxes related
to continuing operations:
Gross assets $ 2,324 $ 2,317
Gross liabilities (5,795) (5,795)
------- -------
Net deferred taxes related to
continuing operations $(3,471) $(3,478)
======= =======
The Company did not have a valuation allowance against deferred tax assets at
December 31, 1997 and 1998, as it believes it is more likely than not that the
deferred tax assets will be realized.
F-11
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998
The tax effect of significant temporary differences representing deferred tax
assets and liabilities related to continuing operations are as follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
(In Thousands)
1997 1998
---- ----
Net Operating loss carryforwards $ 2,324 $ 2,317
Investment in TLSP (5,795) (5,795)
------- -------
Net deferred tax asset (liability) $(3,471) $(3,478)
======= =======
CRW has a June 30 fiscal year-end. As of June 30, 1998, CRW had a net operating
loss carryforward of approximately $9,000,000.
8. Stockholders' Equity:
On February 29, 1996, CRW sold $2.5 million of its Series A Convertible
Preferred Stock (the "Preferred Stock") to an investor group consisting of
several investment funds and certain individuals. In addition, the investor
group received warrants to purchase 451,812 shares of CRW common stock at an
exercise price of $1.94 per share. In December 1996 the Preferred Stock was
converted into 1,290,879 shares of Common Stock. In January 1997, the warrants
were exercised pursuant to a cashless exercise whereby the warrants were
exchanged for 354,586 shares of CRW common stock. In connection with the sale of
the Preferred Stock, the Company's Chief Executive Officer, J. Brian O'Neill,
entered into a put agreement which provided the investor group with the right to
require Mr. O'Neill to purchase their Preferred Stock at a price of $3.87 per
share on March 1, 1999. In connection with the put agreement, the Company
granted Mr. O'Neill a warrant to purchase 300,000 shares of CRW common stock at
an exercise price of $1.94 per share. The warrant expires on August 31, 1999.
9. Commitments and Contingencies:
CRW and CMC had noncancelable related-party leases discussed in Note 10, for its
office facilities. Rent expense under leases related to discontinued operations
was $378,000 in 1996, $172,000 in 1997 and $30,000 in 1998. The future minimum
lease payments under leases related to continuing operations at December 31,
1998, net of sublease commitments is zero.
CRW is a party to a lawsuit which was incidental to the ordinary course of
business of its collection business. NCOG did not assume any potential liability
under such lawsuits in connection with NCOG's acquisition of the net assets of
the collection business in February 1997. The Company intends to vigorously
defend all such actions and, in the current opinion of management, the ultimate
resolution of such actions will not have a material adverse effect on the
Company's business, financial condition or results of operations. The actual
results of these claims, however, could be materially different.
F-12
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998
10. Related Party Transactions:
Since April 1998, CRW has shared office space on a month to month basis with the
O'Neill Group, LLC, a partnership controlled by J. Brian O'Neill. CRW pays the
O'Neill Group $3,000 a month for rent and other office expenses. In 1998, CRW
paid the O'Neill Group $27,000 for rent and office expenses. In June 1998, CMC
entered into a lease for office space from Swedesford Road L.P., a partnership
controlled by J. Brian O'Neill. CMC paid approximately $30,000 in rent for the
office space in 1998. From December 1996 to August 1997, CRW leased an aggregate
of 13,000 square feet in King of Prussia, Pennsylvania from 210 Mall Boulevard
Associates, a partnership which is controlled by J. Brian O'Neill, CRW's Chief
Executive Officer. From February 1997 to July 1997, NCO Group, Inc. subleased
the facility from CRW. In August 1997, the sublease expired and the lease
between CRW and 210 Mall Boulevard Associates was terminated. In 1996 and 1997,
respectively, CRW paid $11,739 and $33,000 in rent to 210 Mall Boulevard
Associates. CRW also subleases a 22,000 square foot facility in King of Prussia,
PA from Cendant Corporation and has subleased the facility to TLSP. Cendant
currently leases the facility from an unrelated party. However, prior to October
1997, Cendant leased the facility from CRW Building Limited Partnership, a
partnership controlled by Mr. O'Neill. Prior to subleasing the facility to TLSP,
CRW paid approximately $365,000 in rent in 1996 under the sublease from Cendant.
In addition, CRW also leased office space in 1996 in Conshohocken, PA, from Lee
Park Investors, L.P., a partnership controlled by Mr. O'Neill. The lease was
assumed by NCOG on February 2, 1997. CRW paid approximately $46,000 and $4,000
in rent in 1996 and 1997, respectively to Lee Park Investors, L.P.
CMC leases approximately 3,000 square feet of space in Las Vegas, Nevada on a
month to month basis. Rent expense for this facility was approximately $115,000
in 1997 and $95,000 in 1998.
The aggregate minimum rent due from the Company on all of the above leases
through the end of their terms, net of commitments for payments under subleases,
is zero. Management believes the Company's existing facilities are sufficient to
support its anticipated needs in 1998.
11. Stock Option Plan:
The Company established the CRW 1995 Stock Option Plan (the "Plan") for its
employees, directors and certain other individuals. The Company may grant either
non-qualified or incentive stock options under the Plan. An aggregate of
3,000,000 shares of common stock have been reserved for the Plan. A committee of
the Board of Directors administers the Plan and determines the terms of the
option grants. Options vest as determined by the Board and expire no later than
10 years from the date of grant. Each option entitles the holder to purchase one
share of common stock at the indicated exercise price. As of December 31, 1998,
options to acquire 1,122,500 shares were outstanding at exercise prices ranging
from $0.97 to $10.00 per share. All of the options outstanding are exercisable.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for the CRW 1995 Stock
Option Plan. All options granted under the plan have been with exercise prices
equal to the fair market value of the stock on the date of grant. Accordingly,
no compensation expense has been recognized for the grants under the Plan. Had
compensation cost for the Plan been determined consistent with the methodology
prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's loss and loss per share would have been approximately ($4,560,000), or
($0.93) per
F-13
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998
share in 1996. The Company did not grant any options during 1997 or 1998. As
such, SFAS No. 123 does not impact the 1997 and 1998 loss or loss per share
because all options granted before 1997 were fully vested. The pro forma effect
for 1996 is not representative of the pro forma effect on earnings in future
years since it does not take into consideration the pro forma compensation
expense related to grants made prior to 1996. The fair value of each option
granted during 1996 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of 0%,
expected volatility of 82%, risk-free interest rate of 5.23% in 1996, and an
expected life of 3 years. The weighted average fair value at the date of grant
for options granted during 1996 was $1.54 per share, respectively. The weighted
average remaining contractual life of the outstanding stock options at December
31, 1998 was five years.
The following table summarizes the aggregate option activity under the plan:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price
Activity Exercise Price Per Share
-------- -------------- ----------------
<S> <C> <C> <C>
Balance outstanding,
December 31, 1995 825,000 $0.97-$ 1.27 $ 0.99
Granted 1,140,000 $1.94-$10.00 $ 3.37
Exercised (482,475) $0.97-$ 7.92 $ 1.89
Canceled -- -- --
Balance outstanding,
December 31, 1996 1,482,525 $0.97-$10.00 $ 2.50
Granted -- -- --
Exercised (224,408) $0.97-$ 3.75 $ 1.88
Canceled -- -- --
Balance outstanding,
December 31, 1997 1,258,117 $0.97 - $10.00 $ 2.55
Granted -- -- --
Exercised (110,867) $0.97-$3.75 $ 3.63
Canceled (24,750) $7.23 $ 7.23
--------- ----- --------
Balance outstanding
December 31, 1998 1,122,500 $0.97 - $10.00 $ 2.45
========= ============== ========
</TABLE>
F-14
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998
Options to purchase 1,122,500 and 1,258,117 shares of common stock were
exercisable at an average exercise price of $2.45 and $2.55 at December 31, 1998
and 1997, respectively. At December 31, 1998, 1,035,000 shares were available
for future grants under the Plan.
During 1996, 1997 and 1998, the Company received proceeds of $1,128,000,
$714,000 and $797,000, respectively, from the exercise of stock options.
12. Discontinued Operations:
The following table summarizes the operating results of the collection business,
CMC and CCI (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net revenues $ 30,844 $ 6,995 $ 4,936
Operating expenses 32,591 7,005 4,547
Other expenses 9 -- --
Income (loss) before
income taxes (1,756) (10) 389
Income taxes (benefit) (754) (32) 159
-------- -------- --------
Income (loss) from discontinued
Operations ($ 1,002) $ 22 $ 230
======== ======== ========
</TABLE>
The following table summarizes the net assets of Casino Money Centers, Inc. as
of December 31, 1997 (in thousands):
Current assets $ 1,678
Property and equipment 197
Intangible assets, net 352
Other assets 9
-------
Total assets 2,236
Current liabilities (498)
-------
Net assets $ 1,738
=======
F-15
<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.
CRW FINANCIAL, INC.
Dated: March 30, 1999 By: /s/ J. Brian O'Neill
---------------------------
J. Brian O'Neill
Chief Executive
Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ J. Brian O'Neill Chief Executive Officer and Director March 30, 1999
- -------------------------- (Principal Executive Officer)
J. Brian O'Neill
/s/ Jonathan P. Robinson Chief Financial Officer and Principal March 30, 1999
- -------------------------- Financial and Accounting Officer
Jonathan P. Robinson
/s/ Robert N. Verratti Director March 30, 1999
- --------------------------
Robert N. Verratti
/s/ Bernard Morgan Director March 30, 1999
- --------------------------
Bernard Morgan
/s/ Mark J. DeNino Director March 30, 1999
- --------------------------
Mark J. DeNino
/s/ Eustace W. Mita Director March 30, 1999
- --------------------------
Eustace W. Mita
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant (1)
3.2 Amendment to Restated Certificate of Incorporation of the
Registrant (2)
3.3 Amended Bylaws of the Registrant (3)
4.1 Term Loan Note and Addendum dated November 1, 1995
executed by the Registrant in favor of J. Brian O'Neill
and Miriam P. O'Neill (2)
10.1 Agreement of Lease dated as of July, 1994, between CRW Building
Limited Partnership and Casino and Credit Services, Inc. (1)
10.2 Sublease Agreement dated May 10, 1995 between Casino and Credit Services, Inc.
and the Registrant (3)
10.3 Sublease Agreement between TeleSpectrum Worldwide Inc. and the
Registrant (2)
10.4 Lease Agreement dated July 1, 1996 between the Registrant and
Lee Park Investors, L.P. (2)
10.5 Lease Agreement dated December 5, 1996 between the
Registrant and 210 Mall Boulevard Associates (2)
10.6 Employment Agreement dated May 11, 1995 between J. Brian O'Neill
and the Registrant (3)
10.7 Employment Agreement dated May 11, 1995 between Jonathan P.
Robinson and the Registrant (3)
10.8 Amended and Restated 1995 Stock Option Plan of the Registrant(4)
10.9 Asset Acquisition Agreement dated February 2, 1997 among the
Registrant, Kaplan & Kaplan, Inc., NCO Group, Inc., CRWF
Acquisition, Inc. and K & K Acquisition, Inc. (5)
10.10 Merger Agreement between CRW Financial, Inc. and TeleSpectrum Worldwide Inc.
21 Subsidiaries of the Registrant (6)
23 Consent of Arthur Andersen LLP (6)
27 Financial Data Schedule (Electronic Filing Only)
</TABLE>
(1) Filed as an Exhibit to the Form 10-K filed with the Securities and Exchange
Commission on March 29, 1996 and incorporated herein by reference.
(2) Filed as an Exhibit to the Form 10-K filed with the Securities and Exchange
Commission on April 6, 1997 and incorporated herein by reference.
(3) Filed as an Exhibit to the Registration Statement on Form S-1 (No. 33-62700)
and incorporated herein by reference.
(4) Filed as an Exhibit to CRW's definitive proxy statement for its 1996 Annual
Meeting of Stockholders and incorporated herein by reference.
(5) Filed as an Exhibit to CRW's Form 8-K dated February 2, 1997 and
incorporated herein by reference.
(6) Filed herewith.
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (File No. 333-10615) and on Form S-3 (File
No. 333-10871).
Philadelphia, Pa.,
March 22, 1999
<PAGE>
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] DEC-31-1998
[CASH] 0
[SECURITIES] 2,118
[RECEIVABLES] 0
[ALLOWANCES] 339
[INVENTORY] 0
[CURRENT-ASSETS] 0
[PP&E] 2,457
[DEPRECIATION] 40
[TOTAL-ASSETS] 0
[CURRENT-LIABILITIES] 18,425
[BONDS] 596
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 0
[OTHER-SE] 69
[TOTAL-LIABILITY-AND-EQUITY] 11,965
[SALES] 0
[TOTAL-REVENUES] 0
[CGS] 539
[TOTAL-COSTS] 539
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 17
[INCOME-PRETAX] (483)
[INCOME-TAX] (150)
[INCOME-CONTINUING] (333)
[DISCONTINUED] 196
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (197)
[EPS-BASIC] (0.03)
[EPS-DILUTED] (0.03)
</TABLE>
<PAGE>
ANNEX IV:
QUARTERLY REPORT ON FORM 10-Q OF CRW FINANCIAL, INC.
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<PAGE>
ANNEX IV
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
----------------------------------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from__________________ to __________________
Commission file number 0-26014
-----------
CRW Financial, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2691986
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. employer identification no.)
or incorporation or organization)
200 Four Falls Corporate Center, Suite 415 West Conshohocken, PA 19428
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 610/878-0879
-----------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (1) has filed all reports required
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of the registrant's common stock outstanding as of
April 20, 1999 was 6,917,521.
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1998 AND MARCH 31, 1999 3
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 4
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 5
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 9
PART II-OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 11
<PAGE>
In addition to historical information, this Quarterly Report contains
forward-looking statements relating to such matters as anticipated financial
performance, business prospects and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operation, performance, development and
results of the Company's business include, but are not limited to, those matters
discussed herein in the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The words "believe,"
"expect," "anticipate," "project" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof.
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, 1998 MARCH 31, 1999
------ ----------------- --------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS: (In Thousands, Except Share Amounts)
Cash $2,118 $1,656
Other current assets 339 200
--- ---
Total current assets 2,457 1,856
PROPERTY AND EQUIPMENT, net 40 38
INVESTMENT IN TELESPECTRUM WORLDWIDE INC 13,611 14,811
DEFERRED INCOME TAX ASSET 2,317 1,868
----- -----
$18,425 $ 18,573
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $63 $--
Accrued expenses 533 100
----- -----
Total current liabilities 596 100
--- ---
DEFFERED INCOME TAXES 5,795 5,795
----- -----
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, 500,000 shares authorized,
no shares issued and outstanding ---- ----
Common Stock $.01 par value, 20,000,000 shares authorized
6,435,486 and 6,917,521 shares issued
and outstanding, respectively 69 69
Additional paid-in capital 41,278 41,278
Accumated deficit (29,313) (28,669)
-------- --------
Total stockholders' equity 12,034 12,678
------ ------
$18,425 $ 18,573
======= ========
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------
1998 1999
---- ----
(In Thousands, except share amounts)
<S> <C> <C>
NET REVENUES $ -- $ --
OPERATING EXPENSES, excluding
Non-cash charges 157 70
DEPRECIATION AND AMORTIZATION 3 2
- -
Operating Income (Loss) (160) (72)
INTEREST INCOME (EXPENSE) (9) 21
GAIN ON SALE OF NCO GROUP, INC. WARRANT 1,914 --
EQUITY IN EARNINGS (LOSS) OF TELESPECTRUM WORLDWIDE INC (2,475) 1,200
------- ------
Income (loss) from continuing operations
before income taxes (730) 1,149
INCOME TAXES (BENEFIT) (291) 449
----- ---
INCOME (LOSS) FROM CONTINUING OPERATIONS (439) 700
INCOME FROM DISCONTINUED OPERATIONS,
NET (Note 6) 121 --
LOSS ON SALE OF DISCONTINUED OPERATIONS, NET (Note 4) -- (56)
--- -----
NET INCOME (LOSS) $ (318) $ 644
======== =======
BASIC NET INCOME (LOSS) PER SHARE:
Continuing Operations $ (0.07) $ 0.10
Discontinued Operations 0.02 (0.01)
---- ------
$ (0.05) $ 0.09
======== =======
DILUTED NET INCOME (LOSS) PER SHARE:
Continuing Operations $ (0.07) $ 0.09
Discontinued 0.02 (0.01)
---- ------
Operations $ (0.05) $ 0.08
======== =======
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1998 1999
---- ----
(In Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (318) $ 644
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Gain on sale of NCO Group, Inc. warrant (1,914) --
Equity in (earnings) loss of TeleSpectrum 2,475 (1,200)
Loss on sale of CMC -- 56
Discontinued operations - non-cash charges
and working capital charges 95 --
Depreciation and amortization 3 2
Deferred tax provision (benefit) (291) 449
Decrease in other assets (19) 83
Increase (decrease) in liabilities
Accounts payable (139) (63)
Accrued expenses (1,291) (433)
------- -----
Net cash used in operating activities (1,399) (462)
------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of NCO Group, Inc. warrant 2,664 --
Purchases of property and equipment (15) --
Net cash provided by investing activities 2,649 --
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 44 --
Repayments of long term debt (655) --
Net cash used in financing activities (611) --
----- --
INCREASE (DECREASE) IN CASH 639 (462)
CASH, BEGINNING OF PERIOD 1,646 2,118
----- -----
CASH, END OF PERIOD $ 2,285 $ 1,656
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Background:
CRW Financial, Inc. was a subsidiary of Casino & Credit Services, Inc.
prior to May 11, 1995, and CRW's operations were a division of CCS from July
1992 to May 11, 1995 when CCS contributed all of its assets and subsidiaries
other than Central Credit, Inc. ("CCI") to a newly formed subsidiary, CRW
Financial, Inc. CCS then spun-off CRW in a distribution of CRW stock to CCS
shareholders on May 11, 1995. The historical financial statements of CRW have
been deemed to be those of CCS, restated to present CCI as a discontinued
operation.
CRW founded TeleSpectrum Worldwide Inc. in April 1996. TeleSpectrum
Worldwide Inc. ("TLSP") provides teleservices solutions to clients in the
telecommunications, insurance, financial services, pharmaceuticals, and
healthcare, consumer products and high technology industries. CRW formed TLSP in
April 1996 to acquire several teleservices businesses in connection with an
initial public offering of TLSP's common stock. CRW accounts for its investment
in TLSP under the equity method of accounting. In 1996, CRW recorded a
$32.1million increase, net of deferred income taxes, to its investment in TLSP
to reflect the increase in TLSP's equity due to its initial public offering of
its common stock and other issuances of its common stock in connection with the
acquisitions of certain businesses. In 1997, CRW wrote-down its investment in
TLSP by $23.3 million, net of deferred income taxes based on TLSP's net loss of
$160.4 million in 1997. TLSP's net loss included a goodwill write-off of $139.1
million. For the three months ended March 31, 1999, CRW recorded a $1.2 million
increase to its investment in TLSP based on TLSP's net income of $4.7 million
for the three months ended March 31, 1999.
In February, 1997, CRW sold the assets of its collection business (see
Note 4). On October 30, 1998, CRW sold its Casino Money Centers, Inc. ("CMC")
subsidiary to Innovative Financial Systems, Inc., an unrelated third party, (see
Note 4). Accordingly, the accompanying financial statements have been restated
to present the collection business and CMC as discontinued operations. On
September 3, 1998, CRW entered into a definitive merger agreement with TLSP
pursuant to which each share of CRW Financial, Inc. will be exchanged for .709
share of TLSP stock. CRW and TLSP have filed a preliminary merger proxy with the
Securities and Exchange Commission and currently expect the merger to close in
the second quarter of 1999.
The continuing operations consist of the CRW's corporate management
costs. CRW has no other operating activities.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with generally accepted accounting principles.
The interim financial information, while unaudited, reflects all normal
recurring adjustments which are, in the opinion of management, necessary for a
fair presentation of the interim financial statements. The results for the three
months ended March
<PAGE>
31, 1999 are not necessarily indicative of results expected for the full year.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the CRW Financial, Inc.
Annual Report on Form 10-K for the year ended December 31, 1998.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
3. Basic and Diluted Net Income (Loss) Per Common Share
The Company has adopted SFAS No. 128, "Earnings per Share". SFAS No. 128
requies 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. The weighted average number of shares of
common stock outstanding at March 31, 1999 and 1998 for the purposes of
computing basic and diluted EPS was 6,917,521 and 7,872,408 and 6,447,170 and
6,447,170, respectively.
4. Sale of Collection Business and Casino Money Centers, Inc.
On February 2, 1997, CRW sold the assets of its Collection Business to NCO
Group, Inc. ("NCOG") for consideration appraised at $12,800,000, consisting of
$3,750,000 in cash, 517,767 shares of NCOG common stock, and a warrant to
purchase 375,000 shares of NCOG stock at $18.42 per share. CRW recorded an
after-tax gain of $1,383,000 on the sale of the Collection Business. The gain
did not result in the payment of any Federal income taxes as the Company had
sufficient net operating loss carryforwards to offset taxes due on the gain. The
appraisal of the consideration paid by NCOG indicated that the fair value of the
517,767 shares of NCOG common stock received by CRW on February 2, 1997 was
$8,300,000, or $16.05 per share, and that the fair value of the warrant to
purchase 375,000 shares of NCOG common stock at $18.42 per share was $750,000.
In July 1997, the Company sold its 517,767 shares of NCOG common stock for
$9,624,000 resulting in a gain of approximately $1,324,000. In February 1998,
the Company sold its warrant to purchase 375,000 shares of NCOG common stock for
approximately $2,664,000, resulting in a gain of approximately $1,914,000.
On October 30 1998, CRW sold all of the outstanding stock of CMC to
Innovative Financial Systems, Inc. ("IFS") for $2,250,000 in cash. The purchase
price was payable $1,950,000 on October 30, 1998 and $300,000 in February 1999,
subject to a final purchase price adjustment.
5. Investment in TeleSpectrum Worldwide Inc.
The Company's common stock investment in TLSP is accounted for on the
equity method. The net investment balance at March 31, 1999 is $14,811,000. The
condensed results of operations of TLSP for the three months ended March 31,
1999 and 1998 are as follows (in thousands):
1999 1998
---- ----
Condensed Statement of Operations Information:
<PAGE>
Revenue $47,925 $39,634
Operating Income (Loss) 4,914 (9,990)
Net Income (Loss) 4,742 (10,069)
March 31,
1999 1998
---- ----
Condensed Balance Sheet Information:
Current Assets $51,229 $62,740
Non-current Assets 67,122 64,231
Current Liabilities 33,130 49,037
Non-current Liabilities 3,570 7,258
Stockholders' Equity 81,651 70,676
As of March 31, 1999, CRW owned 6,946,583 shares of TLSP common stock.
During the first quarter of 1998, a warrant to purchase 75,445 shares of TLSP
common stock from the Company was exercised pursuant to the cashless exercise
provision of the warrant, whereby the warrant was cancelled in exchange for the
Company's transfer to the warrant holder of 45,974 shares of TLSP common stock.
After this exercise and as of March 31, 1999, warrants to purchase 678,410
shares of TLSP from CRW for $1.50 per share remained outstanding. Therefore, if
all the remaining warrants to purchase TLSP stock are exercised, CRW will
receive approximately $1,017,000 of consideration and would then own 6,268,173
shares of TLSP common stock.
6. Discontinued Operations
Below is a summary of the operating results for the Casino Money
Centers, Inc., which as discussed in Notes 1 and 4 was sold on October 30, 1998
and has been classified as a discontinued operation (In thousands):
Three Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
Net Revenues $ ---- $ 1,658
Operating Expenses, ---- 1,457
---- --------
Operating Income ---- 201
Income Taxes ---- 80
---- --
Income from discontinued operations $ ---- $ 121
======== ========
<PAGE>
7. Common Stock Equivalents
As of March 31, 1999, the Company had outstanding the following common
stock equivalents:
Number of Aggregate
Common Stock Exercise
Equivalents Proceeds
----------- --------
Incentive and non-qualified options
to purchase common stock 1,122,500 $2,767,375
Convertible subordinated note 51,433 83,579
Warrants to purchase common stock 362,500 987,250
------- -------
1,536,433 $3,838,204
========= ==========
All of the common stock equivalents listed above are exercisable.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CRW's operating results have been restated to reflect the classification of the
Collection Business and CMC as discontinued operations.
Continuing Operations
- ---------------------
Three Months Ended March 31, 1999 and March 31, 1998
Operating Expenses. Operating expenses decreased $88,000 (55%) to
------------------
$72,000 for the three months ended March 31, 1999 from $160,000 for the three
months ended March 31, 1998, primarily due to a decrease in salary expenses for
administration of the Company, consisting mainly from a $69,000 decrease in
salary during the quarter for the Chief Executive Officer of the Company.
Operating Income (Loss). The Company's operating loss was $72,000 for
-----------------------
the three months ended March 31, 1999 compared to $160,000 for the three months
ended March 31, 1998 due to the decrease in operating expenses.
Interest Income (Expense). Interest income was $21,000 for the three
-------------------------
months ended March 31, 1999 compared to $(9,000) of interest expense for the
three months ended March 31, 1998 due to
<PAGE>
proceeds from the sale of the Company's warrant to purchase NCOG stock in the
first quarter of 1998, the proceeds of which were used to repay all of the
Company's debt and due to interest income on proceeds from the sale of CMC in
the fourth quarter of 1998.
Income Taxes. An income tax provision of $449,000 was recorded for
------------
the three months ended March 31, 1999 compared to a benefit of $211,000 for the
three months ended March 31, 1998. The effective income tax rate was
approximately 40% in 1998 and 1999.
INFLATION
Inflation has not had a significant impact on the Company's operations
to date.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1999 net cash used in operating
activities was $462,000 compared to $1,399,000 of cash used in operating
activities for the three months ended March 31, 1998. The decrease in cash used
in operating activities in the 1999 period was primarily due to a decrease in
cash used to pay accrued expenses.
Net cash provided by investing activities during the three months ended
March 31, 1999 was zero compared to $2,649,000 of cash provided by investing
activities for the three months ended March 31, 1998 primarily due to $2,664,000
of proceeds from the Company's sale of its NCO Group warrant in the 1998 period.
Net cash used in financing activities during the three months ended
March 31, 1999 was zero compared to $611,000 of cash used in financing
activities for the three months ended March 31, 1998 primarily due to $655,000
of repayments of long-term debt in the 1998 period.
CRW believes that its cash on hand will be adequate to meet its needs
through December 31, 1999.
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Number Document
------ --------
3.1 Restated Certificate of Incorporation of the
Company (1)
3.2 Amendment to Restated Certificate of Incorporation of
the Company (2)
3.3 Amended Bylaws of the Company (3)
27 Financial Data Schedule
(1) Filed as an Exhibit to the Company's Form 10-K for the fiscal year ended
December 31, 1995 and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Form 10-K for the fiscal year ended
December 31, 1996 and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(File No. 33-62700) and incorporated herein by reference.
(b) No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CRW FINANCIAL, INC.
-------------------
(Registrant)
Date: April ___, 1999 BY: /s/ Jonathan P. Robinson
------------------------
Jonathan P. Robinson,
Chief Financial Officer
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 102(b)(7) of the Delaware General Corporations Law (DGCL) permits a
corporation, in its certificate of incorporation, to limit or eliminate,
subject to certain statutory limitations, the liability of directors and/or its
shareholders for monetary damages for breaches of their fiduciary duty.
Liability, however, may not be limited (a) for any breach of the director's
duty of loyalty to the corporation or its shareholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the DGCL's provisions for
director liability in the case of an unlawful payment of dividends or the
unlawful purchase or redemption of stock, and (d) for any transaction from
which the director derived an improper benefit. Article VII of TeleSpectrum's
Certificate of Incorporation provides that the personal liability of directors
of the registrant is eliminated to the fullest extent permitted by Section
102(b)(7) of the DGCL.
Section 145 of the DGCL permits indemnification of directors, officers,
agents and controlling persons of a corporation under certain conditions and
subject to certain limitations. Under this Section, a corporation may indemnify
any of its directors or officers who were or are a party, or are threatened to
be made a party to any third party proceeding by reason of the fact that such
person is or was a director or officer of the corporation, against expenses
(including attorney's fees), judgements, fines and amounts paid in settlement,
which are actually and reasonably incurred by such person in connection with
such action, suit or proceeding, if such person acted in good faith and in a
manner such person reasonably believed to be in, or not opposed to, the best
interests of the corporation. With respect to any criminal action or
proceeding, indemnification is permitted only in cases where there is no reason
to believe that such person's conduct was unlawful. In a derivative action,
i.e., one by or in the right of the corporation, the corporation is permitted
to indemnify directors and officers against expenses (including attorneys'
fees) which are actually and reasonably incurred by them in connection with the
defense or settlement of an action or suit if they acted in good faith and in a
manner that they reasonably believed to be in, or not opposed to, the best
interest of the corporation. No indemnification shall be made, however, if such
person has been adjudged liable to the corporation, unless and only to the
extent that the court in which the action or suit was brought shall determine,
upon application, that the defendant directors or officers are fairly and
reasonably entitled to indemnity for their expenses despite such adjudication
of liability. Article VII of TeleSpectrum's Restated Certificate of
Incorporation and Bylaws provides that the company will, upon a finding by the
company that the person has met the applicable standards of conduct set forth
in the Certificate of Incorporation, indemnify any person who was or is an
authorized representative of the corporation, and who was or is a party, or is
threatened to be made a party to any third party proceeding, by reason of the
fact that such person was or is an authorized representative of the company to
the extent permitted under the DGCL. In addition, this Article makes
indemnification mandatory to the extent that an authorized representative or
other employee or agent of the corporation has been successful on the merits or
otherwise in defense of any third party or corporate proceeding or in defense
of any claim, issue or matter therein, such person shall be indemnified against
expenses actually and reasonably incurred by such person in connection
therewith.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 Restated Certification 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).
3.2 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).
4.1 Form of Warrant to Purchase Common Stock of TeleSpectrum Worldwide
Inc. issuable to certain security holders of International Data
Response Corporation.
4.2 TeleSpectrum Stockholder Support Agreement dated as of January 14,
1999 between Keith E. Alessi and IDRC is incorporated by reference to
Exhibit 9.1 to Registrant's Current Report on Form 8-K filed on
January 26, 1999.
4.3 TeleSpectrum Stockholder Support Agreement dated as of January 14,
1999 between J. Brian O'Neill and IDRC is incorporated by reference to
exhibit 9.2 to Registrant's Current Report on Form 8-K filed on
January 26, 1999.
4.4 TeleSpectrum Stockholder Support Agreement dated as of January 14,
1999 between Richard W. Virtue and IDRC is incorporated by reference
to exhibit 9.3 to Registrant's Current Report on Form 8-K filed on
January 26, 1999.
4.5 TeleSpectrum Stockholder Support Agreement dated as of January 14,
1999 between CRW Financial Inc. and IDRC is incorporated by reference
to exhibit 9.4 to Registrant's Current Report on Form 8-K filed on
January 26, 1999.
4.6 Form of IDRC Stockholder Support Agreement dated as of January 14,
1999 between IDRC Stockholder and TeleSpectrum is incorporated by
reference to exhibit 9.5 to Registrant's Current Report on Form 8-K
filed on January 26, 1999.
5.1 Opinion of Morgan, Lewis & Bockius LLP regarding legality of the
securities being registered.
8.1 Opinion of Morgan, Lewis & Bockius LLP regarding certain tax matters.
8.2 Opinion of Cooley Godward LLP regarding certain tax matters.
8.3 Opinion of Arthur Andersen LLP regarding certain tax matters.
10.01 Consulting Agreement between TeleSpectrum Worldwide Inc. and Richard
W. Virtue incorporated by reference to exhibit 10.14 to our 1997
Annual Report on Form 10-K.
10.02 Employment Agreement, dated as of March 18, 1998, between TeleSpectrum
Worldwide Inc. and Keith E. Alessi is incorporated by reference to
exhibit 10.08 to our 1997 Annual Report on Form 10-K.
10.03 Subscription Agreement dated as of March 18, 1998 between TeleSpectrum
Worldwide Inc. and Keith E. Alessi is incorporated by reference to
exhibit 10.09 to our 1997 Annual Report on Form 10-K.
10.04 Stock Option Agreement dated as of March 18, 1998 between TeleSpectrum
Worldwide Inc. and Keith E. Alessi is incorporated by reference to
exhibit 10.10 (a) to our 1997 Annual Report on Form 10-K.
10.05 Stock Option Agreement dated as of March 18, 1998 between TeleSpectrum
Worldwide Inc. and Keith E. Alessi is incorporated by reference to
exhibit 10.10 (b) to our 1997 Annual Report on Form 10-K.
10.06 Amended and Restated Employment Agreement, dated as of February 25,
1998, between TeleSpectrum Worldwide Inc. and J. Brian O'Neill is
incorporated by reference to exhibit 10.11 to our 1997 Annual Report
on Form 10-K.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.07 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).
10.08 Amendment No. 1 to 1996 Equity Compensation Plan is incorporated by
reference to exhibit 10.15 to 1997 Annual Report on Form 10-K.
10.09 Asset Purchase Agreement dated as of March 6, 1998 by and among
TeleSpectrum Worldwide Inc., First Service Corporation, DDS Dyment
Distribution Service, Ltd., DDS Harris Limited and DDS Harris
Fulfillment, Limited is incorporated by reference to exhibit 10.17 to
our 1997 Annual Report on Form 10-K.
10.10 Asset Acquisition Agreement dated as of January 16, 1998 by and among
TeleSpectrum Worldwide Inc., NCO Group, Inc. and NCO Teleservices,
Inc. is incorporated by reference to exhibit 10.18 to our 1997 Annual
Report on Form 10-K.
10.11 Agreement and Plan of Merger dated as of January 14, 1999 by and among
TeleSpectrum Worldwide Inc., International Data Response Corporation,
McCown De Leeuw & Co. III, L.P., McCown De Leeuw & Co. Offshore
(Europe) III, L.P., McCown De Leeuw & Co. III, (Asia) L.P. and The
Gamma Fund LLC is incorporated by reference to Exhibit 2.1 of the
Registrant's Current Report on Form 8-K filed on January 26, 1999.
10.12 Amendment No. 1 to Agreement and Plan of Merger dated as of February
26, 1999 by and among TeleSpectrum Worldwide Inc., International Data
Response Corporation, McCown De Leeuw & Co. III, L.P., McCown De Leeuw
& Co. Offshore (Europe) III, L.P., McCown De Leeuw & Co. III, (Asia)
L.P., and The Gamma Fund LLC is incorporated by reference to Exhibit
10.13 of our 1998 Annual Report on Form 10-K.
10.13 Agreement and Plan of Merger and Reorganization, dated as of September
3, 1998 by and among CRW Financial, Inc., TeleSpectrum Worldwide Inc.,
and CRW Acquisition Corp is incorporated by reference to Exhibit 10.14
of our 1998 Annual Report on Form 10-K.
10.14 Amendment No. 1 to Agreement and Plan of Merger and Reorganization,
dated as of December 30, 1998 by and among CRW Financial, Inc.,
TeleSpectrum Worldwide Inc., and CRW Acquisition Corp is incorporated
by reference to Exhibit 10.15 of our 1998 Annual Report on Form 10-K.
10.15 Amendment No. 2 to Agreement and Plan of Merger dated as of February
26, 1999 by and among TeleSpectrum Worldwide Inc., International Data
Response Corporation, McCown De Leeuw & Co. III, L.P., McCown De Leeuw
& Co. Offshore (Europe) III, L.P., McCown De Leeuw & Co. III, (Asia)
L.P., and the Gamma Fund LLC.
10.16 Form of Indemnity Escrow Agreement.
10.17 Amendment and Restatement of 1996 Equity Compensation Plan.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Arthur Andersen LLP.
23.4 Consent of Morgan, Lewis & Bockius LLP (included in its opinions filed
as part of Exhibits 5.1
and 8.1)
23.5 Consent of Cooley Godward LLP (included in its opinion filed as part
of Exhibit 8.2)
23.6 Consent of Arthur Andersen LLP (included in its opinion filed as part
of Exhibit 8.3)
23.7 Consent of J.P. Morgan Securities, Inc.
23.8 Consent of Janney Montgomery Scott, Inc.
23.9 Consent of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
24 Powers of Attorney (included on the signature page).
99.1 Form of Proxy of TeleSpectrum Worldwide Inc.
99.2 Form of Proxy of CRW Financial, Inc.
99.3 Form of Proxy of International Data Response Corporation.
</TABLE>
(b) Financial Statement Schedules:
Item 22. Undertakings
(1) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in King of Prussia,
Pennsylvania on June 8, 1999.
TeleSpectrum Worldwide Inc.
/s/ Keith E. Alessi
By: _________________________________
Keith E. Alessi
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated. Each person whose signature appears
below in so signing also makes, constitutes and appoints Keith E. Alessi, his
true and lawful attorney-in-fact, with full power of substitution, for him in
any and all capacities, to execute and cause to be filed with the Securities
and Exchange Commission any or all amendments and post-effective amendments to
this Registration Statement, with exhibits thereto and other documents in
connection therewith, and hereby ratifies and confirms all that said attorney-
in-fact or his substitute or substitutes may do or cause to be done by virtue
hereof.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Keith E. Alessi President, Chief Executive June 8, 1999
______________________________________ Officer and Director
Keith E. Alessi (principal executive
officer and principal
financial and accounting
officer)
/s/ Joseph V. Del Raso Director June 8, 1999
______________________________________
Joseph V. Del Raso
/s/ Michael E. Julian Director June 8, 1999
______________________________________
Michael E. Julian
/s/ David L. Kriegel Director June 8, 1999
______________________________________
David L. Kriegel
/s/ J. Brian O'Neill Director June 8, 1999
______________________________________
J. Brian O'Neill
/s/ Richard W. Virtue Director June 8, 1999
______________________________________
Richard W. Virtue
/s/ Kevin W. Walsh Director June 8, 1999
______________________________________
Kevin W. Walsh
</TABLE>
S-1
<PAGE>
Exhibit 4.1
No. I-_________________ Warrant to Purchase
________ shares of Common Stock
Dated as of __________, 1999
WARRANT
TO PURCHASE COMMON STOCK OF
TELESPECTRUM WORLDWIDE INC.
THIS CERTIFIES that ______________________________ (the "Holder"), is
entitled to purchase from TeleSpectrum Worldwide Inc., a corporation organized
and existing under the laws of Delaware (the "Company"), at any time after the
first anniversary of the date hereof and until 5:00 P.M. (Eastern Time) on the
seventh anniversary hereof, _______ fully paid and nonassessable shares (the
"Warrant Shares") of Common Stock of the Company, $.001 par value per share (the
"Common Stock"), subject to adjustment as provided herein, at a purchase price
of $6.504 per share (the "Warrant Price").
1. Definitions. As used in this Warrant, the following terms have the
-----------
respective meanings set forth below:
"Appraised Value" means, in respect of any share of Common Stock on any
date herein specified, the value attributable to such share of Common Stock if
all of the assets of the Company and its subsidiaries were sold for the
appraised value thereof as of the last day of a fiscal month to end within 60
days prior to such date specified, and thereafter liquidated in accordance with
the terms of the Company's Certificate of Incorporation, as determined in good
faith by the Board of Directors of the Company.
"Book Value" means, in respect of any share of Common Stock on any date
herein specified, the value attributable to such share of Common Stock if all of
the assets of the Company and its subsidiaries were sold for the consolidated
book value thereof as of the last day of any month immediately preceding such
date, and thereafter liquidated in accordance with the Company's Certificate of
Incorporation, as determined in accordance with generally accepted accounting
principles in the United States.
"Business Day" means any day that is not a Saturday or Sunday or a day on
which banks are required or permitted to be closed in the State of New York.
<PAGE>
"Current Market Price" means, in respect of the Common Stock on any date
herein specified, the higher of (a) the Book Value per share of Common Stock at
such date and (b) the Appraised Value per share of Common Stock as at such date,
or if there shall then be a public market for the Common Stock, the higher of
(x) the amount set forth in clause (a) above and (y) the average of the daily
market prices for 30 consecutive Business Days ending 5 days before such date.
The daily market price for each such Business Day shall be (i) the last sale
price on such date on the principal stock exchange or over-the-counter market on
which the Common Stock is then listed or admitted to trading, (ii) if no sale
takes place on such day on any such exchange, the average of the last reported
closing bid and asked prices on such day as officially quoted on any such
exchange, (iii) if the Common Stock is not then listed or admitted to trading on
any stock exchange, the average of the last reported closing bid and asked
prices on such day in the over-the-counter market, as furnished by the National
Association of Securities Dealers Automatic Quotation System or the National
Quotation Bureau, Inc., (or if neither such corporation at the time is engaged
in the business of reporting such prices, as furnished by any similar firm then
engaged in such business or if there is no such firm, as furnished by any member
of the National Association of Securities Dealers, Inc. ("NASD") selected by the
Company).
"Expiration Date" means the date which is the seventh anniversary of the
date of this Warrant.
"Outstanding" means, when used with reference to Common Stock or any class
thereof, at any date as of which the number of shares thereof is to be
determined, all issued shares of Common Stock or of the relevant class, except
shares then owned or held by or for the account of the Company or any subsidiary
thereof, and shall include all shares issuable in respect of outstanding scrip
or any certificates representing fractional interests in shares of Common Stock
or of the relevant class.
2. Exercise of Warrant. This Warrant shall be exercisable at any time
-------------------
after the first anniversary of the date hereof until the expiration of the
Warrant as provided in Section 3 hereof, in the manner set forth in Section 4
hereof.
3. Expiration of Warrant. This Warrant, to the extent not exercised,
---------------------
shall expire and cease to be of force and effect at 5:00 P.M. (Eastern Time) on
the Expiration Date.
4. Method of Exercise.
------------------
(a) This Warrant may be exercised in whole or in part (but not as to
fractional shares) by the surrender of the Warrant, with the Purchase Agreement
attached hereto as Annex A properly completed and duly executed, at the
principal office of the Company or such other location which at that time shall
be the principal office of the Company (the "Principal Office"), and upon
payment to it of the Warrant Price for each Warrant Share to be purchased upon
such exercise (the aggregate of the Warrant Price for all shares to be exercised
being referred to herein as the "Purchase
<PAGE>
Price"). The Purchase Price shall be paid by delivering either (i) a certified
check, bank draft or wire transfer of immediately available funds to the order
of the Company.
(b) In lieu of exercising this Warrant for cash, the Holder may elect
to surrender this Warrant at the Principal Office together with notice of such
election in which event the Company shall issue to the Holder a number of
Warrant Shares computed using the following formula:
X = Y(A-B)
------
A
Where X = the number of Warrant Shares to be issued to the Holder
Y = the number of Warrant Shares purchasable under the Warrant
or, if only a portion of the Warrant is being exercised, the
portion of the Warrant being canceled (at the date of
exercise)
A = Current Market Price on the date of exercise
B = Warrant Price (as adjusted on the date of exercise).
(c) The Holder shall be treated for all purposes as the holder of the
Warrant Shares as of the close of business on the date of exercise, and
certificates for the Warrant Shares so purchased shall be delivered to the
person so entitled, properly endorsed for transfer or accompanied by appropriate
stock powers, within a reasonable time, not exceeding five days, after such
exercise. Unless this Warrant shall have expired, a new Warrant of like tenor
and for such number of Warrant Shares as the Holder shall direct, representing
in the aggregate the right to purchase that number of Warrant Shares with
respect to which this Warrant shall not have been exercised, shall also be
issued to the Holder within such time.
5. Certain Covenants. The Company shall cause all Warrant Shares to be
-----------------
listed on each national securities exchange or securities quotation system, if
any, on which the other outstanding shares of Common Stock of the Company are
then listed or quoted. The Company shall (i) use its reasonable best efforts to
comply with the current public information requirements of Rule 144 ("Rule 144")
under the 1933 Act and (ii) at all times Rule 144 is available for use by
Holder, furnish the Holder upon request with all information within the
possession of the Company required for the preparation and filing of Rule 144.
6. Adjustment of Purchase Price and Number of Shares. The number of
-------------------------------------------------
shares of Common Stock purchasable upon the exercise of this Warrant and/or the
Exercise Price shall be subject to adjustment from time to time upon the
happening of certain events as follows:
<PAGE>
6.1 Stock Dividends, Subdivisions or Combinations. If the Company at any
---------------------------------------------
time while the Warrant remains outstanding and unexpired shall:
(a) subdivide its outstanding shares of Common Stock into a larger
number of shares of Common Stock,
(b) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock, or
(c) pay a dividend or make a distribution in shares of its Common
Stock,
then the number of shares of Common Stock purchasable upon the exercise of this
Warrant immediately after the occurrence of any such event shall be adjusted to
equal the number of shares of Common Stock that a record holder of the same
number of shares of Common Stock represented by this Warrant immediately prior
to the occurrence of such event would own or be entitled to receive after the
happening of such event and the Warrant Price shall be proportionately adjusted
such that the aggregate exercise price of this Warrant remains unchanged.
6.2 Reclassification, Consolidation or Merger. At any time while this
-----------------------------------------
Warrant remains outstanding and unexpired, in case of any reclassification or
change of outstanding securities issuable upon exercise of this Warrant (other
than a change in par value, or from par value to no par value, or from no par
value to par value or as a result of an event described in Sections 6.1(a) or
(b) above) or in case of any consolidation or merger of the Company with or into
another corporation (other than a merger with another corporation in which the
Company is a continuing corporation and which does not result in any
reclassification or change, other than a change in par value, or from par value
to no par value, or from no par value to par value), or in the case of any sale
or transfer to another corporation of the property of the Company as an entirety
or substantially as an entirety, the Company shall, without payment of any
additional consideration therefor, execute a new Warrant providing that the
Holder shall have the right to exercise such new Warrant (upon terms not less
favorable to the Holder than those then applicable to this Warrant) and to
receive upon such exercise, in lieu of each share of Common Stock of the Company
theretofore issuable upon exercise of this Warrant, the kind and amount of
shares of stock, other securities, money or property receivable upon such
reclassification, change, consolidation, merger, sale or transfer by the Holder
of one share of Common Stock issuable upon exercise of this Warrant had this
Warrant been exercised immediately prior to such reclassification, change,
consolidation, merger, sale or transfer. Such new Warrant shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 6. The provisions of this Section 6.2
shall similarly apply to successive reclassification, changes, consolidations,
mergers, sales and transfers.
<PAGE>
6.3 Liquidating Dividends, Etc. If the Company at any time while this
--------------------------
Warrant remains outstanding and unexpired makes a distribution of its assets to
the holders of its Common Stock as a dividend in liquidation or by way of return
of capital or other than as a dividend payable out of earnings or surplus
legally available for dividends under applicable law or any distribution to such
holders made in respect of the sale of all or substantially all of the Company's
assets (other than under the circumstances otherwise provided for in this
Section 6), the holder of this Warrant shall be entitled to receive upon the
exercise hereof, in addition to the shares of Common Stock receivable upon such
exercise, and without payment of any consideration other than the Warrant Price,
an amount in cash equal to the value of such distribution per share of Common
Stock multiplied by the number of shares of Common Stock which, on the record
date for such distribution, are issuable upon exercise of this Warrant (with no
further adjustment being made following any event which causes a subsequent
adjustment in the number of shares of Common Stock issuable upon the exercise
hereof), and an appropriate provision therefor should be made a part of any such
distribution. The value of a distribution which is paid in other than cash shall
be determined in good faith by the Company's Board of Directors.
6.4 Other Action Affecting Common Stock. If after the date hereof the
-----------------------------------
Company shall take any action affecting the outstanding number of shares of
Common Stock, other than an action described in any of the foregoing subsections
of Section 6 hereof, inclusive, that would have a materially adverse effect upon
the rights of the Holder, the Warrant Price shall be adjusted in such manner and
at such time as the Board of Directors on the advice of the Company's
independent public accountants may in good faith determine to be equitable in
the circumstances.
6.5 Other Provisions Applicable to Adjustment under this Section. The
------------------------------------------------------------
following provisions shall be applicable to the making of any adjustment of the
number of shares of Common Stock issuable upon exercise of this Warrant provided
for in this Section 6:
(a) When Adjustments to Be Made. The adjustments required by this
---------------------------
Section 6 shall be made whenever and as often as any specified event
requiring an adjustment shall occur, except that any adjustment of the
number of shares of Common Stock issuable upon exercise of the Warrant that
would otherwise be required may be postponed (except in the case of a
subdivision or combination of shares of the Common Stock, as provided for
in Section 6.1) up to, but not beyond the date of exercise if such
adjustment either by itself or with other adjustments not previously made
adds or subtracts less than 1% of the shares of Common Stock issuable upon
exercise of the Warrant immediately prior to the making of such adjustment.
Any adjustment representing a change less than such minimum amount (except
as aforesaid) which is postponed shall be carried forward and made as soon
as such adjustment, together with other adjustments required by this
Section 6 and not previously made, would result in a minimum adjustment or
on the
<PAGE>
date of exercise. For the purpose of any adjustment, any specified
event shall be deemed to have occurred at the close of business on the
date of its occurrence.
(b) When Adjustment Not Required. If the Company shall take a
----------------------------
record of the holders of its Common Stock for the purpose of entitling
them to receive a dividend or distribution or subscription or purchase
rights and shall, thereafter and before the distribution to
stockholders thereof, legally abandon its plan to pay or deliver such
dividend, distribution, subscription or purchase rights, then
thereafter no adjustment shall be required by reason of the taking of
such record and any such adjustment previously made in respect thereof
shall be rescinded and annulled.
(c) Escrow of Warrant Stock. If after any property becomes
-----------------------
distributable pursuant to this Section 6 by reason of the taking of
any record of the holders of Common Stock, but prior to the occurrence
of the event for which such record is taken, and the Holder exercises
this Warrant, any additional shares of Common Stock obtainable upon
exercise by reason of such adjustment shall be deemed the last shares
of Common Stock for which this Warrant is exercised (notwithstanding
any other provision to the contrary herein) and such shares or other
property shall be held in escrow for the Holder by the Company to be
transferred to the Holder upon and to the extent that the event
actually takes place, upon payment of the Warrant Price.
Notwithstanding any other provision to the contrary herein, if the
event for which such record was taken fails to occur or is rescinded,
then such escrowed shares shall be canceled by the Company and
escrowed property returned.
7. Notice of Adjustments. Whenever the number of shares of Common Stock
---------------------
issuable upon exercise of this Warrant shall be adjusted pursuant to Section 6
hereof, the Company shall promptly notify the Holder in writing of such
adjustment, setting forth in reasonable detail the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated (including a description of the basis on which the Company's
Board of Directors made any determination hereunder), and the number of shares
of Common Stock obtainable upon exercise of this Warrant and any change in the
Warrant Price after giving effect to such adjustment. Such notice shall be
mailed (by first class and postage prepaid) to the Holder.
8. Voting. The Holder shall not have any voting rights with respect to
------
the Warrant Shares until the exercise of this Warrant, and thereafter, the
Holder shall have all voting rights with respect to the Warrant Shares for which
exercise is made hereunder.
9. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Holder as follows:
<PAGE>
(a) This Warrant has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed by a duly
authorized officer of the Company and constitutes a valid and binding obligation
of the Company.
(b) Neither the execution and delivery of this Warrant, nor the
consummation of the transactions contemplated hereby, will violate or result in
any violation of or be in conflict with or constitute a default under any term
of the charter or bylaws of the Company or of any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
the Company.
(c) Upon exercise of this Warrant and payment of the Warrant Price
for each Warrant Share by the Holder, the Warrant Shares will be duly issued,
fully paid and nonassessable shares of Common Stock and free from all taxes,
liens and changes with respect to the issuance thereof.
10. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company of
--------------------------------------
evidence reasonably satisfactory to it that this Warrant has been mutilated,
destroyed, lost or stolen, and in the case of any destroyed, lost or stolen
Warrant, a bond of indemnity reasonably satisfactory to the Company, or in the
case of a mutilated Warrant, upon surrender and cancellation thereof, the
Company will execute and deliver in the Holder's name, in exchange and
substitution for the Warrant so mutilated, destroyed, lost or stolen, a new
Warrant of like tenor substantially in the form thereof with appropriate
insertions and variations.
11. Successors and Assigns. This Warrant and the rights evidenced hereby
----------------------
shall inure to the benefit of and be binding upon the successors of the Company
and the Holder.
12. Amendment. This Warrant may be modified with the written consent of
---------
the Company and the Holder.
13. Transferability. Except for a "Permitted Transfer", no holder may
---------------
Transfer this Warrant or, prior to the exercise of this Warrant (and then only
to the extend of such exercise), any Warrant Shares issuable upon exercise of
this Warrant. A "Permitted Transfer" means any Transfer to (a) the spouse or
children of a holder or a trust or fiduciary that acts for the benefit of any
such spouse or children, in either case, for bona fide family planning purposes,
(b) the personal representative or estate of a deceased holder if such Transfer
is made pursuant to a will or other estate-related Transfer at the time of death
or (c) with respect to any holder that is a partnership, to any direct or
indirect owner of any partnership interest therein. A "Transfer" means any
actual or proposed disposition of all or a portion of an interest (legal or
equitable) by any means, direct or indirect, absolute or conditional, voluntary
or involuntary, including by sale, assignment, transfer, pledge, hypothecation,
mortgage or other encumbrance, court order, operation of law, distribution,
settlement, exchange, waiver, abandonment, gift, alienation, bequest or
disposal.
<PAGE>
14. Injunctive Relief. It is acknowledged that it will be impossible to
-----------------
measure the damages that would be suffered by a party if another party fails to
comply with the provisions hereof and that in the event of any such failure,
each non-breaching party may not have an adequate remedy at law. Therefore, any
party shall be entitled to obtain specific performance of another party's
obligations hereunder and to obtain injunctive relief. No party shall argue, as
a defense to any proceeding for such specific performance or injunctive relief,
that another party has no adequate remedy at law.
15. Headings. The descriptive headings of the several sections of this
--------
Warrant are inserted for convenience only and do not constitute a part of this
Warrant.
16. Governing Law. This Warrant shall be governed by the laws of the State
-------------
of Delaware without regard to the provisions thereof relating to conflict of
laws.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer, attested by its duly authorized officer, on the date of
this Warrant.
TELESPECTRUM WORLDWIDE INC.
By:
-------------------------------
<PAGE>
Annex A
-------
PURCHASE AGREEMENT
------------------
Date:
--------------
TO: TeleSpectrum Worldwide Inc.
(1) The undersigned, pursuant to the provisions set forth in the attached
Warrant, hereby irrevocably agrees to purchase _______ shares of Common Stock
covered by such Warrant, and makes payment herewith in full therefor at the
price per share of $6.504 provided by this Warrant.
(2) The undersigned, pursuant to the provisions set forth in the attached
Warrant, hereby irrevocably elects to make a Cashless Exercise, as provided for
in Section 4 of such Warrant, with respect to _________ Warrant Shares,
_________ Warrant Shares of which shall be retained by the Company in payment of
the Purchase Price (as defined in the Warrant).
Signature:
----------------------
Address:
----------------------
<PAGE>
Exhibit 5.1
MORGAN, LEWIS & BOCKIUS LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
June 4, 1999
TeleSpectrum Worldwide Inc.
443 S. Gulph Road
King of Prussia, PA 19406
Ladies and Gentlemen:
We have acted as counsel to TeleSpectrum Worldwide Inc., a Delaware corporation
(the "Company"), in connection with the registration of 16,604,522 shares (the
"Shares") of its common stock, par value $.01 per share (the "Common Stock") on
a registration statement on Form S-4 (the "Registration Statement") filed
pursuant to the Securities Act of 1933, as amended (the "Act").
We have examined the Registration Statement and such corporate records,
documents, statutes and decisions as we have deemed relevant in rendering this
opinion.
Based on the foregoing, it is our opinion that the Shares have been duly
authorized and will be, when issued in the manner and for the consideration
contemplated in the Registration Statement, validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving such consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Act or the rules or regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
Morgan, Lewis & Bockius LLP
<PAGE>
Exhibit 8.1
[LETTERHEAD OF MORGAN, LEWIS & BOCKIUS LLP APPEARS HERE]
June 8, 1999
TeleSpectrum Worldwide Inc.
443 S. Gulph Road
King of Prussia, Pennsylvania 19406
Re: Certain Federal Income Tax Consequences of the Merger of International Data
Response Corporation with and into TeleSpectrum Worldwide, Inc.
---------------------------------------------------------------------------
Gentlemen/Ladies:
This opinion is being delivered to you in connection with the Form S-4
Registration Statement (the "Registration Statement") filed pursuant to an
Agreement and Plan of Merger dated as of January 14, 1999, by and among
TeleSpectrum Worldwide, Inc. ("TeleSpectrum"), a Delaware corporation,
International Data Response Corporation ("IDRC"), a Delaware corporation, McCown
De Leeuw & Co. III, L.P., McCown De Leeuw & Co. Offshore (Europe) III, L.P.,
McCown De Leeuw & Co. III (Asia) L.P. and The Gamma Fund LLC (collectively, the
"MDC Entities"), (the "Agreement").
Pursuant to the Agreement, IDRC will merge with and into TeleSpectrum. IDRC
shareholders will receive TeleSpectrum Common Stock and warrants in exchange for
IDRC Common Stock. Series A Preferred Stock of IDRC and unpaid dividends with
respect to such Series A Preferred Stock will be exchanged or paid, as
applicable, in cash. IDRC shareholders will receive cash in lieu of fractional
shares of TeleSpectrum Common Stock. Capitalized terms not otherwise defined in
this opinion have the meanings ascribed to such terms in the Agreement or other
documents referred to in the Agreement.
We have acted as legal counsel to TeleSpectrum in connection with the Merger and
you have requested our opinion regarding certain federal income tax consequences
of the Merger. As such, and for the purpose of rendering this opinion in
accordance with Sections 4.14(c) and 5.3(h) of the Agreement, we have examined
and are relying upon (without any independent investigation or review thereof)
the truth and accuracy, at all relevant times, of the statements, covenants,
representations and warranties contained in the following documents:
1. The Agreement;
2. Representation letters of TeleSpectrum and IDRC delivered to us for
purposes of this opinion and dated today (the "TeleSpectrum Tax Certificate" and
the "IDRC Tax Certificate," collectively, the "Tax Certificates"); and
<PAGE>
TeleSpectrum Worldwide Inc.
June 8, 1999
Page 2
3. Such other instruments and documents related to the formation,
organization and operation of TeleSpectrum and IDRC and/or to the consummation
of the Merger as we have deemed necessary or appropriate.
* * *
In preparing our opinion, as set forth below, we have reviewed such other
documents relating to the Merger and such federal income tax authority as we
deemed relevant under the circumstances. For purposes of this opinion, we have
also assumed, with your permission and without independent investigation, that
(i) original documents submitted to us (including signatures) are authentic,
(ii) documents submitted to us as copies conform to the original documents,
(iii) all covenants contained in the Agreement and the Tax Certificates have
been, or will be, performed without waiver or breach of any material provision
thereof, (iv) there has been (or will be by the date of the Merger) due
execution and delivery of all documents where due execution and delivery are
prerequisites to the effectiveness of those documents, (v) any representation or
statement made "to the best of knowledge" or similarly qualified is correct
without such qualification, and (vi) the Merger will be effective under the laws
of the State of Delaware.
Furthermore, as to certain facts material to our opinion that we have neither
established nor verified independently, we have relied upon the accuracy of
statements and representations contained in the Tax Certificates.
OPINION
-------
Based upon the foregoing, and on the Internal Revenue Code of 1986, as amended
(the "Code"), the regulations promulgated thereunder, and judicial and
administrative interpretations thereof, all as in effect as of today's date, it
is our opinion that for federal income tax purposes, the Merger will constitute
a reorganization within the meaning of Section 368(a) of the Code.
* * *
In addition to your request for our opinion regarding certain federal income tax
consequences of the Merger, you have asked us to review the discussions of
federal income tax issues contained in the Registration Statement. We have
reviewed the discussion entitled "Federal Income Tax
<PAGE>
TeleSpectrum Worldwide Inc.
June 8, 1999
Page 3
Consequences" contained in the Registration Statement and believe that the
discussion is correct in all material respects.
We consent to the reference to our firm in the discussion entitled "Federal
Income Tax Consequences" contained in the Registration Statement and to the
filing of this opinion as an exhibit to the Registration Statement.
Our opinion set forth herein is based upon existing law, regulations,
administrative pronouncements and judicial decisions, all as in effect as of
today's date. All such authorities are subject to change, either prospectively
or retroactively. No assurance can be provided as to the effect of any such
change on our opinion. Moreover, by rendering this opinion, we undertake no
responsibility to advise you of any new developments in the application or
interpretation of the federal income tax laws.
If any of the facts, assumptions or certifications on which our opinion is based
is incorrect, please advise us so that we may consider the effect, if any, on
our opinion. Moreover, no opinion is expressed as to any federal income tax
consequences of the Merger or any other transactions, except as specifically set
forth herein, and this opinion may not be relied upon except with respect to the
consequences specifically discussed herein. No opinion is provided with resect
to the federal income tax treatment of certain investors that are subject to
special circumstances (for example, dealers in securities, banks, insurance
companies, foreign persons, tax-exempt organizations, financial institutions,
holders who are subject to the alternative minimum tax provisions of the Code).
This opinion does not address any possible state, local, or foreign tax
consequences of the Merger.
The opinion set forth herein has no binding effect on the United States Internal
Revenue Service or the courts. No assurance can be given that, if the matter
were contested, a court would agree with the opinion set forth above.
This opinion is being delivered solely in connection with the Registration
Statement. This opinion is being rendered for the benefit of TeleSpectrum and
its shareholders and may not be relied upon for any other purpose or by any
other person. This opinion may not be made available to any other person
without our prior written consent.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE>
EXHIBIT 8.2
[LETTERHEAD OF COOLEY GODWARD LLP APPEARS HERE]
June 8, 1999
International Data Response Corporation
6041 La Flecha, Suite B
Rancho Santa Fe, California 92087
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the Form S-4
Registration Statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Merger dated as of January 11, 1999 (the Reorganization
Agreement") by and among TeleSpectrum Worldwide Inc., a Delaware corporation
("Acquiror"). International Data Response Corporation, a Delaware corporation
(the "Company"). and the MDC Entities.
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the organization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to the Company in connection with the Merger. As such,
and for the purpose of rendering this opinion, we have examined and are relying
upon (without any independent investigation or review thereof) the truth and
accuracy, at all relevant times, of the statements, covenants, representations
and warranties contained in the following documents (including all exhibits and
schedules attached thereto):
(a) the Reorganization Agreement;
(b) those certain tax representation letters dated June 3, 1999,
delivered to us by Acquiror and the Company containing certain representations
of Acquiror and the Company (the "Tax Representation Letters"); and
(c) such other instruments and documents related to the formation,
organization and operation of Acquiror and the Company and related to the
consummation of the Merger and the other transactions contemplated by the
Reorganization Agreement as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that;
1. Original documents submitted to us (including signatures thereto)
are authentic, documents submitted to us as copies conform to the original
documents, and that all such documents have been (or will be by the Effective
Time) duly and validly executed and delivered where due execution and delivery
are a prerequisite to the effectiveness thereof;
<PAGE>
International Data Response Corporation
June 8, 1999
Page Two
2. All representations, warranties and statements made or agreed to by
Acquiror and the Company, their managements, employees, officers, directors and
shareholders in connection with the Merger, including, but not limited to, those
set forth in the Reorganization Agreement (including the exhibits thereto) and
the Tax Representation Letters are true and accurate at all relevant times;
3. All covenants contained in the Reorganization Agreement (including
exhibits thereto) and the Tax Representation Letters are performed without
waiver or breach of any material provision thereof;
4. The Merger will be consummated in accordance with the terms of the
Reorganization Agreement, will be affective under the laws of the State of
Delaware, and will be reported by Acquiror and the Company on their respective
federal income tax returns in a manner consistent with the opinion set forth
below; and
5. Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.
Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions and caveats set forth herein, we are of the opinion
that, for federal income tax purposes, the Merger will be a reorganization
within the meaning of Section 368(a)(1) of the Code.
In addition to your request for our opinion on this specific matter of federal
income tax law, you have asked us to review the discussions of federal income
tax issues contained in the Registration Statement. We have reviewed the
discussion entitled "Federal income Tax Consequences," contained in the
Registration Statement and believe that, insofar as they relate to statements of
law and legal conclusions, they are correct in all material respects,
We consent to the reference to our firm under the caption "Federal Income Tax
Consequences" included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Merger or the other
transactions contemplated by the Reorganization Agreement except as specifically
set forth herein, and this opinion may not be relied upon except with respect no
the consequences specifically discussed herein. Furthermore, this opinion only
relates to the holders of Company capital stock who hold such stock as a capital
asset. No opinion is expressed as to the federal income tax treatment that may
be relevant to a particular investor in light of personal
<PAGE>
International Data Response Corporation
June 8, 1999
Page Three
circumstances or to certain types of investors subject to special treatment
under the federal income tax laws (for example, stockholders who are dealers in
securities, banks, insurance companies or tax-exempt organizations, who are
subject to the alternative minimum tax provisions of the Code, who are non-
United States persons, who acquired their shares of Company capital stock in
connection with stock option or stock purchase plans or in other compensatory
transactions, or who hold their Company capital stock as a hedge or as part of a
hedging, straddle, conversion or other risk reduction transaction).
No opinion is expressed as to any transaction other than the Merger as described
in the Reorganization Agreement, or as to any other transaction whatsoever,
including the Merger, if all of the transactions described in the Reorganization
Agreement are not consummated in accordance with the terms of the Reorganization
Agreement and without waiver of any material provision thereof. To the extent
that any of the representations, warranties, statements and assumptions material
to our opinion and upon which we have relied are not accurate and complete in
all material respects at all relevant times, our opinion would be adversely
affected and should not be relied upon.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service or
any court of law, tribunal, administrative agency or other governmental body.
The conclusions are based on the Code, existing judicial decisions,
administrative regulations and published rulings. No assurance can be given that
future legislative, judicial or administrative changes or interpretations would
not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
<PAGE>
International Data Response Corporation
June 8, 1999
Page Four
This opinion is being delivered solely in connection with the Registration
Statement. It is intended for the benefit of the Company and its stockholders
and may not be relied upon or utilized for any other purpose or by any other
person and may not be made available to any other person without our prior
written consent.
Sincerely,
Cooley Godward LLP
Webb B. Morrow III
WBM:dp
<PAGE>
Exhibit 8.3
CRW Financial, Inc.
200 Four Falls Corporate Center
West Conshohocken, Pennsylvania 19428
Gentlemen:
You have requested our opinion regarding the Federal income tax consequences to
CRW Financial, Inc. ("CRW") and its shareholders relating to the proposed
acquisition of CRW by TeleSpectrum Worldwide Inc. ("TeleSpectrum"), as described
below. Immediately prior to the acquisition, CRW's only asset will consist of
approximately 27% of the outstanding TeleSpectrum shares, having a value of
approximately $40 million. On the effective date of the transaction (the
"Effective Date"), a wholly-owned subsidiary of TeleSpectrum, MergerSub, will
merge into CRW pursuant to applicable state law. As a result of and immediately
following the merger, all of the outstanding stock of CRW will be held by
TeleSpectrum.
FACTS
-----
CRW
- ---
CRW was incorporated in Delaware on July 18, 1994 and its shares became listed
on Nasdaq on May 11, 1995 pursuant to a spin-off from its predecessor company,
Casino & Credit Services, Inc. Casino & Credit Services, Inc. received a ruling
from the Internal Revenue Service that the spin-off qualified as a tax-free
distribution pursuant to Sec. 355 of the Internal Revenue Code of 1986, as
amended (the "Code"). CRW has only common stock outstanding.
Following the spin-off, CRW operated two businesses, a collection business and,
through its wholly owned subsidiary Casino Money Centers, Inc. ("CMC"), a check
cashing business. In February 1997, CRW sold the assets of the collection
business to NCO Group, Inc. for $12.8 million in cash, NCO stock and NCO
warrants. CRW subsequently sold the NCO stock in July
<PAGE>
1997 and the warrants in February 1998. Following that sale, CRW's only
remaining business operation was the check cashing business operated through
CMC.
On October 30, 1998, all of the CMC stock was sold to Innovative Financial
Systems, Inc., an unrelated third party, for $2.25 million in cash. CRW will
distribute any remaining cash to its shareholders, pro rata, immediately prior
to the acquisition of CRW by TeleSpectrum.
TeleSpectrum
- ------------
TeleSpectrum was formed by CRW and incorporated in Delaware on April 26, 1996.
On May 22, 1996, CRW assigned to TeleSpectrum rights to acquire the assets of
five telemarketing companies and one direct mail and fulfillment company, which
were thereafter acquired by TeleSpectrum on August 12, 1996. In connection with
those acquisitions, TeleSpectrum effected an initial public offering of its
shares, following which CRW owned approximately 35% of the outstanding stock of
TeleSpectrum. TeleSpectrum provides business-to-customer and business-
to-business outbound and inbound telemarketing services, which consist of direct
sales activities initiated by TeleSpectrum on behalf of clients. TeleSpectrum
markets its services to clients in the telecommunications, utilities, insurance,
financial services, pharmaceuticals and health care, consumer products and
technology industries.
On July 24, 1998, MergerSub was incorporated in Delaware and became a wholly
owned subsidiary of TeleSpectrum. MergerSub's sole purpose is to facilitate the
proposed acquisition of CRW.
Proposed Transaction
- --------------------
CRW is presently the largest shareholder of TeleSpectrum. TeleSpectrum wishes to
acquire CRW in order to effect a widespread and orderly redistribution of its
shares, while significantly reducing the number of shares held by any one
shareholder. TeleSpectrum believes the effect of the transaction will be to
significantly increase the float on its stock.
<PAGE>
CRW wishes to effect the transaction with TeleSpectrum in order to eliminate the
costs associated with being a public company as well as the duplicate
administrative fees and expenses associated with being a holding company, which
together exceed $1.5 million per year. In addition, management of CRW believes
that as a result of the sale of CMC, CRW will be subject to the provisions of
the Investment Company Act of 1940, compliance with which will entail
significant additional recurring costs and expenses.
Accordingly, on the Effective Date, pursuant to an Agreement and Plan of Merger
("Merger Agreement"), MergerSub will be merged with and into CRW in accordance
with applicable state law. Each outstanding share of CRW will be converted into
.709 shares of TeleSpectrum common stock; CRW stock options and warrants will be
converted into options and warrants to purchase shares of TeleSpectrum stock
upon the same terms and conditions; and TeleSpectrum's shares in MergerSub will
be converted into shares of TeleSpectrum stock. No fractional shares will be
issued. Instead, CRW shareholders otherwise entitled to receive a fractional
share of TeleSpectrum will receive a cash payment equal to the fair market value
of such fractional share. Any shareholders of CRW who dissent from the proposed
transaction will be entitled to statutory appraisal rights under applicable
state law. As a result of the merger, CRW will become a wholly-owned subsidiary
of TeleSpectrum.
IDRC MERGER
- -----------
On the Effective Date, International Data Response Corporation ("IDRC"), a
privately held corporation providing outsourced telephone, customer service and
sales programs on behalf of large corporate clients, will merge into
TeleSpectrum in a transaction intended to qualify as a reorganization under Sec.
368(a) of the Code. In the IDRC merger, shareholders of IDRC will receive shares
of TeleSpectrum stock. It has been represented that none of the CRW shareholders
is also a shareholder of IDRC. We have not been asked to render any opinion in
connection with the IDRC merger, and express no opinion herein with regard
thereto.
<PAGE>
ADDITIONAL REPRESENTATIONS
--------------------------
The following representations have been made to us by representatives of
TeleSpectrum, MergerSub, and CRW:
a) TeleSpectrum, MergerSub, CRW, and the stockholders of CRW will
pay their respective expenses, if any, incurred in connection
with the consummation of the transaction, except that
following the Effective Date, TeleSpectrum will pay a portion
of CRW's printing expenses incurred in connection with the
transaction.
b) There is no intercorporate indebtedness existing between
TeleSpectrum (or any member of its federal income tax
consolidated group) and CRW (or any member of its federal
income tax consolidated group).
c) MergerSub will be merged with and into CRW pursuant to the
provisions of applicable state law.
d) The CRW common stockholders will have unrestricted rights of
ownership of TeleSpectrum common stock received in the
transaction, and their ability to retain the TeleSpectrum
common stock received in the transaction will not be limited
in any way, except that, pursuant to SEC regulations, for a
period of one year following the Effective Date, former
officers and directors of CRW who receive shares of
TeleSpectrum stock in the transactions may not be permitted to
sell such shares.
e) The ratio for the exchange of shares of CRW common stock for
TeleSpectrum common stock in the transaction was negotiated
through arm's length bargaining. Accordingly, the fair market
value of the TeleSpectrum common stock to be received by CRW
common stockholders in the transaction will be approximately
equal to the fair market value of the CRW common stock
surrendered by such stockholders in exchange therefor.
f) Taking into account the sale of CMC, and the distribution of
the remaining cash proceeds to the CRW shareholders, as
described above, immediately following the transaction, CRW
will hold at least 90 percent of the fair market value of the
net assets and at least 70 percent of the fair market value of
the gross assets held by CRW and MergerSub immediately prior
to the transaction. For purposes of this representation,
amounts paid by CRW to dissenters, amounts paid by CRW to
shareholders who receive cash or other property, amounts used
by CRW to pay reorganization expenses, and all redemptions and
distributions (except for regular,
<PAGE>
normal dividends) made by CRW immediately preceding the
transfer, will be included as assets of CRW held immediately
prior to the transaction.
g) TeleSpectrum, MergerSub, and CRW intend that the merger will
qualify as a tax-free reorganization within the meaning of
Section 368(a)(1)(A) and (a)(2)(E) of the Code and will report
it as such in accordance with Treas. Reg. (S)1.368-3. The
following additional representations have been made to us by
representatives of TeleSpectrum and MergerSub:
h) The payment of cash in lieu of fractional shares of
TeleSpectrum common stock is solely for the purpose of
avoiding the expense and inconvenience to TeleSpectrum of
issuing fractional shares and does not represent separately
bargained-for consideration. The total cash consideration that
will be paid in the transaction to the CRW stockholders
instead of issuing fractional shares of TeleSpectrum common
stock will not exceed (1) one percent of the total
consideration that will be issued in the transaction to the
CRW stockholders in exchange for their shares of CRW common
stock. The fractional share interests of each CRW stockholder
will be aggregated, and no CRW stockholder will receive cash
for such fractional share interests in an amount equal to or
greater than the value of one full share of TeleSpectrum
common stock.
i) Nether TeleSpectrum nor any related party has any plan or
intention to reacquire any of its stock issued in the
transaction. For purposes of this opinion, a "related party"
includes any corporation (i) that is a member of any
affiliated group, as defined in Section 1504 (determined
without regard to Section 1504(b)), of which TeleSpectrum is a
member, or (ii) whose purchase of TeleSpectrum stock would be
treated as a distribution in redemption of stock of
TeleSpectrum under Section 304(a)(2) (determined without
regard to Treas. Reg. (S)1.1502-80).
j) The proposed transaction is being undertaken for reasons
germane to the continuance of the business of TeleSpectrum.
k) TeleSpectrum has no plan or intention to sell or otherwise
dispose of the stock of CRW, or to cause CRW to sell or
otherwise dispose of any of its assets, except for
<PAGE>
dispositions made in the ordinary course of business or
transfers described in Section 368(a)(2)(C) of the Code.
l) TeleSpectrum has no plan or intention to liquidate CRW or to
merge CRW with and into another corporation.
m) TeleSpectrum and MergerSub are not investment companies as
defined in Sections 368(a)(2)(F)(iii) and 368(a)(2)(F)(iv) of
the Code.
n) Following the transaction, CRW will continue its historic
business, or use a significant portion of these historic
business assets in the operation of a trade or business.
o) Prior to the transaction, TeleSpectrum will be in control of
MergerSub within the meaning of Section 368(c)(1) of the Code
(i.e., own stock possessing at least 80 percent of the total
combined voting power of all classes of stock entitled to vote
and own at least 80 percent of the total number of shares of
all other classes of stock of the corporation).
p) Following the transaction, CRW will not issue additional
shares of its stock that would result in TeleSpectrum losing
control of CRW within the meaning of Section 368(c)(1) of the
Code.
q) Taking into account any payments to dissenters, TeleSpectrum
will acquire, in exchange for its voting stock, an amount of
CRW stock constituting control (within the meaning of Sec.
368(c) of the Code) of CRW.
r) The TeleSpectrum stock issued to the CRW shareholders in the
merger will be newly issued shares that are being issued
pursuant to the Agreement of Merger.
s) TeleSpectrum and MergerSub do not own, directly or indirectly,
nor has either owned during the past five years, directly or
indirectly, any stock of CRW. The following representations
have been made to us by representatives of CRW:
t) The fair market value of the Continuing Proprietary Interest
(as defined below), as of the Effective Date, will be at least
50 percent of the fair market value, as of the Effective Date,
of the Existing Proprietary Interest (as defined below) of
CRW. For purposes of this representation:
i) the Continuing Proprietary Interest means all of
the outstanding shares of CRW stock as of the
Effective Date, other than shares of CRW stock (a)
acquired in connection with the Merger by a person
related to TeleSpectrum (within the meaning of
Reg. (S) 1.368-1(e)(3)), (b) exchanged in the
Merger for TeleSpectrum stock that, pursuant to a
plan or intent existing at the Effective Date, is
either redeemed by TeleSpectrum or acquired (other
than in exchange for TeleSpectrum stock) by a
person related to TeleSpectrum (within the meaning
of Reg. (S) 1.368-1(e)(3)), or (c) acquired prior
to the Effective Date and in connection with the
Merger by persons related to CRW (within the
meaning of Reg. (S) 1.368-1(e)(3)(i)(B)), other
than in exchange for TeleSpectrum stock or CRW
stock;
ii) the Existing Proprietary Interest means: (i) all
of the shares of outstanding CRW stock as of the
Effective Date (including shares acquired prior to
the Effective Date and in connection with the
Merger by persons related to CRW), (ii) shares of
CRW stock redeemed prior to the Effective Date and
in connection with the Merger, and (iii) the
amount of any extraordinary distributions made by
CRW with respect to its stock prior to the
Effective Date and in connection with the Merger.
For purposes of this representation, extraordinary
distributions will not include periodic dividends
that are consistent with CRW's historic dividend
practice, but will include the distribution by CRW
of the remaining cash attributable to the sale of
CMC.
iii) an acquisition of TeleSpectrum or CRW stock by a
person acting as an intermediary for TeleSpectrum,
CRW, or a person related to TeleSpectrum or CRW
(within the meaning of Reg. (S) 1.368-1(e)(3))
will be treated as made by TeleSpectrum, CRW, or
the related person, respectively; and
iv) any reference to TeleSpectrum or CRW includes a
reference to any successor or predecessor of such
corporation to the extent provided in Reg. (s)
1.368-1(e)(5).
<PAGE>
u) The proposed transaction is being undertaken for reasons
germane to the continuance of the business of CRW.
v) CRW is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the
Code.
w) CRW is not an investment company as defined in Section s
3468(a)(2)(F)(iii) and 368(a)(2)(F)(iv) of the Code.
x) The shareholders of CRW and IDRC will not, in the aggregate,
own an amount of TeleSpectrum stock immediately after the
merger of MergerSub into CRW, and the merger of IDRC into
TeleSprectrum, that constitutes "control" of TeleSpectrum
within the meaning of Section 304(c) of the Code.
OPINION
-------
In rendering our opinion, we have reviewed the Merger Agreement, proxy
statements and other documents that we deem relevant to the transaction. We have
also reviewed the Merger Agreement and proxy statement relevant to the IDRC
merger. Our understanding of the terms of
<PAGE>
the transaction is as described above, and is based upon our review of the
foregoing documents, as well as additional information, which you have provided
to us. In rendering our opinion, we have relied upon the accuracy and
completeness of the facts, information, assumptions and representations you
provided to us, or that were provided to us on your behalf, that are related to
the transaction. You have represented to us that we have been provided all of
the facts, documents and other materials related to the subject transactions.
However, we have not independently audited or otherwise verified any of these
facts or assumptions.
Our opinion is based upon our interpretation of the Code and Income Tax
Regulations as interpreted by Court decisions, and by rulings and procedures
issued by the Internal Revenue Service ("IRS") as of the date of this letter,
all of which are subject to change. If there is a change, including a change
having retroactive effect, in the Code, Treasury Regulations, IRS Rulings or
Releases, or in the prevailing judicial interpretation of the foregoing, the
opinions expressed herein would have to be reevaluated in light of any such
changes. We have no responsibility to update this opinion for changes in the
above-listed law and authority occurring after the above date.
Based upon the foregoing, we are of the opinion that:
a. The merger of MergerSub with and into CRW, as described above, should
constitute a "reorganization" within the meaning of Sections 368(a)(1)(A) and
368(a)(2)(E) of the Code, and CRW, MergerSub and TeleSpectrum will each be a
party to such reorganization within the meaning of Section 368(b) of the Code;
b. No gain or loss should be recognized by CRW, MergerSub and TeleSpectrum as a
result of the merger;
c. No gain or loss should be recognized by CRW shareholders as a result of the
exchange of CRW common stock for TeleSpectrum common stock pursuant to the
Merger (Section
<PAGE>
354(a)(1)). The payment of cash in lieu of fractional share interests of
TeleSpectrum common stock will be treated as if each fractional share is
distributed as part of the exchange and then redeemed by TeleSpectrum. Subject
to the conditions and limitations of Section 302(a) of the Code, these cash
payments will be treated as having been received as distributions in full
payment in exchange for the fractional share of TeleSpectrum common stock. Any
gain or loss recognized upon such exchange (as determined under Section 1001 and
subject to the limitations of Section 267) will be capital gain or loss provided
the fractional share would constitute a capital asset in the hands of the
exchanging stockholder (Revenue Ruling 66-365 and Revenue Procedure 77-41).
d. No gain or loss should be recognized to the holders of CRW stock options or
warrants upon the exchange of such options or warrants solely for options or
warrants of TeleSpectrum.
e. The aggregate tax basis of the shares of TeleSpectrum common stock received
solely in exchange for CRW common stock pursuant to the Merger (including
fractional shares of TeleSpectrum common stock for which cash is received)
should be the same as the aggregate tax basis of the CRW common stock exchanged
therefor;
f. The holding period for shares of TeleSpectrum common stock received in
exchange for CRW common stock pursuant to the Merger should include the holding
period of such CRW common stock exchanged therefor, provided such CRW common
stock was held as a capital asset by the stockholder on the Effective Date; and
g. Each shareholder of CRW who elects to dissent from the merger transaction
involving CRW and TeleSpectrum under the provisions of applicable state law, and
receives cash in exchange for his shares of CRW common stock, will be treated as
receiving such payment in redemption of his shares of CRW. While such an
exchange will be viewed as a redemption transaction, nevertheless, not all
redemptions give rise to a sale or exchange that is accorded capital gain or
loss treatment. In fact, redemptions of stock can result in the shareholder
having to be treated as receiving a
<PAGE>
dividend distribution taxed at ordinary income tax rates and with no reduction
in the amount of the dividend income for the shareholder's tax basis in the
stock redeemed. Because the tax treatment of a dissenting shareholder is (1)
highly dependent on the particular dissenter's facts and circumstances,
including such shareholder's relationships to other CRW shareholders, and the
owners of TeleSpectrum and IDRC, and (2) involves the application of some
extremely complex rules that must be applied to determine the level of indirect
ownership of stock, it is not possible to opine, in any general fashion, on the
tax treatment for a particular dissenting shareholder. Accordingly, any
shareholder that dissents from the transaction is strongly urged to consult with
his or her own tax advisor to determine the tax treatment of the receipt of cash
for their shares based upon their particular facts and circumstances.
* * * * *
This opinion is based on our review of the agreements and documents described
above and on the assumptions and representations referred to herein. Any
misstatement of a material fact or omission of fact, which may be material, or
any amendment or change in any of the facts referred to, may require a
modification of all or part of this opinion. We have no responsibility to update
this opinion for events, transactions or circumstances occurring after its date.
Our opinion is not binding on the IRS and there can be no assurance that the IRS
will not take a position contrary to the opinion expressed herein.
The opinion expressed herein reflects the probable outcome of litigation and
other adversarial proceedings based solely on an analysis of the existing tax
authorities relating to the issues.
We do not express any opinion on the federal income tax treatment to CRW of the
payment by TeleSpectrum of a portion of CRW's printing expenses.
We have not considered any non-income-tax, state or local income tax
consequences, and, therefore, do not express any opinion regarding the treatment
that would be given the transaction by the applicable authorities on any
non-income tax or any state or local tax issues. We also express no opinion on
non-tax issues.
<PAGE>
The opinions expressed herein reflect what we regard to be the material federal
income tax aspects to CRW and its shareholders of the transaction; nevertheless,
they are opinions only and should not be taken as an assurance of the ultimate
tax treatment.
Our opinion is solely for the benefit of CRW and its shareholders, and is not to
be relied upon by any other parties. Any other parties receiving a copy of this
letter must consult and rely upon the advice of their own counsel, accountant or
other advisor.
Very truly yours,
/s/ ARTHUR ANDERSEN LLP
<PAGE>
Exhibit 10.16
FORM OF INDEMNITY ESCROW AGREEMENT
THIS INDEMNITY ESCROW AGREEMENT ("Agreement") is made and entered into this
______ day of _____, 1999 by and among (i) TeleSpectrum Worldwide Inc., a
Delaware corporation ("TeleSpectrum"), (ii) Glenn McKenzie, as representative of
the stockholders of International Data Response Corporation, a Delaware
corporation ("IDRC"), and the holders of certain options to purchase common
stock of IDRC (the "Stockholders' Representative"), and (iii) Chase Manhattan
Trust Company, National Association (the "Indemnity Escrow Agent"). Capitalized
terms used herein and not otherwise defined shall have the meanings given to
such terms in the Merger Agreement (as defined below).
B A C K G R O U N D :
WHEREAS, pursuant to that certain Agreement and Plan of Merger (the "Merger
Agreement"), dated as of January 14, 1999, as amended, by and among
TeleSpectrum, IDRC and the MDC Entities (as defined in the Merger Agreement),
two escrow funds are to be established to secure the indemnification obligations
of the stockholders of IDRC and the IDRC Optionholders to TeleSpectrum as set
forth in Article VII of the Merger Agreement (the "Indemnity Funds"); and
WHEREAS, the Indemnity Funds are to secure indemnification obligations of
the Stockholders of IDRC and the IDRC Optionholders to TeleSpectrum of $12
million in amount, $9 million of which is available to satisfy indemnification
obligations under Section 7.2 of the Merger Agreement and $3 million of which is
available to satisfy indemnification obligations under Section 7.3 of the Merger
Agreement; and
WHEREAS, on the Closing Date there shall be deposited into escrow in
accordance with Section 1.6 of the Merger Agreement by TeleSpectrum's delivery
to the Indemnity Escrow Agent ______ shares of the common stock of TeleSpectrum,
par value $.01 per share ("Common Stock") and ____ option agreements evidencing
the Escrow Options (the "Escrowed Option Agreements") (collectively, the
"Section 7.2 Escrow Securities", and together with all other property at any
time received or otherwise distributed on, in respect of or in exchange for any
or all of the Section 7.2 Escrow Securities (other than cash dividends), all
securities hereafter issued in substitution for any of the foregoing, all
certificates and instruments representing or evidencing such securities, all
cash and non-cash proceeds of all of the foregoing property and all rights,
titles, interests, privileges (other than right to vote the Section 7.2 Escrow
Securities as set forth in Section 7(b) of this Agreement, which right shall at
all times remain with the stockholders of IDRC and the IDRC Optionholders to the
extent such optionholders exercise their Escrow Options) and preferences
appertaining or incident to the foregoing property, the "Section 7.2 Escrow
Property");
WHEREAS, on the Closing Date there shall be deposited into escrow in
accordance with Section 1.6 of the Merger Agreement by TeleSpectrum's delivery
to the Indemnity Escrow Agent ______ shares of the Common Stock and Escrowed
Option Agreements representing the right to
<PAGE>
purchase _____ shares of Common Stock (collectively, the "Section 7.3 Escrow
Securities" and together with all other property at any time received or
otherwise distributed on, in respect of or in exchange for any or all of the
Section 7.3 Escrow Securities (other than cash dividends), all securities
hereafter issued in substitution for any of the foregoing, all certificates and
instruments representing or evidencing such securities, all cash and non-cash
proceeds of all of the foregoing property and all rights, titles, interests,
privileges (other than right to vote the Section 7.3 Escrow Securities as set
forth in Section 7(b) of this Agreement, which right shall at all times remain
with the stockholders of IDRC and the IDRC Optionholders to the extent such
optionholders exercise their Escrow Options) and preferences appertaining or
incident to the foregoing property, the "Section 7.3 Escrow Property"); and
WHEREAS, the Section 7.2 Escrow Securities and the Section 7.3 Escrow
Securities are collectively referred to as the "Escrow Securities" and the
Section 7.2 Escrow Property and the Section 7.3 Escrow Property are collectively
referred to as the "Escrow Property."
NOW, THEREFORE, in consideration of the promises and of the covenants and
agreements set forth herein and in the Merger Agreement, and intending to be
legally bound hereby, the parties agree as follows:
1. Deposit.
-------
(a) On the Closing Date there shall be deposited with the
Indemnity Escrow Agent stock certificates representing the Escrow Shares and the
Escrowed Option Agreements, and upon such deposit the Indemnity Escrow Agent
shall acknowledge receipt of such stock certificates and Escrowed Option
Agreements bearing a restrictive legend providing that the shares represented by
such certificates may not be offered, sold, exchanged, transferred or otherwise
disposed of (other than by operation of law) prior to the Expiration Date, or
such later date as provided herein. The Indemnity Escrow Agent shall hold the
Escrow Securities and shall administer the same in accordance with the terms of
this Agreement. Except as expressly set forth in this Agreement, the Section 7.2
Escrow Property and the Section 7.3 Escrow Property shall be held as trust funds
and shall not be subject to any lien, attachment, trustee process or any other
judicial process of any creditor of any party hereto or of any stockholder of
IDRC or any IDRC Optionholder.
(b) Additional Terms Relating to Escrow Options. In the event an
-------------------------------------------
IDRC Optionholder elects to exercise any Escrow Options, the IDRC Optionholder
shall send a notice of exercise along with a copy of the Escrowed Option
Agreement and the exercise price therefor to TeleSpectrum and shall send a copy
of such correspondence to the Indemnity Escrow Agent. TeleSpectrum shall deliver
stock certificates representing the shares of TeleSpectrum Common Stock
underlying the Escrowed Option Agreement (or part thereof) being exercised to
the Indemnity Escrow Agent, whom will then surrender to TeleSpectrum the related
Escrowed Option Agreement to be canceled by TeleSpectrum. In the event an Escrow
Option is exercised in part, TeleSpectrum shall, along with the shares of Common
Stock of TeleSpectrum to be delivered to the Indemnity
2
<PAGE>
Escrow Agent, deliver to the Indemnity Escrow Agent a new Escrowed Option
Agreement representing that portion of the Escrow Option not yet exercised. Any
shares represented by the stock certificates (and any Escrowed Option Agreement
representing Escrow Options not yet exercised) delivered to the Indemnity Escrow
Agent upon the exercise of Escrow Options shall become a part of the Escrow
Property and shall be available to satisfy the indemnification obligations of
the stockholders of IDRC and the IDRC Optionholders in accordance with the terms
of this Agreement. All such Option Shares received upon exercise shall be deemed
"Escrow Shares" for all purposes hereunder. TeleSpectrum and the Stockholders'
Representative shall provide an update to Schedule A to the Indemnity Escrow
Agent which shall be signed by both TeleSpectrum and the Stockholders'
Representative reflecting any changes made to Schedule A as a result of the
exercise of Escrow Options.
2. Appointment of Stockholders' Representative. By virtue of the
-------------------------------------------
affirmative vote of the stockholders of IDRC required to approve the Merger and
the agreement of the IDRC Optionholders, the Merger Agreement and this
Agreement, the stockholders of IDRC and the IDRC Optionholders irrevocably
appoint Glenn McKenzie (the "Stockholders' Representative") to act as attorney-
in-fact of said stockholders and Optionholders with authority to make all
decisions on behalf of said stockholders and Optionholders with respect to any
matters arising from the indemnification obligations of the stockholders of IDRC
and the IDRC Optionholders (including matters arising under Article VII of the
Merger Agreement); and any decisions made by the Stockholders' Representative
with respect to any matter thereof shall be final and binding on such
stockholders and Optionholders. Without limiting the foregoing, the
Stockholders' Representative is authorized on behalf of the stockholders of IDRC
and IDRC Optionholders to (i) object to any claim for indemnification against
the Escrow Property or the stockholders of IDRC or the IDRC Optionholders under
Article VII of the Merger Agreement, (ii) settle or compromise any claim for
such indemnification, (iii) assume responsibility for administering all matters
arising under Article VII of the Merger Agreement, (iv) interpret on behalf of
the stockholders of IDRC and the IDRC Optionholders all of the provisions of
this Agreement and of Article VII of the Merger Agreement, and (v) generally to
represent all stockholders of IDRC and the IDRC Optionholders and their heirs,
personal representatives, successors and assigns with respect to all matters
arising under this Agreement and Article VII of the Merger Agreement. The
Stockholders' Representative is authorized to retain counsel to assist him in
matters relating to this Agreement and Article VII of the Merger Agreement and
his obligations hereunder or thereunder, including the dispute of any claims.
With respect to all matters set forth on Schedule 7.3 to the Merger Agreement,
TeleSpectrum shall consult with the Stockholders' Representative regarding
material developments relating to these matters and will not settle or reach a
final resolution with regard to those matters without the approval of the
Stockholders' Representative, which approval will not unreasonably be withheld.
TeleSpectrum will continue to retain the counsel previously retained by IDRC
relating to the matters set forth on Schedule 7.3 to the Merger Agreement unless
(i) the board of directors of TeleSpectrum shall otherwise determine and (ii)
the Stockholders' Representative agrees with any such determination of the
TeleSpectrum Board, which agreement shall not unreasonably be withheld.
3
<PAGE>
3. Substitution of Stockholders' Representative. The
--------------------------------------------
Stockholders' Representative shall have the right to resign upon providing 15
business days written notice to TeleSpectrum and the Indemnity Escrow Agent.
Prior to such resignation, the Stockholders' Representative shall appoint a
successor stockholders' representative, reasonably acceptable to TeleSpectrum,
to assume the rights and responsibilities of the Stockholders' Representative
hereunder. TeleSpectrum shall notify the Escrow Agent in writing of the name of
any successor stockholder's representative appointed pursuant to this Agreement.
All of the terms and conditions of this Agreement shall apply to any successor
stockholders' representative, and after such appointment the term "Stockholders'
Representative" as used herein shall refer to any such successor stockholders'
representative.
4. Indemnification of Stockholders' Representative. The
-----------------------------------------------
Stockholders' Representative shall not be personally liable for any actions or
decisions taken or made in good faith in managing or discharging its duties
hereunder in accordance with the terms hereof, except in the case of gross
negligence or willful misconduct. The stockholders of IDRC and the IDRC
Optionholders shall indemnify and hold harmless the Stockholders' Representative
against any and all Damages suffered or incurred by the Stockholders'
Representative in managing or discharging his duties hereunder.
5. Transfers from the Indemnity Funds.
----------------------------------
(a) TeleSpectrum may, by giving written notice (an
"Indemnity Notice") to the Stockholders' Representative and the Indemnity Escrow
Agent, make a claim against the Escrow Property for any amounts claimed by it
under Article VII of the Merger Agreement at any time prior to the Expiration
Date. Such Indemnity Notice shall contain such facts and information as are then
reasonably available and the specific basis for indemnification including
whether the claim is made under Section 7.2 or 7.3 of the Merger Agreement. If
such amount is liquidated in amount, the Indemnity Notice shall so state and
such amount shall be deemed the amount of the claim against the Escrow Property.
If the amount is not liquidated, then the Indemnity Notice shall so state and,
in such event, a claim shall be deemed asserted against the Escrow Property, but
no transfer shall be made on account thereof until the amount of such claim is
liquidated and such transfer is to be made in accordance with (b) or (c) below.
(b) Unless the Stockholders' Representative shall give
written notice to TeleSpectrum and the Indemnity Escrow Agent that it objects to
any claim made in an Indemnity Notice within 15 business days following the date
on which it receives the Indemnity Notice, at the end of such period the
Indemnity Escrow Agent shall promptly transfer to TeleSpectrum as directed by
such Indemnity Notice from the Escrow Property (to the extent that the Escrow
Property is sufficient therefor) an amount that has an aggregate value equal to
the final amount of the claim. Each amount so transferred shall be drawn pro
---
rata from the Escrow Securities between the Escrow Shares and Shares of
- ----
TeleSpectrum Common Stock (the "Option Shares") underlying the Escrow Options
and any other property included in the Escrow Property, with each Escrow Share
and each Option Share valued at the Trading Value regardless of the actual
market value at such time. The
4
<PAGE>
Escrow Property transferred by the Indemnity Escrow Agent is hereinafter
referred to as "Claim Property." Upon the transfer of the Claim Property to the
Escrow Agent, each Option Agreement shall automatically and without the need of
any further action by any person be modified to become exercisable for such
lesser number of Option Shares to fully reflect the Optionholders pro rata
--- ----
contribution to Claim Property. In the event that the Stockholders'
Representative timely objects to a transfer of the Escrow Property, then
TeleSpectrum and the Stockholders' Representative shall endeavor to settle and
compromise the claims that are the subject of the Indemnity Notice. If
TeleSpectrum and the Stockholders' Representative are unable to agree on any
settlement or compromise, then the Indemnity Escrow Agent shall not make any
transfers of Escrow Property except upon receipt of a written statement executed
by TeleSpectrum and the Stockholders' Representative evidencing their agreement
to the amounts claimed in the Indemnity Notice or pursuant to a final Decision.
The Indemnity Escrow Agent shall take the action specified in notices that are
mutually signed by, and received from, TeleSpectrum and the Stockholders'
Representative as soon as practical after its receipt thereof.
(c) Except as set forth in this subsection (c), all Escrow Property
remaining in escrow hereunder shall be transferred to the stockholders of IDRC
and the IDRC Optionholders within 5 business days following the Expiration Date
in accordance with their respective interests therein in accordance with the
Stockholder's Representative's written direction delivered to the Escrow Agent
on the Expiration Date if (i) all Claim Property has been transferred to
TeleSpectrum in accordance with Section 5(b) hereof with respect to each
Indemnity Notice which has been given by TeleSpectrum as of the Expiration Date
or (ii) no Indemnity Notice has been given by TeleSpectrum as of the Expiration
Date. If TeleSpectrum has made any claim against the Escrow Property to which
the Stockholders' Representative has timely objected and which remains
outstanding as of the Expiration Date, no Escrow Property shall be transferred
to the stockholders of IDRC or the IDRC Optionholders until such time as any
such claim has been resolved in accordance with the provisions of this Section
5. Notwithstanding the foregoing, any "Excess Escrow Property" shall be
transferred to the stockholders of IDRC and the IDRC Optionholders in accordance
with the percentages set forth opposite such stockholders' or Optionholders'
respective names on Schedule A attached hereto within five business days
following the Expiration Date. Such distributions shall be made by mailing the
Escrow Property due to each stockholder and Optionholder to such stockholder's
or Optionholder's address as set forth on Schedule A. As used herein, the terms
"Excess Escrow Property" means that amount of Escrow Property, if any,
equal to the "Remaining Amount of Escrow Property" on the Expiration Date
less the "Maximum Amount."
"Remaining Amount of Escrow Property" means the aggregate Trading Value of
the Escrow Shares and Option Shares remaining in escrow plus the fair
market value of any other Escrow Property remaining in escrow.
5
<PAGE>
"Maximum Amount" means (i) the aggregate amount of all disputed claims on
the Expiration Date that are liquidated in amount plus (ii) the "Estimated
Amount."
"Estimated Amount" means the reasonably estimated maximum aggregate amount
of damages represented by outstanding disputed claims on the Expiration
Date that are not liquidated in amount, which shall be determined in a
writing executed by each of TeleSpectrum and the Stockholders'
Representative that makes specific reference to this Section.
The provisions set forth in this Section 5(c) shall apply to both Section 7.2
Escrow Property and Section 7.3 Escrow Property, and with respect to Section 7.2
Escrow Property, shall take into account the Maximum Amount associated with
Section 7.3 Escrow Property.
(d) Notwithstanding the other provisions of this Section 5, (i)
indemnification obligations under Section 7.2 of the Merger Agreement may only
be satisfied by Section 7.2 Escrow Property and (ii) indemnification obligations
under Section 7.3 of the Merger Agreement must first be satisfied by Section 7.3
Escrow Property until such escrow property is exhausted, and any remaining
indemnification obligations under Section 7.3 of the Merger Agreement may then
be satisfied by Section 7.2 Escrow Property.
(e) Arbitration. The parties shall submit the resolution of any
-----------
claim, cause of action or dispute between the parties arising under this
Agreement or Article VII of the Merger Agreement to expedited, binding
arbitration pursuant to this Section. Any claim, cause of action or dispute
between the parties arising under this Agreement submitted to arbitration under
this Section ("Arbitrated Disputes") shall be resolved by binding arbitration
administered by the American Arbitration Association ("AAA") in Wilmington,
Delaware, and, except as expressly provided in this Agreement, shall be
conducted in accordance with the Expedited Procedures under the Commercial
Arbitration Rules of the AAA, as such rules may be amended from time to time
(the "Rules"). The hearing locale shall be Wilmington, Delaware. The hearing
shall be before a panel of three arbitrators (the "Arbitrators"), one of whom
shall be selected by the Stockholders' Representative, one of whom shall be
selected by TeleSpectrum, and the third of whom shall be selected by the other
two arbitrators. The Arbitrators' decision (the "Decision") shall be binding,
and the prevailing party may enforce the Decision in any court of competent
jurisdiction. The parties shall use their best efforts to cooperate with each
other in causing the arbitration to be held in as efficient and expeditious a
manner as practicable, including, but not limited to, providing such documents
and making available such of their personnel as the Arbitrators may request, so
that the Decision may be reached timely. The Arbitrators shall take into
account the parties' stated goal of expedited proceedings in determining whether
to authorize discovery and, if so, the scope of permissible discovery and other
hearing and pre-hearing procedures. The authority of the Arbitrators shall be
limited to deciding liability for, and the proper amount of, any such claim,
cause of action or dispute, and the Arbitrators shall have no authority to award
punitive damages. The Arbitrators shall have such powers and establish such
procedures as are provided for in the Rules, so long as such powers and
procedures are consistent with this Section and are necessary to resolve the
Arbitrated Dispute
6
<PAGE>
within the time periods specified in this Agreement. The Arbitrators shall
render a Decision within 30 business days (15 business days with respect to any
disputes regarding Section 5(c) hereof) after being appointed to serve as
Arbitrators unless the parties otherwise agree in writing or the Arbitrators
make a finding that a party has carried the burden of showing good cause for a
longer period. The stockholders of IDRC, on the one hand, and TeleSpectrum on
the other hand, shall pay its own expenses of arbitration and the expenses of
the Arbitrators shall be equally shared; provided, however, that if in the
opinion of the Arbitrators any claim or defense or objection thereto by either
party is unreasonable, the Arbitrators may assess, as part of the award, all or
any part of the arbitration expenses (including reasonable attorneys' fees) of
the other party and of the Arbitrators against the party raising such
unreasonable claim, defense or objection. Any amounts due from the stockholders
of IDRC under this Section 5(e) shall be satisfied out of the Escrow Property;
provided, however, that the Indemnity Escrow Agent must notify the Stockholders'
Representative in writing at least 5 business days prior to the payment to the
Arbitrators of any Escrow Property and, if requested, must provide the
Stockholders' Representative with evidence of the total fees and expenses
incurred with respect to arbitration.
6. Escrow Earnings.
---------------
(a) Treatment of Earnings. All income earned on the Escrow Property,
---------------------
after payment of expenses incurred or taxes incurred in connection therewith,
shall be deemed to be a part of the Escrow Property for any and all purposes
hereunder.
(b) Permissible Investments. The Indemnity Escrow Agent shall invest
-----------------------
any cash constituting the Escrow Property at the written direction of
TeleSpectrum and the Stockholders' Representative in United States Treasury
obligations or in one or more mutual funds invested solely in United States
Treasury obligations, including without limitation, the Chase Vista (TM) Money
Market Mutual Funds or any other mutual fund for which the Indemnity Escrow
Agent or an affiliate of the Indemnity Escrow Agent serves as investment
manager, administrator, shareholder servicing agent, and/or custodian or
subcustodian, notwithstanding that (i) the Indemnity Escrow Agent or an
affiliate of the Indemnity Escrow Agent receives fees for services rendered,
(ii) the Indemnity Escrow Agent charges and collects fees for services rendered
pursuant to this Agreement which fees are separate from the fees received from
such funds, and (iii) services performed for such funds and pursuant to this
Agreement may at times duplicate those provided to such funds by the Indemnity
Escrow Agent or its affiliates.
(c) The Indemnity Escrow Agent shall have the right to liquidate any
investments held, in order to provide funds necessary to make required payments
under this Agreement. The Indemnity Escrow Agent shall not incur any liability
for any losses arising as a result of any investment made pursuant to the
instructions of the parties hereto or as a result of any liquidation of any
investment prior to its maturity or for the failure of the parties to give the
Indemnity Escrow Agent instructions to invest or reinvest the Escrow Property or
any earnings thereon.
7
<PAGE>
7. Dividends; Voting.
-----------------
(a) Dividends. Any dividends declared and paid, and any distributions
---------
made with respect to, the Escrow Shares shall be delivered to the Escrow Agent
and shall be held and transferred by the Escrow Agent in the same manner that
the Escrow Shares are held and transferred hereunder. All such dividends and
distributions made in shares of Common Stock of TeleSpectrum shall be deemed to
be Escrow Shares for any and all purposes hereunder.
(b) Voting. The stockholders of IDRC shall vote the Escrow Shares in
------
accordance with their respective interests therein on all matters submitted to a
vote of the stockholders of TeleSpectrum during the term of this Agreement. The
Escrow Agent shall have no responsibility for voting Escrow Shares or in
assisting in the voting of Escrow Shares.
8. Fees of Indemnity Escrow Agent. The stockholders of IDRC and IDRC
------------------------------
Optionholders, on the one hand, and TeleSpectrum on the other, shall each be
responsible for 50% of the reasonable fees and expenses of or incurred by the
Indemnity Escrow Agent in connection with carrying out its duties hereunder. Any
amounts due from the stockholders of IDRC and the IDRC Optionholders under this
Section 8 shall be satisfied by the Escrow Agent after compliance with this
Section 8 out of the Escrow Property; provided, however, that the Indemnity
Escrow Agent must notify the Stockholders Representative in writing at least 5
business days prior to the withdrawal of any Escrow Property and, if requested,
must provide the Stockholders' Representative with evidence of such fees and
expenses incurred.
9. Rights and Duties of the Indemnity Escrow Agent.
-----------------------------------------------
(a) The Indemnity Escrow Agent shall have and may exercise such powers
hereunder as are specifically delegated to the Indemnity Escrow Agent by the
terms hereof (including the power to surrender to TeleSpectrum option agreements
representing Escrow Options so that such agreements may be canceled and
exchanged for new option agreements as appropriate), together with such powers
as are reasonably incidental thereto, including the power to hire attorneys to
represent the Indemnity Escrow Agent with respect to matters arising from this
Agreement and the power to file actions as it deems necessary in a court of
appropriate jurisdiction. The duties and responsibilities of the Escrow Agent
shall be determined solely by the express terms of this Agreement. The Escrow
Agent shall not have any liability under nor duty to inquire into the terms or
provisions of any other Agreement, including the Merger Agreement except for the
definition of capitalized terms not defined herein. The Indemnity Escrow Agent
shall have no implied duties and no obligation to take any action hereunder
except for any action specifically provided by this Agreement to be taken by the
Indemnity Escrow Agent. The Indemnity Escrow Agent shall have no responsibility
or obligation of any kind in connection with this Agreement or the Escrow
Property, and shall not be required to deliver the same or any part thereof or
take any action with respect to any matters that might arise in connection
therewith, other than to administer the Escrow Property as herein provided or by
reason of any order of a court of competent jurisdiction from which no appeal
may timely be taken. The Indemnity Escrow Agent shall not be liable to any
party
8
<PAGE>
for any action taken or omitted to be taken hereunder or in connection herewith
unless a court of competent jurisdiction determines that its own gross
negligence or willful misconduct or breach of the specific provisions of this
Agreement resulted in a loss to TeleSpectrum or the stockholders of IDRC or IDRC
optionholders. TeleSpectrum hereby agrees to indemnify and hold harmless and
defend the Indemnity Escrow Agent and its directors, officers, agents and
employees (collectively, the "Indemnitees") from and against any and all claims,
liabilities, losses, damages, fines, penalties and expenses, including out-of-
pocket and incidental expenses and legal fees and expenses ("Losses"), that may
be imposed on, incurred by or asserted against, the Indemnitees or any of them
for following any instructions or other directions upon which they are
authorized to rely pursuant to the terms of this Agreement. In addition to and
not in limitation of the immediately preceding sentence, TeleSpectrum also
agrees to indemnify and hold the Indemnitees and each of them harmless from and
against any and all Losses that may be imposed on, incurred by or asserted
against the Indemnitees or any of them in connection with or arising out of the
Indemnity Escrow Agent's performance under this Agreement, provided the
Indemnitees have not acted with gross negligence or engaged in willful
misconduct. Anything in this Agreement to the contrary notwithstanding, in no
event shall the Indemnity Escrow Agent be liable for special, indirect or
consequential loss or damage of any kind whatsoever (including but not limited
to lost profits), even if the Indemnity Escrow Agent has been advised of the
likelihood of such loss or damage and regardless of the form of action. The
provisions of this Section 9(a) shall survive the termination of this Agreement
and the resignation or removal of the Indemnity Escrow Agent for any reason. The
Indemnity Escrow Agent shall be fully justified in failing or refusing to take
any action under this Agreement unless it shall first be indemnified to its
reasonable satisfaction against any and all liability and expense which may be
incurred by it by reason of taking or continuing to take any such action. The
Indemnity Escrow Agent may execute any of its duties hereunder by or through
employees, agents and attorneys-in-fact.
(b) The Indemnity Escrow Agent shall have the right to resign after
first having given TeleSpectrum and the Stockholders' Representative notice in
writing of its intent to resign at least 15 business days in advance. At the
expiration of such 15 business days, the Indemnity Escrow Agent shall deliver
the remaining Escrow Property to a successor Indemnity Escrow Agent designated
in writing by TeleSpectrum and the Stockholders' Representative. If
TeleSpectrum and the Stockholders' Representative fail to designate a successor
to the Indemnity Escrow Agent within such 15 business day period, the Indemnity
Escrow Agent shall institute a bill of interpleader as contemplated by Section
9(e) hereof. Any corporation or association into which the Indemnity Escrow
Agent in its individual capacity may be merged or converted or with which it may
be consolidated, or any corporation or association resulting from any merger,
conversion or consolidation to which the Indemnity Escrow Agent in its
individual capacity shall be a party, or any corporation or association to which
all or substantially all the corporate trust business of the Indemnity Escrow
Agent in its individual capacity may be sold or otherwise transferred, shall be
the Indemnity Escrow Agent under this Agreement without further act.
(c) If (i) any Escrow Property is at any time attached, garnished or
levied upon under any
9
<PAGE>
court order, or (ii) the payment, assignment, transfer, conveyance or delivery
of any such property shall be stayed or enjoined by any court order, or (iii)
any order, judgment or decree shall be made or entered by any court of competent
jurisdiction from which no appeal may timely be taken affecting such property or
any part thereof, then in any of such events the Indemnity Escrow Agent is
authorized, in its sole discretion, to rely upon and comply with any such order,
judgment or decree which it is advised by legal counsel of its own choosing is
binding upon it, and if it complies with any such order, judgment or decree it
shall not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, even though such order, judgment or
decree may be subsequently reversed, modified, annulled, set aside or vacated.
(d) The Indemnity Escrow Agent shall be entitled to rely upon the
accuracy, act in reliance upon the contents and assume the genuineness of any
notice which is given to the Indemnity Escrow Agent in proper form pursuant to
this Agreement and reasonably believed by it to be genuine and correct and to
have been signed or sent by the proper person, without the necessity of the
Indemnity Escrow Agent verifying the truth or accuracy thereof. The Indemnity
Escrow Agent shall not be obligated to investigate or in any way determine
whether TeleSpectrum is entitled to indemnification under the Merger Agreement
or the proper amount of any such indemnification.
(e) Should any controversy arise between or among TeleSpectrum and the
Stockholders' Representative or any other person, firm or entity with respect to
this Agreement, the Escrow Property or any part thereof, or the right of any
party or other person to receive the Escrow Property, or should TeleSpectrum and
the Stockholders' Representative fail to designate another Indemnity Escrow
Agent as provided in Section 9(b) hereof, or if the Indemnity Escrow Agent
should be in doubt as to what action to take, the Indemnity Escrow Agent shall
have the right (but not the obligation) to (i) withhold delivery of the Escrow
Property until the controversy is resolved and/or (ii) institute a bill of
interpleader in any court of competent jurisdiction to determine the rights of
the parties hereto (the right of the Escrow Property to institute such bill of
interpleader shall not, however, be deemed to modify the manner in which
Indemnity Escrow Agent is entitled to make transfers from the Escrow Property as
hereinabove set forth other than to tender the Escrow Property into the
possession and control of such court). The expense and cost of any proceeding
under this Section 9(e) shall be payable from the Escrow Property.
10. Term. This Agreement shall continue in full force and effect until
----
all Escrow Property has been transferred in accordance with Section 5 hereof.
11. Miscellaneous.
-------------
(a) Time Periods. All references to "business days" means days
------------
when national banks in Philadelphia, Pennsylvania are open for business.
Whenever under the terms hereof the time for giving a notice or performing an
act falls upon a Saturday, Sunday or bank holiday, such time shall be extended
to the next business day.
10
<PAGE>
(b) Legal Counsel. The Indemnity Escrow Agent may consult with its
-------------
counsel or other counsel satisfactory to it with respect to any question
relating to its duties or responsibilities hereunder or otherwise in connection
herewith and shall not be liable for any action taken, suffered or omitted by
the Indemnity Escrow Agent in good faith upon the advice of such counsel.
(c) Severability. If any provision of this Agreement or the
------------
application thereof to any person or circumstance is held invalid or
unenforceable in any jurisdiction, the remainder hereof, and the application of
such provision to such person or circumstance in any other jurisdiction or to
other persons or circumstances in any jurisdiction, shall not be affected
thereby, and to this end the provisions of this Agreement shall be severable.
(d) Default. Waiver of any default shall not constitute waiver of
-------
any other or subsequent default.
(e) Notices. All notices and other communications hereunder shall be
-------
in writing and shall be deemed to have been duly given when delivered in person,
by telecopy, or by registered or certified mail (postage prepaid, return receipt
requested) or by overnight courier service to the respective parties as follows:
if to TeleSpectrum :
443 S. Gulph Road
King of Prussia, PA 19406
Telecopy: (610) 878-7480
Attention: President
with copies to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Telecopy: (215) 963-5299
Attention: Stephen M. Goodman, Esq.
if to the Stockholders' Representative:
Glenn McKenzie
24 Beach Palm
Hampton, NH 03842
Telecopy: (603) 929-0876
11
<PAGE>
with a copy to:
Cooley Godward LLP
4365 Executive Drive- Suite 100
San Diego, CA 92121
Telecopy: (619) 453-3555
Attention: Lance W. Bridges, Esq.
International Data Response Corporation
PO Box 7130
Rancho Santa Fe, CA 92067-7130
Telecopy: (619) 759-3350
Attention: Paul Grinberg
if to the Indemnity Escrow Agent:
Chase Manhattan Trust Company, National Association
One Liberty Place, Suite 5210
1650 Market Street
Philadelphia PA 19103
Telecopy: 215-972-8372
Attention: Capital Markets Fiduciary Services; John Sohier
or to such other address or facsimile number as the party to whom notice is
given may have previously furnished to the others in writing in the manner set
forth above. Any notice or communication delivered in person shall be deemed
effective on delivery. Any notice or communication sent by telecopy shall be
deemed effective on the first business day at the place of which such notice or
communication is received following the day on which such notice or
communication was sent.
(f) Counterparts; facsimile signatures. This Agreement may be
----------------------------------
executed in counterparts, each of which shall be deemed to be an original, but
all of which shall constitute one and the same agreement. This Agreement may be
executed by facsimile signature which, for all purposes, shall be deemed to be
an original signature.
(g) Amendment. This Agreement may not be amended or modified except
---------
by a written agreement signed by each of the parties hereto which agreement
makes express reference to this Section.
(h) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Delaware regardless of the laws that
might otherwise govern under principles of conflicts of laws applicable thereto.
In any action between or among any of the parties to this Agreement: (i) each of
the parties irrevocably and unconditionally consents and
12
<PAGE>
submits to the exclusive jurisdiction and venue of the state courts located in
the State of Delaware; (ii) each of the parties irrevocably waives the right to
trial by jury; and (iii) 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 11(e) herein.
(i) Entire Agreement. This Agreement constitutes the entire agreement
----------------
among the parties with respect to the subject matter hereof and supersedes all
prior written and oral and all contemporaneous oral agreements and
understandings with respect to the subject matter hereof.
(j) TIN Numbers. Each party hereto, except the Indemnity Escrow
-----------
Agent, shall, in the notice section of this Agreement, provide the Indemnity
Escrow Agent with their Tax Identification Number (TIN) as assigned by the
Internal Revenue Service. Schedule A shall list the TIN for each IDRC
stockholder and Optionholder.
(k) Funds Transfer. In the event funds transfer instructions are
--------------
given (other than in writing at the time of execution of this Agreement),
whether in writing, by telecopier or otherwise, the Indemnity Escrow Agent is
authorized to seek confirmation or such instructions by telephone call-back to
the person or persons designated on Schedule B hereto, and the Indemnity Escrow
Agent may rely upon the confirmation of anyone purporting to be the person or
persons so designated. The persons and telephone numbers for call-backs may be
changed only in a writing actually received and acknowledged by the Indemnity
Escrow Agent. The parties to this Agreement acknowledge that such security
procedure is commercially reasonable.
It is understood that the Indemnity Escrow Agent and the
beneficiary's bank in any funds transfer may rely solely upon any account
numbers or similar identifying number provided by either of the other parties
hereto identify (i) the beneficiary, (ii) the beneficiary's bank, or (iii) an
intermediary bank. The Indemnity Escrow Agent may apply any of the escrowed
funds for any payment order it executes using any such identifying number, even
where its use may result in a person other than the beneficiary being paid, or
the transfer or funds to bank other than the beneficiary's bank, or any
intermediary bank designated.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties as of
the date first above written.
TELESPECTRUM WORLDWIDE INC.
By:
----------------------------------
Name:
Title:
STOCKHOLDERS' REPRESENTATIVE
By:
----------------------------------
Glenn McKenzie
CHASE MANHATTAN TRUST COMPANY,
NATIONAL ASSOCIATION,
as Indemnity Escrow Agent
By:
----------------------------------
14
<PAGE>
SCHEDULE A
Name of Stockholder No. of Escrow Shares % of Total Shares* TIN Number
- ------------------- -------------------- ------------------ --------------
Name and Address
of Optionholder No. of Option Shares % of Total Shares* TIN Number
- ------------------- -------------------- ------------------ --------------
*Total Shares means the sum of the Escrow Shares and Option Shares.
15
<PAGE>
Schedule B
Telephone Number(s) for Call-Backs and
Person(s) Designated to Confirm Funds Transfer Instructions
-----------------------------------------------------------
If to TeleSpectrum:
Name Telephone Number
---- ----------------
1.
--------------------------- --------------------------
2.
--------------------------- --------------------------
3.
--------------------------- --------------------------
If to Stockholders' Representative:
Name Telephone Number
---- ----------------
1.
--------------------------- --------------------------
2.
--------------------------- --------------------------
3.
--------------------------- --------------------------
Telephone call-backs shall be made to each of TeleSpectrum and Stockholders'
Representative if joint instructions are required pursuant to the Escrow
Agreement.
16
<PAGE>
EXHIBIT 10.17
TELESPECTRUM WORLDWIDE INC.
1996 EQUITY COMPENSATION PLAN
-----------------------------
The purpose of the Telespectrum Worldwide Inc. 1996 Equity Compensation
Plan (the "Plan") is to provide (i) designated key employees (including
employees who are also officers or directors) of Telespectrum Worldwide Inc.
(the "Company") and its subsidiaries, (ii) independent contractors and
consultants who perform valuable services for the Company or its subsidiaries
and (iii) non-employee members of the Board of Directors of the Company (the
"Board") with the opportunity to receive grants of incentive stock options,
nonqualified stock options, stock appreciation rights, restricted stock and
performance units. The Company believes that the Plan will cause the
participants to contribute materially to the growth of the Company, thereby
benefitting the Company's shareholders, and will align the economic interests of
the participants with those of the shareholders.
Effective May 12, 1999, the Plan is amended and restated to (i)
increase the number of shares authorized by the Plan subject to shareholder
approval; (ii) provide for discretionary grants of non-qualified stock options
to non-employee directors in lieu of formula grants for grants made after
September 4, 1998; (iii) expand the types of awards that may be granted for
substituted stock options to include other equity awards such as warrants; (iv)
ensure that treatment for qualified performance-based compensation pursuant to
section 162(m) of the Code is available for certain awards under the Plan; (v)
modify the amendment provision of the Plan to reflect current statutory
shareholder approval requirements; and (vi) make other necessary and conforming
changes to the Plan.
1. Administration
--------------
(a) The Plan shall be administered and interpreted by a committee (the
"Committee"), which shall consist of not less than two persons appointed by the
Board. Prior to the Effective Date specified in Section 23(b), the Board
may exercise any power or authority of the Committee under the Plan and, in such
case, any reference to the Committee hereunder shall be deemed to include the
Board as a whole.
On and after the Effective Date set forth in Section 23(b), the
Committee shall consist of two or more persons appointed by the Board, all of
whom shall be "non-employee directors" as defined under Rule 16b-3 under the
Securities Exchange Act of 1934 (the "Exchange Act") and "outside directors" as
defined under section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code") and related Treasury regulations.
(b) Except as provided in Section 6, the Committee shall have the sole
authority to (i) determine the individuals to whom grants shall be made under
the Plan, (ii) determine the type, size and terms of the grants to be made to
each such individual, (iii) determine the time when the grants will be made and
the duration of any applicable exercise or restriction
1
<PAGE>
period, including the criteria for exercisability and the acceleration of
exercisability and (iv) deal with any other matters arising under the Plan.
(c) The Committee shall have full power and authority to administer and
interpret the Plan, to make factual determinations and to adopt or amend such
rules, regulations, agreements and instruments for implementing the Plan and for
the conduct of its business as it deems necessary or advisable, in its sole
discretion. The Committee's interpretations of the Plan and all determinations
made by the Committee pursuant to the powers vested in it hereunder shall be
conclusive and binding on all persons having any interest in the Plan or in any
awards granted hereunder. All powers of the Committee shall be executed in its
sole discretion, in the best interest of the Company, not as a fiduciary, and in
keeping with the objectives of the Plan and need not be uniform as to similarly
situated individuals.
2. Grants
------
Awards under the Plan may consist of grants of incentive stock options as
described in Section 5 ("Incentive Stock Options"), nonqualified stock options
as described in Section 5 and Section 6 ("Nonqualified Stock Options")(Incentive
Stock Options and Nonqualified Stock Options are collectively referred to as
"Options"), restricted stock as described in Section 7 ("Restricted Stock"),
stock appreciation rights as described in Section 8 ("SARs"), and performance
units as described in Section 9 ("Performance Units") (hereinafter collectively
referred to as "Grants"). All Grants shall be subject to the terms and
conditions set forth herein and to such other terms and conditions consistent
with this Plan as the Committee deems appropriate and as are specified in
writing by the Committee to the individual in a grant instrument (the "Grant
Instrument") or an amendment to the Grant Instrument. The Committee shall
approve the form and provisions of each Grant Instrument. Grants under a
particular Section of the Plan need not be uniform as among the grantees.
3. Shares Subject to the Plan
--------------------------
(a) Subject to the adjustment specified below, the aggregate number of
shares of common stock of the Company ("Company Stock") that may be issued under
the Plan is 10,000,000 shares, and the maximum aggregate number of shares of
Company Stock that shall be subject to Grants made under the Plan to any
individual during any calendar year shall be 500,000 shares. The shares may be
authorized but unissued shares of Company Stock or reacquired shares of Company
Stock, including shares purchased by the Company on the open market for purposes
of the Plan. If and to the extent Options or SARs granted under the Plan
terminate, expire, or are canceled, forfeited, exchanged or surrendered without
having been exercised or if any shares of Restricted Stock or Performance Units
are forfeited, the shares subject to such Grants shall again be available for
purposes of the Plan.
2
<PAGE>
(b) If there is any change in the number or kind of shares of Company
Stock outstanding (i) by reason of a stock dividend, spin off, recapitalization,
stock split, or combination or exchange of shares, (ii) by reason of a merger,
reorganization or consolidation in which the Company is the surviving
corporation, (iii) by reason of a reclassification or change in par value, or
(iv) by reason of any other extraordinary or unusual event affecting the
outstanding Company Stock as a class without the Company's receipt of
consideration, or if the value of outstanding shares of Company Stock is
substantially reduced as a result of a spinoff or the Company's payment of an
extraordinary dividend or distribution, the maximum number of shares of Company
Stock available for Grants, the maximum number of shares of Company Stock that
any individual participating in the Plan may be granted in any year, the number
of shares covered by outstanding Grants, the kind of shares issued under the
Plan, and the price per share or the applicable market value of such Grants may
appropriately adjusted by the Committee to reflect any increase or decrease in
the number of, or change in the kind or value of, [of] issued shares of Company
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. Any adjustments determined by the Committee
shall be final, binding and conclusive.
4. Eligibility for Participation
-----------------------------
(a) Prior to the Effective Date specified in Section 23(b), members of
the Board who are not employees of the Company or any of its subsidiaries ("Non-
Employee Directors") shall be eligible to participate in the Plan, but shall not
be eligible to receive Incentive Stock Options. After the Effective Date
specified in Section 23(b), Non-Employee Directors shall be eligible to receive
Grants only under Section 6 of the Plan. Any independent contractors or
consultants who perform valuable services to the Company or any of its
subsidiaries ("Consultants") shall be eligible to participate in the Plan, but
shall not be eligible to receive Incentive Stock Options.
(b) The Committee shall select the Employees, Non-Employee Directors
and Consultants to receive Grants and shall determine the number of shares of
Company Stock subject to a particular Grant in such manner as the Committee
determines. Employees, Consultants and Non-Employee Directors who receive Grants
under this Plan shall hereinafter be referred to as "Grantees".
5. Granting of Options
-------------------
(a) Number of Shares. The Committee shall determine the number of
----------------
shares of Company Stock that will be subject to each Grant of Options.
(b) Type of Option and Price.
-------------------------
3
<PAGE>
(i) The Committee may grant Incentive Stock Options that are
intended to qualify as "incentive stock options" within the meaning of section
422 of the Code or Nonqualified Stock Options that are not intended so to
qualify or any combination of Incentive Stock Options and Nonqualified Stock
Options, all in accordance with the terms and conditions set forth herein.
(ii) The purchase price (the "Exercise Price") of Company Stock
subject to an Option shall be determined by the Committee and may be equal to,
greater than, or less than the Fair Market Value (as defined below) of a share
of such Stock on the date the Option is granted; provided, however, that (x) the
Exercise Price of an Incentive Stock Option shall be equal to, or greater than,
the Fair Market Value of a share of Company Stock on the date the Incentive
Stock Option is granted and (y) an Incentive Stock Option may not be granted to
an Employee who, at the time of grant, owns stock possessing more than 10
percent of the total combined voting power of all classes of stock of the
Company or any parent or subsidiary of the Company, unless the Exercise Price
per share is not less than 110% of the Fair Market Value of Company Stock on the
date of grant.
(iii) If the Company Stock is traded in a public market, then
the Fair Market Value per share shall be determined as follows: (x) if the
principal trading market for the Company Stock is a national securities exchange
or the Nasdaq National Market, the last reported sale price thereof on the
relevant date or (if there were no trades on that date) the latest preceding
date upon which a sale was reported, or (y) if the Company Stock is not
principally traded on such exchange or market, the mean between the last
reported "bid" and "asked" prices of Company Stock on the relevant date, as
reported on Nasdaq or, if not so reported, as reported by the National Daily
Quotation Bureau, Inc. or as reported in a customary financial reporting
service, as applicable and as the Committee determines. If the Company Stock is
not traded in a public market or subject to reported transactions or "bid" or
"ask" quotations as set forth above, the Fair Market Value per share shall be as
determined by the Committee.
(c) Option Term. The Committee shall determine the term of each Option.
-----------
The term of any Option shall not exceed ten years from the date of grant.
However, an Incentive Stock Option that is granted to an Employee who, at the
time of grant, owns stock possessing more than 10 percent of the total combined
voting power of all classes of stock of the Company, or any parent or subsidiary
of the Company, may not have a term that exceeds five years from the date of
grant.
(d) Exercisability of Options. Options shall become exercisable in
-------------------------
accordance with such terms and conditions, consistent with the Plan, as may be
determined by the Committee and specified in the Grant Instrument. The Committee
may accelerate the exercisability of any or all outstanding Options at any time
for any reason.
(e) Termination of Employment, Disability or Death.
----------------------------------------------
4
<PAGE>
(i) Except as provided below, an Option may only be exercised
while the Grantee is employed by the Company as an Employee, Consultant or
member of the Board. In the event that a Grantee ceases to be employed by the
Company for any reason other than a "disability", death, or "termination for
cause", any Option which is otherwise exercisable by the Grantee shall terminate
unless exercised within 90 days of the date on which the Grantee ceases to be
employed by the Company (or within such other period of time as may be specified
by the Committee), but in any event no later than the date of expiration of the
Option term. Any of the Grantee's Options that are not otherwise exercisable as
of the date on which the Grantee ceases to be employed by the Company shall
terminate as of such date.
(ii) In the event the Grantee ceases to be employed by the
Company on account of a "termination for cause" by the Company, any Option held
by the Grantee shall terminate as of the date the Grantee ceases to be employed
by the Company.
(iii) In the event the Grantee ceases to be employed by the
Company because the Grantee is "disabled", any Option which is otherwise
exercisable by the Grantee shall terminate unless exercised within one year
after the date on which the Grantee ceases to be employed by the Company (or
within such other period of time as may be specified by the Committee, but in
any event no later than the date of expiration of the Option term. Any of the
Grantee's Options which are not otherwise exercisable as of the date on which
the Grantee ceases to be employed by the Company shall terminate as of such
date.
(iv) If the Grantee dies while employed by the Company or
within 90 days after the date on which the Grantee ceases to be employed on
account of a termination of employment specified in Section 5(e)(i) above (or
within such other period of time as may be specified by the Committee), any
Option that is otherwise exercisable by the Grantee shall terminate unless
exercised within one year after the date on which the Grantee ceases to be
employed by the Company (or within such other period of time as may be specified
by the Committee), but in any event no later than the date of expiration of the
Option term. Any of the Grantee's Options that are not otherwise exercisable as
of the date on which the Grantee ceases to be employed by the Company shall
terminate as of such date.
(v) For purposes of this Section 5(e) and Sections 6, 7, 8
and 9:
(A) The term "Company" shall mean the Company and its parent
and subsidiary corporations.
(B) "Employed by the Company" shall mean employment as an
Employee, Consultant or member of the Board (so that, for purposes of
exercising Options and SARs and satisfying conditions with respect to
Restricted Stock and Performance Units, a Grantee shall not be
considered to have terminated employment until the Grantee ceases to be
an Employee, Consultant and member of the Board), unless the Committee
determines otherwise.
5
<PAGE>
(C) "Disability" shall mean a Grantee's becoming disabled within
the meaning of section 22(e)(3) of the Code.
(D) "Termination for cause" shall mean, except to the extent
specified otherwise by the Committee, a finding by the Committee that
the Grantee has breached his or her employment or service contract with
the Company, or has been engaged in disloyalty to the Company,
including, without limitation, fraud, embezzlement, theft, commission
of a felony or proven dishonesty in the course of his or her employment
or service, or has disclosed trade secrets or confidential information
of the Company to persons not entitled to receive such information. In
the event a Grantee's employment is terminated for cause, in addition
to the immediate termination of all Grants, the Grantee shall
automatically forfeit all Option shares for any exercised portion of an
Option for which the Company has not yet delivered the share
certificates, upon refund by the Company of the Exercise Price paid by
the Grantee for such shares.
(f) Exercise of Options. A Grantee may exercise an Option that has
-------------------
become exercisable, in whole or in part, by delivering a notice of exercise to
the Company with payment of the Exercise Price. The Grantee shall pay the
Exercise Price for an Option as specified by the Committee (x) in cash, (y) with
the approval of the Committee, by delivering shares of Company Stock owned by
the Grantee owned by the Grantee for the period necessary to avoid a charge to
the Company's earnings for financial reporting purposes []](including Company
Stock acquired in connection with the exercise of an Option, subject to such
restrictions as the Committee deems appropriate) and having a Fair Market Value
on the date of exercise equal to the Exercise Price or (z) except with respect
to Options granted under Section 6 and held by persons who are then Non-Employee
Directors by such other method as the Committee may approve, including payment
through a broker in accordance with procedures permitted by Regulation T of the
Federal Reserve Board or any successor regulation of the agency than responsible
for administering margin regulations pertaining to securities brokers.
Non-Employee Directors who hold Options granted under Section 6 may make payment
through a broker in accordance with procedures permitted by Regulation T. The
Grantee shall pay the Exercise Price and the amount of any withholding tax due
(pursuant to Section 11) at the time of exercise. Shares of Company Stock
shall not be issued upon exercise of an Option until the Exercise Price is fully
paid and any required withholding is made.
(g) Limits on Incentive Stock Options. Each Incentive Stock Option
---------------------------------
shall provide that, if the aggregate Fair Market Value of the stock on the date
of the grant with respect to which Incentive Stock Options are exercisable for
the first time by a Grantee during any calendar year, under the Plan or any
other stock option plan of the Company or a parent or subsidiary, exceeds
$100,000, then the option, as to the excess, shall be treated as a Nonqualified
Stock Option. An Incentive Stock Option shall not be granted to any person
6
<PAGE>
who is not an Employee of the Company or a parent or subsidiary (within the
meaning of section 424(f) of the Code).
6. Option Grants to Non-Employee Directors
This Section 6 shall apply to any grant of an Option to a Non-Employee
Director after the Effective Date specified in Section 23(b).
(a) Initial Grant. Each Non-Employee Director who first becomes a
-------------
member of the Board after the Effective Date specified in Section 23(b)
shall receive a grant of a Nonqualified Stock Option to purchase 2,500 shares of
Company Stock on the date as of which he or she first becomes a member of the
Board.
(b) Annual Grants. On each date that the Company holds its annual
-------------
meeting of shareholders, commencing with the 1997 annual meeting, each
Non-Employee Director who is in office immediately after the annual election of
directors (other than a director who is first elected to the Board at such
meeting) shall receive a grant of a Nonqualified Stock Option to purchase 2,500
shares of Company Stock. The date of grant of each such annual Grant shall be
the date of the annual meeting of the Company's shareholders.
(c) Exercise Price. The Exercise Price per share of Company Stock
--------------
subject to an Option granted under this Section 6 shall be equal to the Fair
Market Value of a share of Company Stock on the date of grant.
(d) Option Term and Exercisability. The term of each Option granted
------------------------------
pursuant to this Section 6 shall be ten years. Options granted under this
Section 6 shall be fully exercisable as of the date of grant.
(e) Payment of Exercise Price.
-------------------------
(i) The Exercise Price for an Option granted under this Section 6
shall be paid in cash. The Grantee shall pay the Exercise Price and the amount
of any withholding tax due at the time of exercise. Shares of Company Stock
shall not be issued upon exercise of an Option until the Exercise Price is fully
paid and any required withholding is made.
(ii) A Grantee may exercise an Option granted under this Section 6
by delivering to the Committee a notice of exercise as described below, with
accompanying payment of the Exercise Price in accordance with Subsection (i)
above. The notice of exercise may instruct the Company to deliver shares of
Company Stock due upon the exercise of the Option to any registered broker or
dealer designated by the Committee in lieu of delivery to the Grantee. Such
instructions shall designate the account into which the shares are to be
deposited.
7
<PAGE>
(f) Applicability of Plan Provisions. Except as otherwise provided in
--------------------------------
this Section 6, Nonqualified Stock Options granted to Non-Employee Directors
shall be subject to the provisions of this Plan applicable to Nonqualified Stock
Options granted to other persons, provided however that (i) if an event
described in Section 3(b) occurs, appropriate adjustments, as described in that
Section, shall be made automatically, (ii) with respect to the provisions of
Section 5(e), the Committee shall not have discretion to modify the terms of
such provisions in the Grant Instrument, and (iii) in the event of a Change of
Control (as defined in Section 15), the provisions of Section 16
shall apply to Options granted pursuant to this Section 6, except that the
Committee shall not have discretion under Section 16(c) to modify the
automatic provisions of that Section.
(g) Administration. The provisions of this Section 6 are intended to
--------------
operate automatically and not require administration. To the extent that any
administrative determinations are required, any determinations with respect to
the provisions of this Section 6 shall be made by the members of the Board who
are not eligible to receive Grants under this Section 6, but in no event shall
such determinations affect the eligibility of Grantees, the determination of the
Exercise Price, the timing of the Grants or the number of shares subject to
Options granted hereunder. If at any time there are not sufficient shares
available under the Plan to permit an automatic Grant as described in this
Section 6, the Grant shall be reduced pro rata (to zero, if necessary) so as not
to exceed the number of shares then available under the Plan.
(h) Discretionary Grants. Effective September 4, 1998, the Board may
--------------------
make discretionary Grants of Nonqualified Stock Options to Non-Employee
Directors in accordance with the terms of the Plan, and effective September 5,
1998, the provisions of Sections 6(a) through 6(d) shall no longer apply. The
provisions of Section 6(g) shall not apply to such discretionary Grants and the
Board shall have the full power and authority reserved for the Committee under
the Plan to administer the Grants. Options granted pursuant to Sections 6(a) and
6(b) shall continue to be administered in accordance with the terms of the
applicable Grant Instrument. Options granted pursuant to this Section 6(h) shall
become exercisable in accordance with such terms and conditions, consistent with
the Plan, as may be determined by the Board and specified in the Grant
Instrument or an amendment to the Grant Instrument. The Board may accelerate the
exercisability of any or all outstanding Options granted pursuant to this
Section 6(h) at any time for any reason.
7. Restricted Stock Grants
-----------------------
The Committee may issue shares of Company Stock to an Employee,
Non-Employee Director (but only before the Effective Date specified in Section
23(b) or Consultant under a Grant of Restricted Stock, upon such terms
as the Committee deems appropriate. The following provisions are applicable to
Restricted Stock:
8
<PAGE>
(a) General Requirements. Shares of Company Stock issued pursuant to
--------------------
Restricted Stock Grants may be issued for consideration or for no consideration
as determined by the Committee. The Committee may establish conditions under
which restrictions on shares of Restricted Stock shall lapse over a period of
time or according to such other criteria as the Committee deems appropriate. The
period of time during which the Restricted Stock will remain subject to
restrictions will be designated in the Grant Instrument as the "Restriction
Period."
(b) Number of Shares. The Committee shall determine the number of
----------------
shares of Company Stock to be issued pursuant to a Restricted Stock Grant and
the restrictions applicable to such shares.
(c) Requirement of Employment. If the Grantee ceases to be employed by
-------------------------
the Company (as defined in Section 5(e)) during a period designated in the Grant
Instrument as the Restriction Period, or if other specified conditions are not
met, the Restricted Stock Grant shall terminate as to all shares covered by the
Grant as to which the restrictions have not lapsed, and those shares of Company
Stock must be immediately returned to the Company. The Committee may, however,
provide for complete or partial exceptions to this requirement as it deems
appropriate.
(d) Restrictions on Transfer and Legend on Stock Certificate. During
--------------------------------------------------------
the Restriction Period, a Grantee may not sell, assign, transfer, pledge or
otherwise dispose of the shares of Restricted Stock except to a Successor
Grantee under Section [11(a)] 12(a). Each certificate for a share of Restricted
Stock shall contain a legend giving appropriate notice of the restrictions in
the Grant. The Grantee shall be entitled to have the legend removed from the
stock certificate covering the shares subject to restrictions when all
restrictions on such shares have lapsed. The Committee, in its sole discretion,
may determine that the Company will not issue certificates for shares of
Restricted Stock until all restrictions on such shares have lapsed, or that the
Company will retain possession of certificates for shares of Restricted Stock
until all restrictions on such shares have lapsed.
(e) Right to Vote and to Receive Dividends. Unless the Committee
--------------------------------------
determines otherwise, during the Restriction Period, the Grantee shall have the
right to vote shares of Restricted Stock and to receive any dividends or other
distributions paid on such shares, subject to any restrictions deemed
appropriate by the Committee.
(f) Lapse of Restrictions. All restrictions imposed on Restricted Stock
---------------------
shall lapse upon the expiration of the applicable Restriction Period and the
satisfaction of all conditions imposed by the Committee. The Committee may
determine, as to any or all Restricted Stock Grants, that the restrictions shall
lapse without regard to any Restriction Period.
9
<PAGE>
8. Stock Appreciation Rights
-------------------------
(a) General Requirements. The Committee may grant stock appreciation
--------------------
rights ("SARs") to any Grantee separately or in tandem with any Option (for all
or a portion of the applicable Option). Tandem SARs may be granted either at the
time the Option is granted or at any time thereafter while the Option remains
outstanding; provided, however, that, in the case of an Incentive Stock Option,
SARs may be granted only at the time of the Grant of the Incentive Stock Option.
The Committee shall establish the base amount of the SAR at the time the SAR is
granted. Unless the Committee determines otherwise, the base amount of each SAR
shall be equal to the per share Exercise Price of the related Option or, if
there is no related Option, the Fair Market Value of a share of Company Stock as
of the date of Grant of the SAR.
(b) Tandem SARs. In the case of tandem SARs, the number of SARs granted
-----------
to a Grantee that shall be exercisable during a specified period shall not
exceed the number of shares of Company Stock that the Grantee may purchase upon
the exercise of the related Option during such period. Upon the exercise of an
Option, the SARs relating to the Company Stock covered by such Option shall
terminate. Upon the exercise of SARs, the related Option shall terminate to the
extent of an equal number of shares of Company Stock.
(c) Exercisability. An SAR shall be exercisable during the period
--------------
specified by the Committee in the Grant Instrument and shall be subject to such
vesting and other restrictions as may be specified in the Grant Instrument. The
Committee, in its sole discretion, may accelerate the exercisability of any or
all outstanding SARs at any time for any reason. SARs may only be exercised
while the Grantee is employed by the Company or during the applicable period
after termination of employment as described in Section 5(e). A tandem SAR shall
be exercisable only during the period when the Option to which it is related is
also exercisable. After the Effective Date specified in Section 23(b),
no SAR may be exercised for cash by an officer or director of the Company who is
subject to Section 16 of the Exchange Act, except in accordance with Rule 16b-3
under the Exchange Act.
(d) Value of SARs. When a Grantee exercises SARs, the Grantee shall
-------------
receive in settlement of such SARs an amount equal to the value of the stock
appreciation for the number of SARs exercised, payable in cash, Company Stock or
a combination thereof. The stock appreciation for an SAR is the amount by which
the Fair Market Value of the underlying Company Stock on the date of exercise of
the SAR exceeds the base amount of the SAR as described in Subsection (a).
(e) Form of Payment. The Committee shall determine whether the
---------------
appreciation in an SAR shall be paid in the form of cash, shares of Company
Stock, or a combination of the two, in such proportion as the Committee deems
appropriate. For purposes of calculating the number of shares of Company Stock
to be received, shares of Company Stock shall be valued
10
<PAGE>
at their Fair Market Value on the date of exercise of the SAR. If shares of
Company Stock are to be received upon exercise of an SAR, cash shall be
delivered in lieu of any fractional share.
9. Performance Units
-----------------
(a) General Requirements. The Committee may grant performance units
--------------------
("Performance Units") to a Grantee. Each Performance Unit shall represent the
right of the Grantee to receive an amount based on the value of the Performance
Unit, if performance goals established by the Committee are met. A Performance
Unit shall be based on the Fair Market Value of a share of Company Stock or on
such other measurement base as the Committee deems appropriate. The Committee
shall determine the number of Performance Units to be granted and the
requirements applicable to such Units.
(b) Performance Period and Performance Goals. When Performance Units
----------------------------------------
are granted, the Committee shall establish the performance period during which
performance shall be measured (the "Performance Period"), performance goals
applicable to the Units ("Performance Goals") and such other conditions of the
Grant as the Committee deems appropriate. Performance Goals may relate to the
financial performance of the Company or its operating units, the performance of
Company Stock, individual performance, or such other criteria as the Committee
deems appropriate.
(c) Payment with respect to Performance Units. At the end of each
-----------------------------------------
Performance Period, the Committee shall determine to what extent the Performance
Goals and other conditions of the Performance Units are met and the amount, if
any, to be paid with respect to the Performance Units. Payments with respect to
Performance Units shall be made in cash, in Company Stock, or in a combination
of the two, as determined by the Committee.
(d) Requirement of Employment. If the Grantee ceases to be employed by
-------------------------
the Company (as defined in Section 5(e)) during a Performance Period, or if
other conditions established by the Committee are not met, the Grantee's
Performance Units shall be forfeited. The Committee may, however, provide for
complete or partial exceptions to this requirement as it deems appropriate.
10. Qualified Performance-Based Compensation.
----------------------------------------
(a) Designation as Qualified Performance-Based Compensation. The
-------------------------------------------------------
Committee may determine that Performance Units, Nonqualified Stock Options with
an exercise price that is less than Fair Market Value ("Discounted Options") or
Restricted Stock granted to an Employee shall be considered "qualified
performance-based compensation" under section 162(m) of the Code. The provisions
of this Section 10 shall apply to Grants of Discounted Options, Performance
Units and Restricted Stock that are to be considered "qualified
performance-based compensation" under section 162(m) of the Code.
11
<PAGE>
(b) Performance Goals. When Discounted Options, Performance Units or
-----------------
Restricted Stock that are to be considered "qualified performance-based
compensation" are granted, the Committee shall establish in writing (i) the
objective performance goals that must be met in order for Discounted Options to
be granted, restrictions on the Restricted Stock to lapse or amounts to be paid
under the Performance Units, (ii) the Performance Period during which the
performance goals must be met, (iii) the threshold, target and maximum amounts
that may be paid if the performance goals are met, and (iv) any other
conditions, including without limitation provisions relating to death,
disability, other termination of employment or Change of Control, that the
Committee deems appropriate and consistent with the Plan and section 162(m) of
the Code. The performance goals may relate to the Employee's business unit or
the performance of the Company and its subsidiaries as a whole, or any
combination of the foregoing. The Committee shall use objectively determinable
performance goals based on one or more of the following criteria: stock price,
earnings per share, net earnings, operating earnings, return on assets,
shareholder return, return on equity, growth in assets, unit volume, sales,
market share, or strategic business criteria consisting of one or more
objectives based on meeting specified revenue goals, market penetration goals,
geographic business expansion goals, cost targets or goals relating to
acquisitions or divestitures.
(c) Establishment of Goals. The Committee shall establish the
----------------------
performance goals in writing either before the beginning of the Performance
Period or during a period ending no later than the earlier of (i) 90 days after
the beginning of the Performance Period or (ii) the date on which 25% of the
Performance Period has been completed, or such other date as may be required or
permitted under applicable regulations under section 162(m) of the Code. The
performance goals shall satisfy the requirements for "qualified
performance-based compensation," including the requirement that the achievement
of the goals be substantially uncertain at the time they are established and
that the goals be established in such a way that a third party with knowledge of
the relevant facts could determine whether and to what extent the performance
goals have been met. The Committee shall not have discretion to increase the
amount of compensation that is payable upon achievement of the designated
performance goals.
(d) Maximum Payment. Subject to the limitations of Section 3(a), if
---------------
Discounted Options, Restricted Stock, or Performance Units measured with respect
to the fair market value of Company Stock, are granted, not more than 500,000
shares of Company Stock may be granted to an Employee under the Discounted
Options, Performance Units or Restricted Stock for any Performance Period. If
Performance Units are measured with respect to other criteria, the maximum
amount that may be paid to an Employee with respect to a Performance Period is
$1 million.
(e) Announcement of Grants. The Committee shall certify and announce
----------------------
the results for each Performance Period to all Grantees immediately following
the announcement of the Company's financial results for the Performance Period.
If and to the
12
<PAGE>
extent that the Committee does not certify that the performance goals have been
met, the grants of Discounted Options, Restricted Stock and Performance Units
for the Performance Period shall be forfeited.
11. Withholding of Taxes
--------------------
(a) Required Withholding. All Grants under the Plan shall be subject to
--------------------
applicable federal (including FICA), state and local tax withholding
requirements. The Company shall have the right to deduct from all Grants paid in
cash, or from other wages paid to the Grantee, any federal, state or local taxes
required by law to be withheld with respect to such Grants. In the case of
Options and other Grants paid in Company Stock, the Company may require the
Grantee or other person receiving such shares to pay to the Company the amount
of any such taxes that the Company is required to withhold with respect to such
Grants, or the Company may deduct from other wages paid by the Company the
amount of any withholding taxes due with respect to such Grants.
(b) Election to Withhold Shares. A Grantee may elect to satisfy the
---------------------------
Company's income tax withholding obligation with respect to an Option, SAR,
Restricted Stock or Performance Units paid in Company Stock by having shares
withheld up to an amount that does not exceed the Grantee's maximum marginal tax
rate for federal (including FICA), state and local tax liabilities. The election
must be in a form and manner prescribed by the Committee and shall be subject to
the prior approval of the Committee. If the Grantee is a director or officer who
is subject to Section 16 of the Exchange Act, the election must be made in
compliance with Rule 16b-3 under the Exchange Act.
12. Transferability of Grants
-------------------------
(a) Only the Grantee or his or her authorized representative may
exercise rights under a Grant. Such persons may not transfer those rights except
by will or by the laws of descent and distribution or, with respect to Grants
other than Incentive Stock Options, if permitted under Rule 16b-3 of the
Exchange Act (to the extent applicable) and if permitted in any specific case by
the Committee in its sole discretion, pursuant to a qualified domestic relations
order (as defined under the Code or Title I of the ERISA or the regulations
thereunder). When a Grantee dies, the representative or other person entitled to
succeed to the rights of the Grantee ("Successor Grantee") may exercise such
rights. A Successor Grantee must furnish proof satisfactory to the Company of
his or her right to receive the Grant under the Grantee's will or under the
applicable laws of descent and distribution.
(b) Notwithstanding the foregoing, the Committee may provide, in a
Grant Instrument, that a Grantee may transfer Nonqualified Stock Options to his
or her children, grandchildren or spouse or to one or more trusts for the
benefit of such family members or to partnerships in which such family members
are the only partners (a "Family Transfer"), provided that the Grantee receives
no consideration for a Family Transfer and the
13
<PAGE>
Nonqualified Stock Options transferred in a Family Transfer continue to be
subject to the same terms and conditions that were applicable to such
Nonqualified Stock Options immediately prior to the Family Transfer.
13. Right of First Refusal
----------------------
Prior to the Effective Date specified in Section 23(b), if at any time
an individual desires to sell, encumber, or otherwise dispose of shares of
Company Stock distributed to him under this Plan, the individual shall first
offer the shares to the Company by giving the Company written notice disclosing:
(a) the name of the proposed transferee of the Company Stock; (b) the
certificate number and number of shares of Company Stock proposed to be
transferred or encumbered; (c) the proposed price; (d) all other terms of the
proposed transfer; and (e) a written copy of the proposed offer. Within 60 days
after receipt of such notice, the Company shall have the option to purchase all
or part of such Company Stock at the then current Fair Market Value (as defined
in Section 5(b)) and may pay such price in installments over a period not to
exceed four years, at the discretion of the Committee.
In the event the Company does not exercise the option to purchase
Company Stock, as provided above, the individual shall have the right to sell,
encumber, or otherwise dispose of his shares of Company Stock on the terms of
the transfer set forth in the written notice to the Company, provided such
transfer is effected within 15 days after the expiration of the option period.
If the transfer is not effected within such period, the Company must again be
given an option to purchase, as provided above.
On and after the Effective Date specified in Section 23(b), the
Company shall have no further right to purchase shares of Company Stock under
this Section, and its limitations shall be null and void.
Notwithstanding the foregoing, the Committee may require that a Grantee
execute a stockholder's agreement, with such terms as the Committee deems
appropriate, with respect to any Company Stock distributed pursuant to this
Plan, in which case the provisions of this Section 13 and Section 14 below shall
not apply to such Company Stock.
14. Purchase by the Company
-----------------------
Prior to the Effective Date specified in Section 23(b), if a
Grantee ceases to be employed by the Company, the Company shall have the right
to purchase all or part of any Company Stock distributed to him under this Plan
at its then current Fair Market Value (as defined in Section 5(b)); provided,
however, that such repurchase shall be made in accordance with applicable
accounting rules to avoid adverse accounting treatment.
15. Change of Control of the Company
--------------------------------
14
<PAGE>
As used herein, a "Change of Control" shall be deemed to have occurred
if:
(a) As a result of any transaction, any one stockholder, other
than an existing stockholder as of the effective date of the Plan (or his
beneficiary or estate), becomes a beneficial owner, directly or indirectly, of
securities of the Company representing more than 40% of the common stock of the
Company or the combined voting power of the Company's then outstanding
securities;
(b) A liquidation or dissolution of the Company or sale (other
than a transfer to a subsidiary) of all or substantially all of the Company's
assets occurs;
(c) On or after the Effective Date specified in Section
23(b), any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3
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;
(d) The shareholders of the Company approve (or, if
shareholder approval is not required, the Board approves) an agreement providing
for (i) the merger or consolidation of the Company with another corporation
where the shareholders of the Company, immediately prior to the merger or
consolidation, will not beneficially own, immediately after the merger or
consolidation, shares entitling such shareholders to 50% or more of all votes to
which all shareholders of the surviving corporation would be entitled in the
election of directors (without consideration of the rights of any class of stock
to elect directors by a separate class vote), or where the members of the Board,
immediately prior to the merger or consolidation, would not, immediately after
the merger or consolidation, constitute a majority of the board of directors of
the surviving corporation, (ii) the sale or other disposition of all or
substantially all of the assets of the Company, or (iii) a liquidation or
dissolution of the Company;
(e) Any person has commenced a tender offer or exchange offer
for 50% or more of the voting power of the then outstanding shares of the
Company; or
(f) At least a majority of the Board does not consist of
individuals who were elected, or nominated for election, by the directors in
office at the time of such election or nomination.
16. Consequences of a Change of Control
-----------------------------------
(a) Upon a Change of Control (i) the Company shall provide each Grantee
with outstanding Grants written notice of such Change of Control, (ii) all
outstanding Options and SARs shall automatically accelerate and become fully
exercisable, (iii) the restrictions and conditions on all outstanding Restricted
Stock shall immediately lapse, and (iv) Grantees
15
<PAGE>
holding Performance Units shall receive a payment in settlement of such
Performance Units, in an amount determined by the Committee, based on the
Grantee's target payment for the Performance Period and the portion of the
Performance Period that precedes the Change of Control.
(b) In addition, upon a Change of Control described in Section
15(d)(i) where the Company is not the surviving corporation (or
survives only as a subsidiary of another corporation), all outstanding Options
and SARs shall be assumed by, or replaced with comparable options or rights by,
the surviving corporation.
(c) Notwithstanding the foregoing, subject to subsection (d) below, in
the event of a Change of Control, the Committee may take one or both of the
following actions: the Committee may (i) require that Grantees surrender their
outstanding Options and SARs in exchange for a payment by the Company, in cash
or Company Stock as determined by the Committee, in an amount equal to the
amount by which the then Fair Market Value of the shares of Company Stock
subject to the Grantee's outstanding Options and SARs exceeds the Exercise Price
of the Options or the base amount of the SARs, as applicable, and (ii) terminate
any or all outstanding Options and SARs at such time as the Committee deems
appropriate. Such surrender shall take place as of the date of the Change of
Control or such other date as the Committee may specify, and, in the case of an
Option or SAR held by a Grantee who is subject to Section 16(b) of the Exchange
Act, any such surrender or payment shall be made on such date as the Committee
shall determine consistent with Rule 16b-3 under the Exchange Act.
(d) Notwithstanding anything in the Plan to the contrary, in the event
of a Change of Control, the Committee shall not have the right to take actions
described in the Plan (including without limitation actions described in
Subsection (c) above) that would make the Change of Control ineligible for
pooling of interest accounting treatment or that would make the Change of
Control ineligible for desired tax treatment if, in the absence of such right,
the Change of Control would qualify for such treatment and the Company intends
to use such treatment with respect to the Change of Control.
17. Amendment and Termination of the Plan
-------------------------------------
(a) Amendment. The Board may amend or terminate the Plan at any time;
---------
provided, however, that the Board shall not amend the Plan without shareholder
approval if such approval is required in order for Incentive Stock Options
granted or to be granted under the Plan to meet the requirements
16
<PAGE>
of section 422 of the Code or such approval is required in order to exempt
compensation under the Plan from the deduction limit under section 162(m) of the
Code.
(b) Termination of Plan. The Plan shall terminate on the day
-------------------
immediately preceding the tenth anniversary of its effective date unless
terminated earlier by the Board or unless extended by the Board with the
approval of the shareholders.
(c) Termination and Amendment of Outstanding Grants. A termination or
-----------------------------------------------
amendment of the Plan that occurs after a Grant is made shall not materially
impair the rights of a Grantee unless the Grantee consents or unless the
Committee acts under Section 24(b). The termination of the Plan shall not impair
the power and authority of the Committee with respect to an outstanding Grant.
Whether or not the Plan has terminated, an outstanding Grant may be terminated
or amended under Section 24(b) or may be amended by agreement of the Company and
the Grantee consistent with the Plan.
(d) Governing Document. The Plan shall be the controlling document. No
------------------
other statements, representations, explanatory materials or examples, oral or
written, may amend the Plan in any manner. The Plan shall be binding upon and
enforceable against the Company and its successors and assigns.
18. Funding of the Plan
-------------------
This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Grants under this Plan. In no event shall
interest be paid or accrued on any Grant, including unpaid installments of
Grants.
19. Rights of Participants
----------------------
Nothing in this Plan shall entitle any Employee, Consultant or other
person to any claim or right to be granted a Grant under this Plan, except as
provided in Section 6. Neither this Plan nor any action taken hereunder shall be
construed as giving any individual any rights to be retained by or in the employ
of the Company or any other employment rights.
20. No Fractional Shares
--------------------
No fractional shares of Company Stock shall be issued or delivered
pursuant to the Plan or any Grant. The Committee shall determine whether cash,
other awards or other property shall be issued or paid in lieu of such
fractional shares or whether such fractional shares or any rights thereto shall
be forfeited or otherwise eliminated.
21. Requirements for Issuance of Shares
-----------------------------------
17
<PAGE>
No Company Stock shall be issued or transferred in connection with any
Grant hereunder unless and until all legal requirements applicable to the
issuance or transfer of such Company Stock have been complied with to the
satisfaction of the Committee. The Committee shall have the right to condition
any Grant made to any Grantee hereunder on such Grantee's undertaking in writing
to comply with such restrictions on his or her subsequent disposition of such
shares of Company Stock as the Committee shall deem necessary or advisable as a
result of any applicable law, regulation or official interpretation thereof and
certificates representing such shares may be legended to reflect any such
restrictions. Certificates representing shares of Company Stock issued under the
Plan will be subject to such stop-transfer orders and other restrictions as may
be applicable under such laws, regulations and other obligations of the Company,
including any requirement that a legend or legends be placed thereon.
22. Headings
--------
Section headings are for reference only. In the event of a conflict
between a title and the content of a Section, the content of the Section shall
control.
23. Effective Date of the Plan.
---------------------------
(a) Plan Effective Date. Subject to the approval of the Company's
-------------------
shareholders, this Plan shall be effective on May 17, 1996.
(b) Effective Date of Section 16 and Section 162(m) Provisions. The
----------------------------------------------------------
provisions of the Plan that refer to, or are applicable to persons subject to,
Section 16 of the Exchange Act or Section 162(m) of the Code shall be effective,
if at all, upon the initial registration of the Company Stock under Section
12(g) of the Exchange Act, and shall remain effective thereafter for so long as
such stock is so registered.
24. Miscellaneous
-------------
(a) Substitute Grants. The Committee may make a Grant or other equity
-----------------
award to an employee of another corporation who becomes an Employee by reason of
a corporate merger, consolidation, acquisition of stock or property,
reorganization or liquidation involving the Company or any of its subsidiaries
in substitution for a stock option or restricted stock grant made by such
corporation ("Substituted Stock Incentives"). The terms and conditions of the
substitute grant may vary from the terms and conditions required by the Plan and
from those of the Substituted Stock Incentives. The Committee shall prescribe
the provisions of the substitute grants.
(b) Compliance with Law. The Plan, the exercise of Options and SARs and
-------------------
the obligations of the Company to issue or transfer shares of Company Stock
under Grants shall be subject to all applicable laws and to approvals by any
governmental or regulatory agency
18
<PAGE>
as may be required. With respect to persons subject to Section 16 of the
Exchange Act, it is the intent of the Company that the Plan and all transactions
under the Plan comply with all applicable provisions of Rule 16b-3 or its
successors under the Exchange Act. The Committee may revoke any Grant if it is
contrary to law or modify a Grant to bring it into compliance with any valid and
mandatory government regulation. The Committee may also adopt rules regarding
the withholding of taxes on payments to Grantees. The Committee may, in its sole
discretion, agree to limit its authority under this Section.
(c) Ownership of Stock. A Grantee or Successor Grantee shall have no
------------------
rights as a shareholder with respect to any shares of Company Stock covered by a
Grant until the shares are issued or transferred to the Grantee or Successor
Grantee on the stock transfer records of the Company.
(d) Governing Law. The validity, construction, interpretation and
-------------
effect of the Plan and Grant Instruments issued under the Plan shall exclusively
be governed by and determined in accordance with the law of the Commonwealth of
Pennsylvania.
19
<PAGE>
- ------------------ COMPARISON OF FOOTERS ------------------
- -FOOTER 1-
[PH06/115977.4] 1-PH/938115.6
20
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
dated February 5, 1999 (except with respect to the matter discussed in Note 9,
as to which the date is February 26, 1999) on the consolidated financial
statements of TeleSpectrum Worldwide Inc. And Subsidiaries and to all references
to our Firm included in or made a part of this registration statement.
/s/ Arthur Andersen LLP
Philadelphia, Pa.,
June 8, 1999
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of TeleSpectrum Worldwide
Inc. on Form S-4 of our report on the consolidated financial statements of
International Data Response Corporation dated February 26, 1999, appearing in
the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
San Diego, California
June 8, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
dated February 10, 1999 on the consolidated financial statements of CRW
Financial, Inc. and Subsidiaries and to all references to our Firm included in
or made a part of this registration statement.
/s/ Arthur Andersen LLP
Philadelphia, Pa.,
June 8, 1999
<PAGE>
Exhibit 23.7
CONSENT OF J.P. MORGAN SECURITIES, INC.
We hereby consent to (i) the inclusion of our opinion letter, dated
January 11, 1999, to the Board of Directors of TeleSpectrum Worldwide Inc. as
Appendix IV to the Joint Proxy Statement/Prospectus of TeleSpectrum Worldwide
Inc., CRW Financial, Inc. and International Data Response Corporation relating,
in part, to the proposed merger between TeleSpectrum Worldwide Inc. and
International Data Response Corporation and (ii) all references to J.P. Morgan
Securities, Inc. And our opinion letter in the Joint Proxy Statement/Prospectus
which forms a part of this Registration Statement on Form S-4. In giving such
consent, we do not admit that we come within the category of persons whose
consent is required under, and we do not admit that we are "experts" for
purposes of, the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
J.P. MORGAN SECURITIES, INC.
/s/ J.P. Morgan Securities, Inc.
<PAGE>
EXhibit 23.8
CONSENT OF JANNEY MONTGOMERY SCOTT, INC.
We hereby consent to the use of our opinion letter dated September 2,
1998 to the Board of Directors of CRW Financial, Inc. ("CRW") as Appendix VI to
the Joint Proxy Statement/Prospectus of CRW, TeleSpectrum Worldwide Inc. and
International Data Response Corporation relating, in part, to the proposed
merger between CRW and a wholly-owned subsidiary of TeleSpectrum Worldwide Inc.
and to the references to our firm in the Joint Proxy Statement/Prospectus which
forms a part of this Registration Statement on Form S-4. In giving such consent,
we do not admit that we come within the category of persons whose consent is
required under, and we do not admit that we are "experts" for purposes of, the
Securities Act of 1933, as amended, or the rules and regulations promulgated
thereunder.
JANNEY MONTGOMERY SCOTT, INC.
/s/ Janney Montgomery Scott, Inc.
<PAGE>
Exhibit 23.9
[LOGO APPEARS HERE]
HOULIHAN LOKEY HOWARD & ZUKIN
-----------------------------
FINANCIAL ADVISORS
June 4, 1999
To The Board of Directors of
International Data Response Corporation
Gentlemen:
We hereby consent to the inclusion of our opinion letter dated January 14, 1999
to the Board of Directors of International Data Response Corporation as Appendix
V to the Joint Proxy Statement/Prospectus of TeleSpectrum Worldwide Inc. and
International Data Response Corporation relating to the proposed merger
transaction between the parties and references thereto in such Joint Proxy
Statement/Prospectus. In giving such consent, we do not mean to imply or admit
that we are "experts" for purposes of, the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder. This consent shall not
modify or waive the terms and conditions of our retainer letter dated December
16, 1998, or any of the matters set forth in the opinion letter.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
/s/ Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
[LETTERHEAD OF HOULIHAN LOKEY & ZUKIN APPEARS HERE]
<PAGE>
Exhibit 99.1
TELESPECTRUM WORLDWIDE INC.
443 S. Gulph Road
King of Prussia, PA 19406
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING OF STOCKHOLDERS, JUNE 30, 1999.
KNOW ALL MEN BY THESE PRESENTS that I, the undersigned stockholder of
TeleSpectrum Worldwide, Inc., a Delaware corporation (the "Company"), do hereby
nominate, constitute, and appoint Keith E. Alessi or Francis Pennella, or any
one or more of them, my true and lawful attorney(s) with full power of
substitution for me and in my name, place and stead, to vote all of the Common
Stock, par value $.01 per share, of the Company, standing in my name on its
books on May 28, 1999, at the Annual Meeting of its Stockholders to be held on
June 30, 1999 at the Philadelphia Marriot Hotel, 1201 Market Street,
Philadelphia, Pennsylvania, at 9:00 a.m., local time, and at any and all
postponements or adjournments thereof.
- --------------------------------------------------------------------------------
(1) To consider and vote upon a proposal to approve and adopt the Agreement and
Plan of Merger dated as of January 14, 1999, as amended on February 26,
1999 and effective May 13, 1999, (the "Merger Agreement"), among
TeleSpectrum Worldwide Inc., International Data Response Corporation
(IDRC), and certain stockholders of IDRC. This merger agreement provides
for the merger of IDRC with TeleSpectrum. Holders of IDRC common stock and
options exercisable for IDRC common stock will be entitled to receive
shares of TeleSpectrum common stock and warrants exercisable for
TeleSpectrum common stock in exchange for all of these IDRC securities.
FOR [_] AGAINST [_] ABSTAIN [_]
- --------------------------------------------------------------------------------
<TABLE>
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(2) ELECTION FOR all nominees at right WITHHOLD AUTHORITY Nominees:
OF (except as marked to vote for all Keith E. Alessi
DIRECTORS. to the contrary below) nominees at right Joseph V. Del Raso
[_] [_] Michael E. Julian
David R. Kriegel
J. Brian O'Neill
Richard W. Virtue
Kevin W. Walsh
- ------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(3) To approve an amendment to our 1996 Equity Compensation Plan.
FOR [_] AGAINST [_] ABSTAIN [_]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(4) In their discretion, to transact any other business that may properly come
before the Annual Meeting.
- --------------------------------------------------------------------------------
ALL SHARES WILL BE VOTED AS DIRECTED HEREIN AND, UNLESS OTHERWISE DIRECTED, WILL
BE VOTED "FOR" PROPOSALS 1, 2, AND 3 AND IN THE DISCRETION OF THE PERSON VOTING
THE PROXY WITH RESPECT TO ANY OTHER BUSINESS PROPERLY BROUGHT BEFORE THE
MEETING.
<PAGE>
REVERSE SIDE
The undersigned acknowledges receipt of the Notice of Annual Meeting
and a joint proxy statement/prospectus, and revokes all prior Proxies for said
meeting. This Proxy, when properly executed, will be voted in the manner
directed herein by the undersigned stockholder.
-----------------------------------------------
Signature
-----------------------------------------------
Signature if jointly held
DATED:__________________, 1999
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREON. WHEN SHARES ARE HELD BY JOINT
TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR,
TRUSTEE, OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON. MAKE SURE
THAT THE NAME ON YOUR STOCK CERTIFICATE(S) IS EXACTLY AS YOU INDICATE ABOVE.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
SELF-ADDRESSED, POSTAGE PREPAID ENVELOPE.
<PAGE>
Exhibit 99.2
CRW FINANCIAL, INC.
200 Four Falls Corporate Center
West Conshohocken, PA 19428
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR
THE ANNUAL MEETING OF STOCKHOLDERS, JUNE 30, 1999.
KNOW ALL MEN BY THESE PRESENTS that I, the undersigned stockholder of CRW
Financial, Inc., (the "Company"), do hereby nominate, constitute, and appoint J.
Brian O'Neill and Jonathan P. Robinson, or any one or more of them, my true and
lawful attorney(s) with full power of substitution for me and in my name, place
and stead, to vote all of the Common Stock, par value $.01 per share, of the
Company, standing in my name on its books on May 28, 1999, at the Annual Meeting
of its Stockholders to be held on June 30, 1999 at the Philadelphia Marriot
Hotel, 1201 Market Street, Philadelphia, Pennsylvania, at 9:00 a.m., local
time, and at any and all postponements or adjournments thereof.
- --------------------------------------------------------------------------------
(1) To consider and vote upon a proposal to approve and adopt the Agreement and
Plan of Merger dated as of September 3, 1998, as amended on December 30,
1998, (the "Merger Agreement"), among CRW, TeleSpectrum Worldwide Inc., and
CRW Acquisition Corp. This merger agreement provides for the merger of CRW
and CRW Acquisition, a subsidiary of TeleSpectrum. In the merger, our
stockholders will receive .709 shares of TeleSpectrum common stock in
exchange for each share of CRW common stock that they own.
FOR [_] AGAINST [_] ABSTAIN [_]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Class III FOR all nominees at left WITHHOLD AUTHORITY
--------- (except as marked to vote for all
J. Brian O'Neill to the contrary below) nominees at left
Mark J. DeNino [_] [_]
(2) ELECTION
OF ----------------------------------------------------------------------------------
DIRECTORS. Class II FOR all nominees at left WITHHOLD AUTHORITY
-------- (except as marked to vote for all
Bernard Morgen to the contrary below) nominees at left
Eustice Mita [_] [_]
- -------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(3) In their discretion, to transact any other business that may properly come
before the Annual Meeting.
- --------------------------------------------------------------------------------
ALL SHARES WILL BE VOTED AS DIRECTED HEREIN AND, UNLESS OTHERWISE DIRECTED, WILL
BE VOTED "FOR" PROPOSALS 1, AND 2, AND IN THE DISCRETION OF THE PERSON VOTING
THE PROXY WITH RESPECT TO ANY OTHER BUSINESS PROPERLY BROUGHT BEFORE THE
MEETING.
REVERSE SIDE
<PAGE>
The undersigned acknowledges receipt of the Notice of Annual Meeting
and a joint proxy statement/prospectus, and revokes all prior Proxies for said
meeting. This Proxy, when properly executed, will be voted in the manner
directed herein by the undersigned stockholder.
-----------------------------------------------
Signature
-----------------------------------------------
Signature if jointly held
DATED:__________________, 1999
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREON. WHEN SHARES ARE HELD BY JOINT
TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR,
TRUSTEE, OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON. MAKE SURE
THAT THE NAME ON YOUR STOCK CERTIFICATE(S) IS EXACTLY AS YOU INDICATE ABOVE.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
SELF-ADDRESSED, POSTAGE PREPAID ENVELOPE.
<PAGE>
Exhibit 99.3
INTERNATIONAL DATA RESPONSE CORPORATION
6041 La Flecha, Suite B
P.O. Box 7130
Rancho Santa Fe, CA 92067-7130
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL
MEETING OF STOCKHOLDERS, JUNE 30, 1999.
KNOW ALL MEN BY THESE PRESENTS that I, the undersigned stockholder of
International Data Response Corporation, (hereinafter the "Company") do hereby
nominate, constitute, and appoint Robert B. Hellman, Jr., and Jeffrey E.
Stiefler, or any one or more of them, my true and lawful attorney(s) with full
power of substitution for me and in my name, place and stead, to vote all of the
Common Stock and Preferred Stock of the Company, standing in my name on its
books on June 4, 1999, at the Special Meeting of its Stockholders to be held on
June 30, 1999 at the offices of Cooley Godward LLP, counsel to IDRC, located at
4365 Executive Drive, Suite 1100, San Diego, California, at 7:00 a.m., local
time, and at any and all postponements or adjournments thereof.
- --------------------------------------------------------------------------------
(1) To consider and vote upon a proposal to approve and adopt the Agreement and
Plan of Merger dated as of January 14, 1999, as amended on February 26,
1999 and May 13, 1999, (the "Merger Agreement"), among TeleSpectrum
Worldwide Inc., IDRC and certain stockholders of IDRC. This merger
agreement provides for the merger of IDRC with TeleSpectrum. Holders of
IDRC common stock will be entitled to receive shares of TeleSpectrum common
stock and warrants exercisable for TeleSpectrum common stock in exchange
for all of their outstanding IDRC securities. Holders of IDRC preferred
stock will receive cash in redemption of their preferred stock.
FOR [_] AGAINST [_] ABSTAIN [_]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(2) In their discretion, to transact any other business that may properly come
before the Special Meeting.
- --------------------------------------------------------------------------------
ALL SHARES WILL BE VOTED AS DIRECTED HEREIN AND, UNLESS OTHERWISE DIRECTED, WILL
BE VOTED "FOR" PROPOSAL 1, AND IN THE DISCRETION OF THE PERSON VOTING THE PROXY
WITH RESPECT TO ANY OTHER BUSINESS PROPERLY BROUGHT BEFORE THE MEETING. WHERE NO
CHOICE IS SPECIFIED, THIS PROXY WILL CONFER DISCRETIONARY POWER TO THE
ATTORNEYS-IN-FACT AND WILL BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT AND THE
MERGER.
<PAGE>
REVERSE SIDE
The undersigned acknowledges receipt of the Notice of Special Meeting
and a joint proxy statement/prospectus, and revokes all prior Proxies for said
meeting. This Proxy, when properly executed, will be voted in the manner
directed herein by the undersigned stockholder.
-----------------------------------------------
Signature
-----------------------------------------------
Signature if jointly held
DATED:__________________, 1999
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREON. WHEN SHARES ARE HELD BY JOINT
TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR,
TRUSTEE, OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON. MAKE SURE
THAT THE NAME ON YOUR STOCK CERTIFICATE(S) IS EXACTLY AS YOU INDICATE ABOVE.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
SELF-ADDRESSED, POSTAGE PREPAID ENVELOPE.
