CRW FINANCIAL INC /DE, 10-K405, 1998-03-31

CRW FINANCIAL INC /DE
10-K405, 1998-03-31
CONSUMER CREDIT REPORTING, COLLECTION AGENCIES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _____________

Commission File Number 0-26015

CRW FINANCIAL, INC.
-------------------------
(Exact name of registrant as specified in its charter)

Delaware 23-2691986
----------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

200 Four Falls
Corporate Center
Suite 415
West Conshohocken, PA 19428
--------------------- --------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (610) 878-7429

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
------------------- --------------------
NONE NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO___.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X}

The aggregate market value of the voting stock held by non-affiliates of the
Registrant is approximately $15,437,000. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the NASDAQ Small Cap Market on March 25, 1998. For purposes of making this
calculation only, the Registrant has excluded shares held by all directors,
executive officers and beneficial owners of more than ten percent of the Common
Stock of the Company.

The number of shares of the Registrant's Common Stock outstanding as of March
25, 1998 was 6,435,486 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive proxy statement for its 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III.

<PAGE>

TABLE OF CONTENTS

PART I

Item 1. Business.................................................... 2
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 7
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 9
Item 8. Financial Statements and Supplementary Data................. 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 14

PART III

Item 10. Directors and Executive Officers of the Registrant.......... 14
Item 11. Executive Compensation...................................... 14
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................................... 14
Item 13. Certain Relationships and Related Transactions.............. 14

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 15

In addition to historical information, this Annual Report contains
forward-looking statements relating to such matters as anticipated financial
performance, business prospects and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operation, performance and development and
results of the Company's business include, but are not limited to, those matters
discussed herein in the sections entitled "Item 1 - Business", "Item 3 - Legal
Proceedings" and "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations." The words "believe," "expect,"
"anticipate," "project" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof.

Unless the context indicates otherwise, the terms "CRW" and "Company" refer to
CRW Financial, Inc.

<PAGE>

PART I

ITEM 1. BUSINESS

Background

CRW Financial, Inc. ("CRW" or the "Company") founded TeleSpectrum Worldwide Inc.
("TLSP") in April 1996. TLSP is a provider of integrated teleservices and is
listed on the NASDAQ National Market System under the symbol "TLSP." CRW owns
approximately 6.2 million shares of TLSP, representing approximately 25% of the
outstanding common stock of TLSP. In addition, CRW's wholly-owned subsidiary
Casino Money Centers, Inc. ("CMC") provides check cashing and other financial
services to the casino industry.

CRW was spun-off from its predecessor company, Casino & Credit Services, Inc.
("CCS"), in May 1995. CCS was formed in May 1992 and in July 1992, CCS purchased
Receivable Management Services, Inc. and Central Credit, Inc. ("CCI") from TRW
Inc. for approximately $11.5 million. CCS was capitalized with approximately
$12.1 million of bank and convertible debt and $1 million of equity. In August
1993, CCS completed an initial public offering of its common stock, generating
net proceeds of approximately $12.7 million and valuing CCS at approximately $26
million. Proceeds from the offering were used to repay all of CCS' debt and fund
the acquisition of Central Credit of New Jersey, Inc., CCI's only competitor.
During the remainder of 1993 and 1994, CCS completed the acquisition of five
complimentary receivables management ("Collection") businesses for an aggregate
of approximately $5.5 million in cash and formed Casino Money Centers, Inc. to
complement CCI's business.

In July 1994, CCS commenced discussions with Hospitality Franchise Systems, Inc.
("HFS") regarding a sale of CCI. In November 1994, CCS and HFS announced a
merger and plan of reorganization whereby CCS would merge with HFS after a
spin-off of the Collection business and CMC to CCS' shareholders. In May 1995,
the merger and spin-off were completed resulting in CCS shareholders receiving
approximately $37.2 million in HFS common stock and approximately $3.5 million
in CRW common stock. CRW's common stock began trading on the NASDAQ Small Cap
Market under the symbol "CRWF" on May 11, 1995.

In December 1995, CRW's management team began to explore the creation of a
telemarketing subsidiary to capitalize on the rapid growth in demand by large
corporations for large-scale professional telemarketing services. CRW's
management team concluded that its experience in acquiring and operating call
centers for its Collection Division would provide the foundation to build a CRW
subsidiary into a leading teleservices company. In April 1996, CRW formed TLSP
and TLSP agreed to acquire four telemarketing businessess, a market research
business and a fulfillment business, contingent upon an initial public offering
of its common stock. In August 1996, TLSP completed its initial public offering,
generating net proceeds of approximately $162 million and valuing TLSP at
approximately $375 million. The total purchase price for the six businesses
acquired was approximately $200 million consisting of approximately $90.9
million in cash, $49 million in TLSP stock and warrants, $25.6 million in notes,
and $34.5 million in assumed liabilities and transaction expenses.

In October 1996, CRW's Board of Directors approved a plan to sell the Company's
Collection Division. On February 2, 1997, the Company completed the sale of its
Collection Division to NCO Group, Inc. ("NCOG") for $3.75 million in cash,
517,767 shares of NCOG common stock and a warrant to purchase 375,000 shares of
NCOG common stock for $18.42 per share. The Company sold its 517,767 shares of
NCOG common stock in July 1997 for approximately $9.6 million. Proceeds from
this sale of stock were used to retire all of the Company's outstanding bank
debt and increase working capital. The Company sold its warrant to purchase
375,000 shares of NCOG in February 1998 for approximately $2.66 million. The
results of the Collection Division and CCI's results have been presented as
discontinued operations in the accompanying financial statements.

<PAGE>

The Company is continuing to explore various alternatives to increase
shareholder value, including a sale or spin-off of CMC, the sale or distribution
to CRW stockholders of its investment in TLSP or the merger of the Company into
TLSP, although there can be no assurance that the Company may not pursue other
alternatives or that an increase in shareholder value will be achieved.

Currently, CRW's only operating business is conducted through its wholly-owned
subsidiary, CMC.

CMC Background

Casino Money Centers, Inc. ("CMC") was formed in September 1993 to provide funds
transfer services at gaming sites. CMC opened its first casino operation in
October 1993 at the Table Mountain Casino, a casino located on Indian land near
Fresno, California. CMC purchased Strip Check Cashing Service, Inc. in Las
Vegas, Nevada in February 1994 and established operations in the Oneida casino
on Indian lands in Green Bay, Wisconsin in July 1994 and in the Mohican
Northstar Casino on Indian Lands in Bowler, Wisconsin in December 1995. In
August 1995, CMC acquired the operations of All Check Cashing, Inc. in Laughlin,
Nevada. In January 1997, CMC began operations in the Grand Coushatta Casino in
Louisiana and purchased the assets of Twain Check Cashing in Las Vegas, Nevada.
CMC generally has contracts with its casino clients which have one to five year
terms. CMC's contract with its largest client, the Oneida Casino expired in 1997
and CMC currently provides services to such casino on a month-to-month basis.

General

CMC provides funds transfer services to casino customers through operations
located in casinos. These services include wire transfers, cash advances on
debit and credit cards and check cashing. Currently, CMC operates in five
casinos, one in Las Vegas, two in Wisconsin, one in Louisiana and one in
California and is actively pursuing arrangements to establish additional casino
operations. In addition, CMC operates two locations not located within casinos.
The funds transfer business, however, is highly competitive, and there can be no
assurance that CMC will be successful in achieving its planned expansion.

CMC offers wire transfers, debit and credit card cash advance services and check
cashing services based upon the requirements of the host casino. Debit and
credit card cash advance services are provided through a system which enables
casino customers to use their MasterCard(R), VISA(R) or Discover(R) credit cards
to obtain cash in the casino. The casino customer may initiate a request for a
cash advance at CMC's service desk or at one of CMC's remote terminals located
on the casino floor. The use of a remote terminal affords the casino customer
privacy and the ability to determine whether the desired cash advance will be
authorized by the customer's credit card company. The remote terminal also
speeds the cash advance process by allowing multiple pre-authorizations to occur
simultaneously and by enabling service desk personnel to handle more
transactions.

Check cashing services are provided at all of CMC's casino operations. When a
casino customer requests check cashing at CMC's service desk, CMC conducts a
check verification process using identification procedures and software licensed
by CMC. Each transaction also provides additional data for CMC's customer
database, which database is used in assessing the credit worthiness for the
particular customer.

CMC provides its services pursuant to various agreements with the
operators of the host casinos. Such agreements enable the casino operators to
provide funds transfer services to their customers without assuming any credit
risk. CMC believes that the efficient and confidential manner in which it
provides its services makes CMC's services attractive to casino operators and
their customers.

The Casino Gaming Market

Casino gaming in the United States has expanded significantly in recent years.
Once found only in Nevada and New Jersey, casino gaming has recently been
legalized in numerous states, including land-based casinos on Indian lands and
elsewhere, and on riverboats and dockside casinos. Several additional
jurisdictions are currently considering the authorization of casino gaming.

<PAGE>

The expansion of casino gaming has generated a corresponding demand for
ancillary services, including funds transfer services in casinos. While some
casino operators provide such services directly, most casinos rely on third
parties to provide funds transfer services pursuant to contracts with the casino
operator. CMC management believes that the principal objective of casino
operators in providing or arranging for such services is to promote gaming
activity by making funds available to casino customers on a convenient basis. In
some cases, however, the casino operator may view such services as a potential
profit center separate from the gaming operations.

CMC's business currently is concentrated in the casino gaming industry and its
plan of operation contemplates that CMC's operations will continue to be focused
on operations in casinos and other gaming locations. Accordingly, a decline in
the popularity of gaming, a reduction in the rate of expansion of casino gaming,
changes in laws or regulations affecting casinos and related operations, or
other adverse changes in the gaming industry would have an adverse effect on
CMC's operations.

Debit and Credit Card Advances

CMC provides a system by which casino customers may use their MasterCard(R),
VISA(R) or Discover(R) credit cards to obtain cash. In a typical credit card
transaction, the amount of the cash advance together with a service fee is
charged to the individual's MasterCard(R), VISA(R) or Discover(R) credit card
account. Upon authorization of the transaction by either the bank who issued the
card, the credit card company or a designated agent, CMC issues a draft to the
customer who then cashes the draft at CMC's service desk in the casino. The
casino customer may initiate a request for a cash advance at CMC's service desk
or at one of CMC's remote terminals located on the casino floor. The use of a
remote terminal serves several purposes. First, it affords the casino customer
privacy. The remote terminal informs the casino customer whether the desired
cash advance will be authorized, eliminating embarrassment if the request is not
approved. Second, it speeds the process by allowing multiple pre-authorizations
to occur simultaneously, thereby reducing any bottleneck of customers at the
service desk.

For debit and credit card advances, customers are currently charged a
transaction fee equal to a percentage of the amount advanced, or a flat fee,
whichever is greater. The fee is charged to the customer's card at the time of
the advance. CMC pays a vendor a fee based on a percentage of the amount of the
cash advance. The vendor then pays MasterCard(R), VISA(R) and Discover(R). In
some cases, such as when CMC must seek a manual or voice authorization or does
not transmit its transactions electronically, the fee can be a higher percentage
than otherwise would be charged. Any fee owed by CMC to MasterCard(R), VISA(R)
or Discover(R) is deducted from the monthly settlement made by the card
companies to CMC.

Check Cashing Services

CMC currently provides check cashing services at each of its casino locations. A
casino customer initiates a request for check cashing at CMC's service desk at
the casino. CMC uses systems and software licensed by CMC to store and maintain
data regarding all customer check cashing activity to aid in the check
verification process. The system and software enable CMC's employees to perform
the following functions: accept and store customer data, including names,
addresses and other personal data; review recent transactions of existing
customers; determine the collection risk in cashing a particular customer's
check; add check cashing transactions for any customer in the database; add
return item data for any customer in the database; add payment transactions for
any customer in the database; and summarize the daily check cashing activity for
transmittal to headquarters. The system and software permit information to be
gathered and reported in an efficient and timely manner. CMC has designed and
implemented a credit rating system which utilizes this customer database to
determine whether a casino customer's check should be cashed.

Fees for check cashing services are paid by the customer. Check cashing involves
the risk that some cashed checks will be uncollectible because of insufficient
funds, stop payment orders, closed accounts or fraud. This risk of collection is
greater in new locations where the amount of data in CMC's database is smaller.

<PAGE>

Wire Transfer Services

CMC provides wire transfer services to casino customers through CMC operations
located at casinos.

Competition

CMC competes with a number of providers of funds transfer services in casinos,
many of which have significantly greater financial resources than CMC.
Competitors include Game Financial, Premier CashLink, Valley National Bank and
First Interstate Bank of Nevada, which currently provide cash advance services
in casinos and other gaming locations through automated teller machines ("ATMs")
and other facilities located at casinos and other gaming establishments, and in
hotels associated with casinos.

CMC also competes with sponsors of ATM networks which place ATMs in casinos, and
with major credit card companies and vendors of traveler's checks, which make
cash available to holders of their credit cards and checks on a nationwide
basis. ATMs offer several advantages in providing cash advances, including the
following: speed, convenience, and minimal expense per transaction; limited
supervision required by casino staff, and, with a personal identification number
("PIN"), access to most major credit cards, including VISA(R), MasterCard(R),
American Express(R), Diners Club(R) and Discover(R) cards. Customers who utilize
ATMs to obtain cash advances, however, must have and remember a PIN and are
subject to limitations (typically $300) on the amount of cash which may be
withdrawn in a day.

CMC believes that the principal competitive factors in providing credit card
cash advance and check cashing services are marketing efforts, pricing,
reliability, convenience and speed in effecting transactions.

Government Regulation

Many states require companies engaged in the business of providing cash advance
services or transmitting funds to obtain a license from the appropriate state
agency. In certain states, such as Wisconsin, such companies are required to
post bonds or other collateral to secure their obligations to their customers in
those states. State agencies have extensive discretion to deny or revoke
licenses. CMC has obtained the necessary licenses and bonds to do business in
the states where it currently operates and will be subject to similar and
possibly more onerous licensing requirements if it expands its operations into
other jurisdictions. While there can be no assurance that it will be able to do
so, CMC anticipates that it will be able to obtain and maintain the licenses
necessary for the conduct of its business.

Employees

As of March 25, 1998, CRW had 82 full-time employees. The full-time employees
consisted of 7 engaged in corporate management and administration and 75 in CMC
operations.

ITEM 2. PROPERTIES

The Company currently leases approximately 3,000 square feet of office space in
Valley Forge, Pennsylvania for its corporate management on a month to month
basis. Rent expense in 1997 for this space was $26,000. CMC leases approximately
3,000 square feet of space in Las Vegas, Nevada on a month to month basis. Rent
expense for this facility was $115,000 in 1997. From December 1996 to August
1997, CRW leased an aggregate of 13,000 square feet in King of Prussia,
Pennsylvania from 210 Mall Boulevard Associates, a partnership which is
controlled by J. Brian O'Neill, CRW's Chief Executive Officer. From February
1997 to July 1997, NCO Group, Inc. subleased the facility from CRW. In August
1997, the sublease expired and the lease between CRW and 210 Mall Boulevard
Associates was terminated. In 1996 and 1997, respectively, CRW paid $11,739 and
$33,000 in rent to 210 Mall Boulevard Associates. CRW also subleases a 22,000
square foot facility in King of Prussia, PA from Cendant Corporation and has
subleased the facility to TLSP. Cendant currently leases the facility from an
unrelated party. However, prior to October 1997, Cendant leased the facility
from CRW Building Limited Partnership, a partnership controlled by Mr. O'Neill.
Prior to subleasing the facility to TLSP, CRW paid approximately $365,000 in
rent in 1996 under the sublease from Cendant. In addition, CRW also leased
office space in 1996 in Conshohocken, PA, from Lee Park Investors, L.P., a
partnership controlled by Mr. O'Neill. The lease was assumed by NCOG on February
2, 1997. CRW paid approximately $46,000 and $4,000 in rent in 1996 and 1997,
respectively to Lee Park Investors, L.P.

<PAGE>

The aggregate minimum rent due from the Company on all of the above leases
through the end of their terms, net of commitments for payments under subleases,
is zero. Management believes the Company's existing facilities are sufficient to
support its anticipated needs in 1998.

ITEM 3. LEGAL PROCEEDINGS

CRW is a party to several lawsuits which were incidental to the ordinary course
of business of its Collection Division. NCOG did not assume any potential
liability under such lawsuits in connection with NCOG's acquisition of the
Collection Division's net assets in February 1997. The Company intends to
vigorously defend all such actions and, in the current opinion of management,
the ultimate resolution of such actions will not have a material adverse effect
on the Company's business, financial condition or results of operations,
although there can be no assurance that this will be the case.

One of such lawsuits was filed in August 1996 by Eugene Piscitelli, an employee
of the Company, in the United States District Court for the Eastern District of
Pennsylvania. Mr. Piscitelli made a claim against the Company for an unspecified
amount of money damages in excess of jurisdictional limits based on claims of
alleged fraud in the inducement by the Company and alleged breach by the Company
of his employment agreement with respect to compensation matters. In March 1998,
the Company entered into a settlement agreement and release agreement with Mr.
Piscitelli, whereby Mr. Piscitelli's employment with CRW was terminated and the
lawsuit was dismissed with prejudice in exchange for a cash payment by CRW of
$800,000. The Company has recorded the expense and liability for this amount in
the accompanying 1997 Financial Statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The following matters were submitted to and approved by a vote of the Company's
stockholders, following the solicitation of stockholder proxies by the Board of
Directors, at the 1997 Annual Meeting of Stockholders of the Company held on
October 16, 1997. The Board of Directors fixed the close of business on
September 2, 1997 as the record date for determining the stockholders entitled
to notice of and to vote at the Meeting and any adjournment thereof.
Stockholders voted their shares as indicated below. All items were approved by
the affirmative vote of a majority of the shares of Common Stock present and
entitled to vote.

Shares Voted
------------
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
1. The election of Bernard Morgan and Eustace W. Mita as the Class II
directors of the Company for a three year term.
Bernard Morgan 5,139,661 -- 44,425
Eustace W. Mita 5,139,661 -- 44,425
2. The ratification of the appointment by the Board of Directors of Arthur
Andersen LLP as the Company's independent certified public accountants for
the fiscal year ending Decemeber 31, 1997 5,170,157 2,850 11,079
</TABLE>

<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Common Stock of CRW Financial, Inc. is quoted on the NASDAQ Small Cap Market
under the symbol "CRWF". The following table sets forth, for the periods
indicated, the range of high and low closing sale prices as reported on the
NASDAQ Small Cap Market.

High Low
---- ---
Fiscal 1996
First Quarter 2.80 1.88
Second Quarter 13.33 2.75
Third Quarter 12.67 9.33
Fourth Quarter 11.83 6.75

Fiscal 1997
First Quarter 9.50 6.56
Second Quarter 9.18 4.38
Third Quarter 5.81 3.00
Fourth Quarter 5.00 2.63

As of March 25, 1998 there were 40 holders of record of the Common Stock of CRW.
Because a substantial portion of the Company's Common Stock is held in street
name, the Company believes that it has a significantly larger number of
beneficial owners of its Common Stock.

CRW has never paid a cash dividend on its Common Stock. CRW currently intends to
retain all earnings for use in its business and does not anticipate paying any
cash dividend on the Common Stock in the foreseeable future, except in
connection with alternatives to dispose of the Company's remaining net assets
(see Note 1 to the Financial Statements).

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The historical consolidated financial statements of CRW have been deemed to be
those of CCS, restated to reflect the classification of the Collection Division
and CCI as discontinued operations. The selected historical consolidated
financial information of CRW set forth in the tables below have been derived
from the audited financial statements of CCS for the years ended December 31,
1993 and 1994 and from the audited financial statements of CRW for the years
ended December 31, 1995, 1996 and 1997. The Company's CMC business did not have
substantial operations prior to January 1, 1994, therefore, the Company did not
have any revenues from continuing operations prior to that date. The following
information should be read in conjunction with and is qualified in its entirety
by reference to the historical consolidated financial statements and
accompanying notes of CRW included elsewhere in this Form 10-K. See Notes 1, 2,
3 and 13 to CRW's historical consolidated financial statements.

Year Ended December 31
----------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Net revenues ................................. $ -- $ 1,429 $ 2,949 $ 3,412 $ 4,989
Operating expenses, excluding
non-cash and special charges .............. 1,408 3,664 3,458 5,504 8,655

Special compensation charge .................. -- -- -- 1,319 --
Depreciation and
Amortization ............................... -- 23 48 162 220
-------- -------- -------- -------- --------

Operating loss from
continuing operations ...................... (1,408) (2,258) (557) (3,573) (3,886)
Other income ................................. -- -- -- 1,136 1,324
Equity in earnings(loss) of TLSP ............. -- -- -- 774 (39,389)
Interest expense ............................. (697) (263) (655) (825) (421)
-------- -------- -------- -------- --------

Loss from continuing operations
before income tax benefit .................. (2,105) (2,521) (1,212) (2,488) (42,372)

Income tax benefit ........................... (730) (622) -- (855) (16,803)
-------- -------- -------- -------- --------

Loss from continuing
operations ................................. (1,375) (1,899) (1,212) (1,633) (25,569)
Income (loss) from
discontinued operations and
gains from disposition of $28,176 and $1,383
in 1995 and 1997, respectively, net of tax . (356) 104 29,275 (1,152) 1,320
-------- -------- -------- -------- --------

Income (loss) before
extraordinary item ......................... (1,731) (1,795) 28,063 (2,785) (24,249)
Extraordinary loss on
extinguishment of debt,
net of tax benefit ......................... (1,467) -- -- (1,132)
-------- -------- -------- -------- --------

Net income (loss) ............................ (3,198) (1,795) 28,063 (3,917) (24,249)
Preferred dividends .......................... (82) (210) -- -- --
-------- -------- -------- -------- --------

Net income (loss) applicable
to common stockholders ..................... $ (3,280) $ (2,005) $ 28,063 ($ 3,917) $(24,249)
======== ======== ======== ======== ========

BASIC NET INCOME (LOSS) PER SHARE(1):
Continuing operations ........................ $ (0.34) $ (0.43) $ (4.19)
Discontinued operations and
gain from merger ........................... 8.30 (0.30) 0.22
Extraordinary item ........................... -- (0.30) --
-------- -------- --------
$ 7.96 $ (1.03) $ (3.97)
======== ======== ========
DILUTED NET INCOME (LOSS)
PER SHARE(1):
Continuing operations ..................... $ (0.25) $ (0.43) $ (4.19)
Discontinued operations ................... 6.12 (0.30) 0.22
Extraordinary item ........................ -- (0.30) --
-------- -------- --------
$ 5.87 $ (1.03) $ (3.97)
======== ======== ========
</TABLE>

8
<PAGE>

YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net assets of discontinued operations(2) $13,909 $15,650 $ 9,146 $ 8,235 $ --
Total assets ........................... 13,909 16,727 11,332 67,945 22,128
Bank and subordinated debt ............. -- 5,066 7,005 9,185 798
Stockholders' equity ................... 13,350 11,345 3,186 34,873 12,601
</TABLE>

(1) Per share information is not presented for 1993 and 1994 as such
information is not meaningful due to the formation of CRW in May 1995.

(2) The net assets of discontinued operations represent the assets and
liabilities of the Collection Division sold to NCOG and CCI's business
acquired by HFS in the Merger. See Notes 2 and 13 to CRW's historical
consolidated financial statements included elsewhere in this Form 10-K.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion is based upon and should be read in conjunction with
the Selected Historical Financial Information and CRW's Financial Statements,
including the notes thereto, included elsewhere herein.

General

CRW's operating results have been restated to reflect the classification of the
Collection Division and CCI as discontinued operations. See Note 1 of the notes
to the accompanying financial statements for a description of the basis of
presentation.

Below is a summary of operating results for CRW and its Casino Money Centers,
Inc. subsidiary:

Year Ended December 31,

1995 1996 1997
---- ---- ----

Net revenues ......................... $ 2,949 $ 3,412 $ 4,989
Operating expenses, excluding non-cash
charges ............................ 3,458 5,504 8,655
Special compensation charges ......... -- 1,319 --
Depreciation and amortization ........ 48 162 220
------- ------- -------

Operating loss ....................... $ (557) $(3,573) $(3,886)
======= ======= =======

<PAGE>
YEAR ENDED DECEMBER 31, 1997
-----------------------------
Corporate CMC TOTAL
--------- ------- --------

Net revenues ................................. $ -- $ 4,989 $ 4,989
Operating expenses, excluding non-cash charges 3,813 4,842 8,655
Depreciation and amortization ................ 158 62 220
------- ------- -------

Operating income (loss) ...................... $(3,971) $ 85 $(3,886)
======= ======= =======

YEAR ENDED DECEMBER 31, 1996
------------------------------
Corporate CMC TOTAL
--------- ------- -------

Net revenues ................................. $ -- $ 3,412 $ 3,412
Operating expenses, excluding non-cash charges 2,292 3,212 5,504
Special compensation charge .................. 1,319 -- 1,319
Depreciation and amortization ................ 112 50 162
------- ------- -------

Operating income (loss) ...................... $(3,723) $ 150 $(3,573)
======= ======= =======

YEAR ENDED DECEMBER 31, 1995
------------------------------
Corporate CMC TOTAL
--------- ------- -------
Net revenues ................................. $-- $ 2,949 $ 2,949
Operating expenses, excluding non-cash charges 1,036 2,422 3,458
Depreciation and amortization ................ 22 26 48
------- ------- -------

Operating income (loss) ...................... $(1,058) $ 501 $ (557)
======= ======= =======

<PAGE>

Years Ended December 31, 1997 and 1996

Net Revenues

CMC's revenues increased $1,577,000 (46%) to $4,989,000 in 1997 from $3,412,000
in 1996 principally due to the opening of the CMC facility at the Grand
Coushatta Casino in Kinder, Louisiana in January, 1997.

Operating Expenses

The Company's operating expenses increased $1,890,000 (27%) to $8,875,000 in
1997 from $6,985,000 in 1996. CMC's operating expenses increased $1,642,000
(50%) to $4,904,000 from $3,262,000 in 1996 due to the opening of the Coushatta
operation in 1997 and higher sales and administrative expenses which were
incurred in order to help facilitate CMC's growth. CMC also incurred $83,000 of
severance pay for the termination of several employees. Corporate's operating
expenses increased $248,000 to $3,971,000 from $3,723,000 primarily due to
approximately $1,300,000 of expense related to litigation with an employee,
partially offset by lower compensation expense in 1997.

Interest Expense

Interest expense was $421,000 in 1997 compared to $825,000 in 1996 due to lower
borrowings in 1997 and the repayment of all bank debt in July 1997.

Other Income

Other income increased $188,000 to $1,324,000 in 1997 compared to $1,136,000 in
1996 due to the gain on sale of NCOG stock of $1,324,000 in 1997 compared to the
gain of $1,136,000 on the sale of TeleSpectrum stock in 1996.

Equity in Earnings (Loss) of TLSP

Equity in earnings (loss) of TLSP was $(39,389,000) in 1997 compared to $774,000
in 1996 due to CRW's equity method of accounting for its share of TLSP's net
loss of $160,475,000 in 1997 compared to its net income of $3,650,000 in 1996.
TLSP's net loss of $160,475,000 included a $139,100,000 write-down of goodwill.
The write-down of goodwill was made due to a conclusion by TLSP's management
that its goodwill had been permanently impaired by developments in the
teleservices industry and TLSP's operating performance.

Income Taxes

The Company's income tax benefit was $16,803,000 in 1997 compared to $855,000 in
1996. The income tax benefit in 1997 represents a 40% benefit for State and
Federal income taxes on the Company's pre-tax loss representing reduction of its
deferred tax liability. The income tax benefit in 1996 represents a 34% benefit
for Federal income taxes on the Company's pre-tax loss.

Years Ended December 31, 1996 and 1995

Net Revenues

CMC's revenues increased $463,000 (16%) to $3,412,000 in 1996 from $2,949,000 in
1995 due to the opening of a new facility at the Northstar Casino in December
1995.

Operating Expenses

The Company's operating expenses increased $3,479,000 (99%) to $6,985,000 in
1996 from $3,506,000 in 1995. CMC's operating expenses increased $814,000 (33%)
to $3,262,000 from $2,448,000 in 1995 due to the opening of the Northstar
facility in December 1995 and higher sales and administrative expenses which
were incurred in order to help facilitate CMC's growth. Corporate's operating
expenses increased $2,665,000 to $3,723,000 from $1,058,000 in 1995 due to
special compensation charges of $1,319,000 and payroll costs, professional fees,
travel and other expenses related to the formation and development of TLSP. The
special compensation charges included the accrual of $690,000 of severance pay
for certain employment contracts related to the Collection Division and a
$629,000 charge for the TLSP management warrants described in Note 5 to the
accompanying financial statements.

Other Income

Other income was 1,136,000 in 1996 compared to zero in 1995 due to a gain of
$1,136,000 recognized in September 1996 from the exercise of certain of the
lender warrants described in Note 5 to the accompanying financial statements.
The exercise of the lender warrants resulted in the sale by CRW of 785,000
shares of TLSP common stock for $1,177,000 in cash.

Equity in Earnings of TLSP

Equity in earnings of TLSP was $774,000 in 1996 compared to zero in 1995 due to
the formation and initial public offering of TLSP in 1996 described in Note 5 to
the accompanying financial statements.

Interest Expense

Interest expense was $825,000 in 1996 compared to $655,000 in 1995 primarily due
to higher borrowings made in 1996 to fund CRW's $2.1 million investment in TLSP.

11
<PAGE>

Income Tax Benefit

The income tax benefit of $855,000 in 1996 represents the future Federal income
tax benefit of the Company's operating loss. No income tax benefit was recorded
in 1995.

Discontinued Operations

Below is a summary of operating results for the discontinued operations of the
Collection Division and CCI:

Year Ended December 31,
1995 1996 1997
---- ---- ----
(in thousands)
Net revenues .......... $ 32,073 $ 27,432 $ 2,006
Operating expenses .... 30,738 29,329 2,101
-------- -------- --------

Operating income (loss) 1,335 (1,897) (95)
Other expenses ........ -- 9 --
Income taxes (benefit) 236 (754) (32)
-------- -------- --------

Net income (loss) ..... $ 1,099 $ (1,152) $ (63)
======== ======== ========

Years Ended December 31, 1997 and 1996

Net revenues, operating expenses, operating loss and net loss all decreased
substantially in 1997 as the Collection Division was sold on February 2, 1997
and therefore, the operating results above for 1997 consist of the period from
January 1, 1997 to February 2, 1997.

Years Ended December 31, 1996 and 1995

Net Revenues

Net revenues decreased $4,641,000 (14%) to $27,432,000 in 1996 from $32,073,000
in 1995 due to a $3,331,000 decrease in CCI's revenues due to the sale of CCI to
HFS in the May 1995 merger, a $512,000 decrease in revenues from the Collection
Division's largest customer, a decrease in revenues from several of the
Collection Division's larger customers, including Bell South and the New Jersey
Department of Motor Vehicles, partially offset by $1,510,000 of revenues
generated in 1996 from the market research division which began operations in
January 1996 and ceased operations in August 1996.

Operating Expenses

Operating expenses decreased $1,409,000 (5%) to $29,329,000 in 1996 from
$30,738,000 in 1995 due to the 14% decrease in revenues and a $169,000 decrease
in depreciation and amortization. The operating expenses in 1996 decreased only
5% as compared to a the 14% decrease in revenues due to the high level of fixed
costs incurred by the Collection Division.

Income Taxes (Benefit)

Income taxes (benefit) of $(754,000) in 1996 and $236,000 in 1995 represents an
effective tax rate of approximately 40% for the future tax liability (benefit)
of the Collection Division's operating income and losses.

Inflation

Inflation has not had a significant impact on CRW's operations to date.

12
<PAGE>

Year 2000

In some cases, computer programs have been written using two digits rather than
four to define the applicable year. Such programs were written without
considering the impact of the upcoming change in the century and may experience
problems handling dates beyond December 31, 1999. This could cause computer
applications to fail or to create erroneous results unless corrective measures
are taken. Incomplete or untimely resolution of the Year 2000 issue could have a
material adverse impact on the Company's business, operations or financial
condition in the future.

The Company has been assessing the impact that the Year 2000 issue will have on
its computer systems, including both hardware and software utilized by the
Company, since 1998. In response to those assessments, which are ongoing, the
Company has developed and is implementing a plan to develop solutions to those
systems found to have date-related deficiencies. Project plans call for the
completion of the solution implementation phase and testing of such solutions
prior to any anticipated impact on our systems. The Company is also surveying
its bank and critical suppliers and customers to determine the status of their
Year 2000 compliance programs.

Based on the current status of the Company's Year 2000 compliance program, and
assuming that project plans, which continue to evolve, can be implemented as
planned, the Company believes future costs relating to the Year 2000 issue will
not have a material adverse impact on the Company's business, operations or
financial condition.

Liquidity and Capital Resources

During the year ended December 31, 1997, net cash used in operating activities
was $5,255,000 compared to $2,303,000 for the year ended December 31, 1996. The
increase in net cash used in operating activities was primarily due to cash paid
of $1,700,000 in 1997 to reduce accrued expenses and other liabilities and due
to a decrease in cash provided by discontinued operations of $907,000. The cash
paid for accrued expenses in 1997 was primarily due to accrued expenses related
to the Collection Division.

Net cash provided by investing activities in 1997 was $13,109,000 and consisted
primarily of $3,750,000 of proceeds from the sale of the Collection Division,
$9,624,000 of proceeds from the sale of NCOG stock, partially offset by $140,000
of capital expenditures, $25,000 of cash paid for an acquisition and $100,000 of
capital expenditures for discontinued operations.

Net cash used in financing activities in 1997 was $7,656,000 and consisted of
$672,000 of proceeds from loans from stockholders, $9,042,000 of payments on
long-term debt, and $714,000 of proceeds from the exercise of stock options.

CRW believes that its cash on hand, including cash generated from the March 1998
sale of the NCOG warrant is adequate to meet its needs through December 31,
1998. The Company believes that its cash required for operating activities will
be substantially less in 1998 than the $5,255,000 and $2,303,000 of cash used
for operating activities in 1997 and 1996, respectively. The projected reduction
in cash to be used in operating activities in 1998 is based on a substantial
reduction in corporate expenses.

Net Operating loss Carryforward

CRW has a June 30 fiscal year end. As of June 30, 1997, CRW had available
approximately $7,000,000 of net operating loss carryforwards. As of December 31,
1997, CRW had accumulated an additional loss carryforward of approximately
$1,724,000. The net operating loss carryforwards will be used to offset the
Company's gain on the sale of its NCOG warrant.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Consolidated Financial Statements and notes thereto of the Company beginning
on Page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not Applicable

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 will be contained in the Company's
definitive proxy statement for the 1998 annual meeting of stockholders, or in an
amendment to this Form 10-K, to be filed with the Securities and Exchange
Commission by April 30, 1998, and is hereby incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 will be contained in the Company's
definitive proxy statement for the 1998 annual meeting of stockholders, or in an
amendment to this Form 10-K, to be filed with the Securities and Exchange
Commission by April 30, 1998, and is hereby incorporated by reference

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 will be contained in the Company's
definitive proxy statement for the 1998 annual meeting of stockholders, or in an
amendment to this Form 10-K, to be filed with the Securities and Exchange
Commission by April 30, 1998, and is hereby incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 will be contained in the Company's
definitive proxy statement for the 1998 annual meeting of stockholders, or in an
amendment to this Form 10-K, to be filed with the Securities and Exchange
Commission by April 30, 1998, and is hereby incorporated by reference.

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Attached hereto and filed as part of this report are the financial
statement schedules and exhibits listed below:

1. FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 1996 and 1997
Consolidated Statements of Operations - For the Years ended
December 31, 1995,1996 and 1997
Consolidated Statements of Stockholders' Equity - For the
Years ended December 31, 1995, 1996 and 1997.
Consolidated Statements of Cash Flows - For the Years ended
December 31, 1995, 1996 and 1997.
Notes to Consolidated Financial Statements

2. EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE

3.1 Restated Certificate of Incorporation of the Registrant (1)

3.2 Amendment to Restated Certificate of Incorporation of the
Registrant (2)

3.3 Amended Bylaws of the Registrant (3)

4.1 Term Loan Note and Addendum dated November 1, 1995 executed by
the Registrant in favor of J. Brian O'Neill and Miriam P.
O'Neill (2)

<PAGE>

10.1 Agreement of Lease dated as of July, 1994, between CRW Building
Limited Partnership and Casino and Credit Services, Inc. ("CCS")
(1)

10.2 Sublease Agreement dated May 10, 1995 between CCS and the
Registrant (3)

10.3 Sublease Agreement between TeleSpectrum Worldwide Inc. and the
Registrant (2)

10.4 Lease Agreement dated July 1, 1996 between the Registrant and
Lee Park Investors, L.P. (2)

10.5 Lease Agreement dated December 5, 1996 between the Registrant
and 210 Mall Boulevard Associates (2)

10.6 Employment Agreement dated May 11, 1995 between J. Brian O'Neill
and the Registrant (3)

10.7 Employment Agreement dated May 11, 1995 between Jonathan P.
Robinson and the Registrant (3)

10.8 Amended and Restated 1995 Stock Option Plan of the Registrant(4)

10.9 Asset Acquisition Agreement dated February 2, 1997 among the
Registrant, Kaplan & Kaplan, Inc., NCO Group, Inc., CRWF
Acquisition, Inc. and K & K Acquisition, Inc. (5)

21 Subsidiaries of the Registrant (6)

23 Consent of Arthur Andersen LLP (6)

27 Financial Data Schedule (Electronic Filing Only)

(1) Filed as an Exhibit to the Form 10-K filed with the Securities and Exchange
Commission on March 29, 1996 and incorporated herein by reference.

(2) Filed as an Exhibit to the Form 10-K filed with the Securities and Exchange
Commission on April 6, 1997 and incorporated herein by reference.

(3) Filed as an Exhibit to the Registration Statement on Form S-1 (No.
33-62700) and incorporated herein by reference.

(4) Filed as an Exhibit to CRW's definitive proxy statement for its 1996 Annual
Meeting of Stockholders and incorporated herein by reference.

(5) Filed as an Exhibit to CRW's Form 8-K dated February 2, 1997 and
incorporated herein by reference.

(6) Filed herewith.

(b) CRW did not file a Form 8-K with the Securities and Exchange Commission
during the fourth quarter of 1997.

<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Public Accountants F-2

Consolidated Balance Sheets -- December 31, 1996 and 1997 F-3

Consolidated Statements of Operations -- For the Years
ended December 31, 1995, 1996 and 1997 F-4

Consolidated Statements of Stockholders' Equity--
For the Years ended December 31, 1995, 1996 and 1997 F-5

Consolidated Statements of Cash Flows--
For the Years ended December 31, 1995, 1996 and 1997 F-6

Notes to Consolidated Financial Statements F-7

F-1

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To CRW Financial, Inc.:

We have audited the accompanying consolidated balance sheets of CRW Financial,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CRW Financial,
Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
February 16, 1998

F-2

<PAGE>

CRW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
---- ----
(In Thousands --
Except Share Amounts)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash (including $1,448 and $1,531, respectively of cash used
in check cashing operations).......................................... $ 1,448 $ 1,646
Net assets of discontinued operation (Notes 2 and 13) ................. 8,235 --
Investment in NCO Group, Inc. (Note 2) ................................ -- 2,013
Other current assets................................................... 319 232
-------- --------
Total current assets ............................................. 10,002 3,891

PROPERTY AND EQUIPMENT, net ................................................ 143 240
INTANGIBLE ASSETS, net ..................................................... 475 352
INVESTMENT IN TELESPECTRUM WORLDWIDE INC. .................................. 54,655 15,266
DEFERRED INCOME TAX ASSET .................................................. 2,586 2,324
OTHER ASSETS ............................................................... 84 55
-------- --------
$ 67,945 $ 22,128
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Revolving line of credit .............................................. $ 8,500 $ --
Current portion of long-term debt
(due to stockholders' in 1997 - Note 7) .............................. 353 798
Accounts payable ...................................................... 340 466
Accrued expenses ...................................................... 1,489 2,468
-------- --------
Total current liabilities ......................................... 10,682 3,732
-------- --------
LONG-TERM DEBT ............................................................. 332 --
-------- --------
OTHER LONG-TERM LIABILITIES ................................................ 160 --
-------- --------
DEFERRED INCOME TAXES...................................................... 21,898 5,795
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 10)

STOCKHOLDERS' EQUITY:

Preferred Stock, no par value, 500,000 shares authorized,
no shares issued and outstanding ................................. -- --
Common Stock, $.01 par value, 20,000,000 shares
authorized 5,366,442 and 6,435,486 shares issued
and outstanding, respectively ..................................... 54 64
Additional paid-in capital ............................................ 39,686 40,390
Accumulated deficit ................................................... (4,867) (29,116)
Unrealized gain on investment in NCO Group, Inc. ...................... -- 1,263
-------- --------
Total stockholders' equity ....................................... 34,873 12,601
-------- --------
$ 67,945 $ 22,128
======== ========
</TABLE>
The accompanying notes are an integral part of these statements

F-3

<PAGE>

CRW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
---- ---- ----

(In Thousands - Except Share Amounts)

<S> <C> <C> <C>
NET REVENUES ............................................................ $ 2,949 $ 3,412 $ 4,989
-------- -------- --------
OPERATING EXPENSES:
Compensation .................................................... 1,650 2,986 3,610
Special compensation charges .................................... -- 1,319 --
Other operating costs ........................................... 1,808 2,518 5,045
Depreciation and amortization ................................... 48 162 220
-------- -------- --------
Operating loss ................................................ (557) (3,573) (3,886)

INTEREST EXPENSE ................................................... (655) (825) (421)

EQUITY IN EARNINGS (LOSS) OF TELESPECTRUM WORLDWIDE INC. ........... -- 774 (39,389)

OTHER INCOME (Notes 2 and 5) ....................................... -- 1,136 1,324
-------- -------- --------

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT ............... (1,212) (2,488) (42,372)

INCOME TAX BENEFIT ................................................. -- (855) (16,803)
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS ......................................... (1,212) (1,633) (25,569)

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of income
taxes (benefit) of $236, $(754) and $(32) (Note 13) ....... 1,099 (1,152) (63)

GAIN ON SALE OF DISCONTINUED OPERATIONS, net of income taxes
of $996 (Note 2) ........................................ -- -- 1,383

GAIN ON MERGER OF CCS AND HFS, (Note 3) ............................ 28,176 -- --
-------- -------- --------

INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ................................. 28,063 (2,785) (24,249)

EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT ....................... -- (1,132) --
-------- -------- --------

NET INCOME (LOSS) ....................................................... $ 28,063 $ (3,917) $(24,249)
======== ======== ========

BASIC NET INCOME (LOSS) PER COMMON SHARE:

Continuing operations ............................................... $ (0.34) $ (0.43) $ (4.19)
Discontinued operations and gain on merger .......................... 8.30 (0.30) 0.22
Extraordinary item .................................................. -- (0.30) --
-------- -------- --------

$ 7.96 $ (1.03) $ (3.97)
======== ======== ========
DILUTED NET INCOME (LOSS) PER COMMON SHARE:

Continuing operations ............................................... $ (0.25) $ (0.43) $ (4.19)
Discontinued operations ............................................. 6.12 (0.30) 0.22
Extraordinary item .................................................. -- (0.30) --
-------- -------- --------
$ 5.87 $ (1.03) $ (3.97)
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-4

<PAGE>

CRW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

COMMON ADDITIONAL UNREALIZED TOTAL
PREFERRED COMMON STOCK PAID-IN ACCUMULATED GAIN STOCKHOLDERS'
(In Thousands) STOCK STOCK WARRANTS CAPITAL DEFICIT ON INVESTMENT EQUITY
--------- -------- -------- ---------- ----------- ------------- -------------

<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 .......... $ 3,000 $ 34 $ 273 $ 14,643 $ (6,605) $ -- $ 11,345

HFS Stock Received By CCS
Shareholders ................... -- -- -- (14,821) (22,408) -- (37,229)
Cancellation of Stock Options ....... -- -- -- 715 -- -- 715
Conversion of Preferred Stock ....... (3,000) -- (273) 3,273 -- -- --
Forfeiture of Accrued Dividends
on Preferred Stock ............. -- -- -- 292 -- -- 292
Net Income .......................... -- -- -- -- 28,063 -- 28,063
-------- -------- -------- -------- -------- ------- --------

BALANCE, DECEMBER 31, 1995........... -- 34 -- 4,102 (950) -- 3,186

Sale of Preferred Stock ............. 2,345 -- -- -- -- -- 2,345
Conversion of Preferred Stock ....... (2,345) 13 -- 2,332 -- -- --
Exercise of Stock Options and
Warrants ....................... -- 7 -- 1,121 -- -- 1,128
Adjustment to Investment in
TeleSpectrum Worldwide Inc.
(Note 1) ....................... -- -- -- 32,131 -- -- 32,131
Net Loss ............................ -- -- -- -- (3,917) -- (3,917)
-------- -------- -------- -------- -------- ------- --------

BALANCE, DECEMBER 31, 1996 .......... -- 54 -- 39,686 (4,867) -- 34,873

Unrealized gain on investment in
NCO Group, Inc. ................ -- -- -- -- -- 1,263 1,263
Exercise of Stock Options and
Convertible Note ............... -- 10 -- 704 -- -- 714
Net Loss ............................ -- -- -- -- (24,249) -- (24,249)
-------- -------- -------- -------- -------- ------- --------

BALANCE, DECEMBER 31, 1997 .......... $ -- $ 64 $ -- $ 40,390 $(29,116) $ 1,263 $ 12,601
======== ======== ======== ======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-5

<PAGE>

CRW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
-------- --------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES: (In Thousands)

<S> <C> <C> <C>
Net income (loss) ................................................................. $ 28,063 $ (3,917) $(24,249)

Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities-

Deferred income taxes ........................................................ -- (1,609) (16,803)
Gain on merger of CCS and HFS ................................................ (28,176) -- --
Non-cash special compensation charge ......................................... -- 629 --
Gain on sale of collection business .......................................... -- -- (1,383)
Gain on sale of NCO Group, Inc. stock ........................................ -- -- (1,324)
Discontinued operations--noncash charges and working capital changes ......... 297 1,260 353
Equity in TLSP (income) loss ................................................. -- (774) 39,389
Extraordinary loss on extinguishment of debt ................................. -- 1,132 --
Depreciation and amortization ................................................ 132 162 220
Changes in operating assets and liabilities -
Other current assets .................................................. (204) 147 87
Other assets .......................................................... (105) (179) 29
Accounts payable ...................................................... 158 174 126
Accrued expenses and other liabilities ................................ 738 672 (1,700)
-------- -------- --------

Net cash provided by (used in) operating activities ............... 903 (2,303) (5,255)
-------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:

Investment in TeleSpectrum Worldwide Inc. .................................. -- (2,110) --
Cash paid for acquisitions ................................................. (25) -- (25)
Purchases of property and equipment ........................................ (64) (132) (140)
Proceeds from sale of collection business .................................. -- -- 3,750
Proceeds from sale of NCO Group, Inc. stock ................................ -- -- 9,624
Investing activities of discontinued operations ............................ (2,416) (246) (100)
-------- -------- --------

Net cash provided by (used in) investing activities ............... (2,505) (2,488) 13,109
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of debt ............................................ 7,000 -- 672
Repayment of debt ......................................................... (3,104) (318) (9,042)
Proceeds from (repayments of) line of credit .............................. (1,800) 2,500 --
Payment of financing costs ................................................ (264) -- --
Proceeds from exercise of stock options ................................... -- 1,128 714
Financing activities of discontinued operation ............................ (104) (180) --
Sale of preferred stock ................................................... -- 2,345 --
-------- -------- --------

Net cash provided by (used in) financing activities ............... 1,728 5,475 (7,656)
-------- -------- --------

NET INCREASE IN CASH .............................................................. 126 684 198

CASH, BEGINNING OF PERIOD ......................................................... 638 764 1,448
-------- -------- --------

CASH, END OF PERIOD ............................................................... $ 764 $ 1,448 $ 1,646
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these statements

F-6

<PAGE>

CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997

1. Background:

CRW Financial, Inc. ("CRW" or the "Company") was a subsidiary of Casino & Credit
Services, Inc. ("CCS") prior to May 11, 1995, and CRW's operations were a
division of CCS from July 1992 to May 11, 1995 when CCS contributed all of its
assets and subsidiaries other than Central Credit, Inc. ("CCI") to a newly
formed subsidiary, CRW Financial, Inc. CCS then spun-off CRW in a distribution
of CRW stock to CCS shareholders on May 11, 1995. The historical financial
statements of CRW have been deemed to be those of CCS, restated to present CCI
as a discontinued operation.

CRW founded TeleSpectrum Worldwide Inc. in April 1996. TeleSpectrum Worldwide
Inc. ("TLSP") provides teleservices solutions to clients in the
telecommunications, insurance, financial services, pharmaceuticals, and
healthcare, consumer products and high technology industries. CRW formed TLSP in
April 1996 to acquire several teleservices businesses in connection with an
initial public offering of TLSP's common stock. CRW accounts for its investment
in TLSP under the equity method of accounting. In 1996, CRW recorded a $32.1
million increase, net of deferred income taxes, to its investment in TLSP to
reflect the increase in TLSP's equity due to its initial public offering of its
common stock and other issuances of its common stock in connection with the
acquisitions of certain businesses. In 1997, CRW wrote-down its investment in
TLSP by $23.3 million, net of deferred income taxes based on TLSP's net loss of
$160.4 million in 1997. TLSP's net loss included a goodwill write-off of $139.1
million.

In February, 1997, CRW sold the assets of its Collection Division (see Note 2).
Accordingly, the accompanying financial statements have been restated to present
the Collection Division as a discontinued operation. The continuing operations
consist of the Company's Casino Money Centers, Inc. subsidiary and CRW's
corporate management costs.

2. Sale of Collection Division

On February 2, 1997, CRW sold the assets of its Collection Division to NCO
Group, Inc. ("NCOG") for consideration appraised at $12,800,000, consisting of
$3,750,000 in cash, 517,767 shares of NCOG common stock, and a warrant to
purchase 375,000 shares of NCOG stock at $18.42 per share. CRW recorded an
after-tax gain of $1,383,000 on the sale of the Collection Division. The gain
will not result in the payment of any Federal income taxes as the Company has
sufficient net operating loss carryforwards to offset taxes due on the gain. The
gain on the sale of the Collection Division was recorded as follows (in
thousands):

Fair Market Value of Consideration Paid by NCOG $12,800
Net Assets Sold (7,942)
Retention, Severance Pay and Non-compete Payments (1,339)
Estimated Purchase Price Adjustment (259)
Professional Fees and Accrued Expenses (881)
------
Gain on sale before income taxes 2,379
Utilization of Net Operating Loss Carryforward (996)
------
Gain on Sale of Collection Division $1,383
======

The appraisal of the consideration paid by NCOG indicated that the
fair value of the 517,767 shares of NCO Group, Inc. common stock received by CRW
on February 2, 1997 was $8,300,000, or $16.03 per share, and that the fair value
of the warrant to purchase 375,000 shares of NCO Group, Inc. common stock at
$18.42 per share was $750,000.

The Company accounts for its investment in NCOG in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). At December 31, 1997,
the investment in NCOG is classified as available-for-sale and reported at
market value; therefore, an unrealized holding gain or loss is presented as a
separate component of stockholders' equity. As of December 31, 1997, the Company
recorded a $1,263,000 unrealized gain, net of tax, on its investment in NCOG.

In July 1997, the Company sold its 517,767 shares of NCO Group, Inc.
common stock for $9,624,000 resulting in a gain of $1,324,000. In February 1998,
the Company sold its warrant to purchase 375,000 shares of NCO Group, Inc.
common stock for $2,663,000 resulting in a gain of $1,900,000. The gain on the
sale of the warrant will be recorded in the results of operations for the
quarter ended March 31, 1998.

F-7

<PAGE>

CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1997

3. Merger Agreement and Distribution of Certain Businesses:

On November 1, 1994, CCS entered into a merger agreement (the "Merger
Agreement") with Hospitality Franchise Systems, Inc. ("HFS") providing for,
among other things, the merger of CCS into HFS ("the Merger"). The merger closed
on May 11, 1995. Immediately prior to the Merger, each outstanding share of 7%
Convertible Preferred Stock of CCS was converted to one share of CCS Common
Stock and CCS contributed all of the assets and liabilities of its collection
business and its stock in all of its subsidiaries other than CCI to a new
subsidiary, CRW Financial, Inc. and distributed the stock of CRW to CCS
stockholders in a transaction intended to be tax-free for federal income tax
purposes to CCS, CRW and the stockholders of CCS. Each outstanding share of CCS
Common Stock was then exchanged for .588 shares of HFS. In connection with the
Merger and the Distribution, each CCS Stock Option outstanding was cancelled in
exchange for .130 shares of HFS stock and three shares of CRW Common Stock for
every five shares of CCS Common Stock subject to such CCS Stock Option. CRW has
also agreed to indemnify HFS and CCS with respect to certain CCS losses,
damages, claims and liabilities arising prior to the Merger and the
Distribution. In connection with the merger, a gain was recorded as follows (in
thousands):

Consideration paid by HFS in the merger $37,229
Compensation expense for stock options
cancelled in merger (715)
Carrying value of net assets of
discontinued operations (6,968)
Transaction costs (1,070)
Purchase price adjustment (300)
-------
$28,176
=======

4. Summary of Significant Accounting Policies:

Principles of Consolidation

The consolidated financial statements include the accounts of CRW and its wholly
owned subsidiary. All significant intercompany accounts and transactions have
been eliminated.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

F-8

<PAGE>

CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1997

Property and Equipment

Property and equipment are stated at cost. CRW provides for depreciation on a
straight-line basis over estimated useful lives of three to five years.
Leasehold improvements are amortized over the lease term. Property and equipment
consist of the following (in thousands):

DECEMBER 31,
------------------
1996 1997
----- -----

Office equipment $ 154 $ 224
Furniture and fixtures 16 28
Leasehold improvements 12 70
----- -----
182 322
Less-Accumulated depreciation
and amortization (39) (82)
----- -----
$ 143 $ 240
===== =====

Depreciation expense for the year ended December 31, 1996 and 1997 was $33,000
and $43,000, respectively.

Intangible Assets
DECEMBER 31,
-------------------------------
LIFE 1996 1997
---- ---- ----
(In Thousands)
Goodwill, net of accumulated
amortization of $70 and $100
in 1996 and 1997,
respectively 15 years $328 $352

Deferred financing costs, net of
accumulated amortization of
$223 and $370 in 1996 and 1997,
respectively 3 years 147 --
---- ----

$475 $352
==== ====

Amortization expense for the year ended December 31, 1996 and 1997 was $129,000
and $177,000, respectively.

The Company determines impairments to goodwill and other intangibles based upon
management's estimates of undiscounted future cash flows over the remaining
useful life of the intangible asset. If the amount of such estimated
undiscounted future cash flows is less than the net book value of the related
intangible asset, the intangible asset is written down to the amount of the
estimated discounted cash flows. No such write-downs of intangible assets were
made in 1995, 1996 or 1997.

Income Taxes

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under
SFAS No. 109, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and income tax basis of assets and
liabilities measured using enacted income tax rates and laws that are expected
to be in effect when the differences reverse.

F-9

<PAGE>

CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1997

Statement of Cash Flows

For the years ended December 31, 1995, 1996 and 1997 the Company paid interest
expense of $692,000, $791,000 and $488,000, respectively. The Company did not
pay any income taxes for the years ended December 31, 1995, 1996 and 1997.

Stock Split

On October 3, 1996, the Company declared a three-for-one stock split payable on
October 24, 1996 to all holders of record on October 14, 1996. All amounts and
per share amounts in the accompanying financial statements have been
retroactively restated to reflect this stock split.

Basic and Diluted Net Income (Loss) Per Common Share

The Company has adopted SFAS No. 128, "Earnings per Share". SFAS No. 128
requires a dual presentation of "Basic" and "Diluted" EPS on the face of the
income statement. Basic EPS is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding for the period.
Diluted EPS includes the effect, if any, from the potential exercise or
conversion of securities, such as stock options, which would result in the
issuance of shares of common stock. The weighted average number of shares of
common stock outstanding in 1995, 1996, and 1997 for purposes of computing basic
EPS was 3,526,694, 3,793,846 and 6,099,118. The number of shares of common stock
in 1995, 1996 and 1997 for purposes of computing diluted EPS was 4,780,485,
3,793,846 and 6,099,118. A reconciliation between basic and diluted EPS for 1995
is as follows:

Shares
---------
Shares used in Basic EPS 3,526,794

Impact of Options
and Warrants 1,253,691
---------
Shares used in Diluted EPS 4,780,485
=========

New Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income." This statement, which establishes
standards for reporting and disclosure of comprehensive income, is effective for
interim and annual periods beginning after December 15, 1997. Reclassification
of financial information for earlier periods presented for comparative purposes
is required under SFAS No. 130. As this statement requires additional
disclosures in the Company's consolidated financial statements, its adoption
will not have any impact on the Company's financial position or consolidated
results of operations. The Company will adopt SFAS No. 130 in 1998.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement, which establishes standards
for reporting of information about operating segments and requires the reporting
of selected information about operating segments in interim financial
statements, is effective for fiscal years beginning after December 15, 1997.
Adoption of the statement will have no effect on the Company's financial
position or consolidated results of operations. The Company will adopt SFAS No.
131 in 1998.

5. Investment in TLSP:

On April 29, 1996 CRW formed a wholly owned subsidiary, TeleSpectrum Worldwide
Inc. ("TLSP"). TLSP entered into asset purchase agreements to acquire six
teleservices business contingent upon an initial public offering of its common
stock. CRW made a $2,100,000 capital contribution to TLSP on May 23, 1996 (Note
7). On May 23, 1996, in connection with the acquisitions and initial public
offering, CRW issued warrants to its CEO, CFO, Director of Acquisitions and a
consultant to purchase an aggregate of 839,108 shares of TLSP stock from CRW at
$1.50 per share. The Company obtained an appraisal which indicated that the
warrants had a fair value of $0.75 per warrant on May 23, 1996. Accordingly, the
Company recorded a special non-cash compensation charge of $629,000 on May 23,
1996.

F-10

<PAGE>

CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1997

In September 1996, certain subordinated lenders described in Note 7 exercised
warrants to purchase 784,997 shares of TLSP common stock from CRW at $1.50 per
share. As a result, the Company received cash proceeds of $1,177,000 and
recorded a gain on the sale of $1,136,000. In February 1997, certain
subordinated lenders exercised warrants to purchase 809,155 shares of TLSP
common stock from the Company pursuant to the cashless exercise provisions of
the warrants whereby the warrants were cancelled in exchange for 732,583 shares
of TLSP stock. After these exercises, CRW owned 6,992,557 shares of TLSP common
stock. If all of the remaining warrants to purchase TLSP stock are exercised,
CRW will receive approximately $1,131,000 of consideration and would then own
6,238,413 shares of TLSP.

As of December 31, 1997, CRW has an investment in TLSP that is accounted for on
the equity method. The net investment balance at December 31, 1997 is
$15,266,000. For the year ended December 31, 1997, CRW recorded a $39,389,000
loss on its investment in TLSP, under the equity method, which represented CRW's
portion of TLSP's 1997 net loss. This loss was partially offset by a $16,103,000
reduction in CRW's deferred tax liabilities. TLSP reported a net loss of
$160,475,000 for the year ended December 31, 1997, primarily due to a goodwill
impairment charge of $139,100,000. At December 31, 1997, TLSP changed it method
of measuring goodwill impairment from an undiscounted cash flow approach to a
discounted cash flow approach because TLSP believes the measurement of the value
of goodwill through a discounted cash flow approach is preferable in that such
method most closely approximates the fair value of goodwill.

The condensed results of operations for the year ended December 31, 1997 and
financial position as of December 31, 1997 of TLSP, is as follows (in
thousands):

Condensed Statement of Operations Information:
Revenue $178,922
Operating Loss (164,038)
Net Loss (160,475)

Condensed Balance Sheet Information:
Current Assets $ 45,124
Non-Current Assets 98,118
Current Liabilities 58,329
Non-Current Liabilities 6,015
Stockholders' Equity 78,898

6. Acquisitions:

In August 1995, CMC purchased the assets of All Check Cashing, Inc. for $25,000
in cash and a $50,000 promissory note. The note bears interest at 9% and is due
in twenty-nine monthly installments of $1,925. The acquisition was accounted for
using the purchase method of accounting. The excess of the consideration paid
for the acquisition over the fair market value of the assets purchased and
liabilities assumed was approximately $75,000 and was recorded as goodwill,
which is being amortized over 15 years.

In February 1997, CMC purchased the assets of Twain Check Cashing, Inc. for
$54,000. The acquisition was accounted for using the purchase method of
accounting. The excess of the consideration paid for the acquisition over the
fair market value of the assets purchased and liabilities assumed was $54,000
and was recorded as goodwill, which is being amortized over 15 years.

7. Debt:
December 31,
-------------------------
1996 1997
------ -----
(In Thousands)

Revolving line of credit with bank $8,500 $ --
Convertible subordinated note to stockholder 664 126
Note payable to All Check Cashing (see Note 6) 21 --
Notes payable to stockholders -- 672
------ -----
9,185 798
Less-Current portion (8,853) (798)
------ -----

$ 332 $ --
====== =====
F-11

<PAGE>

CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1997

In connection with the Merger and the Distribution discussed in Note 1, CRW
assumed certain bank debt of CCS and refinanced it with proceeds from a
$6,000,000 three-year revolving line of credit which bears interest at the
bank's prime rate plus 1 1/2%. Proceeds from the line of credit were used to
repay all of CCS's bank debt and to provide additional working capital. In
connection with the February 2, 1997 sale of CRW's Collection Division, CRW
repaid $2,000,000 of the line of credit. In July 1997, CRW repaid the remaining
$6,500,000. In connection with the line of credit, CRW issued to the bank
warrants to purchase an aggregate of 335,554 shares of its Common Stock at an
average exercise price of $1.95 per share. In 1997, 273,054 of these warrants
were exercised in a cashless exercise whereby the warrants were cancelled in
exchange for 241,041 shares of CRW common stock. As a result, the bank still
holds 62,500 warrants with an exercise price of $6.50 per share.

In November 1995, the Company issued a $1,000,000 convertible subordinated note
to J. Brian O'Neill, the Company's CEO. The note bears interest at 12.5% and
requires 36 monthly payments of $33,454. The remaining principal balance due
under the note as of December 31, 1997 of $126,000 is convertible into
approximately 88,000 shares of CRW Common Stock. In addition, the note contains
a provision which allows Mr. O'Neill to repay to CRW principal payments made by
CRW under the note during the previous 24 months and convert such repayments
into CRW common stock. As of December 31, 1997, Mr. O'Neill had the right to
repay CRW approximately $546,000 and convert such amount into approximately
336,000 shares of CRW common stock. Proceeds from the loan were used for capital
expenditures and to increase working capital. Remaining principal payments total
$126,000 and are due under the note in 1998.

On May 23, 1996, CRW issued $2,100,000 of subordinated notes to certain
directors, shareholders and employees. The subordinated notes were repaid in
September 1996 with proceeds from the bank line. Proceeds from the subordinated
notes were used to capitalize TLSP (see Note 5). In connection with the
subordinated notes, CRW issued warrants ("lender warrants") to the subordinated
lenders and to CRW's bank to purchase 1,433,454 and 74,445 shares of TLSP common
stock, respectively, from CRW for $1.50 per share. The Company obtained an
appraisal which indicated that the lender warrants had a fair value of $0.75 per
warrant on May 23, 1996. Accordingly, the debt was discounted $1,132,000 to
reflect the value of the lender warrants. The repayment of the subordinated debt
in September 1996 resulted in an extraordinary loss of $1,132,000.

In November 1997, a shareholder and former employee issued a $500,000 demand
note to the Company. The note bears interest at 12% and was repaid in March
1998. Proceeds were used to fund temporary working capital requirements prior to
the sale of the NCO Group, Inc. warrant (Note 2).

In December 1997, a shareholder issued a $172,000 demand note to the Company.
The note is non-interest bearing and was repaid in March 1998. Proceeds were
used to fund temporary working capital requirements prior to the sale of the NGO
Group, Inc. warrant (Note 2).

8. Income Taxes:

The net income tax provision (benefit) consists of the following:

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---- ------- --------
(In Thousands)
Income taxes (benefit) from:
Continuing operations $ -- $ (855) $(16,803)
Discontinued operation 236 (754) 964
---- ------- ---------
Net income taxes (benefit) $236 $(1,609) $(15,839)
==== ======= ========

The net income tax benefit in 1996 and 1997 has been allocated to continuing
operations and the discontinued operation by applying CRW's effective income tax
rate to loss from continuing operations and income from the discontinued
operation. The net income tax benefits relate to operating losses incurred
during the periods. The tax benefits result from the reduction of the deferred
tax liabilities. No deferred state tax benefit has been recorded.

F-12

<PAGE>

CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1997

The statutory federal income tax rate is different from the effective income tax
rate as indicated below:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
---- ---- ----

<S> <C> <C> <C>
Statutory federal income tax rate (benefit) (34.0)% (34.0)% (34.0)%
Non-deductible expenses -- 17.3 --
Operating losses not tax benefited 34.0 -- --
Reduction of deferred tax asset
valuation allowance -- (17.7) (5.6)
----- ----- -----
-- % (34.4)% (39.6)%
===== ===== =====
</TABLE>

Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and income tax bases of assets and
liabilities given the provisions of tax laws. The net deferred tax asset related
to continuing operations is comprised of the following:

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997
-------- --------
(In Thousands)
<S> <C> <C>
Non-current deferred taxes related to continuing operations:
Gross assets $ 2,586 $ 2,324
Gross liabilities (21,898) (5,795)
-------- --------
Net deferred taxes related to
continuing operations $(19,312) $ (3,471)
======== ========
</TABLE>

The Company did not have a valuation allowance against deferred tax assets at
December 31, 1997, as it believes it is more likely than not that the deferred
tax assets will be realized.

The tax effect of significant temporary differences representing deferred tax
assets and liabilities related to continuing operations are as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
(In Thousands)
1996 1997
-------- --------
<S> <C> <C>
Depreciation $ 17 $ --
Net Operating loss carryforwards 2,333 2,324
Investment in TLSP (21,898) (5,795)
Accruals and reserves 236 --
-------- --------
Net deferred tax asset (liability) $(19,312) $ (3,471)
======== ========
</TABLE>

F-13

<PAGE>

CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1997

CRW has a June 30 fiscal year-end. As of June 30, 1997, CRW had a net operating
loss carryforward of approximately $7,000,000. As of December 31, 1997, CRW has
an additional loss carryforward of approximately $1,724,000 which will be
included in the Company's June 30, 1998 tax return.

9. Stockholders' Equity:

On February 29, 1996, CRW sold $2.5 million of its Series A Convertible
Preferred Stock (the "Preferred Stock") to an investor group consisting of
several investment funds and certain individuals. In addition, the investor
group received warrants to purchase 451,812 shares of CRW Common Stock at an
exercise price of $1.94 per share. In December 1996 the Preferred Stock was
converted into 1,290,879 shares of Common Stock. In January 1997, the warrants
were exercised pursuant to a cashless exercise whereby the warrants were
exchanged for 354,586 shares of CRW common stock. In connection with the sale of
the Preferred Stock, the Company's Chief Executive Officer, J. Brian O'Neill,
entered into a put agreement which provided the investor group with the right to
require Mr. O'Neill to purchase their Preferred Stock at a price of $3.87 per
share on March 1, 1999. In connection with the put agreement, the Company
granted Mr. O'Neill a warrant to purchase 300,000 shares of CRW common stock at
an exercise price of $1.94 per share. The warrant expires on August 31, 1999.

10. Commitments and Contingencies:

CRW has noncancelable related-party leases discussed in Note 11, for its office
facilities, automobiles and certain office equipment. Rent expense under leases
related to continuing operations was $420,000 in 1995, $378,000 in 1996 and
$172,000 in 1997. The future minimum lease payments under leases related to
continuing operations at December 31, 1997, net of sublease commitments is zero.

CRW is a party to several lawsuits which were incidental to the ordinary course
of business of its Collection Division. NCOG did not assume any potential
liability under such lawsuits in connection with NCOG's acquisition of the
Collection Division's net assets in February 1997. The Company intends to
vigorously defend all such actions and, in the current opinion of management,
the ultimate resolution of such actions will not have a material adverse effect
on the Company's business, financial condition or results of operations. The
actual results of these claims, however, could be materially different.

One of such lawsuits was filed in August 1996 by Eugene Piscitelli, an employee
of the Company, in the United States District Court for the Eastern District of
Pennsylvania. Mr. Piscitelli made a claim against the Company for an unspecified
amount of money damages in excess of jurisdictional limits based on claims of
alleged fraud in the inducement by the Company and alleged breach by the Company
of his employment agreement with respect to compensation matters. In March 1998,
the Company entered into a settlement agreement and release agreement with Mr.
Piscitelli, whereby Mr. Piscitelli's employment with CRW was terminated and the
lawsuit was dismissed with prejudice in exchange for a cash payment by CRW of
$800,000. The Company has recorded the expense and liability for this settlement
in the accompanying 1997 Consolidated Financial Statements.

11. Related Party Transactions:

F-14

<PAGE>

CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1997

12. Stock Option Plan:

The Company established the CRW 1995 Stock Option Plan (the "Plan") for its
employees, directors and certain other individuals. The Company may grant either
non-qualified or incentive stock options under the Plan. An aggregate of
3,000,000 shares of Common Stock have been reserved for the Plan. A committee of
the Board of Directors administers the Plan and determines the terms of the
option grants. Options vest as determined by the Board and expire no later than
10 years from the date of grant. Each option entitles the holder to purchase one
share of Common Stock at the indicated exercise price. As of December 31, 1997,
options to acquire 1,258,117 shares were outstanding at exercise prices ranging
from $0.97 to $10.00 per share. All of the options outstanding are exercisable.

The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for the CRW 1995 Stock
Option Plan. All options granted under the plan have been with exercise prices
equal to the fair market value of the stock on the date of grant. Accordingly,
no compensation expense has been recognized for the grants under the Plan. Had
compensation cost for the Plan been determined consistent with the methodology
prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's income (loss) and income (loss) per share would have been
approximately ($4,560,000) and $27,722,000, or ($0.93) per share and $8.59 per
share, for 1996 and 1995, respectively. The Company did not grant any options
during 1997. As such, SFAS No. 123 does not impact the 1997 loss or loss per
share because all options granted before 1997 were fully vested. The pro forma
effect for 1996 and 1995 is not representative of the pro forma effect on
earnings in future years since it does not take into consideration the pro forma
compensation expense related to grants made prior to 1995. The fair value of
each option granted during 1996 and 1995 is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: dividend
yield of 0%, expected volatility of 82%, risk-free interest rate of 5.23% in
1996 and 6.39% in 1995, and an expected life of 3 years. The weighted average
fair value at the date of grant for options granted during 1996 and 1995 was
$1.54 and $0.97 per share, respectively. The weighted average remaining
contractual life of the outstanding stock options at December 31, 1997 was six
years.

<TABLE>
<CAPTION>
The following table summarizes the aggregate option activity under the plan:

Weighted
Average
Exercise Price
Activity Exercise Price Per Share
-------- -------------- --------------
<S> <C> <C> <C>
Balance outstanding,
January 1, 1995 -- -- --
Granted 825,000 $0.97 - $ 1.27 $0.99
Exercised -- -- --
Canceled -- -- --
--------- -------------- -----
Balance outstanding,
December 31, 1995 825,000 $0.97 - $ 1.27 $0.99

Granted 1,140,000 $1.94 - $10.00 $3.37
Exercised (482,475) $0.97 - $ 7.92 $1.89
Canceled -- -- --
---------- -------------- ----
Balance outstanding,
December 31, 1996 1,482,525 $0.97 - $10.00 $2.50

Granted -- -- --
Exercised (224,408) $0.97 - $ 3.75 $1.88
Canceled -- -- --
---------- -------------- -----

Balance outstanding,
December 31, 1997 $1,258,117 $0.97 - $10.00 $2.55
========== ============== =====
</TABLE>

F-15

<PAGE>

CRW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1997

Options to purchase 1,258,117 and 1,482,525 shares of Common Stock were
exercisable at an average exercise price of $2.55 and $2.50 at December 31, 1997
and 1996, respectively. At December 31, 1997, 1,035,000 shares were available
for future grants under the Plan.

During 1996 and 1997, the Company received proceeds of $1,060,000 and $714,000,
respectively, from the exercise of stock options.

13. Discontinued Operations:

The following table summarizes the operating results of the collection business
and CCI (in thousands):

FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
-------- -------- --------

Net revenues $ 32,073 $ 27,432 $ 2,006
Operating expenses 30,738 29,329 2,101
Other expenses -- 9 --
-------- -------- --------

Income (loss) before
income taxes 1,335 (1,906) (95)
Income taxes (benefit) 236 (754) (32)
-------- -------- --------
Income (loss) from discontinued
operation $ 1,099 ($ 1,152) $ (63)
======== ======== ========

The following table summarizes the net assets of the collection business as of
December 31, 1996 (in thousands):

Current assets $ 6,857
Property and equipment 2,584
Intangible assets, net 4,391
Other assets 475
-------

Total assets 14,307
Current liabilities (5,993)
Long-term debt and liabilities (79)
------
Net assets $8,235
======

F-16

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

CRW FINANCIAL, INC.

By: /s/ J. Brian O'Neill
--------------------------------
J. Brian O'Neill
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ J. Brian O'Neill Chief Executive Officer and Director March 31, 1998
- ----------------------------- (Principal Executive Officer)
J. Brian O'Neill

/s/ Jonathan P. Robinson Chief Financial Officer and Principal March 31, 1998
- ----------------------------- Financial and Accounting Officer
Jonathan P. Robinson

March 31, 1998
- ----------------------------- Director
Robert N. Verratti

/s/ Bernard Morgan Director March 31, 1998
- -----------------------------
Bernard Morgan

/s/ Mark J. DeNino Director March 31, 1998
- -----------------------------
Mark J. DeNino

/s/ Eustace W. Mita Director March 31, 1998
- -----------------------------
Eustace W. Mita
</TABLE>

<PAGE>

EXHIBIT INDEX

<TABLE>
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant (1)