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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 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 November 12, 1999 was 32,593,364.
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<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Table of Contents
-----------------
<TABLE>
<CAPTION>
Item No. Page
- ----------- ------
<S> <C>
PART I -- FINANCIAL INFORMATION
1. Financial Statements (unaudited):
Condensed Consolidated Results of Operations
For the Three Months Ended September 30, 1999 and
For the Three Months Ended September 30, 1998.................... 3
Condensed Consolidated Results of Operations
For the Nine Months Ended September 30, 1999 and
For the Nine Months Ended September 30, 1998..................... 4
Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998......................... 5
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and
For the Nine Months Ended September 30, 1998..................... 6
Notes to Condensed Consolidated Financial Statements................ 7
2. Management's Discussion and Analysis of Results of Operations
and Financial Condition.......................................... 13
PART II - OTHER INFORMATION.......................................... 20
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
Telespectrum Worldwide Inc. and Subsidiaries
Condensed Consolidated Results of Operations
(Unaudited)
(Dollars in Thousands - Except Per Share Amounts)
Three Months Ended
-------------------------------------------
September 30, September 30,
1999 1998
------------------- ----------------------
REVENUES $86,471 $44,476
------- -------
OPERATING EXPENSES:
Cost of services 64,011 32,805
Selling, general and administrative 16,135 8,547
Goodwill amortization 1,787 294
------- -------
Total operating expenses 81,933 41,646
------- -------
Operating income 4,538 2,830
INTEREST EXPENSE, net (2,792) (162)
------- -------
INCOME BEFORE INCOME TAXES 1,746 2,668
INCOME TAXES - -
------- -------
NET INCOME $ 1,746 $ 2,668
======= =======
BASIC EARNINGS PER SHARE (Note 4) $ .06 $ .10
======= =======
DILUTED EARNINGS PER SHARE (Note 4) $ .05 $ .10
======= =======
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
Telespectrum Worldwide Inc. and Subsidiaries
Condensed Consolidated Results of Operations
(Unaudited)
(Dollars in Thousands - Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------
September 30, September 30,
1999 1998
------------------- -----------------
<S> <C> <C>
REVENUES $181,011 $124,391
-------- --------
OPERATING EXPENSES:
Cost of services 130,101 98,464
Selling, general and administrative 39,278 34,713
Goodwill amortization 2,376 884
-------- --------
Total operating expenses 171,755 134,061
-------- --------
Operating income (loss) 9,256 (9,670)
INTEREST EXPENSE, net (3,708) (1,095)
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 5,548 (10,765)
INCOME TAX BENEFIT -- 247
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS 5,548 (10,518)
INCOME FROM DISCONTINUED OPERATIONS -- 479
-------- --------
NET INCOME (LOSS) $ 5,548 $(10,039)
======== ========
BASIC EARNINGS (LOSS) PER SHARE (Note 4):
CONTINUING OPERATIONS $ .20 $ (.41)
DISCONTINUED OPERATIONS -- .02
-------- --------
NET INCOME (LOSS) $ .20 $ (.39)
======== ========
DILUTED EARNINGS (LOSS) PER SHARE (NOTE 4):
CONTINUING OPERATIONS $ .18 $ (.41)
DISCONTINUED OPERATIONS -- .02
-------- --------
NET INCOME (LOSS) $ .18 $ (.39)
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in Thousands - Except Share Amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------- ------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 794
Accounts receivable, net 73,359 36,859
Prepaid expenses and other 4,768 2,307
--------- ---------
Total current assets 78,127 39,960
PROPERTY AND EQUIPMENT, net 59,555 35,430
GOODWILL AND OTHER INTANGIBLES, net 173,758 26,786
OTHER ASSETS 6,418 1,513
--------- ---------
Total assets $ 317,858 $ 103,689
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 14,258 $ 820
Cash overdraft -- 1,658
Accounts payable 9,224 7,058
Accrued telecom 3,569 969
Accrued expenses 15,499 2,815
Accrued compensation 12,401 5,081
Deferred revenue 1,858 2,512
Other current liabilities 1,370 2,345
--------- ---------
Total current liabilities 58,179 23,258
LONG-TERM DEBT 110,120 2,876
--------- ---------
OTHER NONCURRENT LIABILITIES 3,220 987
--------- ---------
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,
39,533,332 shares issued and 32,586,749 shares outstanding, at
September 30, 1999, and 25,771,449 shares issued and
outstanding at December 31, 1998 395 258
Additional paid-in capital 346,140 240,176
Common stock purchase warrants 7,840 --
Accumulated deficit (157,738) (163,286)
Treasury stock, 6,946,583 shares at cost (48,810) --
Due from stockholders' (952) --
Deferred compensation (214) (363)
Cumulative currency translation adjustment (322) (217)
--------- ---------
Total stockholders' equity 146,339 76,568
--------- ---------
Total liabilities and stockholders' equity $ 317,858 $ 103,689
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
Telespectrum Worldwide Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------
September 30, September 30,
1999 1998
------------------- -----------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 5,548 $(10,039)
Adjustments to reconcile net income (loss) to net cash flows from operating
activities:
Depreciation and amortization 9,016 6,193
Amortization of goodwill 2,376 884
Provision for bad debt 5,392 2,361
Non-cash compensation 269 326
Other items, net 500 932
Changes in operating assets and liabilities net of acquisitions:
Accounts receivable (11,031) (5,254)
Income tax receivable -- 1,180
Prepaid expenses and other (1,315) 3,112
Accounts payable (5,547) (1,280)
Accrued telecom (899) --
Accrued expenses (1,456) (1,374)
Accrued compensation 2,630 (1,983)
Deferred revenue (705) (153)
Other liabilities (2,547) (2,603)
Net operating activities of discontinued operations -- (432)
--------- --------
Net cash provided by (used in) operating activities 2,231 (8,130)
--------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment (17,059) (4,313)
Proceeds from sales of business -- 38,048
Net cash acquired in mergers 762 --
Payments of deferred transaction costs (174) --
Net investing activities of discontinued operations -- (275)
Payments related to acquisition of Initial Operating Businesses -- (378)
Payments of notes to sellers and acquisition liabilities (590) --
--------- --------
Net cash (used in) provided by investing activities (17,061) 33,082
--------- --------
Cash Flows From Financing Activities:
Exercise of stock options and sale of common stock 1,356 1,446
Cash overdraft (1,658) --
Payments of capital lease obligations (594) (778)
Borrowings on long-term debt 120,596 --
Payments on long-term debt (105,473) (26,394)
Payment for treasury stock (191) --
--------- --------
Net cash provided by (used in) financing activities 14,036 (25,726)
--------- --------
Net decrease in cash and cash equivalents (794) (774)
Cash and cash equivalents, beginning of period 794 774
--------- --------
Cash and cash equivalents, end of period $ 0 $ 0
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying financial statements are unaudited and have been prepared by
TeleSpectrum Worldwide Inc. and subsidiaries ("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. During the third quarter the Company has
changed its presentation of operating expenses in the Condensed Consolidated
Statements of Operations. Cost of services now represents all costs incurred at
the call centers. All remaining costs including account management, management
information systems and human resources are included in SG&A. This
reclassification has been made for all periods presented.
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 other
prior period amounts have been reclassified to conform to 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 three
business segments, Telemarketing, Customer Care and Canada. The results of
operations of the Company's former Market Research Segment and Direct Mail and
Fulfillment Segment have been accounted for as discontinued operations (see Note
5).
3. Mergers
IDRC Merger
On January 14, 1999, TeleSpectrum and International Data Response Corporation
("IDRC") entered into a merger agreement which was amended on February 26, 1999
and May 13, 1999 and consummated on June 30, 1999. Under this agreement, each of
the holders of outstanding shares of IDRC common stock, options and warrants to
purchase IDRC common stock were entitled to receive their pro rata portion of an
aggregate of 9,200,000 shares of TeleSpectrum common stock and warrants
exercisable for 2,500,000 shares of TeleSpectrum common stock. In addition, the
IDRC preferred stock was exchanged for $6,000,000 of cash, plus all accrued and
unpaid dividends of $1,400,000. The majority stockholders of IDRC invested the
proceeds from the exchange of their IDRC preferred stock of $4,873,000 for a
term note with the Company. This note is payable one year from the closing and
bears interest at 10.0%. The merger was accounted for as a purchase and,
accordingly, the net tangible liabilities of IDRC have been included in the
consolidated financial statements as of June 30, 1999.
The total purchase price of IDRC at June 30, 1999 was $64,486,000 which
consisted of (in thousands):
Issuance of 8,269,101 shares of TeleSpectrum common stock,
valued at $7.119 per share, with 6,449,349 shares discounted
10% due to lock up and escrow restrictions of twelve and
fifteen months................................................ $54,275
Issuance of options to purchase 930,899 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).................... 4,307
Issuance of warrants to purchase 2,247,038 shares of
TeleSpectrum common stock, valued at $3.136 per
warrant....................................................... 7,047
Issuance of warrants to purchase 252,962 shares of
TeleSpectrum common stock, valued at $3.136 per warrant, to
IDRC option holders........................................... 793
Issuance of a term note to IDRC majority stockholders............... 4,873
Cash payment to certain IDRC Preferred stockholders................. 2,527
Value of shares and options held in escrow.......................... (10,778)
Transaction costs................................................... 1,442
--------
Total purchase price................................................ $ 64,486
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Based on a preliminary allocation of the purchase price, the application of the
purchase method resulted in approximately $148,978,000 in excess purchase price
over the estimated fair value of the net tangible liabilities acquired of
$84,492,000, which includes accruals by IDRC in the second quarter related to
closed centers and bad debt reserves. A preliminary analysis completed by
TeleSpectrum resulted in the excess purchase price being assigned to intangible
assets consisting of $1,002,000 for assembled workforce, $14,079,000 for
customer relationships, and $133,897,000 for goodwill. During the third quarter
of 1999, approximately $942,000 was added to 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.
The Company is implementing it's plans to consolidate certain facilities and
departments and has estimated the costs of non-cancelable lease commitments and
severance of $2,248,000. This liability is reflected in the net tangible
liabilities acquired. During the third quarter of 1999, approximately $94,000
was charged against this reserve. Upon completion of the integration, any
adjustments to the original estimates will be reflected as an adjustment to the
purchase price.
Of the shares of TeleSpectrum common stock issuable to the holders of IDRC
common stock and options, an aggregate 1,730,977 shares/options were placed in
escrow, as required by the merger agreement, to secure the indemnification
obligations of the IDRC security holders to TeleSpectrum. The term of the escrow
is for 15 months and is governed by an indemnity escrow agreement. These shares
represent "contingent consideration" and in accordance with APB No. 16 will not
be reflected as part of the purchase price until the contingency is
determinable. At closing, IDRC had a contingent liability related to a claim by
certain of its shareholders. On July 19, 1999, this claim was settled for
$1,907,000, the majority of which was satisfied with 275,153 shares being
released from the escrow.
CRW Merger
On June 30, 1999, TeleSpectrum and CRW completed a merger agreement whereby
7,296,454 outstanding shares of CRW common stock were exchanged for 5,173,186
shares of TeleSpectrum common stock valued at $38,799,000. In addition, the
outstanding CRW options and warrants to purchase shares of CRW common stock were
exchanged for options to purchase 1,499,079 shares of TeleSpectrum common stock
valued at $9,820,000. Transaction costs related to this transaction amounted to
$191,000. For financial reporting purposes, the Company treated the exchange of
shares of TeleSpectrum common stock for shares of CRW common stock as a treasury
stock transaction. The transaction did not have an effect on TeleSpectrum net
income (loss) but did effect its net income (loss) per share.
Pro Forma Merger Summary
The following unaudited pro forma summary combines the consolidated results of
operations of TeleSpectrum, IDRC and CRW as if the mergers had occurred on
January 1, 1998 after giving effect to certain adjustments including
amortization of the purchase price in excess of net tangible liabilities
acquired, interest expense, a reduction in officer compensation expense,
consulting fees, and center fixed operating costs (rent, utilities, phones, and
call center management salaries/benefits) on centers shut down in accordance
with the merger agreement. This pro forma summary is not necessarily indicative
of the results of operations that would have occurred if TeleSpectrum, IDRC and
CRW had been combined during such periods. Moreover, the pro forma summary is
not intended to be indicative of the results of operations to be attained in the
future.
Nine Months Ended September 30,
-------------------------------------
(in thousands, except per share data)
1999 1998
--------- ---------
Net revenues $256,960 $242,727
Loss from continuing operations (21,331) (15,959)
Net loss per common share $ (0.69) $ (0.52)
Other
During October 1996, the Company acquired its consulting business Technical
Assistant Research Programs, Inc. ("TARP"). The agreement allowed for potential
earnouts to be paid to prior owners based upon future performance. During
October 1999 the Company signed an agreement to pay $3.2 million in installments
ending July 2001 to settle these earnout provisions. This amount will
be reflected as goodwill.
4. Earnings Per Share
The Company has adopted SFAS No. 128 "Earnings Per Share" which 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 and warrants, which would result in the
issuance of shares of common stock.
8
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
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 Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Shares used in computing basic earnings
(loss) per share 31,056 25,671 27,652 25,468
Dilutive effect of options and warrants 4,147 1,810 2,909 -
------ ------ ------ ------
Shares used in computing diluted earnings
(loss) per share 35,203 27,481 30,561 25,468
====== ====== ====== ======
</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 a
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
nine months ended September 30, 1998, and the net assets at September 30, 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.
The following table summarizes the operating results of the discontinued
operations (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
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 is engaged in various software development projects and is
capitalizing the costs incurred thereon, in accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. In addition, in accordance with SFAS No. 34, Capitalization of
Interest Costs, the Company capitalized interest in connection with these
projects totaling approximately $528,000 for the nine months ended September 30,
1999. $4,284,000 of interest expense was incurred for the same period.
During 1998, the Company began a software development project and capitalized
the costs incurred thereon, totaling approximately $1,600,000 through September
30, 1999. During the quarter ended June 30, 1999, the Company determined that
the software being developed in this project would not be marketed externally
and would only be used for internal purposes. The Company is continuing to
capitalize costs related to this project in accordance with SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". Upon the completion of the project, scheduled for the end of
1999, these software development costs will be amortized on a straight line
basis over the estimated useful life of three years.
9
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
7. Secured Credit Facility
In connection with the mergers on June 30, 1999, the Company entered into $135.0
million in new credit facilities consisting of Term A, Term B, Term C and
working capital revolver facilities (the "Credit Facilities") incurring costs of
$5.0 million which are being amortized on a straight line basis over the life of
the Credit Facility. The Company borrowed $20.0 million under the Term A
facility, $20.0 million under the Term B facility and $50.0 million under the
Term C facility. In addition, the Company can borrow the lesser of $45.0 million
or 85% of eligible receivables, as defined, under its working capital revolver
facility. The working capital revolver facility also provides for the issuance
of letters of credit subject to certain borrowing limits, of which $.4 million
was outstanding at September 30, 1999. At September 30, 1999, the Company had
$28.6 million in outstanding borrowings and $16.0 million available under the
working capital revolver facility. The unused portion of the working capital
revolver facility is subject to an annual fee of 0.50%. The Term A facility
matures December 31, 2001 and requires quarterly principal payments totaling
$1.83 million for the remainder of 1999, $8.0 million in 2000 and $10.0 million
in 2001. The Term B facility matures December 31, 2002 and requires quarterly
principal payments totaling $0.1 million for the remainder of 1999, $.3 million
in 2000 and 2001, and a final payment of $19.3 million in 2002. The Term C
facility matures December 31, 2003 and requires quarterly principal payments
totaling $0.1 million for the remainder of 1999, $0.4 million in 2000 and 2001,
$0.9 million in 2002 and $48.0 million in 2003. All outstanding principal is due
under the working capital revolver facility on the maturity date, December 31,
2001.
The Company can elect at the time it makes borrowings to pay interest quarterly
at prime plus 1.75% or LIBOR plus 3.25% for the Term A and working capital
revolver facilities; prime plus 2.25% or LIBOR plus 3.75% for the Term B
facility and prime plus 2.75% or LIBOR plus 4.25% for the Term C facility. At
September 30, 1999, the weighted average interest rate payable under the Credit
Facilities was 9.39%. Borrowings under the Credit Facilities are collateralized
by substantially all of the assets of the Company. The Credit Facilities require
interest rate caps (see Item 3) and contain covenants, the most restrictive of
which require the maintenance of certain financial ratios, restrict future
indebtedness, limit capital expenditures and prohibit cash dividends.
The proceeds from the Credit Facilities were used to refinance $98.0 million in
principal and interest outstanding under the IDRC credit facilities and $10.9
million in principal, interest and early termination fees outstanding under the
Company's April 14, 1998 Secured Credit Facility. The remaining Credit
Facilities proceeds were used in the mergers to repay certain notes including
accrued interest, redeem preferred stock and pay transaction fees aggregating
$9.7 million. At December 31, 1998, the Company had no outstanding balance and
$18.1 million available under the Secured Credit Facility. During the nine
months ended September 30, 1999 and 1998, the weighted average interest rate on
borrowings under the Secured Credit Facility was 9.15% and 8.90%, respectively.
8. Supplemental Cash Flows Information
The Company paid $538,000 and $64,000 of interest expense for the three months
ended September 30, 1999 and 1998, and $1,421,000 and $664,000 for the nine
months ended September 30, 1999 and 1998, respectively. The Company did not pay
any income taxes during the three and nine months ended September 30, 1999 and
1998.
On June 30, 1999, TeleSpectrum and CRW completed a merger. As discussed in Note
3, the merger was accounted for as a treasury stock transaction and,
accordingly, did not impact cash except for transaction costs of approximately
$191,000.
In connection with the merger of IDRC at June 30, 1999, the net noncash assets
acquired were $64,534,000, which is the result of the issuance of stock, options
and warrants, the redemption of preferred stock, the paydown of certain notes
and the payments of transaction costs less cash received in the merger of
$762,000.
9. Commitments and Contingencies
On March 18, 1998, the Company entered into an employment contract with its 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.
10
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
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. As
of September 30, 1999, all amounts due from NTC have been reserved.
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 September 30,
1999. The following table summarizes those customers with revenue or accounts
receivable in excess of 10% of total revenue for the three and nine months ended
September 30, 1999 and 1998 or total receivables as of September 30, 1999 and
1998, respectively:
Revenues
------------------------------------------ Accounts
Three months ended Nine months ended Receivable
September 30, September 30, September 30,
--------------------- ------------------- ---------------
1999 1998 1999 1998 1999 1998
---------- --------- --------- -------- ------- ------
CUSTOMER 1 10.7% - - - 9.1% -
CUSTOMER 2 - 11.5% 11.6% - 9.4% 19.4%
CUSTOMER 3 - 11.4% - - - 2.4%
CUSTOMER 4 - - - - - 11.8%
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 September 30, 1999 and
1998 was $1,819,000 and $2,710,000, respectively, and for the nine months ended
September 30, 1999 and 1998 was $5,443,000 and $(9,983,000), respectively.
12. Related-Party Transactions
11
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
CRW Financial, Inc.
The Company subleases a 21,000 square foot office building in King of Prussia,
Pennsylvania, from CRW Financial, Inc. a former partial owner of the Company.
The sublease commenced on May 9, 1996, and requires monthly base rent payments
through September 30, 2004, of approximately $42,000. Total rent expense for the
nine months ended September 30, 1999 and 1998 was approximately $378,000 and
$341,000, respectively.
AffiniCorp Usa, Inc.
On September 25, 1998, the Company purchased 19.4% of the outstanding common
stock of AffiniCorp USA, Inc. ("AffiniCorp") 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 certain 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. As of September 30,
1999, the Company has a $3,347,000 receivable from AffiniCorp recorded in
current assets. Based upon the receivable collateral position and future
business developments for AffiniCorp, the Company allocated a portion of its
accounts receivable reserve against the outstanding AffiniCorp receivable. The
Company will continue to evaluate whether later events or circumstances occur
that would cause the net receivable to not be realizable. During the second
quarter of 1999, the Company wrote off the $500,000 investment.
13. Segments
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Company has historically classified its
continuing operations into two segments: Telemarketing and Customer Care. Due to
the IDRC merger, beginning in the third quarter of 1999, the Company began
disclosing a third segment, Canada. The segment information outlined below has
been restated to reflect this new segment for all periods presented. The
operating segments are managed separately because each operating segment
represents a strategic business unit that offers different services or serves a
different market. The business segments are described in further detail below.
Segment assets include amounts specifically identified to Telemarketing,
Customer Care and operations in Canada. Corporate assets consist
primarily of property and equipment, and the goodwill related to the IDRC
merger, which will be allocated to the business segments after evaluations
are completed by management.
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.
The Canada Segment provides both business-to-consumer and business-to-business
telemarketing services and customer care support - primarily direct sales
initiated by the Company on behalf of its clients. This segment has a separate
business management. For the three months ended September 30, 1998, this segment
only included the operations of one call center located in Canada and,
therefore, is not comparable to the results of the Canada segment for the three
months ended September 30, 1999.
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).
12
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Business segment information is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
REVENUES
Telemarketing ......................... $ 42,373 $28,675 $101,623 $ 76,005
Customer Care ......................... 29,795 12,560 58,862 37,928
Canada.................................. 14,303 3,241 20,526 10,458
-------- ------- -------- --------
Total................................. $ 86,471 $44,476 $181,011 $124,391
======== ======= ======== ========
OPERATING INCOME (LOSS)
Telemarketing ......................... $ 10,601 $ 5,779 $ 26,026 $ 11,849
Customer Care ......................... 7,895 4,657 18,190 11,664
Canada.................................. 3,670 941 5,811 1,530
Corporate............................... (17,628) (8,547) (40,771) (34,713)
-------- ------- -------- --------
Total................................. $ 4,538 $ 2,830 $ 9,256 $ (9,670)
======== ======= ======== ========
TOTAL ASSETS
<CAPTION>
AS OF SEPTEMBER 30,
--------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Telemarketing.......................... $ 59,799 $ 42,045
Customer Care.......................... 68,508 51,187
Canada................................. 20,161 4,650
Corporate.............................. 169,390 6,865
-------- --------
$317,858 $104,747
======== ========
</TABLE>
13
<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 and May 13, 1999 and was consummated on June 30,
1999. Under this agreement, the holders of outstanding shares of IDRC common
stock, options and warrants were entitled to receive their pro rata portion of
an aggregate of 9.2 million shares of TeleSpectrum common stock and warrants
exercisable for 2.5 million shares of TeleSpectrum common stock. In addition,
the IDRC preferred stock was exchanged for $6.0 million in cash, plus all
accrued and unpaid dividends of $1.4 million. The majority stockholders of IDRC
invested the proceeds from the exchange of their IDRC preferred stock of $4.9
million for a term note from us. This note is payable one year from the closing
and bears interest at 10.0%. We accounted for the IDRC merger as a purchase
pursuant to Accounting Principles Board Opinion No. 16 "Business Combinations."
Of the shares of TeleSpectrum common stock issuable to the holders of IDRC
common stock and options, an aggregate 1,730,977 shares/options were placed in
escrow, as required by the merger agreement, to secure the indemnification
obligations of the IDRC security holders to TeleSpectrum. The term of the escrow
is for 15 months and is governed by an indemnity escrow agreement.
These shares represent "contingent consideration" and in accordance with APB No.
16 will not be reflected as part of the purchase price until the contingency is
determinable. At closing, IDRC had a contingent liability related to a claim by
certain of its shareholders. On July 19, 1999, this claim was settled for
$1.9 million. 275,153 shares were initially released from the escrow to satisfy
the majority of this claim.
We received financing for a new $135.0 million senior debt facility (the "Credit
Facilities") which has been used to replace our current facility and to
refinance IDRC's long-term debt including accrued interest and repay certain
seller notes including accrued interest, redeem preferred stock, including
accrued dividends and pay transaction fees. The Credit Facilities consist of
three term notes in the aggregate of $90.0 million with maturities between 30
and 54 months and a revolving credit facility of $45.0 million due in 30 months.
The Credit Facilities allow for alternative interest rates. The Credit
Facilities require interest rate caps (see Item 3) and contain covenants, the
most restrictive of which require the maintenance of certain financial ratios,
restrict future indebtedness, limit capital expenditures and prohibit cash
dividends.
CRW Merger Agreement
On September 3, 1998, we entered into a merger agreement with CRW Financial,
Inc. ("CRW"). This agreement was amended on December 30, 1998 and was
consummated on June 30, 1999. Under this agreement each outstanding share of CRW
common stock was exchanged for .709 of a share of TeleSpectrum common stock. In
addition, each outstanding option to purchase shares of CRW common stock was
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 were unaffected by this merger. Immediately prior to the
merger, CRW did not have any continuing business operations and its only
significant asset was 6.9 million shares of our common stock. For financial
reporting purposes, we treated the exchange of our shares of common stock for
shares of CRW common stock as a treasury stock transaction. The transaction did
not have an effect on our net income or loss, but did effect our net income or
loss per share.
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
TeleSpectrum Worldwide Inc. and Subsidiaries
are without merit. In February 1999, NTC filed for reorganization under Chapter
11 of the Federal Bankruptcy Code. We have established a reserve for all amounts
due from NTC.
Results of Operations
The following discussions should be read in connection with the Condensed
Consolidated Financial Statements contained within this report on Form 10Q.
During the third quarter of 1999, the Company has changed its presentation of
operating expenses in the Condensed Consolidated Statements of Operations. Cost
of services now represents all costs incurred at the call centers. All remaining
costs including account management, management information systems and human
resouces are included in SG&A. This reclassification has been made for all
periods presented.
14
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Comparison of the results of operations for the three months ended September 30,
1999 to the three months ended September 30, 1998.
<TABLE>
<CAPTION>
Results Of Operations
(Dollars In Millions)
----------------------------------------------------------------------
Three Months As a Three Months As a
Ended Percentage Of Ended Percentage Of
September 30, Revenues September 30, Revenues
1999 ---------------- 1998 ----------------
---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Telemarketing................................ $42.4 49% $28.7 65%
Customer care................................ 29.8 34 12.6 28
Canada....................................... 14.3 17 3.2 7
----- --- ----- ---
Total revenue.................................. 86.5 100 44.5 100
Cost of services:
Telemarketing................................ 31.8 75 22.9 80
Customer care................................ 21.6 73 7.6 61
Canada....................................... 10.6 74 2.3 71
----- --- ----- ---
Total cost of services......................... 64.0 74 32.8 74
Total selling, general and administrative...... 16.2 19 8.5 19
Amortization of goodwill....................... 1.8 2 0.3 1
----- --- ----- ---
Total operating expenses....................... 82.0 95 41.6 94
----- --- ----- ---
Operating income............................... 4.5 5 2.9 6
Interest expense, net.......................... 2.8 3 0.2 0
----- --- ----- ---
Income before taxes............................ 1.7 2 2.7 6
Income taxes................................... - - - -
----- --- ----- ---
Net income..................................... $ 1.7 2% $ 2.7 6%
===== === ===== ===
</TABLE>
Revenues
Our total revenues for the three months ended September 30, 1999 were $86.5
million, representing an increase of 94% from $44.5 million for the three months
ended September 30, 1998. This increase is primarily the result of the IDRC
merger, increased fulfillment revenues, increased volume and higher revenue
per hour. Fulfillment services involve filling orders received through
telemarketing. Approximately 10.7% of total revenues for the three months ended
September 30, 1999 were generated by services provided on behalf of one client
in the telecommunications industry and is reported in our customer care segment.
Telemarketing Segment
Our telemarketing segment revenues were $42.4 million for the three months ended
September 30, 1999. These revenues accounted for 49% of our total revenues and
represent an increase of $13.7 million or 48% from telemarketing revenues of
$28.7 million for the three months ended September 30, 1998. The increase in
telemarketing revenues is primarily attributable to the IDRC merger of $11.1
million, an increase in fulfillment revenues of $1.6 million provided through a
third party, a $1.5 million increase associated with revenue per hour and
decreased volume of $0.5 million. Revenue from services initiated for new
clients totaled $1.8 million, and net new services for existing clients totaled
$0.6 million offset by lost or terminated clients of $1.4 million.
Customer Care Segment
Our customer care segment revenues were $29.8 million for the three months ended
September 30, 1999. These revenues accounted for 34% of our total revenues and
increased by $17.2 million or 137% from the three months ended September 30,
1998. In addition to $12.4 million in revenue gained through the IDRC merger
this increase was attributable to revenues generated from services initiated for
new clients of $4.1 million, and from net new services for existing clients for
$1.6 million offset by lost or terminated clients of $0.9 million.
Canada Segment
Our Canada segment revenues were $14.3 for the three months ended September 30,
1999. These revenues accounted for 17% of our total revenues and increased by
$11.1 million or 341% from the three months ended September 30, 1998. The
increase in revenue is primarily attributable to the IDRC merger which resulted
in three additional call centers.
15
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Cost of Services
Our cost of services were $64.0 million for the three months ended September 30,
1999, an increase of $31.2 million or 95% from cost of services of $32.8 million
for the three months ended September 30, 1998. As a percentage of total
revenues, cost of services were 74% for each of the three months ended September
30, 1999 and 1998.
Telemarketing Segment
Our telemarketing segment cost of services for the three months ended September
30, 1999 were 75% of telemarketing revenues and increased by $8.9 million or 39%
from the three months ended September 30, 1998. Costs of services for the
three months ended September 30, 1998 were 80% of telemarketing revenues. The
decrease in cost of services as a percentage of revenues 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 73% of our customer
care revenues for the three months ended September 30, 1999 and increased by
$14.0 million or 184% from the three months ended September 30, 1998. Cost of
services for the three months ended September 30, 1998 were 61% of customer care
revenues. The increase as a percentage of revenues is due to a change in the
client mix, inefficiencies and start up costs relating to the opening/
transferring of three call centers and an increase in infrastructure to support
higher volumes.
Canada Segment
Our Canada segment cost of services accounted for 74% of our Canada segment
revenues for the three months ended September 30, 1999 and increased by $8.3
million or 361% from the three months ended September 30, 1998. Cost of services
for the three months ended September 30, 1998 were 71% of Canada segment
revenues. By the end of the second quarter of 1998 all Canadian operations were
terminated except for one call center in Winnipeg, therefore the infrastructure
costs were lower during the third quarter of 1998.
Selling General and Administrative
SG&A expenses were $16.2 million for the three months ended September 30, 1999,
an increase of $7.7 million or 89% from the three months ended September 30,
1998. As a percentage of total revenue, SG&A expenses were 19% for each of the
three months ended September 30, 1999 and 1998. The overall increase during the
three months ended September 30, 1999 relates primarily to charges incurred with
the integration of IDRC and the associated costs of redundant overhead.
Amortization of Goodwill
Our goodwill amortization was $1.8 million, representing 2% of total revenues
for the three months ended September 30, 1999, and increased by $1.5 million or
508% from the three months ended September 30, 1998. This increase is entirely
attributable to the IDRC merger.
Interest Expense, net
We incurred net interest expense of $2.8 million for the three months ended
September 30, 1999 which represented an increase of $2.6 million from the
three months ended September 30, 1998. This increase in interest expense is
primarily attributable to increased debt levels from the IDRC merger less
amounts capitalized on software development projects.
16
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Results of Operations
The following discussions should be read in connection with the Condensed
Consolidated Financial Statements contained within this report on Form 10Q.
Comparison of the results of operations for the nine months ended September 30,
1999 to the nine months ended September 30, 1998.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
(Dollars In Millions)
-----------------------------------------------------------------------
NINE MONTHS AS A NINE MONTHS ENDED AS A
ENDED PERCENTAGE OF SEPTEMBER 30, PERCENTAGE OF
SEPTEMBER 30, REVENUES 1998 REVENUES
1999 ---------------- ----------------- ----------------
----------------
<S> <C> <C> <C> <C>
Revenues:
Telemarketing................................ $101.6 56% $ 76.0 61%
Customer care................................ 58.9 33 37.9 31
Canada....................................... 20.5 11 10.5 8
------ --- ------ ---
Total revenue.................................. 181.0 100 124.4 100
Cost of services:
Telemarketing................................ 75.6 74 64.2 84
Customer care................................ 39.8 68 25.4 67
Canada....................................... 14.7 72 8.9 85
------ --- ------ ---
Total cost of services......................... 130.1 72 98.5 79
Total selling, general and administrative...... 39.3 22 34.7 28
Amortization of goodwill....................... 2.4 1 0.9 1
------ --- ------ ---
Total operating expenses....................... 171.8 95 134.1 108
Operating income (loss)........................ 9.2 5 (9.7) (8)
Interest expense, net.......................... 3.7 2 1.1 1
------ --- ------ ---
Income (loss) before taxes..................... 5.5 3 (10.8) (9)
Income tax benefit............................. - - 0.3 -
------ --- ------ ---
Income (loss) from continuing operations....... 5.5 3 (10.5) (9)
Income from discontinued operations
(net of tax).............................. - - 0.5 1
------ --- ------ ---
Net income (loss).............................. $ 5.5 3% $(10.0) (8)%
====== === ====== ===
</TABLE>
Revenues
Our total revenues for the nine months ended September 30, 1999 were $181.0
million, representing an increase of 46% from $124.4 million for the nine months
ended September 30, 1998. This increase is primarily the result of the IDRC
merger, increased fulfillment revenues, increased volume and higher revenue
per hour. Fulfillment services involve filling orders received through
telemarketing. Approximately 11.6% of total revenues for the nine months ended
September 30, 1999 were generated by services provided on behalf of one client
in the telecommunications industry and is reported in our telemarketing segment.
Telemarketing Segment
Our telemarketing segment revenues were $101.6 million for the nine months ended
September 30, 1999. These revenues accounted for 56% of our total revenues and
represent an increase of $25.6 million or 34% from the telemarketing revenues of
$76.0 million for the nine months ended September 30, 1998. The increase in
telemarketing revenues is primarily attributable to the IDRC merger of $11.1
million, an increase in fulfillment revenues of $7.3 million provided through a
third party, a $3.6 million increase associated with revenue per hour and
increased volume of $3.6 million. Revenues from services initiated for new
clients of $4.1 million, and from net new services for existing clients totaled
$15.4 million offset by lost or terminated clients of $12.3 million.
17
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Customer Care Segment
Our customer care segment revenues were $58.9 million for the nine months ended
September 30, 1999. These revenues accounted for 33% of our total revenues and
increased by $21.0 million or 55% from the nine months ended September 30, 1998.
In addition to IDRC's $12.4 million in revenue, services initiated for new
clients totaled $5.1 million, and net new services for existing clients totaled
$4.9 million offset by lost or terminated clients of $1.4 million.
Canada Segment
Our Canada segment revenues were $20.5 million for the nine months ended
September 30, 1999. These revenues account for 11% of our total revenue and
represent an increase of $10.0 million or 96% from the nine months ended
September 30, 1998. The IDRC merger resulted in additional Canadian call
centers which accounts for the majority of the increase.
Cost of Services
Our cost of services were $130.1 million for the nine months ended September 30,
1999, an increase of $31.6 million or 32% from cost of services of $98.5 million
for the nine months ended September 30, 1998. As a percentage of total revenues,
cost of services were 72% and 79% for the nine months ended September 30, 1999
and 1998 respectively.
Telemarketing Segment
Our telemarketing segment cost of services for the nine months ended September
30, 1999 were 74% of telemarketing revenues and increased by $11.4 million or
18% from the nine months ended September 30, 1998. Cost of services for the nine
months ended September 30, 1998 were 84% of telemarketing revenues. The decrease
in cost of services as a percentage of revenues 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 68% of our customer
care revenues for the nine months ended September 30, 1999 and increased by
$14.4 million or 57% from the nine months ended September 30, 1998, which
reflected cost of services as 67% of revenue, remaining consistent with 1999.
Canada Segment
Our Canada segment cost of services accounted for 72% of our Canada segment
revenues for the nine months ended September 30, 1999 and increased by $5.8
million or 65% from the nine months ended September 30, 1998. Cost of services
for the nine months ended September 30, 1998 were 85% of Canada segment
revenues. As discussed earlier the Company significantly wound down its
operations during the first half of 1998 which caused the operating costs to
increase as a percentage of revenue.
Selling General and Administrative
SG&A expenses were $39.3 and $34.7 million for the nine months ended September
30, 1999 and 1998, respectively. As a percentage of total revenue, SG&A
expenses were 22% and 28% for the nine months ended September 30, 1999 and 1998,
respectively. The decrease in SG&A expenses as a percentage of revenue is
attributable to incremental nonrecurring charges offset by continuing corporate
overhead reductions for the nine months ended September 30, 1999.
SG&A nonrecurring charges for the nine months ended September 30, 1999 amounted
to $4.7 million, comprised of $2.6 million in bad debt provision which related
to NTC, a telemarketing customer that ceased operations in July 1998, $1.5
million of severance, compensation and consulting charges associated with the
CRW and IDRC mergers and $0.6 million of other charges.
SG&A nonrecurring charges for the nine months ended September 30, 1998 amounted
to $3.0 million and includes a $1.3 million severance charge, $2.3 million
provision for bad debts related to NTC, offset by a reduction in employee
benefit accruals of $0.6 million.
SG&A expenses without these nonrecurring charges would have amounted to $34.6
million and $31.7 million or 19% and 25% as a percentage of revenue for the nine
months ended September 30, 1999 and 1998, respectively.
Amortization of Goodwill
Our goodwill amortization was $2.4 million, representing 1% of total revenues
for the nine months ended September 30, 1999, and increased by $1.5 million or
169% from the nine months ended September 30, 1998. This increase is
attributable to the IDRC merger.
Interest Expense, net
We incurred interest expense of $3.7 million for the nine months ended September
30, 1999, which represented an increase of $2.6 million from the nine months
ended September 30, 1998. This increase in interest expense is primarily
attributable to the IDRC merger less amounts capitalized on software development
projects.
18
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Income Tax Benefit
The income tax benefit from continuing operations for the nine months ended
September 30, 1998 represents the offset of the provision for income taxes from
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 nine months ended September 30, 1998, the
Company 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 nine months ended September 30, 1998 amounted to
$0.5 million (net of tax).
19
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Liquidity and Capital Resources
<TABLE>
<CAPTION>
Dollars in Millions Nine Months Nine Months
Ended Ended
Cash Flows Provided By (Used In): September 30, September 30,
1999 1998
- ----------------------------------------------- -------------------- --------------------
<S> <C> <C>
Operating Activities........................... 2.2 (8.1)
Investing Activities........................... (17.1) 33.1
Financing Activities........................... 14.0 (25.7)
</TABLE>
For the nine months ended September 30, 1999
The $2.2 million of cash provided by operating activities consisted of $5.5
million of net income and non cash items including depreciation and amortization
of $11.4 million and $5.4 million of bad debts, offset by working capital
requirements including an increase in accounts receivable of $11.0 million and a
$5.5 million decrease in accounts payable.
The $17.1 million of cash used in investing activities primarily consisted of
property and equipment purchases attributable to maintaining and enhancing our
technology platforms and the opening/transferring of three call centers.
The $14.0 million of net cash provided by financing activities primarily
consisted of borrowings related to long-term debt.
In connection with the mergers on June 30, 1999, the Company entered into $135.0
million in new credit facilities consisting of Term A, Term B, Term C and
working capital revolver facilities (the "Credit Facilities") incurring costs of
$5.0 million which are being amortized on a straight line basis over the life of
the Credit Facility. The Company borrowed $20.0 million under the Term A
facility, $20.0 million under the Term B facility and $50.0 million under the
Term C facility. In addition, the Company can borrow the lesser of $45.0 million
or 85% of eligible receivables, as defined, under its working capital revolver
facility. The working capital revolver facility also provides for the issuance
of letters of credit subject to certain borrowing limits, of which $.4 million
was outstanding at September 30, 1999. At September 30, 1999, the Company had
$28.6 million in outstanding borrowings and $16.0 million available under the
working capital revolver facility. The unused portion of the working capital
revolver facility is subject to an annual fee of 0.50%. The Term A facility
matures December 31, 2001 and requires quarterly principal payments totaling
$1.83 million for the remainder of 1999, $8.0 million in 2000 and $10.0 million
in 2001. The Term B facility matures December 31, 2002 and requires quarterly
principal payments totaling $0.1 million for the remainder of 1999, $0.3 million
in 2000 and 2001, and a final payment of $19.3 million in 2002. The Term C
facility matures December 31, 2003 and requires quarterly principal payments
totaling $0.1 million for the remainder of 1999, $0.4 million in 2000 and 2001,
$0.9 million in 2002 and $48.0 million in 2003. All outstanding principal is due
under the working capital revolver facility on the maturity date, December 31,
2001.
20
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
The Company can elect at the time it makes borrowings to pay interest quarterly
at prime plus 1.75% or LIBOR plus 3.25% for the Term A and working capital
revolver facilities; prime plus 2.25% or LIBOR plus 3.75% for the Term B
facility and prime plus 2.75% or LIBOR plus 4.25% for the Term C facility. At
September 30, 1999, the weighted average interest rate payable under the Credit
Facilities was 9.39%. Borrowings under the Credit Facilities are collateralized
by substantially all of the assets of the Company. The Credit Facilities require
interest rate caps (see Item 3) and contain covenants, the most restrictive of
which require the maintenance of certain financial ratios, restrict future
indebtedness, limit capital expenditures and prohibit cash dividends.
The proceeds from the Credit Facilities were used to refinance $98.0 million in
principal and interest outstanding under the IDRC credit facilities and $10.9
million in principal, interest and early termination fees outstanding under the
Company's April 14, 1998 Secured Credit Facility. The remaining Credit
Facilities proceeds were used in the mergers to repay certain notes including
accrued interest, redeem preferred stock and pay transaction fees aggregating
$9.7 million. At December 31, 1998, the Company had no outstanding balance and
$18.1 million available under the Secured Credit Facility. During the nine
months ended September 30, 1999 and 1998, the weighted average interest rate on
borrowings under the Secured Credit Facility was 9.15% and 8.90%, respectively.
We believe that our existing cash balances, and borrowings available under our
$135.0 million Credit Facilities 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.
For the nine months ended September 30, 1998
- --------------------------------------------
The $8.1 million of cash used in operating activities consisted of $7.7 million
used in continuing operations and $0.4 million used in discontinued operations.
The $7.7 million of cash used in continuing operations was principally related
to operating losses and the funding of working capital requirements.
The $33.1 million of cash provided by investing activities primarily consisted
of $38.0 million of proceeds from the sale of the Market Research and the Direct
Mail and Fulfillment Segments in February and April of 1998, primarily offset by
$4.3 million of purchases of property and equipment.
The $25.7 million of net cash used in financing activities primarily consisted
of $26.4 million of net payments under our secured credit facility, $0.8 million
of other debt payments offset by proceeds from stock transactions of $1.5
million.
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 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. 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 or being rewritten to be Year 2000 compliant.
We are developing TESS to replace many of our current data processing systems.
We believe 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.
21
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Costs to Address the Year 2000 Issue. Our current cost estimate to become Year
2000 compliant is $2,000,000 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 EITF 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.
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 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
In connection with the merger of IDRC on June 30, 1999, we refinanced $10.5
million of our $20.0 million Secured Credit Facility debt and acquired $118.6
million in senior debt under the new $135.0 million Credit Facilities. The
increased level of long-term debt increases our exposure to interest rate risk.
We pay 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 September 30, 1999, we would be required to pay an
additional $1.2 million in interest annually for every 1.0% increase in the
average prime rate or LIBOR. To reduce the risk associated with a large increase
in interest rates, we have in place two derivative financial instruments known
as interest rate caps each with notional amounts of $29.5 million. Under the
terms of the interest rate cap agreements, we would receive quarterly cash
payments when the 3-month LIBOR rate at the end of any quarter exceeded 7.5%.
The payment would be determined by multiplying the difference between the actual
LIBOR rate and 7.5% by the notional amounts of $29.5 million. The interest rate
cap agreements expire on September 30, 2002. These interest rate caps are
required under the terms of the $135.0 million Credit Facilities, which dictates
that we establish and maintain three-year interest rate caps at 200 basis points
above the three-month LIBOR rate with notional amounts not less than 66.0% of
the term loan balance. The three-month LIBOR interest rate was approximately
5.62% at September 30, 1999.
Foreign Currency Risk
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.
22
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Approximately $22.0 million of the Credit Facilities proceeds have been loaned
to our Canadian subsidiary (acquired in the June 30, 1999 merger with IDRC). The
loan proceeds have been converted to Canadian dollars. Under the terms of the
Credit Facilities agreement, large principal payments due in the years 2002 and
2003 may require conversion of all or a portion of our Canadian dollar loan to
US dollars. An unfavorable change in the Canadian dollar exchange rate at the
time of the conversion could cause a foreign currency exchange loss. At this
time, we do not believe that such a conversion would be required. The other
foreign subsidiaries are limited in their operations and the level of investment
by the parent company so that 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 for all the
accounts receivable amount due from NTC.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
23
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
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
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)
/s/ Keith E. Alessi
----------------------------------------------
Keith E. Alessi
Telespectrum Worldwide Inc.
President and Chief Executive Officer
Date: November 15, 1999 /s/ Paul Grinberg
----------------------------------------------
Paul Grinberg
TeleSpectrum Worldwide Inc.
Chief Financial Officer
24
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