<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
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 July 31, 2000 was 33,038,568.
<PAGE> 2
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 June 30, 2000 and
For the Three Months Ended June 30, 1999....................... 3
Condensed Consolidated Results of Operations
For the Six Months Ended June 30, 2000 and
For the Six Months Ended June 30, 1999......................... 4
Condensed Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999............................ 5
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2000 and
For the Six Months Ended June 30, 1999......................... 6
Notes to Condensed Consolidated Financial Statements............. 7
2. Management's Discussion and Analysis of Results of Operations
and Financial Condition........................................... 15
PART II - OTHER INFORMATION......................................... 28
</TABLE>
See Notes to Condensed Consolidated Financial Statements
2
<PAGE> 3
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands - Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------
June 30, June 30,
2000 1999
---- ----
<S> <C> <C>
REVENUES $ 79,259 $ 46,615
OPERATING EXPENSES:
Cost of services 60,049 32,864
Selling, general and
administrative 18,007 13,653
Goodwill amortization 1,942 294
---------- ----------
Total operating expenses 79,998 46,811
---------- ----------
Operating loss (739) (196)
INTEREST EXPENSE, net (3,893) (744)
---------- ----------
LOSS BEFORE INCOME TAXES (4,632) (940)
INCOME TAXES - -
---------- ----------
LOSS BEFORE MINORITY
INTEREST (4,632) (940)
MINORITY INTEREST 697 -
---------- ----------
NET LOSS $ (3,935) $ (940)
========== ==========
BASIC LOSS PER SHARE (Note 4): $ (.12) $ (.04)
DILUTED LOSS PER SHARE (Note 4): $ (.12) $ (.04)
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE> 4
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands - Except Per Share Amounts)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, June 30,
2000 1999
---- ----
<S> <C> <C>
REVENUES $ 157,939 $ 94,540
OPERATING EXPENSES:
Cost of services 121,587 66,090
Selling, general and administrative 33,882 23,143
Goodwill amortization 3,940 589
--------- ----------
Total operating expenses 159,409 89,822
--------- ----------
Operating (loss) income (1,470) 4,718
INTEREST EXPENSE, net (7,380) (916)
--------- ----------
(LOSS) INCOME BEFORE INCOME TAXES (8,850) 3,802
INCOME TAXES - -
--------- ----------
(LOSS) INCOME BEFORE MINORITY INTEREST (8,850) 3,802
MINORITY INTEREST 1,006 -
--------- ----------
NET (LOSS) INCOME $ (7,844) $ 3,802
========= ==========
BASIC (LOSS) EARNINGS PER SHARE (Note 4): $ (.25) $ .15
DILUTED (LOSS) EARNINGS PER SHARE (Note 4): $ (.25) $ .14
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE> 5
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Dollars in Thousands - Except Share Amounts)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,907 $ --
Accounts receivable, net 64,193 72,879
Prepaid expenses and other 5,816 5,809
--------- -------
Total current assets 71,916 78,688
PROPERTY AND EQUIPMENT, net 62,781 59,455
GOODWILL AND OTHER INTANGIBLES, net 184,639 174,703
OTHER ASSETS 4,562 5,561
--------- -------
Total assets $ 323,898 $ 318,407
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 17,505 $ 16,411
Accounts payable 9,762 9,305
Accrued expenses 36,157 32,597
Other current liabilities 935 6,463
--------- -------
Total current liabilities 64,359 64,776
LONG-TERM DEBT 121,321 113,846
MINORITY INTEREST AND OTHER 7,213 352
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,
39,907,066 shares issued and 32,965,483 shares outstanding,
at June 30, 2000, and 39,558,746 shares issued and 32,612,163
shares outstanding at December 31, 1999 399 396
Additional paid-in capital 338,421 338,848
Common stock purchase warrants 7,840 7,840
Accumulated deficit (165,248) (157,404)
Treasury stock, 6,946,583 shares at cost (48,810) (48,810)
Due from stockholders (952) (952)
Deferred compensation (113) (163)
Cumulative currency translation adjustment (532) (322)
--------- -------
Total stockholders' equity 131,005 139,433
--------- -------
Total liabilities and stockholders' equity $ 323,898 $ 318,407
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE> 6
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in Thousands - Except Share Amounts)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, June 30,
2000 1999
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net (loss) income $ (7,844) $ 3,802
Adjustments to reconcile net (loss) income to net cash
flows from operating activities:
Depreciation and amortization 8,875 4,496
Amortization of goodwill 3,940 589
Provision for bad debts 1,179 3,300
Minority interest (1,006) --
Non-cash compensation -- 218
Other items, net 50 500
Changes in operating assets and liabilities net of acquisitions:
Accounts receivable 7,581 (7,241)
Prepaid expenses and other (7,090) (2,046)
Accounts payable 366 (900)
Accrued expenses 3,948 3,241
Other liabilities (5,053) (2,107)
--------- ---------
Net cash provided by operating activities 4,946 3,852
--------- ---------
Cash Flows From Investing Activities:
Purchases of property and equipment (11,768) (7,213)
Net cash acquired in acquisitions 71 762
Payments of notes to sellers and acquisition liabilities -- (470)
--------- ---------
Net cash used in investing activities (11,697) (6,921)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from exercise of stock options and sale of common stock 1,045 362
Debt issuance costs (402) (4,604)
Payments of capital lease obligations (365) --
Net borrowings related to merger -- 118,596
Net paydowns related to merger -- (102,940)
Payment for treasury stock -- (191)
Borrowings on long-term debt 13,500 --
Payments on long-term debt (5,120) (362)
--------- ---------
Net cash provided by financing activities 8,658 10,861
--------- ---------
Net increase in cash and cash equivalents 1,907 7,792
Cash and cash equivalents, beginning of period -- 794
--------- ---------
Cash and cash equivalents, end of period $ 1,907 $ 8,586
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE> 7
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, 1999 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, 1999.
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 of 1999 the Company
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, 1999. 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
business segments: Acquisition Services (formerly referred to as Telemarketing),
ChannelCare (formerly referred to as Customer Care) and e-Satisfy.com. As
discussed further in Note 3, the Company completed mergers with International
Data Response Corporation ("IDRC") and CRW Financial, Inc. ("CRW") on June 30,
1999.
3. MERGERS
IDRC Merger
On January 14, 1999, TeleSpectrum and 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, 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 bears
interest at 10% and is payable one year from the closing depending upon certain
covenants as defined in the agreement which do not currently allow for payment.
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.
See Notes to Condensed Consolidated Financial Statements
7
<PAGE> 8
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
The total purchase price of IDRC was $58,700,000 which consisted of (in
thousands):
<TABLE>
<S> <C>
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
Value of shares and options held in escrow.......................................... (9,164)
Transaction costs................................................................... 1,442
-----------
Total purchase price....................................................... $ 58,700
===========
</TABLE>
Based on management's analysis of the transaction, the application of the
purchase method resulted in approximately $156,211,000 in excess purchase price
over the estimated fair value of the net tangible liabilities acquired of
$90,011,000, which includes accruals by IDRC in the second quarter of 1999
related to closed centers and bad debt reserves. The excess purchase price
increased by $7,500,000 during the quarter for certain lease termination costs
and severance accruals. An 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
$141,130,000 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.
The Company has completed its plans to consolidate certain facilities and
departments and has estimated the costs of non-cancelable lease commitments and
severance of $1,539,000. This liability is reflected in the net tangible
liabilities acquired. During the first half of 2000, approximately $1,473,000
was charged against this reserve. Based upon management's analysis of the fair
value of the assets acquired, the goodwill was allocated to our Acquisition
Services and ChannelCare segments as $105,848,000 and $35,282,000, respectively.
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.
8
<PAGE> 9
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
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 but did effect its net income per share.
TARP Acquisition
During October 1996, the Company acquired its consulting business Technical
Assistance 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 $3,200,000 in installments
ending July 2001 to settle these earnout provisions. This note was discounted to
$2,852,000 and is reflected as goodwill which is being amortized on a
straight-line basis over the remaining life of the original TARP goodwill.
Customer Insites Acquisition
During January 2000, the Company placed all assets and liabilities specifically
related to TARP into a new wholly owned corporation called e-Satisfy.com. On
February 2, 2000, e-Satisfy.com acquired Customer Insites, Inc. ("CI") by
issuing 2,410,741 shares or 27.6% of e-Satisfy.com in exchange for all of the
issued and outstanding capital stock of CI. This acquisition was accounted for
as a purchase and accordingly, the net assets and results of operations of CI
have been included in the condensed consolidated financial statements commencing
February 2, 2000. The minority interest's portion of e-Satisfy.com's net losses
are reflected in the Condensed Consolidated Results of Operations as minority
interest. The total purchase price paid for CI was valued at approximately
$6,200,000. Based upon a preliminary analysis, the excess of the purchase price
over the fair value of the net tangible liabilities acquired totaling
approximately $6,478,000, has been recorded as goodwill and is being amortized
on a straight-line basis over twenty-five years. If the acquisition had been in
effect from January 1, 1999, unaudited pro forma net sales and net earnings of
the Company would have been substantially the same as those reported.
4. EARNINGS PER SHARE
The Company reports earnings per share in accordance with 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.
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):
9
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TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares used in computing basic earnings (loss) per
share 31,527 25,861 31,490 25,803
Dilutive effect of options and warrants -- -- -- 2,287
------ ------ ------ ------
Shares used in computing diluted earnings (loss)
per share 31,527 25,861 31,490 28,090
====== ====== ====== ======
</TABLE>
5. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company capitalizes both acquired and internally developed or modified
software used as an integral part of the operations of the Company, in
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The Company
capitalizes certain internal and external costs directly associated with
developing or modifying the internal use software, which begins with the
application development stage and ends when the project is substantially
complete and ready for its intended use. Amounts capitalized as of June 30, 2000
and 1999 were $18,917,000 and $1,216,000, respectively, and are included in the
Condensed Consolidated Balance Sheets in property, plant and equipment. Such
costs are amortized on a straight-line basis over the estimated useful life,
usually 3-5 years.
6. 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 none were
outstanding at June 30, 2000. 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 $4.0
million for the remainder of 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 2000, $0.3 million in 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 $0.2 million for the
remainder of 2000, $0.4 million in 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
June 30, 2000, the weighted average interest rate payable under the Credit
Facilities was 10.1%. 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
10
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TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
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 six months
ended June 30, 2000 and 1999, the weighted average interest rate on borrowings
under the Secured Credit Facility was 10.1% and 8.3%, respectively.
During April 2000, the Company signed an amendment to the Credit Facility that
modified the Company's debt covenants effective February 2000 including the
leverage ratio and the fixed charge coverage ratio and increased the working
capital revolver facility by $6.0 million to $51.0 million. In addition, the
annual limitation allowed for capital expenditures decreased for the year 2000
from $32,500,000 to $25,000,000. At June 30, 2000, the Company had $43.6 million
in outstanding borrowings and $6.4 million available under the working capital
revolver facility. During the second quarter of 2000, the Company renegotiated
the terms of a note payable to the former principals of TARP. The original
scheduled payment of $1,200,000 due June 30, 2000 was changed to payments of
$300,000 on the first day of July, October, November and December plus interest
at 10%.
7. SUPPLEMENTAL CASH FLOWS INFORMATION
The Company paid $3,685,000 and $765,000 in interest expense for the three
months ended June 30, 2000 and 1999, and $6,285,000 and $883,000 for the six
months ended June 30, 2000 and 1999, respectively. The Company did not pay any
income taxes during the three months ended June 30, 2000 and 1999.
8. COMMITMENTS AND CONTINGENCIES
On April 27, 2000, the Company entered into an employment contract with its CEO
and President which expires in April, 2003. The contract provides for annual
compensation of not less than $325,000 per year, plus potential bonuses.
Additionally stock options were granted under TeleSpectrum's Amended and
Restated 1996 Equity Compensation Plan exercisable for an aggregate of 1,500,000
shares of common stock. One of these stock options, which is exercisable for an
aggregate 500,000 shares, vests incrementally on the earlier of any ten day
periods that the TeleSpectrum common stock reaches certain closing prices, or in
May 2004. The vesting schedule is as follows: 166,667 shares vest if the closing
price of the common stock reaches $11.00 per share during a ten day period that
begins prior to November 1, 2001: 166,667 shares vest if the closing price of
the common stock reaches $17.00 per share during a ten day period that begins
prior to August 1, 2003; and 166,667 shares vest if the closing price of the
common share reaches $23.50 per share during a ten day period that begins prior
to April 30, 2003. The remaining two of these options, exercisable for an
aggregate of 1,000,000 shares, vest as to 100,000 shares on April 30, 2000 and
the remaining 900,000 shares vest in three equal amounts on each of April 26,
2001, 2002 and 2003.
On March 18, 1998, the Company entered into an employment contract with its
former 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.
11
<PAGE> 12
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
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.
9. CONCENTRATIONS OF RISK
The financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
Concentrations of credit risk with respect to accounts receivable are limited
due to the large number of customers comprising the Company's customer base, and
their dispersion across many different industries and geographies. The Company
does not require collateral or other securities to support customer accounts
receivable. The Company performs periodic reviews of its clients' condition to
reduce the collection risk.
The Company does not believe a significant credit risk exists at June 30, 2000.
The following table summarizes those customers with revenue or accounts
receivable in excess of 10% of total revenue for the three months ended June 30,
2000 and 1999 or total receivables as of June 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
Revenues Accounts
-------- Receivable
Three Months Ended Six Months Ended --------
June 30, June 30, June 30,
-------- -------- --------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Customer 1 - 12.35% - 14.10% - 10.06%
Customer 2 - - - - - 12.03%
</TABLE>
10. COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which is
effective for financial statements issued for fiscal years beginning after
December 15, 1997. The Company's comprehensive income includes net income (loss)
and unrealized losses from foreign currency translation. Total comprehensive
income (loss) for the three months ended June 30, 2000 and 1999 was $(4,134,000)
and $(1,062,000), respectively. Total comprehensive income (loss) for the six
months ended June 30, 2000 and 1999 was $(8,054,000) and $3,624,000,
respectively.
11. RELATED-PARTY TRANSACTION:
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
who in turn was subleasing the facility from another landlord. As discussed in
Note 3, CRW was merged with the Company on June 30, 1999. The sublease commenced
on May 9, 1996, and requires monthly base rent payments through September 30,
2004, of approximately $44,000. Total rent expense for the six months ended June
30, 2000 and 1999 was approximately $312,000 and $279,000, respectively.
12
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TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
12. SEGMENTS
The Company classifies its continuing operations into three segments:
Acquisition Services, ChannelCare and e-Satisfy.com. 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 with Acquisition Services, ChannelCare and e-Satisfy.com segments.
Corporate assets consist primarily of property and equipment.
The Acquisition Services Segment provides both business-to-consumer and
business-to-business acquisition services, primarily direct sales initiated by
the Company on behalf of its clients.
The ChannelCare Segment provides customer service expertise to its clients. The
Company's customer service expertise includes the more traditional inbound
services of 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. In addition, ChannelCare also includes our
more recent strategic initiatives into multi-channel Customer Relationship
Management including Web-based sales and service, e-mail response, Web
telephony, Web chat, web collaboration and fax.
The e-Satisfy.com segment, a business-to-business internet company, measures,
monitors and improves the customer service experience.
Corporate operations include the selling, general and administrative functions
of the Company.
During 1999, the Company began reporting operating expenses differently from the
historical presentation in order to be more consistent with industry practices.
The principal change relates to the components of two line items - Cost of
Services and SG&A. Cost of Services now reflects only those costs that are
directly associated with the operation of a call center. All other costs
including account management, management information systems and human resources
are included in SG&A. This reclassification has been made for all periods
presented.
13
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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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Acquisition Services............................... $ 50,925 $ 32,657 $ 101,939 $ 65,473
ChannelCare........................................ 26,677 11,341 52,758 23,567
e-Satisfy.com...................................... 1,657 2,617 3,242 5,500
----------- ----------- ----------- -----------
Total....................................... $ 79,259 $ 46,615 $ 157,939 $ 94,540
=========== =========== =========== ===========
Operating income (loss):
Acquisition Services............................... $ 11,579 $ 8,740 $ 21,243 $ 17,566
ChannelCare........................................ 5,228 3,439 10,254 7,309
e-Satisfy.com...................................... 461 1,278 915 2,986
Corporate.......................................... (18,007) (13,653) (33,882) (23,143)
------------ ------------ ------------ ------------
Total....................................... $ (739) $ (196) $ (1,470) $ 4,718
============ ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
As of June 30,
-------------------
2000 1999
---- ----
<S> <C> <C>
Total assets
Acquisition Services............................... $ 193,507 $ 188,367
ChannelCare........................................ 89,618 66,385
e-Satisfy.com...................................... 30,475 38,270
Corporate.......................................... 10,298 31,593
----------- -----------
Total....................................... $ 323,898 $ 324,615
=========== ===========
</TABLE>
14
<PAGE> 15
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
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 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. 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.
In connection with the mergers on June 30, 1999, the Company entered into a new
$135.0 million senior debt facility (the "Credit Facilities") which was 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
15
<PAGE> 16
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
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.
Strategic Initiatives
During the first quarter of 2000 the Company retained an investment banking firm
to raise capital for e-Satisfy.com - a company formed by merging TARP, a wholly
owned subsidiary of the Company and Customer Insites, Inc., a company acquired
in February 2000. The scope of the investment banker's engagement was then
expanded to raise additional capital to assist in the strategic initiatives of
ChannelCare, the Company's multi-channel CRM platform. During the second quarter
of 2000, the Company reviewed the suggestions of the investment banking firm and
continued to evaluate various capital raising alternatives.
Customer Insites Acquisition
During January 2000, the Company placed all assets and liabilities specifically
related to TARP into a new corporation called e-Satisfy.com. On February 2,
2000, e-Satisfy.com acquired Customer Insites, Inc. ("CI") by issuing 2,410,741
shares or 27.6% of e-Satisfy.com in exchange for all of the issued and
outstanding capital stock of CI. This acquisition was accounted for as a
purchase and accordingly, the net assets and results of operations of CI have
been included in the condensed consolidated financial statements commencing
February 2, 2000. The total purchase price paid for CI was valued at
approximately $6,200,000. The excess of the purchase price over the fair value
of the net tangible liabilities acquired totaling approximately $6,478,000, has
been recorded as goodwill and is being amortized on a straight-line basis over
twenty-five years. If the acquisition had been in effect from January 1, 1999,
unaudited pro forma net sales and net earnings of the Company would have been
substantially the same as those reported.
New President and CEO
On April 27, 2000, TeleSpectrum entered into an employment agreement with Mr.
Vincent Ciavardini that provides that he be employed by TeleSpectrum as its
President and Chief
16
<PAGE> 17
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
Executive Officer through April 26, 2003. This position was vacated by Mr. Keith
Alessi, who has become Chairman.
Credit Facility Amendments
During April 2000, the Company signed amendments to the Credit Facility that
modified the Company's debt covenants effective February 2000, including the
leverage ratio and the fixed charge coverage ratio and increased the working
capital revolver facility by $6.0 million to $51.0 million. In addition, the
annual limitation regarding capital expenditures was lowered for the year 2000
from $32,500,000 to $25,000,000.
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 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.
Comparison of the results of operations for the three months ended June 30, 2000
to the three months ended June 30, 1999.
<TABLE>
<CAPTION>
Results of Operations
(Dollars in Millions)
---------------------------------------------------------------
Three Months As a Three Months As a
Ended Percentage Ended Percentage
June 30, of June 30, of
2000 Revenues 1999 Revenues
--------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Acquisition Services................... $ 50.9 64% $ 32.7 70%
ChannelCare............................ 26.7 34 11.3 24
e-Satisfy.com.......................... 1.7 2 2.6 6
------ ---- ------ ----
Total revenue............................. 79.3 100 46.6 100
Cost of services:
Acquisition Services.................. 38.2 75 23.9 73
ChannelCare........................... 21.0 79 7.8 69
e-Satisfy.com......................... 0.9 53 1.2 46
------ ---- ------ ----
Total cost of services.................... 60.1 76 32.9 71
Total selling, general and administrative. 18.0 23 13.6 29
Amortization of goodwill.................. 1.9 2 0.3 1
------ ---- ------ ----
Total operating expenses.................. 80.0 101 46.8 101
Operating (loss) income................... (0.7) (1) (0.2) 0
Interest expense.......................... (3.9) (5) (0.7) (2)
------ ---- ------ ----
(Loss) income before taxes................ (4.6) (6) (0.9) 3
</TABLE>
17
<PAGE> 18
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
<TABLE>
<S> <C> <C> <C> <C>
Income taxes.............................. -- -- -- --
------ ---- ------ ---
(Loss) income before minority interest.... (4.6) (6) (0.9) (3)
Minority interest......................... 0.7 1 -- --
------ ---- ------ ---
Net (loss)................................ $ (3.9) (5)% $ (0.9) (3)%
======= =======
</TABLE>
18
<PAGE> 19
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
Revenues
Our total revenues for the three months ended June 30, 2000 were $79.3 million,
representing an increase of 70% from $46.6 million for the three months ended
June 30, 1999. This increase is primarily the result of the merger with IDRC or
$33.4 million.
Acquisition Services Segment
Our Acquisition Services segment revenues were $50.9 million for the three
months ended June 30, 2000. These revenues accounted for 64% of our total
revenues and represent an increase of $18.2 million or 56% from Acquisition
Services revenues of $32.7 million for the three months ended June 30, 1999. The
increase in Acquisition Services revenues is primarily attributable to the IDRC
merger of $22.6 million, and a decrease in fulfillment business revenue of $2.6
million.
ChannelCare Segment
Our ChannelCare segment revenues were $26.7 million for the three months ended
June 30, 2000. These revenues accounted for 34% of our total revenues and
increased by $15.4 million or 136% from the three months ended June 30, 1999. In
addition to $10.8 million in revenue gained through the IDRC merger this
increase was attributable to net new services for existing clients of $5.2
million.
e-Satisfy.com Segment
Our e-Satisfy.com segment revenues were $1.7 million for the three months ended
June 30, 2000. These revenues accounted for 2% of total revenues and decreased
by $.9 million or 35% from the three months ended June 30, 1999. The decrease in
revenue is primarily attributable to the completion of three client contracts in
the first quarter. During the first half of 2000, e-Satisfy.com focused on
developing their business-to-business internet strategy after the acquisition of
CI in February 2000. During that same period of 1999, the focus was on the
traditional TARP business before the CI acquisition.
Cost of Services
Our cost of services were $60.1 million for the three months ended June 30,
2000, an increase of $27.2 million or 83% from cost of services of $32.9 million
for the three months ended June 30, 1999. As a percentage of total revenues,
cost of services were 76% and 71% for each of the three months ended June 30,
2000 and 1999.
Acquisition Services Segment
Our Acquisition Services segment cost of services for the three months ended
June 30, 2000 were 75% of Acquisition Services revenues and increased by $14.3
million or 60% from the three months ended June 30, 1999.
19
<PAGE> 20
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
Costs of services for the three months ended June 30, 1999 were 73% of
Acquisition Services revenues. The increase in cost of services as a percentage
of revenue is attributable to lower revenue per hour due to competitive pricing
pressures and an increase in infrastructure to support higher volumes.
ChannelCare Segment
Our ChannelCare segment cost of services were 79% of our ChannelCare revenues
for the three months ended June 30, 2000 and increased by $13.2 million or 169%
from the three months ended June 30, 1999. Cost of services for the three months
ended June 30, 1999 were 69% of ChannelCare revenues. The increase in cost of
services as a percentage of revenues is due to a change in the client mix, and
an increase in infrastructure to support higher volumes.
e-Satisfy.com Segment
Our e-Satisfy.com segment cost of services were 53% of our e-Satisfy.com
revenues for the three months ended June 30, 2000 and decreased by $0.3 million
or 25% from the three months ended June 30, 1999. Cost of services for the three
months ended June 30, 1999 were 46% of e-Satisfy.com revenues.
Selling, General and Administrative
SG&A expenses were $18.0 million for the three months ended June 30, 2000, an
increase of $4.4 million or 32% from the three months ended June 30, 1999. As of
percentage of total revenue, SG&A expenses were 23% and 29% for the three months
ended June 30, 2000 and 1999, respectively. $3.0 million of the $18.0 million
relates directly to e-Satisfy.com which increased $1.7 million from 1999. The
remainder of the overall increase during the three months ended June 30, 2000
related primarily to charges incurred with the addition of IDRC, increased
depreciation, amortization and maintenance fees related to our technology
initiatives offset by a reduction in bad debt expense.
Goodwill Amortization
Our goodwill amortization was $1.9 million, representing 2% of total revenues
for the three months ended June 30, 2000, and increased by $1.6 million from the
three months ended June 30, 1999. This increase is primarily attributable to the
IDRC merger.
Interest Expense, net
We incurred net interest expense of $3.9 million for the three months ended June
30, 2000 which represented an increase of $3.2 million from the three months
ended June 30, 1999. This increase in interest expense is primarily attributable
to increased debt levels from the IDRC merger and amortization of debt issuance
costs.
Minority Interest
Minority interest represents the portion of e-Satisfy owned by other individuals
(27.6%). For the three months ended June 30, 2000 minority interest was $0.7
million. There was no minority interest for the three months ended June 30,
1999.
20
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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.
During the third quarter of 1999 the Company 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.
21
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TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
Comparison of the results of operations for the six months ended June 30, 2000
to the six months ended June 30, 1999.
<TABLE>
<CAPTION>
Results of Operations
(Dollars in Millions)
---------------------------------------------------------------
Six Months As a Six Months As a
Ended Percentage Ended Percentage
June 30, of June 30, of
2000 Revenues 1999 Revenues
--------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Acquisition Services................... $101.9 65% $ 65.5 69%
ChannelCare............................ 52.8 33 23.5 25
e-Satisfy.com.......................... 3.2 2 5.5 6
------ ---- ------ ----
Total revenue............................. 157.9 100 94.5 100
Cost of services:
Acquisition Services.................. 78.3 77 47.9 73
ChannelCare........................... 41.5 79 16.0 68
e-Satisfy.com......................... 1.8 56 2.2 40
------ --- ------ -----
Total cost of services.................... 121.6 77 66.1 70
Total selling, general and administrative. 33.9 22 23.1 24
Amortization of goodwill.................. 3.9 2 0.6 1
------ ---- ------ -----
Total operating expenses.................. 159.4 101 89.8 95
Operating (loss) income................... (1.5) (1) 4.7 5
Interest expense.......................... (7.3) (5) (0.9) (1)
------- ----- -------
(Loss) income before taxes................ (8.8) (6) 3.8 4
Income taxes.............................. -- -- -- --
------ ---- ------ ---
(Loss) income before minority interest.... (8.8) (6) 3.8 4
Minority interest......................... 1.0 1 -- --
------ ---- ---- ---
Net (loss)................................ $(7.8) (5)% $3.8 4%
------ ---- ------ -----
</TABLE>
Revenues
Our total revenues for the six months ended June 30, 2000 were $157.9 million,
representing an increase of 67% from $94.5 million for the six months ended June
30, 1999. This increase is primarily the result of the merger with IDRC or
$65.6 million.
Acquisition Services Segment
Our Acquisition Services segment revenues were $101.9 million for the six months
ended June 30, 2000. These revenues accounted for 65% of our total revenues and
represent an increase of $36.4 million or 56% from Acquisition Services revenues
of $65.5 million for the six months ended June 30, 1999. The
22
<PAGE> 23
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
increase in Acquisition Services revenues is primarily attributable to the IDRC
merger of $42.9 million, offset by a decrease in our fulfillment business
revenue.
ChannelCare Segment
Our ChannelCare segment revenues were $52.8 million for the six months ended
June 30, 2000. These revenues accounted for 33% of our total revenues and
increased by $29.3 million or 125% from the six months ended June 30, 1999. In
addition to $22.7 million in revenue gained through the IDRC merger there were
net new services for existing clients of $8.1 million.
e-Satisfy.com Segment
Our e-Satisfy.com segment revenues were $3.2 million for the six months ended
June 30, 2000. These revenues accounted for 2% of total revenues and decreased
by $2.3 million or 42% from the six months ended June 30, 1999. During the first
half of 2000, e-Satisfy.com focused on developing their business-to-business
internet strategy after the acquisition of CI in February 2000. During that same
period of 1999, the focus was on the traditional TARP business before the CI
acquisition.
Cost of Services
Our cost of services were $121.6 million for the six months ended June 30, 2000,
an increase of $55.5 million or 84% from cost of services of $66.1 million for
the six months ended June 30, 1999. As a percentage of total revenues, cost of
services were 77% and 70% for each of the six months ended June 30, 2000 and
1999.
Acquisition Services Segment
Our Acquisition Services segment cost of services for the six months ended June
30, 2000 were 77% of Acquisition Services revenues and increased by $30.4
million or 63% from the six months ended June 30, 1999. Costs of services for
the six months ended June 30, 1999 were 73% of Acquisition Services revenues.
The increase in cost of services as a percentage of revenue is attributable to
lower revenue per hour due to competitive pricing pressures and an increase in
infrastructure to support higher volumes.
ChannelCare Segment
Our ChannelCare segment cost of services accounted for 79% of our ChannelCare
revenues for the six months ended June 30, 2000 and increased by $25.5 million
or 159% from the six months ended June 30, 1999. Cost of services for the six
months ended June 30, 1999 were 68% of ChannelCare revenues. The increase in
cost of services as a percentage of revenues is due to a change in the client
mix, and an increase in infrastructure to support higher volumes.
e-Satisfy.com Segment
Our e-Satisfy.com segment cost of services accounted for 56% of our e-Satisfy
revenues for the six months ended June 30, 2000 and decreased by $0.4 million or
18% from the six months ended June 30, 1999. Cost of services for the six months
ended June 30, 1999 were 40% of e-Satisfy revenues.
23
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TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
Selling, General and Administrative
SG&A expenses were $33.9 million for the six months ended June 30, 2000, an
increase of $10.8 million or 47% from the six months ended June 30, 1999. As a
percentage of total revenue, SG&A expenses were 22% and 24% for each of the six
months ended June 30, 2000 and 1999, respectively. $4.9 million of the $33.9
million relates directly to e-Satisfy.com which increased $2.5 million from
1999. The remainder of the increase during the six months ended June 30, 2000
related primarily to charges incurred with the integration of IDRC, increased
depreciation, amortization and maintenance fees related to our technology
initiatives offset by a reduction in bad debt expense.
Goodwill Amortization
Our goodwill amortization was $3.9 million, representing 2% of total revenues
for the six months ended June 30, 2000, and increased by $3.3 million from the
six months ended June 30, 1999. This increase is primarily attributable to the
IDRC merger.
Interest Expense, net
We incurred net interest expense of $7.3 million for the six months ended June
30, 2000 which represented an increase of $6.4 million from the six months ended
June 30, 1999. This increase in interest expense is primarily attributable to
increased debt levels from the IDRC merger and amortization of debt issuance
costs.
Minority Interest
Minority interest represents the portion of e-Satisfy owned by other individuals
(27.6%). For the six months ended June 30, 2000 minority interest was $ 1.0
million. There was no minority interest for the six months ended June 30, 1999.
Liquidity and Capital Resources
Cash flows provided by (used in) (dollars in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
2000 1999
------------ --------
<S> <C> <C>
Operating activities................................................... $ 4,946 $ 3,852
Investing activities................................................... (11,697) (6,921)
Financing activities................................................... 8,658 10,861
</TABLE>
For the six months ended June 30, 2000
The $4.9 million of cash provided by operating activities consisted of $7.8
million of net loss offset by non cash items including depreciation and
amortization of $12.8 million and $1.2 million for
24
<PAGE> 25
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
bad debts. Working capital requirements which positively effected cash flow
included a decrease in accounts receivable of $7.6 million, a $3.9 million
increase in accrued expenses, offset by a $7.1 million increase in prepaids, a
$5.1 million decrease in other liabilities and a $1.0 million decrease in
minority interest.
The $11.7 million of cash used in investing activities primarily consisted of
property and equipment purchases attributable to maintaining and enhancing our
technology platforms.
The $8.7 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 none were
outstanding at June 30, 2000. 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 $4.0
million for the remainder of 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 2000, $0.3 million in 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 $0.2 million for the
remainder of 2000, $0.4 million in 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
June 30, 2000, the weighted average interest rate payable under the Credit
Facilities was 10.1%. 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 six months
ended June 30, 2000 and 1999,
25
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TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
the weighted average interest rate on borrowings under the Secured Credit
Facility was 10.1% and 8.3%, respectively.
During April 2000, the Company signed an amendment to the Credit Facility that
modified the Company's debt covenants effective February 2000 including the
leverage ratio and the fixed charge coverage ratio and increased the working
capital revolver facility by $6.0 million to $51.0 million. In addition, the
annual limitation allowed for capital expenditures decreased for the year 2000
from $32,500,000 to $25,000,000. At June 30, 2000, the Company had $43.6 million
in outstanding borrowings and $6.4 million available under the working capital
revolver facility. During the second quarter of 2000, the Company renegotiated
the terms of a note payable to the former principals of TARP. The original
scheduled payment of $1,200,000 due June 30, 2000 was changed to payments of
$300,000 on the first day of July, October, November and December plus interest
at 10%.
We expect that the operational and capital needs of the Company through the end
of the year will be provided by our existing cash balances, operational cash
flows and borrowings available under our Credit Facilities. The credit
agreements with our lenders impose numerous financial covenants that we will
need to meet in order to avoid a default under the Credit Facilities. Our
ability to meet the operational and capital needs of the Company and to comply
with these debt covenants is highly dependent upon our ability to achieve our
operational plans which include revenue growth and cost reductions. If we are
unsuccessful in achieving our operational plans, we may need to obtain
additional capital which may be difficult to obtain on terms acceptable to us,
if at all.
For the six months ended June 30, 1999
The $3.9 million of cash used in operating activities consisted of $3.8 million
of net income and noncash items including depreciation and amortization of $5.1
million, and $3.3 million for bad debts, offset by working capital requirements
including an increase in accounts receivable of $7.2 million, an increase in
prepaids of $2.0 million, offset by a $3.2 million increase in accrued expenses
and a $2.1 million decrease in other liabilities.
The $6.9 million of cash provided by investing activities primarily consisted of
$7.2 million of property and equipment purchases (of which $6.0 related to
maintaining and enhancing our technology platforms) offset by approximately
$.8 million of net cash acquired in the acquisition of IDRC.
The $10.9 million of net cash provided by financing activities primarily
consisted of $15.7 million of net borrowings from the merger offset by debt
issuance costs of $4.6 million.
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 error causing disruptions of operations or
other business problems, including, among others, a temporary inability to
process transactions or engage in other normal business activities.
Starting in 1998 and continuing in 1999 we undertook a comprehensive program,
including the hiring of an outside consulting firm, to address the Year 2000
issue.
As of June 30, 2000, we had spent approximately $1.6 million on the Year 2000
issue. Many of our systems that required Year 2000 remediation or replacement
also received performance upgrades or enhancements. Our costs do not include
costs related to these upgrades or enhancements. Because we have not experienced
material Year 2000 problems at the beginning of 2000 or any material leap year
issues after February 29, 2000, we do not expect future remediation costs to be
material to our consolidated position or results of operations.
26
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TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
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 June 30, 2000, we would be required to pay an additional
$1.3 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 6.3% at June
30, 2000.
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.
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
U.S. 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.
27
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TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5.
None
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
NONE
28
<PAGE> 29
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\ Vincent J. Ciavardini
----------------------------------------
Vincent J. Ciavardini
TeleSpectrum Worldwide Inc.
President & Chief Executive Officer
Date: August 14, 2000 \s\ William Hoke
----------------------------------------
William Hoke
TeleSpectrum Worldwide Inc.
Interim Chief Financial Officer
29
<PAGE> 30
EXHIBIT INDEX
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.
EXHIBIT DESCRIPTION
NUMBER
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.
