-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FOHGSrzFNgqbPhKqDpBDip7IVZLhPPrHKtt//Kw4Ug6ht5ZV3Z9HR1MWA/ZDm6t3 Jl4u4s/ZQgAgLUU7KtjhVg== 0000950115-99-000444.txt : 19990331 0000950115-99-000444.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950115-99-000444 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRW FINANCIAL INC /DE CENTRAL INDEX KEY: 0000943809 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-CONSUMER CREDIT REPORTING, COLLECTION AGENCIES [7320] IRS NUMBER: 232691986 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26014 FILM NUMBER: 99578048 BUSINESS ADDRESS: STREET 1: 443 S GULPH RD CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109625100 MAIL ADDRESS: STREET 1: 443 S GULPH RD CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to _____________ Commission File Number 0-26014 CRW FINANCIAL, INC. ------------------- (Exact name of registrant as specified in its charter) Delaware 23-2691986 --------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 Four Falls Corporate Center Suite 415 West Conshohocken, PA 19428 --------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (610) 878-7429 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered --------------------------------------------------------- NONE N/A Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO[ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant is approximately $18,799,000. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the NASDAQ Small Cap Market on March 22, 1999. For purposes of making this calculation only, the Registrant has excluded shares held by all directors, executive officers and beneficial owners of more than ten percent of its common stock. The number of shares of the Registrant's common stock outstanding as of February 19, 1999 was 6,917,521 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive proxy statement for its 1999 Annual Meeting of Stockholders are incorporated by reference into Part III. TABLE OF CONTENTS PART I Item 1. Business 2 Item 2. Properties 5 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 7 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 8. Financial Statements and Supplementary Data 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 PART III Item 10. Directors and Executive Officers of the Registrant 14 Item 11. Executive Compensation 14 Item 12. Security Ownership of Certain Beneficial Owners and Management 14 Item 13. Certain Relationships and Related Transactions 14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 15 In addition to historical information, this Annual Report contains forward-looking statements relating to matters including our anticipated financial performance and business prospects. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties that may affect the operation, performance and development and results of our business include, but are not limited to, those matters discussed herein in the sections entitled "Item 1 - Business", "Item 3 Legal Proceedings" and "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations." The words "believe," "expect," "anticipate," "project" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Unless the context indicates otherwise, the terms "we", "our" and "CRW" refer to CRW Financial, Inc. PART I ITEM 1. BUSINESS Background We currently own 6.26 million shares of TeleSpectrum Worldwide Inc., a company that we formed in April 1996. TeleSpectrum is a provider of integrated teleservices and is listed on the NASDAQ National Market System under the symbol "TLSP." Our ownership represents approximately 25% of the outstanding common stock of TeleSpectrum. We were a subsidiary of Casino & Credit Services, Inc. prior to May 1995 when it distributed all of the stock of CRW to its shareholders. Casino & Credit Services was formed in May 1992 and in July 1992, it purchased Receivable Management Services, Inc. and Central Credit, Inc. from TRW Inc. for approximately $11.5 million. Casino & Credit Services was capitalized with approximately $12.1 million of bank and convertible debt and $1 million of equity. In August 1993, Casino & Credit Services completed an initial public offering of its common stock, generating net cash proceeds of approximately $12.7 million and valuing the company at approximately $26 million. Casino & Credit Services used the proceeds from the offering to repay all of its outstanding debt and fund the acquisition of Central Credit of New Jersey, Inc., its only competitor. During the remainder of 1993 and 1994, Casino & Credit Services completed the acquisition of five complimentary collection businesses for an aggregate of approximately $5.5 million in cash and formed Casino Money Centers, Inc. to complement its business. In July 1994, Casino & Credit Services began discussions with Hospitality Franchise Systems, Inc. regarding a sale of Central Credit. In November 1994, Casino & Credit Services and Hospitality Franchise Systems entered into a merger and plan of reorganization whereby Casino & Credit Services would merge with Hospitality Franchise Systems after a distribution of all of the stock of CRW to the stockholders of Casino & Credit Services. Ultimately, CRW owned Casino & Credit Services' collection business and its wholly owned subsidiary Casino Money Centers. In May 1995, the merger and stock distribution were completed resulting in Casino & Credit Services shareholders receiving approximately $37.2 million in Hospitality Franchise Systems common stock and approximately $3.5 million in CRW common stock. CRW's common stock began trading on the NASDAQ Small Cap Market under the symbol "CRWF" on May 11, 1995. In December 1995, our management team began to explore the creation of a telemarketing subsidiary to capitalize on the rapid growth in demand by large corporations for large-scale professional telemarketing services. Our management team concluded that its experience in acquiring and operating call centers for its collection business would provide the foundation to build a CRW subsidiary into a leading teleservices company. In April 1996, we formed TeleSpectrum and in that month signed agreements to acquire four telemarketing businesses, a market research business and a fulfillment business. These acquisitions were contingent upon an initial public offering of TeleSpectrum's common stock. In August 1996, TeleSpectrum completed its initial public offering, generating net proceeds of approximately $162 million and valuing TeleSpectrum at approximately $375 million. The total purchase price for the six businesses acquired was approximately $200 million consisting of approximately $90.9 million in cash, $49 million in TeleSpectrum common stock and warrants, $25.6 million in notes, and $34.5 million in assumed liabilities and transaction expenses. In October 1996, our board of directors approved a plan to divest our collection business and Casino Money Centers. On February 2, 1997, we completed the sale of our collection business to NCO Group, Inc. for $3.75 million in cash, 517,767 shares of NCO Group common stock and a warrant to purchase 375,000 shares of NCO Group common stock for $18.42 per share. We sold our 517,767 shares of NCO Group common stock in July 1997 for approximately $9.6 million. We used the proceeds from this sale to retire all of the our outstanding bank debt and for additional working capital. We sold our warrant to purchase 375,000 shares of NCO Group in February 1998 for approximately $2.66 million. On October 30, 1998, we sold Casino Money Centers to Innovative Financial Systems, Inc. for $2.25 million in cash. We have presented the economic impact of the disposition of our collection business, Casino Money Centers and Central Credit as discontinued operations in the accompanying financial statements. On September 3, 1998, we signed a definitive agreement to merge with TeleSpectrum. In that merger, each share of CRW common stock will be exchanged for 0.709 share of TeleSpectrum common stock. Immediately prior to the merger, we expect to pay a special cash distribution to our shareholders and the holders of certain warrants issued by us with our cash on hand. We have filed a preliminary merger proxy with the Securities and Exchange Commission and currently expect the merger to close in the second quarter of 1999. Employees As of February 25, 1999, we had two employees: J. Brian O'Neill, Chief Executive Officer, and Jonathan P. Robinson, Chief Financial Officer. ITEM 2. PROPERTIES Since April 1998, we have shared office space on a month to month arrangement with the O'Neill Group, LLC, a company controlled by J. Brian O'Neill. We pay the O'Neill Group $3,000 a month for rent and other office expenses. In 1998, we paid the O'Neill Group $27,000 for rent and office expenses. In June 1998, Casino Money Centers entered into a lease for office space from Swedesford Road L.P., a partnership controlled by J. Brian O'Neill. Casino Money Centers paid approximately $30,000 in rent for the office space in 1998. From December 1996 to August 1997, we leased an aggregate of 13,000 square feet in King of Prussia, Pennsylvania from 210 Mall Boulevard Associates, a partnership which is controlled by J. Brian O'Neill. From February 1997 to July 1997, NCO Group, Inc. subleased the facility from CRW. In August 1997, the sublease expired and the lease between CRW and 210 Mall Boulevard Associates was terminated. In 1996 and 1997, respectively, we paid $11,739 and $33,000 in rent to 210 Mall Boulevard Associates. The aggregate minimum rent due by us on all of the above leases through the end of their terms, net of commitments for payments under subleases, is zero. We believe our existing facility is sufficient to support our anticipated needs in 1999. ITEM 3. LEGAL PROCEEDINGS We have no litigation that we believe will involve an outcome that will have a material adverse effect on our financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders in the fourth quarter of 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is quoted on the NASDAQ Small Cap Market under the symbol "CRWF". The following table sets forth, for the periods indicated, the range of high and low bid prices as reported on the NASDAQ Small Cap Market. High Low ---- --- Fiscal 1997 First Quarter 10 1/4 6 1/4 Second Quarter 9 1/8 3 3/4 Third Quarter 6 1/8 2 7/8 Fourth Quarter 5 3/8 2 9/16 Fiscal 1998 First Quarter 5 9/16 2 1/2 Second Quarter 7 3/4 3 7/8 Third Quarter 6 1/4 2 3/4 Fourth Quarter 6 7/8 4 3/4 As of December 28, 1998 there were 72 holders of record of our common stock. Because a substantial portion of our common stock is held in street name, we believe that we have a significantly larger number of beneficial owners of our common stock. We have never paid a cash dividend on our common stock. However, we intend to pay a special cash dividend immediately prior to the merger with TeleSpectrum in an amount equal to our cash on hand immediately prior to the merger, after satisfying all of our remaining liabilities. ITEM 6. SELECTED FINANCIAL DATA Our historical consolidated financial statements prior to May 1995 have been deemed to be those of Casino & Credit Services, Inc., restated to reflect the classification of the collection business, Casino Money Centers, Inc., and Central Credit, Inc. as discontinued operations and have been derived from the audited financial statements of Casino & Credit Services for the year ended December 31, 1994 and from the audited financial statements of CRW for the subsequent years. The following information should be read in conjunction with and is qualified in its entirety by reference to the historical consolidated financial statements and accompanying notes of CRW included elsewhere in this Form 10-K. See Notes 1, 2, 3 and 12 to CRW's consolidated financial statements.
Year Ended December 31 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Statement of Operations Data: Net revenues $ -- $ -- $ -- $ -- $ -- Operating expenses, excluding non-cash and special charges 2,541 1,036 2,292 3,813 530 Special compensation charge -- -- 1,319 -- -- Depreciation and Amortization -- 22 112 158 9 -------- -------- -------- -------- -------- Operating loss from continuing operations (2,541) (1,058) (3,723) (3,971) (539) Other income -- -- 1,136 1,324 1,694 Equity in earnings(loss) of TeleSpectrum -- -- 774 (39,389) (1,655) Interest (expense) income (263) (655) (825) (421) 17 -------- -------- -------- -------- -------- Loss from continuing operations before income tax benefit (2,804) (1,713) (2,638) (42,457) (483) Income tax benefit (622) -- (855) (16,803) (150) -------- -------- -------- -------- -------- Loss from continuing operations (2,182) (1,713) (1,783) (25,654) (333) Income (loss) from discontinued operations and gains (loss) from disposition of $28,176, $1,383, and ($94) in 1996, 1997, and 1998 respectively, net of tax 387 29,776 (1,002) 1,405 136 -------- -------- -------- -------- -------- Income (loss) before extraordinary item (1,795) 28,063 (2,785) (24,249) (197) Extraordinary loss on extinguishment of debt, net of tax benefit -- -- (1,132) -- -- Net income (loss) (1,795) 28,063 (3,917) (24,249) (197) Preferred dividends (210) -- -- -- -- -------- -------- -------- -------- -------- Net income (loss) applicable to common stockholders $ (2,005) $ 28,063 ($ 3,917) $(24,249) $ (197) ======== ======== ======== ======== ======== BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE(1): Continuing operations $ (0.49) $( 0.47) $ (4.20) $ (0.05) Discontinued operations and gain from merger 8.45 (0.26) 0.23 0.02 Extraordinary item -- (0.30) -- -- -------- -------- -------- -------- $ 7.96 $ (1.03) $( 3.97) $ (0.03) ========= ======== ======== ======== DILUTED NET INCOME (LOSS) PER COMMON SHARE(1): Continuing operations $ (0.36) $ (0.47) $ (4.20) $ (0.05) Discontinued operations 6.23 (0.26) 0.23 0.02 Extraordinary item -- (0.30) -- -- --------- -------- ------- -------- $ 5.87 $ (1.03) $ (3.97) $ (0.03) ========= ======== ======== ========
YEAR ENDED DECEMBER 31, 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (IN THOUSANDS) BALANCE SHEET DATA: Net assets of discontinued operations(2) $16,727 $10,929 $ 9,969 $ 1,738 $ -- Total assets 16,727 11,332 67,945 21,631 18,425 Bank and subordinated debt 5,066 7,005 9,185 798 -- Stockholders' equity 11,345 3,186 34,873 12,601 12,034
(1) Per share information is not presented for 1994 as such information is not meaningful due to the formation of CRW in May 1995. (2) The net assets of discontinued operations represent the assets and liabilities of the collection business sold in February 1997, the merger of the Central Credit business in May 1995 and the sale of Casino Money Centers in October 1998. See Notes 2, 3 and 12 to CRW's historical consolidated financial statements included elsewhere in this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is based upon and should be read in conjunction with the Selected Historical Financial Information and our Consolidated Financial Statements, including the accompanying notes included elsewhere in this Form 10-K. Years Ended December 31, 1998 and 1997 Operating Expenses Our operating expenses decreased $3,432,000 (86%) to $539,000 in 1998 from $3,971,000 in 1997 due to a $1,427,000 decrease in compensation expense and a $1,854,000 decrease in other corporate expenses. The decrease in compensation expense was due to a substantial reduction in corporate employees due to the sale of the collection business in February 1997 and Casino Money Centers in October 1998. The decrease in other corporate expenses was primarily due to approximately $1,300,000 of expense in 1997 related to litigation with a former employee. Other Income Other income was $1,694,000 in 1998 and was comprised of a $1,914,000 gain from the sale of our warrant to purchase NCO Group, Inc. stock in February 1998 partially offset by $220,000 of expenses related to the merger with TeleSpectrum. Other income was $1,324,000 in 1997 and was derived from the sale of our NCO Group common stock. Equity in Loss of TeleSpectrum Equity in loss of TeleSpectrum was $(1,655,000) in 1998 compared to $(39,389,000) in 1997 due to a decrease in TeleSpectrum's net loss from $160,475,000 in 1997 to $6,461,000 in 1998. Our equity in TeleSpectrum's loss was based on our ownership in TeleSpectrum of approximately 25% in both 1997 and 1998. Interest Income (Expense) Interest income was $17,000 in 1998 compared to $(421,000) of interest expense in 1997 due to the repayment of all of our debt in 1998 and interest income on our cash on hand in the fourth quarter of 1998. Income Taxes The income tax benefit of $16,803,000 in 1997 and $150,000 in 1998 represents the future Federal income tax benefit of our operating loss. The tax benefits represent an effective tax rate of approximately 40% in 1997 and 31% in 1998. The 1998 effective tax rate is approximately 9% lower than our effective statutory rate due to approximately $220,000 of non-deductible expenses in 1998 related to our planned merger with TeleSpectrum. Years Ended December 31, 1997 and 1996 Operating Expenses Our operating expenses increased $248,000 to $3,971,000 in 1997 from $3,723,000 in 1996 due to an increase in other operating expenses of $1,620,000, partially offset by a $1,420,000 decrease in compensation expense. The increase in other operating expenses was primarily due to approximately $1,300,000 of expense related to litigation with a former employee. Interest Expense Interest expense was $421,000 in 1997 compared to $825,000 in 1996 due to lower borrowings in 1997 and the repayment of all bank debt in July 1997. Other Income Other income increased $188,000 to $1,324,000 in 1997 compared to $1,136,000 in 1996 due to the gain on sale of NCO Group common stock of $1,324,000 in 1997 compared to the gain of $1,136,000 from the exercise of warrants to purchase TeleSpectrum common stock in 1996. Equity in Earnings (Loss) of TeleSpectrum Equity in earnings (loss) of TeleSpectrum was $(39,389,000) in 1997 compared to $774,000 in 1996 due to our equity method of accounting for our share of TeleSpectrum's net loss of $160,475,000 in 1997 compared to its net income of $3,650,000 in 1996. TeleSpectrum's net loss of $160,475,000 included a $139,100,000 write-down of goodwill. The write-down of goodwill was made due to a conclusion by TeleSpectrum's management that its goodwill had been permanently impaired by developments in the teleservices industry and TeleSpectrum's operating performance. Our equity in the earnings (loss) of TeleSpectrum was based on its ownership in TeleSpectrum of approximately 25% in both 1997 and 1996. Income Taxes Our income tax benefit was $16,803,000 in 1997 compared to $855,000 in 1996. The income tax benefit in 1997 represents a 40% benefit for State and Federal income taxes on our pre-tax loss representing reduction of its deferred tax liability. The income tax benefit in 1996 represents a 34% benefit for Federal income taxes on our pre-tax loss. Discontinued Operations Our operating results have been restated to reflect the classification of our disposition of the collection business, Casino Money Centers, Inc., and Central Credit, Inc. as discontinued operations. See Note 1 of the notes to the accompanying consolidated financial statements for a description of the basis of presentation. Below is a summary of operating results for the discontinued operations. YEAR ENDED DECEMBER 31, 1998 ---------------------------- Casino Collection Money Business Centers TOTAL ---------- ------- ----- Net revenues $ -- $ 4,936 $ 4,936 Operating expenses -- 4,547 4,547 -- ------ ------- Operating income $ $ 389 $ 389 ===== ======= ======= YEAR ENDED DECEMBER 31, 1997 ---------------------------- Casino Collection Money Business Centers TOTAL ---------- ------- ----- Net revenues $ 2,006 $ 4,989 $ 6,995 Operating expenses 2,101 4,904 7,005 ------- ------- Operating income $ (95) $ 85 $ (10) ======= ======= ======= YEAR ENDED DECEMBER 31, 1996 ---------------------------- Casino Collection Money Business Centers TOTAL ---------- ------- ----- Net revenues $ 27,432 $ 3,412 $ 30,844 Operating expenses 29,329 3,262 32,591 -------- ------- -------- Operating income (loss) $ (1,897) $ 150 $ (1,747) ======== ======= ======== Years Ended December 31, 1998 and 1997 Net revenues decreased $2,059,000 from $6,995,000 in 1997 to $4,936,000 due to our sale of the collection business in February 1997. Casino Money Centers' revenues decreased $53,000 due to CRW's sale of Casino Money Centers in October 1998. Casino Money Centers' operating expenses decreased $357,000 due to severance of $83,000 in 1997 and lower sales and marketing expenses in 1998. Years Ended December 31, 1997 and 1996 Net revenues, operating expenses, operating loss and net loss all decreased substantially in 1997 as the collection business was sold on February 2, 1997 and therefore, the operating results above for 1997 consist of Casino Money Centers and the collection business results for the period from January 1, 1997 to February 2, 1997. Inflation Inflation has not had a significant impact on our operations to date. Year 2000 We believe that we do not have any Year 2000 exposure since our principal assets now consist of cash and our passive ownership of shares of TeleSpectrum. Liquidity and Capital Resources During the year ended December 31, 1998, net cash used in operating activities decreased $2,632,000 to $2,706,000 in 1998 from 5,338,000 in 1997. The decrease in net cash used in operating activities was primarily due to the $3,432,000 decrease in our operating loss in 1998. Net cash provided by investing activities in 1998 was $4,614,000 and consisted of $2,664,000 of proceeds from the sale of our NCO Group warrant and $1,950,000 of proceeds from the sale of Casino Money Centers. Net cash provided by investing activities in 1997 was $13,109,000 and consisted primarily of $3,750,000 of proceeds from the sale of the collection business, $9,624,000 of proceeds from the sale of the NCO Group common stock, partially offset by $250,000 of cash used in investing activities for discontinued operations. Net cash provided by financing activities in 1998 was $95,000 compared to $7,656,000 of net cash used in financing activities in 1997. Net cash provided by financing activities in 1998 was generated from $797,000 of proceeds from the exercise of stock options, partially offset by the repayment of $702,000 of debt. Net cash used in financing activities in 1997 consisted of $672,000 of proceeds from loans from stockholders, $9,042,000 of payments on long-term debt, and $714,000 of proceeds from the exercise of stock options. We believe that our cash on hand is adequate to meet our needs for the foreseeable future. Net Operating Loss Carryforward We have a June 30 fiscal year end. As of June 30, 1998, we had available approximately $9,000,000 of net operating loss carryforwards. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See our Consolidated Financial Statements and notes thereto beginning on Page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 will be contained in our definitive proxy statement for the 1999 annual meeting of stockholders, or in an amendment to this Form 10-K, to be filed with the Securities and Exchange Commission by April 30, 1999, and is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 will be contained in our definitive proxy statement for the 1999 annual meeting of stockholders, or in an amendment to this Form 10-K, to be filed with the Securities and Exchange Commission by April 30, 1999, and is hereby incorporated by reference ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 will be contained in our definitive proxy statement for the 1999 annual meeting of stockholders, or in an amendment to this Form 10-K, to be filed with the Securities and Exchange Commission by April 30, 1999, and is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 will be contained in our definitive proxy statement for the 1999 annual meeting of stockholders, or in an amendment to this Form 10-K, to be filed with the Securities and Exchange Commission by April 30, 1999, and is hereby incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Attached hereto and filed as part of this report are the financial statement schedules and exhibits listed below: 1. FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants Consolidated Balance Sheets - December 31, 1997 and 1998 Consolidated Statements of Operations - For the Years ended December 31, 1996, 1997 and 1998 Consolidated Statements of Stockholders' Equity - - For the Years ended December 31, 1996, 1997 and 1998 Consolidated Statements of Cash Flows - For the Years ended December 31, 1996, 1997 and 1998 Notes to Consolidated Financial Statements 2. EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE 3.1 Restated Certificate of Incorporation of the Registrant (1) 3.2 Amendment to Restated Certificate of Incorporation of the Registrant (2) 3.3 Amended Bylaws of the Registrant (3) 4.1 Term Loan Note and Addendum dated November 1, 1995 executed by the Registrant in favor of J. Brian O'Neill and Miriam P. O'Neill (2) 10.1 Agreement of Lease dated as of July, 1994, between CRW Building Limited Partnership and Casino and Credit Services, Inc. (1) 10.2 Sublease Agreement dated May 10, 1995 between Casino & Credit Services, Inc. and the Registrant (3) 10.3 Sublease Agreement between TeleSpectrum Worldwide Inc. and the Registrant (2) 10.4 Lease Agreement dated July 1, 1996 between the Registrant and Lee Park Investors, L.P. (2) 10.5 Lease Agreement dated December 5, 1996 between the Registrant and 210 Mall Boulevard Associates (2) 10.6 Employment Agreement dated May 11, 1995 between J. Brian O'Neill and the Registrant (3) 10.7 Employment Agreement dated May 11, 1995 between Jonathan P. Robinson and the Registrant (3) 10.8 Amended and Restated 1995 Stock Option Plan of the Registrant (4) 10.9 Asset Acquisition Agreement dated February 2, 1997 among the Registrant, Kaplan & Kaplan, Inc., NCO Group, Inc., CRWF Acquisition, Inc. and K & K Acquisition, Inc. (5) 10.10 Merger Agreement between CRW Financial, Inc. and TeleSpectrum Worldwide Inc. (6) 23 Consent of Arthur Andersen LLP (6) 27 Financial Data Schedule (Electronic Filing Only) (1) Filed as an Exhibit to the Form 10-K filed with the Securities and Exchange Commission on March 29, 1996 and incorporated herein by reference. (2) Filed as an Exhibit to the Form 10-K filed with the Securities and Exchange Commission on April 6, 1997 and incorporated herein by reference. (3) Filed as an Exhibit to the Registration Statement on Form S-1 (No. 33-62700) and incorporated herein by reference. (4) Filed as an Exhibit to CRW's definitive proxy statement for its 1996 Annual Meeting of Stockholders and incorporated herein by reference. (5) Filed as an Exhibit to CRW's Form 8-K dated February 2, 1997 and incorporated herein by reference. (6) Filed herewith. (b) CRW did not file a Form 8-K with the Securities and Exchange Commission during the fourth quarter of 1998. \
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants F-2 Consolidated Balance Sheets -- December 31, 1997 and 1998 F-3 Consolidated Statements of Operations -- For the Years ended December 31, 1996, 1997 and 1998 F-4 Consolidated Statements of Stockholders' Equity-- For the Years ended December 31, 1996, 1997 and 1998 F-5 Consolidated Statements of Cash Flows-- For the Years ended December 31, 1996, 1997 and 1998 F-6 Notes to Consolidated Financial Statements F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CRW Financial, Inc.: We have audited the accompanying consolidated balance sheets of CRW Financial, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CRW Financial, Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Philadelphia, Pa., February 10, 1999 F-2 CRW FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------- 1997 1998 ---- ---- ASSET - ----- CURRENT ASSETS: (In Thousands, Except Share Amounts) Cash ......................................................... $ 115 $ 2,118 Other current assets ........................................ 83 339 Investment in NCO Group, Inc. ................................ 2,013 -- Net assets of discontinued operations ........................ 1,738 -- ------- ------- Total current assets .............................. 3,949 2,457 PROPERTY AND EQUIPMENT, net .................................. 44 40 INVESTMENT IN TELESPECTRUM WORLDWIDE INC...................... 15,266 13,611 DEFERRED INCOME TAX ASSET .................................... 2,324 2,317 OTHER ASSETS ................................................. 48 -- ................................................. $21,631 $18,425 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Current portion of long term debt ....................... $ 798 $--- Accounts payable ........................................ 159 63 Accrued expenses ........................................ 2,278 533 -------- -------- Total current liabilities ......................... 3,235 596 -------- -------- DEFERRED INCOME TAXES ........................................ 5,795 5,795 -------- -------- STOCKHOLDERS' EQUITY: Preferred Stock, no par value, 500,000 shares authorized, no shares issued and outstanding ...................... -- -- Common Stock $.01 par value, 20,000,000 shares authorized 6,435,486 and 6,917,521 shares issued and outstanding, respectively ......................... 64 69 Additional paid-in capital .............................. 40,390 41,278 Unrealized gain on investment in NCO Group,Inc .......... 1,263 -- Accumulated deficit ..................................... (29,116) (29,313) -------- -------- Total stockholders' equity ................................. 12,601 12,034 -------- -------- $ 21,631 $ 18,425 ======== ======== The accompanying notes are an integral part of these statements F-3
CRW FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------- 1996 1997 1998 ---- ---- ---- (In Thousands -Except Share Amounts) NET REVENUES $ -- $ -- $ -- -------- -------- -------- OPERATING EXPENSES: Compensation 1,768 1,667 240 Special compensation charge 1,319 -- -- Other operating costs 524 2,144 290 Depreciation and amortization 112 160 9 -------- -------- -------- Operating loss (3,723) (3,971) (539) INTEREST (EXPENSE) INCOME (825) (421) 17 EQUITY IN EARNINGS (LOSS) OF TELESPECTRUM WORLDWIDE INC 774 (39,389) (1,655) OTHER INCOME (Notes 2 and 5) 1,136 1,324 1,694 -------- -------- -------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT (2,638) (42,457) (483) INCOME TAX BENEFIT (855) (16,803) (150) -------- -------- -------- LOSS FROM CONTINUING OPERATIONS (1,783) (25,654) (333) INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of income taxes (benefit) of $(754), $(32) and $159 (Note 12) (1,002) 22 230 GAIN (LOSS) ON SALE OF DISCONTINUED OPERATIONS, net of income taxes of $996 in 1997 (Note 2 and 3) -- 1,383 (94) -------- -------- -------- LOSS BEFORE EXTRAORDINARY ITEM (2,785) (24,249) (197) EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT (1,132) -- -- -------- -------- -------- NET LOSS $ (3,917) $(24,249) $ (197) ======== ======== ======== BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE: Continuing operations $ (0.47) $ (4.20) $ (0.05) Discontinued operations and gain on merger (0.26) 0.23 0.02 Extraordinary item (0.30) -- -- -------- -------- -------- $ (1.03) $ (3.97) $ (0.03) ======== ======== ========
The accompanying notes are an integral part of these statements. F-4 CRW FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL UNREALIZED TOTAL PREFERRED COMMON PAID-IN ACCUMULATED GAIN STOCKHOLDERS' (In Thousands) STOCK STOCK CAPITAL DEFICIT ON INVESTMENT EQUITY ---------- ------ ------- ----------- ------------- ------ BALANCE, DECEMBER 31, 1995 $ -- $ 34 $ 4,102 $ (950) -- $ 3,186 Sale of Preferred Stock 2,345 -- -- -- -- 2,345 Conversion of Preferred Stock (2,345) 13 2,332 -- -- -- Exercise of Stock Options and Warrants -- 7 1,121 -- -- 1,128 Adjustment to Investment in TeleSpectrum Worldwide Inc. (Note 1) -- -- 32,131 -- -- 32,131 Net Loss -- -- -- (3,917) -- (3,917) ------ -------- -------- -------- -------- -------- BALANCE, DECEMBER 31, 1996 -- 54 39,686 (4,867) -- 34,873 Unrealized gain on investment in NCO Group, Inc. -- -- -- -- 1,263 1,263 Exercise of Stock Options and Convertible Note -- 10 704 -- -- 714 Net Loss -- -- -- -- (24,249) ------ -------- -------- -------- -------- -------- BALANCE, DECEMBER 31, 1997 -- 64 40,390 (29,116) 1,263 12,601 Realized Gain on Investment in NCO Group, Inc. -- -- -- -- (1,263) (1,263) Exercise of Stock Options and Convertible Note -- 5 888 -- -- 893 Net Loss -- -- -- (197) -- (197) ------ -------- -------- -------- -------- -------- BALANCE, DECEMBER 31, 1998 $ $ 69 $ 41,278 $(29,313) $ -- $ 12,034 ====== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these statements. F-5 CRW FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------- 1996 1997 1998 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: (In Thousands) Net Loss $ (3,917) $(24,249) $ (197) Adjustments to reconcile net loss to net cash used in operating activities- Deferred income taxes (1,609) (16,803) (150) Non-cash special compensation charge 629 -- -- (Gain) Loss on sale of collection business and Casino Money Centers -- (1,383) 94 Gain on sale of NCO Group, Inc. investment -- (1,324) (1,914) Discontinued operations--noncash charges and working capital changes 1,010 584 44 Equity in TeleSpectrum Worldwide Inc. (income) loss (774) 39,389 1,655 Extraordinary loss on extinguishment of debt 1,132 -- -- Depreciation and amortization 112 160 9 Changes in operating assets and liabilities - Other current assets 28 120 (20) Other assets (179) 32 -- Accounts payable 174 (157) (96) Accrued expenses and other liabilities 407 (1,707) (2,131) -------- -------- -------- Net cash used in operating activities (2,987) (5,338) (2,706) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in TeleSpectrum Worldwide Inc. (2,110) -- -- Purchases of property and equipment (32) (15) -- Proceeds from sale of Casino Money Centers, Inc. -- -- 1,950 Proceeds from sale of collection business -- 3,750 -- Proceeds from sale of NCO Group, Inc. investment -- 9,624 2,664 Investing activities of discontinued operations (346) (250) -- -------- -------- -------- Net cash provided by (used in) investing activities (2,488) 13,109 4,614 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt -- 672 -- Repayment of debt (318) (9,042) (702) Proceeds from (repayments of) line of credit 2,500 -- -- Proceeds from exercise of stock options 1,128 714 797 Financing activities of discontinued operation (180) -- -- Sale of preferred stock 2,345 -- -- -------- -------- -------- Net cash provided by (used in) financing activities 5,475 (7,656) 95 -------- -------- -------- NET INCREASE IN CASH -- 115 2,003 CASH, BEGINNING OF PERIOD -- -- 115 -------- -------- -------- CASH, END OF PERIOD $ -- $ 115 $ 2,118 ======== ======== ========
The accompanying notes are an integral part of these statements F-6 CRW FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 1. Background: CRW Financial, Inc. was a subsidiary of Casino & Credit Services, Inc. prior to May 11, 1995, and CRW's operations were a division of CCS from July 1992 to May 11, 1995 when CCS contributed all of its assets and subsidiaries other than Central Credit, Inc. ("CCI") to a newly formed subsidiary, CRW Financial, Inc. CCS then spun-off CRW in a distribution of CRW stock to CCS shareholders on May 11, 1995. The historical financial statements of CRW have been deemed to be those of CCS, restated to present CCI as a discontinued operation. CRW founded TeleSpectrum Worldwide Inc. in April 1996. TeleSpectrum Worldwide Inc. ("TLSP") provides teleservices solutions to clients in the telecommunications, insurance, financial services, pharmaceuticals, and healthcare, consumer products and high technology industries. CRW formed TLSP in April 1996 to acquire several teleservices businesses in connection with an initial public offering of TLSP's common stock. CRW accounts for its investment in TLSP under the equity method of accounting. In 1996, CRW recorded a $32.1 million increase, net of deferred income taxes, to its investment in TLSP to reflect the increase in TLSP's equity due to its initial public offering of its common stock and other issuances of its common stock in connection with the acquisitions of certain businesses. In 1997, CRW wrote-down its investment in TLSP by $23.3 million, net of deferred income taxes based on TLSP's net loss of $160.4 million in 1997. TLSP's net loss included a goodwill write-off of $139.1 million. In February, 1997, CRW sold the assets of its collection business (see Note 2). On October 30, 1998, CRW sold its Casino Money Centers, Inc. ("CMC") subsidiary to Innovative Financial Systems, Inc., an unrelated third party, (see Note 3). Accordingly, the accompanying financial statements have been restated to present the collection business and CMC as discontinued operations. On September 3, 1998, CRW entered into a definitive merger agreement with TLSP pursuant to which each share of CRW Financial, Inc. will be exchanged for .709 share of TLSP stock. CRW and TLSP have filed a preliminary merger proxy with the Securities and Exchange Commission and currently expect the merger to close in the second quarter of 1999. The continuing operations consist of the CRW's corporate management costs. CRW has no other operating activities. 2. Sale of the Collection Business On February 2, 1997, CRW sold the assets of its collection business to NCO Group, Inc. ("NCOG") for consideration appraised at $12,800,000, consisting of $3,750,000 in cash, 517,767 shares of NCOG common stock, and a warrant to purchase 375,000 shares of NCOG stock at $18.42 per share. CRW recorded a gain of $1,383,000 on the sale of the collection business. The gain on the sale of the collection business was recorded as follows (in thousands): Fair Market Value of Consideration Paid by NCOG $ 12,800 Net Assets Sold (7,942) Retention, Severance Pay and Non-compete Payments (1,339) Estimated Purchase Price Adjustment (259) Professional Fees and Accrued Expenses (881) -------- Gain on sale before income taxes 2,379 Utilization of Net Operating Loss Carryforward (996) -------- Gain on Sale of Collection Business $ 1,383 ======== The appraisal of the consideration paid by NCOG indicated that the fair value of the 517,767 shares of NCO Group, Inc. common stock received by CRW on February 2, 1997 was $8,300,000, or $16.03 per share, and that the fair value of the warrant to purchase 375,000 shares of NCO Group, Inc. common stock at $18.42 per share was $750,000. In July 1997, the Company sold its 517,767 shares of NCO Group, Inc. common stock for $9,624,000 resulting in a gain of $1,324,000. In February 1998, the Company sold its warrant to purchase 375,000 shares of NCO Group, Inc. common stock for $2,664,000 resulting in a gain of $1,914,000. F-7 CRW FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) DECEMBER 31, 1998 The Company accounts for its investment in NCOG in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). At December 31, 1997, the investment in NCOG was classified as available-for-sale and reported at market value; therefore, an unrealized holding gain of $1,263,000 was presented as a separate component of stockholders' equity. Sale of Casino Money Centers, Inc. On October 30 1998, CRW sold all of the outstanding stock of CMC to Innovative Financial Systems, Inc. ("IFS") for $2,250,000 in cash. The purchase price was payable $1,950,000 on October 30, 1998 and $300,000 in February 1999, subject to a final purchase price adjustment. The Company recorded a loss of $94,000 on the sale of CMC. Below is a summary of the loss on the sale of CMC: Sale proceeds $2,250,000 Net Book Value (1,824,000) Severance and Transaction Costs (448,000) Purchase Price Adjustment (72,000) -------- Loss on Sale of CMC $ (94,000) ========== 4. Summary of Significant Accounting Policies: Principles of Consolidation The consolidated financial statements include the accounts of CRW Financial Inc. As of December 31, 1998, CRW had no operating subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates in Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Property and Equipment Property and equipment are stated at cost. CRW provides for depreciation on a straight-line basis over estimated useful lives of three to five years. Leasehold improvements are amortized over the lease term. Depreciation expense for the years ended December 31, 1996, 1997 and 1998 was $33,000, $43,000 and $9,000, respectively. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under SFAS No. 109, deferred income tax assets and liabilities are determined based on differences between the financial reporting and income tax basis of assets and liabilities measured using enacted income tax rates and laws that are expected to be in effect when the differences reverse. Statement of Cash Flows For the years ended December 31, 1996, 1997 and 1998 the Company paid interest expense of approximately $791,000, $488,000 and $15,000, respectively. The Company did not pay any income taxes for the years ended December 31, 1996, 1997 and 1998. F-8 CRW FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) DECEMBER 31, 1998 Stock Split On October 3, 1996, the Company declared a three-for-one stock split payable on October 24, 1996 to all holders of record on October 14, 1996. All amounts and per share amounts in the accompanying financial statements have been retroactively restated to reflect this stock split. Basic and Diluted Net Income (Loss) Per Common Share The Company has adopted SFAS No. 128, "Earnings per Share". SFAS No. 128 requires a dual presentation of "Basic" and "Diluted" EPS on the face of the income statement. Basic EPS is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted EPS includes the effect, if any, from the potential exercise or conversion of securities, such as stock options, which would result in the issuance of shares of common stock. The weighted average number of shares of common stock outstanding in 1996, 1997 and 1998 for purposes of computing basic and diluted EPS was 3,793,846, 6,099,118 and 6,549,177 in 1996, 1997 and 1998, respectively. 5. Investment in TLSP: On April 29, 1996 CRW formed a wholly owned subsidiary, TeleSpectrum Worldwide Inc. ("TLSP"). TLSP entered into asset purchase agreements to acquire six teleservices business contingent upon an initial public offering of its common stock. CRW made a $2,100,000 capital contribution to TLSP on May 23, 1996 (Note 6). On May 23, 1996, in connection with the acquisitions and initial public offering, CRW issued warrants to its CEO, CFO, Director of Acquisitions and a consultant to purchase an aggregate of 839,108 shares of TLSP stock from CRW at $1.50 per share. The Company obtained an appraisal which indicated that the warrants had a fair value of $0.75 per warrant on May 23, 1996. Accordingly, the Company recorded a special non-cash compensation charge of $629,000 on May 23, 1996. In September 1996, certain subordinated lenders described in Note 6 exercised warrants to purchase 784,997 shares of TLSP common stock from CRW at $1.50 per share. As a result, the Company received cash proceeds of $1,177,000 and recorded a gain on the sale of $1,136,000. In February 1997, certain subordinated lenders exercised warrants to purchase 809,155 shares of TLSP common stock from the Company pursuant to the cashless exercise provisions of the warrants whereby the warrants were canceled in exchange for 732,583 shares of TLSP stock. In 1998, a warrant holder exercised a warrant to purchase 75,445 shares of TLSP common stock from the Company pursuant to the cashless exercise provision of the warrant, whereby the warrants were canceled in exchange for 45,974 shares of TLSP common stock. After these exercises, CRW owned 6,946,583 shares of TLSP common stock. If all of the remaining warrants to purchase TLSP stock are exercised, CRW will receive approximately $1,018,000 of consideration and would then own 6,238,413 shares of TLSP. CRW's investment in TLSP has been accounted for on the equity method since August 1996. The net investment balance at December 31, 1998 and 1997 was $13,611,000 and $15,266,000, respectively. For the year ended December 31, 1998 and 1997, CRW recorded a $1,655,000 and $39,389,000 loss on its investment in TLSP, under the equity method, which represented CRW's portion of TLSP's net loss. These losses were partially offset by a $662,000 and $16,103,000 reduction in CRW's deferred tax liabilities, respectively. TLSP reported a net loss of $160,475,000 for the year ended December 31, 1997, primarily due to a goodwill impairment charge of $139,100,000. At December 31, 1997, TLSP changed it method of measuring goodwill impairment from an undiscounted cash flow approach to a discounted cash flow approach because TLSP believes the measurement of the value of goodwill through a discounted cash flow approach is preferable in that such method most closely approximates the fair value of goodwill. F-9 CRW FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) DECEMBER 31, 1998 The condensed results of operations for the year ended December 31, 1998 and financial position as of December 31, 1998 of TLSP, is as follows (in thousands): Condensed Statement of Operations Information: Revenue $ 167,428 Operating Loss (5,941) Net Loss (6,461) Condensed Balance Sheet Information: Current Assets $ 39,960 Non-Current Assets 63,729 Current Liabilities 23,258 Non-Current Liabilities 3,863 Stockholders' Equity 76,568 6. Debt: December 31, ------------------ 1997 1998 ---- ---- (In Thousands) Revolving line of credit with bank $-- $-- Convertible subordinated note to stockholder 126 -- Note payable to All Check Cashing (see Note 6) -- -- Notes payable to stockholders 672 -- ---- ---- 798 -- Less-Current portion (798) -- ---- ---- $-- $-- ==== ==== In connection with the Merger and the Distribution discussed in Note 1, CRW assumed certain bank debt of CCS and refinanced it with proceeds from a $6,000,000 three-year revolving line of credit. Proceeds from the line of credit were used to repay all of CCS's bank debt and to provide additional working capital. In connection with the February 2, 1997 sale of CRW's collection business, CRW repaid $2,000,000 of the line of credit. In July 1997, CRW repaid the remaining $6,500,000. In connection with the line of credit, CRW issued to the bank warrants to purchase an aggregate of 335,554 shares of its common stock at an average exercise price of $1.95 per share. In 1997, 273,054 of these warrants were exercised in a cashless exercise whereby the warrants were canceled in exchange for 241,041 shares of CRW common stock. As a result, the bank still holds 62,500 warrants with an exercise price of $6.50 per share. In November 1995, the Company issued a $1,000,000 convertible subordinated note to J. Brian O'Neill, the Company's CEO. The note bore interest at 12.5% and requires 36 monthly payments of $33,454. There is no remaining principal balance due under the note as of December 31, 1998. The note contains a provision which allows Mr. O'Neill to repay to CRW principal payments made by CRW under the note during the previous 24 months and convert such repayments into CRW common stock. During 1996, 1997 and 1998, Mr. O'Neill utilized this provision to repay CRW $916,455 and convert such amount into 560,989 shares of CRW common stock. As of December 31, 1998, Mr. O'Neill had the right to repay CRW approximately $83,000 and convert such amount into approximately 51,412 shares of CRW common stock. Proceeds from the loan were used for capital expenditures and to increase working capital. On May 23, 1996, CRW issued $2,100,000 of subordinated notes to certain directors, shareholders and employees. The subordinated notes were repaid in September 1996 with proceeds from the bank line. Proceeds from the subordinated notes were used to capitalize TLSP (see Note 5). In connection with the subordinated notes, CRW issued warrants ("lender warrants") to the subordinated lenders and to CRW's bank to purchase 1,433,454 and 74,445 shares of TLSP common stock, respectively, from CRW for $1.50 per share. The Company obtained an appraisal which indicated that the lender warrants had a fair value of $0.75 per warrant on May 23, 1996. Accordingly, the debt was discounted $1,132,000 to reflect the value of the lender warrants. The repayment of the subordinated debt in September 1996 resulted in an extraordinary loss of $1,132,000. F-10 CRW FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) DECEMBER 31, 1998 In November 1997, a shareholder and former employee issued a $500,000 demand note to the Company. The note bears interest at 12% and was repaid in March 1998. Proceeds were used to fund temporary working capital requirements prior to the sale of the NCO Group, Inc. warrant (Note 2). In December 1997, a shareholder issued a $172,000 demand note to the Company. The note is non-interest bearing and was repaid in March 1998. Proceeds were used to fund temporary working capital requirements prior to the sale of the NGO Group, Inc. warrant (Note 2). 7. Income Taxes: The net income tax provision (benefit) consists of the following: FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1997 1998 ---- ---- ---- (In Thousands) Income taxes (benefit) from: Continuing operations $ (855) $(16,803) $ (150) Discontinued operation (754) 964 159 -------- -------- -------- Net income taxes (benefit) $ (1,609) $(15,839) $ 9 ======== ======== ======== The net income tax benefit in 1996 and 1997 has been allocated to continuing operations and the discontinued operation by applying CRW's effective income tax rate to loss from continuing operations and income from the discontinued operation. The net income tax benefits relate to operating losses incurred during the periods. The tax benefits result from the reduction of the deferred tax liabilities. No deferred state tax benefit has been recorded. The statutory federal income tax rate is different from the effective income tax rate as indicated below: FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1997 1998 ---- ---- ---- Statutory federal income tax rate (benefit) (34.0)% (34.0)% (34.0)% Non-deductible expenses 17.3 -- 9.0 Reduction of deferred tax asset valuation allowance (17.7) (5.6) (6.0) ----- ----- ----- (34.4)% (39.6)% (31.0)% ===== ===== ===== Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and income tax bases of assets and liabilities given the provisions of tax laws. The net deferred tax asset related to continuing operations is comprised of the following: FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1997 1998 ---- ---- (In Thousands) Non-current deferred taxes related to continuing operations: Gross assets $ 2,324 $ 2,317 Gross liabilities (5,795) (5,795) ------- ------- Net deferred taxes related to continuing operations $(3,471) $(3,478) ======= ======= The Company did not have a valuation allowance against deferred tax assets at December 31, 1997 and 1998, as it believes it is more likely than not that the deferred tax assets will be realized. F-11 CRW FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) DECEMBER 31, 1998 The tax effect of significant temporary differences representing deferred tax assets and liabilities related to continuing operations are as follows: FOR THE YEARS ENDED DECEMBER 31, -------------------------------- (In Thousands) 1997 1998 ---- ---- Net Operating loss carryforwards $ 2,324 $ 2,317 Investment in TLSP (5,795) (5,795) ------- ------- Net deferred tax asset (liability) $(3,471) $(3,478) ======= ======= CRW has a June 30 fiscal year-end. As of June 30, 1998, CRW had a net operating loss carryforward of approximately $9,000,000. 8. Stockholders' Equity: On February 29, 1996, CRW sold $2.5 million of its Series A Convertible Preferred Stock (the "Preferred Stock") to an investor group consisting of several investment funds and certain individuals. In addition, the investor group received warrants to purchase 451,812 shares of CRW common stock at an exercise price of $1.94 per share. In December 1996 the Preferred Stock was converted into 1,290,879 shares of Common Stock. In January 1997, the warrants were exercised pursuant to a cashless exercise whereby the warrants were exchanged for 354,586 shares of CRW common stock. In connection with the sale of the Preferred Stock, the Company's Chief Executive Officer, J. Brian O'Neill, entered into a put agreement which provided the investor group with the right to require Mr. O'Neill to purchase their Preferred Stock at a price of $3.87 per share on March 1, 1999. In connection with the put agreement, the Company granted Mr. O'Neill a warrant to purchase 300,000 shares of CRW common stock at an exercise price of $1.94 per share. The warrant expires on August 31, 1999. 9. Commitments and Contingencies: CRW and CMC had noncancelable related-party leases discussed in Note 10, for its office facilities. Rent expense under leases related to discontinued operations was $378,000 in 1996, $172,000 in 1997 and $30,000 in 1998. The future minimum lease payments under leases related to continuing operations at December 31, 1998, net of sublease commitments is zero. CRW is a party to a lawsuit which was incidental to the ordinary course of business of its collection business. NCOG did not assume any potential liability under such lawsuits in connection with NCOG's acquisition of the net assets of the collection business in February 1997. The Company intends to vigorously defend all such actions and, in the current opinion of management, the ultimate resolution of such actions will not have a material adverse effect on the Company's business, financial condition or results of operations. The actual results of these claims, however, could be materially different. F-12 CRW FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) DECEMBER 31, 1998 10. Related Party Transactions: Since April 1998, CRW has shared office space on a month to month basis with the O'Neill Group, LLC, a partnership controlled by J. Brian O'Neill. CRW pays the O'Neill Group $3,000 a month for rent and other office expenses. In 1998, CRW paid the O'Neill Group $27,000 for rent and office expenses. In June 1998, CMC entered into a lease for office space from Swedesford Road L.P., a partnership controlled by J. Brian O'Neill. CMC paid approximately $30,000 in rent for the office space in 1998. From December 1996 to August 1997, CRW leased an aggregate of 13,000 square feet in King of Prussia, Pennsylvania from 210 Mall Boulevard Associates, a partnership which is controlled by J. Brian O'Neill, CRW's Chief Executive Officer. From February 1997 to July 1997, NCO Group, Inc. subleased the facility from CRW. In August 1997, the sublease expired and the lease between CRW and 210 Mall Boulevard Associates was terminated. In 1996 and 1997, respectively, CRW paid $11,739 and $33,000 in rent to 210 Mall Boulevard Associates. CRW also subleases a 22,000 square foot facility in King of Prussia, PA from Cendant Corporation and has subleased the facility to TLSP. Cendant currently leases the facility from an unrelated party. However, prior to October 1997, Cendant leased the facility from CRW Building Limited Partnership, a partnership controlled by Mr. O'Neill. Prior to subleasing the facility to TLSP, CRW paid approximately $365,000 in rent in 1996 under the sublease from Cendant. In addition, CRW also leased office space in 1996 in Conshohocken, PA, from Lee Park Investors, L.P., a partnership controlled by Mr. O'Neill. The lease was assumed by NCOG on February 2, 1997. CRW paid approximately $46,000 and $4,000 in rent in 1996 and 1997, respectively to Lee Park Investors, L.P. CMC leases approximately 3,000 square feet of space in Las Vegas, Nevada on a month to month basis. Rent expense for this facility was approximately $115,000 in 1997 and $95,000 in 1998. The aggregate minimum rent due from the Company on all of the above leases through the end of their terms, net of commitments for payments under subleases, is zero. Management believes the Company's existing facilities are sufficient to support its anticipated needs in 1998. 11. Stock Option Plan: The Company established the CRW 1995 Stock Option Plan (the "Plan") for its employees, directors and certain other individuals. The Company may grant either non-qualified or incentive stock options under the Plan. An aggregate of 3,000,000 shares of common stock have been reserved for the Plan. A committee of the Board of Directors administers the Plan and determines the terms of the option grants. Options vest as determined by the Board and expire no later than 10 years from the date of grant. Each option entitles the holder to purchase one share of common stock at the indicated exercise price. As of December 31, 1998, options to acquire 1,122,500 shares were outstanding at exercise prices ranging from $0.97 to $10.00 per share. All of the options outstanding are exercisable. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for the CRW 1995 Stock Option Plan. All options granted under the plan have been with exercise prices equal to the fair market value of the stock on the date of grant. Accordingly, no compensation expense has been recognized for the grants under the Plan. Had compensation cost for the Plan been determined consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's loss and loss per share would have been approximately ($4,560,000), or ($0.93) per F-13 CRW FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) DECEMBER 31, 1998 share in 1996. The Company did not grant any options during 1997 or 1998. As such, SFAS No. 123 does not impact the 1997 and 1998 loss or loss per share because all options granted before 1997 were fully vested. The pro forma effect for 1996 is not representative of the pro forma effect on earnings in future years since it does not take into consideration the pro forma compensation expense related to grants made prior to 1996. The fair value of each option granted during 1996 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%, expected volatility of 82%, risk-free interest rate of 5.23% in 1996, and an expected life of 3 years. The weighted average fair value at the date of grant for options granted during 1996 was $1.54 per share, respectively. The weighted average remaining contractual life of the outstanding stock options at December 31, 1998 was five years. The following table summarizes the aggregate option activity under the plan:
Weighted Average Exercise Price Activity Exercise Price Per Share -------- -------------- ---------------- Balance outstanding, December 31, 1995 825,000 $0.97-$ 1.27 $ 0.99 Granted 1,140,000 $1.94-$10.00 $ 3.37 Exercised (482,475) $0.97-$ 7.92 $ 1.89 Canceled -- -- -- Balance outstanding, December 31, 1996 1,482,525 $0.97-$10.00 $ 2.50 Granted -- -- -- Exercised (224,408) $0.97-$ 3.75 $ 1.88 Canceled -- -- -- Balance outstanding, December 31, 1997 1,258,117 $0.97 - $10.00 $ 2.55 Granted -- -- -- Exercised (110,867) $0.97-$3.75 $ 3.63 Canceled (24,750) $7.23 $ 7.23 --------- ----- -------- Balance outstanding December 31, 1998 1,122,500 $0.97 - $10.00 $ 2.45 ========= ============== ========
F-14 CRW FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) DECEMBER 31, 1998 Options to purchase 1,122,500 and 1,258,117 shares of common stock were exercisable at an average exercise price of $2.45 and $2.55 at December 31, 1998 and 1997, respectively. At December 31, 1998, 1,035,000 shares were available for future grants under the Plan. During 1996, 1997 and 1998, the Company received proceeds of $1,128,000, $714,000 and $797,000, respectively, from the exercise of stock options. 12. Discontinued Operations: The following table summarizes the operating results of the collection business, CMC and CCI (in thousands):
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1997 1998 ---- ---- ---- Net revenues $ 30,844 $ 6,995 $ 4,936 Operating expenses 32,591 7,005 4,547 Other expenses 9 -- -- Income (loss) before income taxes (1,756) (10) 389 Income taxes (benefit) (754) (32) 159 -------- -------- -------- Income (loss) from discontinued Operations ($ 1,002) $ 22 $ 230 ======== ======== ========
The following table summarizes the net assets of Casino Money Centers, Inc. as of December 31, 1997 (in thousands): Current assets $ 1,678 Property and equipment 197 Intangible assets, net 352 Other assets 9 ------- Total assets 2,236 Current liabilities (498) ------- Net assets $ 1,738 ======= F-15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CRW FINANCIAL, INC. Dated: March 30, 1999 By: /s/ J. Brian O'Neill --------------------------- J. Brian O'Neill Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ J. Brian O'Neill Chief Executive Officer and Director March 30, 1999 - -------------------------- (Principal Executive Officer) J. Brian O'Neill /s/ Jonathan P. Robinson Chief Financial Officer and Principal March 30, 1999 - -------------------------- Financial and Accounting Officer Jonathan P. Robinson /s/ Robert N. Verratti Director March 30, 1999 - -------------------------- Robert N. Verratti /s/ Bernard Morgan Director March 30, 1999 - -------------------------- Bernard Morgan /s/ Mark J. DeNino Director March 30, 1999 - -------------------------- Mark J. DeNino /s/ Eustace W. Mita Director March 30, 1999 - -------------------------- Eustace W. Mita
EXHIBIT INDEX 3.1 Restated Certificate of Incorporation of the Registrant (1) 3.2 Amendment to Restated Certificate of Incorporation of the Registrant (2) 3.3 Amended Bylaws of the Registrant (3) 4.1 Term Loan Note and Addendum dated November 1, 1995 executed by the Registrant in favor of J. Brian O'Neill and Miriam P. O'Neill (2) 10.1 Agreement of Lease dated as of July, 1994, between CRW Building Limited Partnership and Casino and Credit Services, Inc. (1) 10.2 Sublease Agreement dated May 10, 1995 between Casino and Credit Services, Inc. and the Registrant (3) 10.3 Sublease Agreement between TeleSpectrum Worldwide Inc. and the Registrant (2) 10.4 Lease Agreement dated July 1, 1996 between the Registrant and Lee Park Investors, L.P. (2) 10.5 Lease Agreement dated December 5, 1996 between the Registrant and 210 Mall Boulevard Associates (2) 10.6 Employment Agreement dated May 11, 1995 between J. Brian O'Neill and the Registrant (3) 10.7 Employment Agreement dated May 11, 1995 between Jonathan P. Robinson and the Registrant (3) 10.8 Amended and Restated 1995 Stock Option Plan of the Registrant(4) 10.9 Asset Acquisition Agreement dated February 2, 1997 among the Registrant, Kaplan & Kaplan, Inc., NCO Group, Inc., CRWF Acquisition, Inc. and K & K Acquisition, Inc. (5) 10.10 Merger Agreement between CRW Financial, Inc. and TeleSpectrum Worldwide Inc. 21 Subsidiaries of the Registrant (6) 23 Consent of Arthur Andersen LLP (6) 27 Financial Data Schedule (Electronic Filing Only)
(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. EX-10.10 2 MATERIAL CONTRACTS Exhibit 10.10 ================================================================================ AGREEMENT AND PLAN OF MERGER AND REORGANIZATION Among CRW FINANCIAL, INC. TELESPECTRUM WORLDWIDE INC., and AND CRW ACQUISITION CORP. Dated as of September 3, 1998 ================================================================================ TABLE OF CONTENTS
Page No. -------- W I T N E S S E T H...................................................................................1 ARTICLE I THE MERGER............................................................................................1 SECTION 1.1. The Merger.......................................................................1 SECTION 1.2. Stockholder Meeting, Closing, Effective Time of the Merger.......................2 SECTION 1.3. Conversion and Cancellation of Securities........................................2 SECTION 1.4. Exchange of Certificates.........................................................3 SECTION 1.5. Options and Warrants.............................................................5 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY.........................................................6 SECTION 2.1. Organization, Powers and Qualifications..........................................6 SECTION 2.2. Subsidiaries.....................................................................6 SECTION 2.3. Capital Stock....................................................................7 SECTION 2.4. Certificate of Incorporation, By-Laws and Minute Books...........................8 SECTION 2.5. Authority; Binding Effect........................................................8 SECTION 2.6. Conflict with Other Agreements; Approvals........................................8 SECTION 2.7. Governmental Consents and Approvals..............................................8 SECTION 2.8. SEC Reports......................................................................9 SECTION 2.9. Financial Statements.............................................................9 SECTION 2.10. Absence of Certain Changes......................................................10 SECTION 2.11. Indebtedness; Absence of Undisclosed Liabilities................................10 SECTION 2.12. Assets..........................................................................10 SECTION 2.13. Contracts.......................................................................11 SECTION 2.14. Insurance.......................................................................11 SECTION 2.15. Authorizations; Compliance With Law.............................................11 SECTION 2.16. Taxes...........................................................................11 SECTION 2.17. Absence of Litigation; Claims...................................................12 SECTION 2.18. Employee Benefit Plans; Employment Agreements...................................12 SECTION 2.19. Labor Matters...................................................................14 SECTION 2.20. Intellectual Property...........................................................14 SECTION 2.21. Adequacy of Disclosure..........................................................14 SECTION 2.22. Registration Statement; Proxy Statement/Prospectus..............................14 SECTION 2.23. Tax Matters.....................................................................15 SECTION 2.24. Affiliates......................................................................15 SECTION 2.25. Board Action; Vote Required; Applicability of Section 203.......................15 SECTION 2.26. Opinion of Financial Advisor....................................................15 SECTION 2.27. Brokers and Finders.............................................................15 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB..............................................16 SECTION 3.1. Organization and Powers.........................................................16 SECTION 3.2. Authority; Binding Effect.......................................................16 i SECTION 3.3. Conflict with Other Agreements; Approvals.......................................16 SECTION 3.4. Governmental Consents and Approvals.............................................16 SECTION 3.5. Capital Stock...................................................................17 SECTION 3.6. Registration Statement; Proxy Statement/Prospectus..............................17 SECTION 3.7. SEC Reports.....................................................................17 SECTION 3.8. Financial Statements............................................................18 SECTION 3.9. Absence of Certain Changes......................................................18 SECTION 3.10. Absence of Litigation; Claims...................................................18 SECTION 3.11. Tax Matters.....................................................................18 SECTION 3.12. Affiliates......................................................................19 SECTION 3.13. Adequacy of Disclosure..........................................................19 SECTION 3.14. Brokers and Finders.............................................................19 ARTICLE IV OTHER AGREEMENTS.....................................................................................19 SECTION 4.1. Conduct of the Company's Business...............................................19 SECTION 4.2. Parent's Undertakings...........................................................21 SECTION 4.3. Access to Information...........................................................21 SECTION 4.4. Stockholder Vote; Proxy Statement...............................................21 SECTION 4.5. Reasonable Best Efforts.........................................................23 SECTION 4.6. Public Announcements............................................................23 SECTION 4.7. Notification....................................................................23 SECTION 4.8. Subsequent Financial Statements.................................................23 SECTION 4.9. Control of Operations...........................................................24 SECTION 4.10. Regulatory and Other Authorizations.............................................24 SECTION 4.11. Takeover Statute................................................................24 SECTION 4.12. Indemnification of Directors and Officers.......................................24 SECTION 4.13. Tax-Free Reorganization.........................................................24 SECTION 4.14. No Solicitation.................................................................25 ARTICLE V CONDITIONS TO CLOSING................................................................................26 SECTION 5.1. Conditions to the Obligations of the Company and Parent and Merger Sub .........26 SECTION 5.2. Conditions to the Obligations of the Company....................................27 SECTION 5.3. Conditions to the Obligations of Parent and Merger Sub..........................27 ARTICLE VI TERMINATION, AMENDMENT AND WAIVER....................................................................29 SECTION 6.1. Termination.....................................................................30 SECTION 6.2. Effect of Termination...........................................................30 SECTION 6.3. Amendment.......................................................................30 SECTION 6.4. Waiver..........................................................................30 ARTICLE VII MISCELLANEOUS........................................................................................31 SECTION 7.1. Survival of Representations and Warranties......................................31 ii SECTION 7.2. Entire Agreement................................................................31 SECTION 7.3. Notices.........................................................................31 SECTION 7.4. Governing Law...................................................................32 SECTION 7.5. Descriptive Headings............................................................32 SECTION 7.6. Parties in Interest.............................................................32 SECTION 7.7. Counterparts; Facsimile Signatures..............................................32 SECTION 7.8. Expenses........................................................................32 SECTION 7.9. Personal Liability..............................................................32 SECTION 7.10. Binding Effect; Assignment......................................................33 SECTION 7.11. Severability....................................................................33
iii AGREEMENT AND PLAN OF MERGER AND REORGANIZATION This Agreement and Plan of Merger and Reorganization (this "Agreement"), dated as of September 3, 1998, is made by and among CRW FINANCIAL, INC., a Delaware corporation (the "Company"), TELESPECTRUM WORLDWIDE INC., a Delaware corporation ("Parent"), and CRW ACQUISITION CORP., a Delaware corporation and wholly-owned subsidiary of Parent ("Merger Sub"). W I T N E S S E T H WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the Company and the sole stockholder of Merger Sub have each approved the business combination described herein in which the Company will become a subsidiary of Parent as a result of a merger of Merger Sub with and into the Company upon the terms and subject to the conditions hereinafter set forth (the "Merger"), pursuant to which each outstanding share of common stock, par value $.01 per share ("Company Common Stock"), of the Company will be converted into the right to receive shares of common stock, par value $.01 per share ("Parent Common Stock"), of Parent in the manner set forth herein; WHEREAS, the Boards of Directors of Parent and the Company have each determined that the Merger is in the best interest of their respective stockholders and have each approved this Agreement and the Merger upon the terms and conditions set forth herein; WHEREAS, the Board of Directors of Merger Sub has approved and adopted this Agreement, and Parent, as the sole stockholder of Merger Sub, will adopt this Agreement promptly after the execution hereof; and WHEREAS, for federal income tax purposes, it is intended that the Merger qualify as a reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants, agreements and conditions set forth below, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE I THE MERGER SECTION 1.1. The Merger. Subject to the terms and conditions hereof and in accordance with the General Corporation Law of the State of Delaware, as amended (the "DGCL"), at the Effective Time (hereinafter defined): (a) Merger Sub shall be merged with and into the Company and the separate existence of Merger Sub shall cease; (b) the Company, as the surviving corporation in the Merger (the "Surviving Corporation"), (i) shall be a wholly-owned subsidiary of Parent, (ii) shall continue its corporate existence under the laws of the State of Delaware, (iii) shall retain its present name and (iv) shall succeed to all rights, assets, liabilities and obligations of Merger Sub and the Company in accordance with the DGCL; (c) the Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall continue as the Certificate of Incorporation of the Surviving Corporation; (d) the By-laws of the Merger Sub, as in effect immediately prior to the Effective Time, -1- shall continue as the By-laws of the Surviving Corporation; (e) the directors of Merger Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation; and (f) the officers of the Merger Sub immediately prior to the Effective Time shall continue as the officers of the Surviving Corporation. From and after the Effective Time, the Merger will have all the effects provided by the DGCL. SECTION 1.2. Stockholder Meeting, Closing, Effective Time of the Merger. The Company shall submit this Agreement to the holders of Company Common Stock for approval and adoption at the Stockholders Meeting (hereinafter defined) to be held as soon as practicable following the date of this Agreement in accordance with Section 4.4 hereof. Subject to this Agreement receiving such stockholder approval, and subject to the other provisions of this Agreement, the parties shall hold a closing (the "Closing") on the next business day (or such later date as the parties hereto may agree) following the day on which the last of the conditions set forth in Article V hereof is fulfilled or waived (such later date, the "Closing Date"), at 9:00 A.M. at the offices of Morgan, Lewis & Bockius LLP, One Logan Square, Philadelphia, Pennsylvania, or at such other time or place as the parties agree upon. On the next business day after the Closing Date, the parties hereto shall cause the Merger to be consummated by filing a certificate of merger (the "Certificate of Merger") with the Secretary of State of the State of Delaware in such form as required by, and executed in accordance with the relevant provisions of, the DGCL (the date and time of such filing, or such later date or time agreed upon by Parent and the Company and set forth therein, the "Effective Time.") SECTION 1.3. Conversion and Cancellation of Securities. (a) At the Effective Time, each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (other than any Appraisal Shares (as defined in Section 1.3(d) hereof) and shares of Company Common Stock described in Section 1.3(b) hereof) shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive .709 (the "Exchange Ratio") of a share of Parent Common Stock (the "Merger Consideration"); provided that no fractional shares of Parent Common Stock shall be issued and, in lieu thereof, a cash payment shall be made pursuant to Section 1.4(i) hereof. For purposes hereof, Fully- Diluted Common Stock means the number of outstanding shares of Company Common Stock as of the Effective Time (other than those shares of Company Common Stock beneficially owned by the Parent or any of its Subsidiaries (as defined in Section 2.2 hereof)), plus the number of shares of Common Stock obtainable upon the exercise of all outstanding options and warrants exercisable for Company Common Stock. (b) At the Effective Time, each share of Company Common Stock (i) beneficially owned by the Parent (or one of its Subsidiaries) immediately prior to the Effective Time, or (ii) held in the treasury of the Company immediately prior to the Effective Time, shall by virtue of the Merger and without any action on the part of the holder thereof, be automatically canceled and retired and cease to exist, and no cash, securities or other property shall be payable in respect thereof. (c) At the Effective Time, each share of Merger Sub common stock, without par value ("Merger Sub Common Stock"), issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action by the holder thereof, be converted into one validly issued, fully paid and nonassessable common share, par value $.01 per share, of the Surviving Corporation ("Surviving Corporation Common Stock"). -2- (d) Notwithstanding anything in this Agreement to the contrary, shares of Company Common Stock held by a holder who, pursuant to Section 262 of the DGCL or any successor provision, has the right to demand and properly demands an appraisal of such shares of Company Common Stock ("Appraisal Shares"), shall not be converted into the right to receive the Merger Consideration, unless such holder fails to perfect or otherwise loses such holder's right to such appraisal, if any. If, after the Effective Time, such holder fails to perfect or loses any such right to appraisal, each such share of Company Common Stock held by such holder shall be treated as a share of Company Common Stock that had been converted as of the Effective Time into the right to receive the Merger Consideration. At the Effective Time, any holder of Appraisal Shares shall cease to have any rights with respect thereto, except the rights provided in Section 262 of the DGCL or any successor provision and as provided in the immediately preceding sentence. The Company shall give prompt notice to the Parent of any demands received by the Company for appraisal of shares of Company Common Stock. (e) If between the date of this Agreement and the Effective Time, the number of shares of Fully-Diluted Common Stock or the outstanding shares of Parent Common Stock shall be changed into a different number of shares by reason of any reclassification, recapitalization, split-up, combination or exchange of shares, or any dividend payable in stock shall be declared thereon with a record date within such period, the Exchange Ratio shall be adjusted accordingly to provide to the holders of Fully-Diluted Common Stock and accord the Parent and the Merger Sub with the same economic effect as contemplated by this Agreement. Section 1.4. Exchange of Certificates. (a) Prior to the Closing Date, the Parent shall select a bank or trust company reasonably acceptable to the Company to act as exchange and paying agent (the "Exchange Agent") in connection with the surrender of certificates evidencing shares of Company Common Stock converted into Merger Consideration pursuant to the Merger. At the Effective Time, Parent shall deposit with the Exchange Agent one or more certificates representing the shares of Parent Common Stock to be issued in the Merger (the "Merger Stock"), which shares of Merger Stock shall be deemed to be issued at the Effective Time. Promptly after the Effective Time, Parent shall deliver to the Exchange Agent such cash as may be required from time to time to make payment of cash in lieu of fractional shares in accordance with Section 1.4(i) and 1.5 hereof. (b) As soon as practicable after the Effective Time, but in no event later than five days after the Effective Time, Parent shall direct the Exchange Agent to mail to each person who was, at the Effective Time, a holder of record of a certificate or certificates that immediately prior to the Effective Time evidenced outstanding shares of Company Common Stock (the "Certificates") (i) a letter of transmittal (with instructions for its use) specifying that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent, which shall be in a form and contain any other provisions as Parent and the Surviving Corporation may reasonably agree and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon the proper surrender of Certificates to the Exchange Agent, together with a properly completed and duly executed letter of transmittal and such other documents as may be required by the Exchange Agent, the holder of such Certificate shall be entitled to receive in exchange therefor, and the Surviving Corporation shall cause to be issued and paid, certificates representing the shares of Merger Stock that such holder has the right to receive pursuant to the terms hereof (together with any dividend or distribution with respect thereto made after the Effective Time and any cash paid in -3- lieu of fractional shares pursuant to Section 1.4(i)), and the Certificate so surrendered shall be canceled. If any portion of the Merger Consideration is to be paid to a person other than the person who is the record holder of the Company Common Stock at the Effective Time, it shall be a condition to such payment that the certificate evidencing the Company Common Stock so surrendered shall be properly endorsed or otherwise be in proper form for transfer and that it be accompanied by all documents required to evidence and effect such transfer and by evidence reasonably satisfactory to the Surviving Corporation and Parent that any applicable stock transfer tax has been paid. (c) After the Effective Time, each outstanding Certificate which theretofore represented shares of Company Common Stock shall, until surrendered for exchange in accordance with this Section 1.4, be deemed for all purposes to evidence ownership of full shares of Parent Common Stock into which the shares of Company Common Stock (which, prior to the Effective Time, were represented thereby) shall have been so converted. (d) Except as otherwise expressly provided herein, the Parent shall pay all charges and expenses, including those of the Exchange Agent, in connection with the exchange of Certificates for shares of Merger Stock. Any Merger Stock or other cash delivered to the Exchange Agent pursuant to Section 1.4(a) hereof, and not exchanged pursuant to Section 1.4(b) hereof for Company Common Stock or fractional interests pursuant to Section 1.4(i) hereof within 180 days after the Effective Time shall be returned by the Exchange Agent to the Surviving Corporation which shall thereafter act as exchange agent subject to the rights of holders of Company Common Stock hereunder. (e) At the Effective Time, the stock transfer books of the Company shall be closed and no transfer of shares of Company Common Stock shall thereafter be made. (f) None of Parent, Merger Sub, the Company, the Surviving Corporation or the Exchange Agent will be liable to any holder of shares of Company Common Stock for any shares of Merger Stock, dividends or distributions with respect thereto or cash payable in lieu of fractional shares pursuant to Section 1.4(i) hereof delivered to a state abandoned property administrator or other public official pursuant to any applicable abandoned property, escheat or similar law. (g) If any Certificates shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificates to be lost, stolen or destroyed, the Exchange Agent will deliver in exchange for such lost, stolen or destroyed Certificates the Merger Consideration for the shares represented thereby, deliverable in respect thereof, as determined in accordance with the terms hereof. When authorizing such payment in exchange for any lost, stolen or destroyed Certificates, the person to whom the Merger Consideration is to be issued, as a condition precedent to such delivery, shall give Parent a bond or indemnity reasonably satisfactory to Parent, its transfer agent and their respective insurance carriers against any claim that may be made against Parent with respect to the Certificates alleged to have been lost, stolen or destroyed. (h) No dividend or other distribution declared or made after the Effective Time with respect to the Merger Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Merger Stock issuable upon surrender thereof until the holder of such Certificate shall surrender such Certificate in accordance with Section 1.4(b). Subject to the effect of applicable law, following surrender of any such Certificate there shall be paid, without interest, to the record holder of certificates representing whole shares of Merger Stock issued in -4- exchange therefor: (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Merger Stock; and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to surrender of such Certificate and a payment date subsequent to such surrender payable with respect to such whole shares of Merger Stock. No holder of Company Common Stock shall be entitled to any interest on any cash amounts payable for fractional interests pursuant to this Section 1.4(h). (i) No certificates or scrip evidencing fractional shares of Merger Stock shall be issued upon the surrender for exchange of Certificates, and such fractional share interests shall not entitle the owner thereof to any rights of a stockholder of Parent. In lieu of any such fractional shares, each holder of a Certificate previously evidencing Company Common Stock, upon surrender of such Certificate for exchange pursuant to this Article I, shall be paid an amount in cash (without interest), rounded to the nearest cent, determined by multiplying (a) the closing price for a share of Parent Common Stock on the Nasdaq National Market on the first business day immediately following the Effective Time, by (b) the fractional interest to which such holder would otherwise be entitled (after taking into account all shares of Company Common Stock held of record by such holder at the Effective Time). Section 1.5. Options and Warrants. (a) At the Effective Time, each option and warrant granted or issued by the Company and exercisable for shares of Company Common Stock, which is outstanding and unexercised or unconverted immediately prior thereto, shall be assumed by Parent pursuant to a writing to be executed at the Closing in form and substance reasonably acceptable to the Company, and, subject to the following provisions, shall be converted into an option or warrant to purchase shares of Parent Common Stock. Each such option or warrant shall be converted into an option or warrant to purchase such number of shares of Parent Common Stock at such exercise price as is determined as provided below (and otherwise having the same duration and other terms as the original option or warrant): (i) the number of shares of Parent Common Stock to be subject to the new option or warrant shall be equal to the product of (A) the number of shares of Company Common Stock subject to the option or warrant immediately prior to the Effective Time and (B) the Exchange Ratio, the product being rounded, if necessary, up or down, to the nearest whole share; and (ii) the exercise or convertible price per share of Parent Common Stock under the new option or warrant shall be equal to (A) the exercise price per share of the Company Common Stock under the option or warrant immediately prior to the Effective Time divided by (B) the Exchange Ratio, rounded, if necessary, up or down, to the nearest cent. Notwithstanding the foregoing, those warrants that were issued by the Company and Parent that are by their terms exercisable for shares of Parent Common Stock (the "TLSP/CRW Warrants") shall be unaffected as a result of the Merger. (b) At the Effective Time, the Purchaser shall deliver to holders of original options and warrants (except for the TLSP/CRW Warrants) appropriate agreements representing the new options -5- and warrants on the terms and conditions set forth in this Section 1.5(b). The Parent shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Parent Common Stock for delivery upon exercise of the new options and warrants in accordance with this Section 1.5(b). The Parent shall file (i) a registration statement on Form S-8 (or any successor form) or another appropriate form, effective promptly after the Effective Time, with respect to shares of Parent Common Stock subject to the new options (but not any such new warrants) and (ii) a registration statement on Form S-3 (or any successor form) or another appropriate form (such registration statement, the "Parent Form S-3"), effective promptly after the Effective Time, with respect to shares of Parent Common Stock subject to the new warrants (but only with respect to such shares of Parent Common Stock associated with shares of Company Common Stock that had been registered by the Company on a registration statement on Form S-3 (the "Company Form S-3"))). The Company, from time to time, shall also prepare such resale prospectuses for inclusion in the Parent Form S-3 on the same basis as contemplated by the Company Form S-3. The Company shall use all reasonable efforts to maintain the effectiveness of (i) such Form S-8 registration statement for so along as such options remain outstanding and (ii) the Parent Form S-3 for such period covered by the existing Company Form S-3. In addition, with respect to those individuals who subsequent to the Merger will be subject to the reporting requirements under Section 16(a) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the "Exchange Act"), the Parent shall administer any option plans assumed pursuant to this Section 1.5(b) in a manner that complies with Rule 16b-3 promulgated under the Exchange Act to the extent such option plan complied with such rule prior to the Merger. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to, and agrees with, Parent and Merger Sub as follows, except as set forth on a Disclosure Schedule delivered by the Company concurrently with the execution and delivery of this Agreement (the "Company Schedule"), each of which exceptions shall specifically identify the relevant subsection hereof to which it relates and shall be deemed to be representations and warranties as if made hereunder: Section 2.1. Organization, Powers and Qualifications. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has all requisite corporate power and authority to carry on its business as it has been and is now being conducted and to own, lease and operate the properties and assets used in connection therewith. The Company is duly qualified as a foreign corporation authorized to do business and is in good standing in every jurisdiction in which such qualification is required, all of which jurisdictions are disclosed in the Company Schedule, except where the failure to be so qualified would not have a Company Material Adverse Effect. As used in this Agreement, "Company Material Adverse Effect" shall mean any fact, condition, event, development or occurrence which, individually or when taken together with all other such facts, conditions, events, developments or occurrences, could reasonably be expected to have a material adverse effect on the financial condition, or operating results of the Company and its Subsidiaries (hereinafter defined), taken as a whole. Section 2.2. Subsidiaries. (a) "Subsidiary" means, with respect to any party, any corporation, limited liability company, partnership, joint venture, or other business association or entity, at least a majority of the voting securities or economic interests of which is, directly or indirectly, owned -6- or controlled by such party or by any one or more of its Subsidiaries. As used in this Agreement, "Joint Venture" means, with respect to any party, any corporation, limited liability company, partnership, joint venture or other business association or entity in which (i) such party or any one or more of its Subsidiaries, directly or indirectly, owns or controls more than five percent and less than a majority of any class of the outstanding voting securities or economic interests, or (ii) such party or a Subsidiary of such party is a general partner. (b) The Company Schedule lists each Subsidiary and Joint Venture of the Company, the jurisdiction of its organization and the amount of its securities outstanding and the owners thereof. Each Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Each Subsidiary has all requisite power and authority to carry on its business as it has been and is now being conducted and to own, lease and operate the assets and properties used in connection therewith. Each Subsidiary is duly qualified as a foreign corporation authorized to do business and is in good standing in every jurisdiction in which such qualification is required, all of which jurisdictions are disclosed on the Company Schedule, except where the failure to be so qualified would not have a Company Material Adverse Effect. All issued and outstanding shares of capital stock of each Subsidiary have been duly authorized, are validly issued and outstanding, are fully paid and nonassessable and were issued in compliance with all applicable Federal and state securities laws and, except as set forth on the Company Schedule, are lawfully owned of record and beneficially by the Company or another Subsidiary of the Company, free and clear of all pledges, liens, claims, security interests and other charges or defects in title of any nature whatsoever ("Liens"). There are no existing subscriptions, options, warrants, convertible securities, calls, commitments, agreements, conversion rights or other rights of any character (contingent or otherwise) calling for or requiring the issuance, transfer, sale or other disposition of any shares of the capital stock of any Subsidiary of the Company, or calling for or requiring the issuance of any securities or rights convertible into or exchangeable for shares of capital stock of any Subsidiary of the Company, nor is the Company or any Subsidiary of the Company subject to any obligation (contingent or otherwise) to repurchase, redeem or otherwise acquire shares of capital stock of any Subsidiary of the Company, in any case except as set forth on the Company Schedule. Except for its Subsidiaries and its Joint Ventures or as set forth in the Company Schedule, neither the Company nor any Subsidiary of the Company directly or indirectly (i) owns or controls any shares of any corporation nor has any voting securities of, or economic interest in, either of record or beneficially in any association, partnership, limited liability company, joint venture or other legal entity, or (ii) is a general partner of any partnership. Section 2.3. Capital Stock. The Company has authorized capital stock consisting of 20,000,000 shares of Company Common Stock and 500,000 shares of Preferred Stock, par value $.01 per share ("Company Preferred Stock"). As of the date hereof: (i) 6,533,209 shares of Company Common Stock are issued and outstanding, (ii) no shares of Company Preferred Stock were issued and outstanding, (iii) no shares of Company Common Stock are held as treasury shares, (iv) 1,205,000 shares of the Company Common Stock are underlying outstanding stock options granted under the Company stock option or equity compensation plans (the "Company Stock Plans"), (v) 362,500 shares of the Company Common Stock are underlying outstanding warrants and (vi) 352,821 shares of the Company Common Stock are obtainable pursuant to the terms of the convertible notes. As of the date hereof, the Company owned 6,946,583 shares of Parent Common Stock and other than the TLSP/CRW Warrants, which as of the date hereof were exercisable for an aggregate of 678,410 shares of Parent Common Stock, there are no existing subscriptions, options, warrants, convertible securities, calls, commitments, agreements, conversion rights or other rights of any character (contingent or otherwise) calling for or -7- requiring the issuance, transfer, sale or other disposition of any shares of Company Common Stock or Parent Common Stock by the Company. All of the issued and outstanding shares of Company Common Stock have been duly authorized and are validly issued and outstanding, fully paid and nonassessable, and were issued in compliance with all applicable Federal and state securities laws; and all of such treasury shares were acquired by the Company in compliance with all applicable laws, including without limitation all applicable Federal and state securities laws. No shares of capital stock issued by the Company are or were, at the time of their issuance, issued in violation of preemptive rights. There are no voting trusts or other agreements or understandings to which the Company is a party, nor, to the knowledge of the Company, to which any stockholder of the Company is a party, with respect to the voting of capital stock of the Company. Section 2.4. Certificate of Incorporation, By-Laws and Minute Books. The copies of the Certificate of Incorporation and all amendments thereto and of the By-laws, as amended, of the Company and the Subsidiaries which have been delivered to Parent are true, correct and complete copies thereof as in effect on the date hereof. The minute books of the Company and the Subsidiaries which have been made available for inspection contain minutes, which are accurate and complete in all material respects, of all meetings and consents in lieu of meetings of the Board of Directors (and any committee thereof) and of the stockholders of the Company and the Subsidiaries since the respective dates of incorporation. Section 2.5. Authority; Binding Effect. The Company has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All necessary action, corporate or otherwise, required to have been taken by or on behalf of it by applicable law, its charter document or otherwise to authorize (i) the approval, execution and delivery on its behalf of this Agreement and (ii) its performance of its obligations under this Agreement and the consummation of the transactions contemplated hereby has been taken, except that this Agreement must be approved by the holders of a majority of the outstanding Company Common Stock of record on the record date for the Stockholders Meeting ("Required Company Stockholder Approval"). This Agreement constitutes the Company's valid and binding agreement, enforceable against it in accordance with its terms. Section 2.6. Conflict with Other Agreements; Approvals. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, (i) violate or conflict with the Company's charter or bylaws or the comparable organizational documents of any of its Subsidiaries, or (ii) constitute a breach or default (or an event that with notice or lapse of time or both would become a breach or default) or give rise to any Lien, third party right of termination, cancellation, material modification or acceleration, or loss of any benefit, under any Contract (hereinafter defined) to which the Company or any Subsidiary of the Company is a party or by which it is bound, or (iii) subject to the consents, approvals, orders, authorizations, filings, declarations and registrations specified in Section 2.7 or in the Company Schedule in response thereto, conflict with or result in a violation of any permit, concession, franchise or license or any law, rule or regulation applicable to the Company or any of its Subsidiaries or any of their properties or assets, except, in the case of clauses (ii) and (iii), for any such breaches, defaults, liens, third party rights, cancellations, modifications, accelerations or losses of benefits, conflicts or violations which would not have a Company Material Adverse Effect and do not materially impair the ability of the Company to perform its obligations under this Agreement or prevent or materially delay the consummation of any of the transactions contemplated hereby. -8- Section 2.7. Governmental Consents and Approvals. Except as set forth on the Company Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will require any consent, approval, order, authorization, or permit of, or filing with or notification to, any local, state, federal or foreign court, administrative agency, commission or other governmental or regulatory authority, agency or instrumentality ("Governmental Entity"), except (a) the filing of the Registration Statement (hereinafter defined) with the Securities and Exchange Commission (the "SEC") in accordance with the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "Securities Act") and the entry of an order by the SEC permitting such Registration Statement to become effective, and compliance with applicable state securities laws, (b) the filing of the Proxy Statement (hereinafter defined) and related proxy materials with the SEC in accordance with 0the Exchange Act, (c) notification pursuant to, and expiration or termination of the waiting period under, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the "HSR Act") and (d) the filing and recording of the Certificate of Merger in accordance with the DGCL. Section 2.8. SEC Reports. The Company has filed all required forms, reports and documents with the SEC since January 1, 1997 (collectively, the "Company's SEC Reports"), including without limitation the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the "Company 1997 Form 10-K") and the Company's Quarterly Report on Form 10-Q for the fiscal quarters ended March 31, 1998 and June 30, 1998 (the "Company Forms 10-Q"). The Company's SEC Reports have complied in all material respects with all applicable requirements of the Securities Act and the Exchange Act. As of their respective dates, none of the Company's SEC Reports, including, without limitation, any financial statements or schedules included or incorporated by reference therein, contained any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. There have been filed as exhibits to, or incorporated by reference in, the Company 1997 Form 10-K and Company Forms 10-Q all contracts which, as of the date hereof, are material as described in Item 601(b)(10) of Regulation S-K. The Company has heretofore delivered or made available to Parent, in the form filed with the SEC, all of the Company's SEC Reports. Section 2.9. Financial Statements. The (a) consolidated balance sheets of the Company and its Subsidiaries at December 31, 1997 and 1996 and the related consolidated statements of earnings, changes in stockholders' equity and statements of cash flow for the years then ended, together with the notes thereto, audited by Arthur Anderson LLP (the "Company's Auditors"); and (b) unaudited consolidated balance sheets of the Company and Subsidiaries at June 30, 1998 and related consolidated statements of income, changes in stockholders' equity and statements of cash flow for the six-month period ended June 30, 1998, (the "Balance Sheet Date") have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved ("GAAP"). Such balance sheets, including the related notes, fairly present, in all material respects, the consolidated financial position, assets and liabilities (whether accrued, absolute, contingent or otherwise) of the Company and its Subsidiaries at the dates indicated and such consolidated statements of income, changes in stockholders' equity and statements of cash flow fairly present the consolidated results of operations, changes in stockholders' equity and cash flow of the Company and its Subsidiaries for the periods indicated. The unaudited consolidated financial statements as at and for the six-month period ending June 30, 1998 contain all adjustments, which are solely of a normal recurring nature, necessary to present fairly, in all material respects, the financial position at June 30, 1998, and the results of operations and -9- changes in stockholders' equity and financial position for the six-month period then ended. (The unaudited consolidated balance sheet of the Company and its Subsidiaries at June 30, 1998 described above is referred to herein as the "Company Balance Sheet"). Section 2.10. Absence of Certain Changes. Except as described in the Company Schedule, since December 31, 1997 (the "Company Audit Date"), the Company and the Subsidiaries have conducted their business solely in the ordinary course consistent with past practice. Except as otherwise disclosed on the Company Schedule or as referred to in the Company's SEC Reports, since the Company Audit Date, the Company and the Subsidiaries have not: (a) suffered any Company Material Adverse Effect; (b) been subject to any other events or conditions of any character that would impair the ability of the Company to perform its obligations under this Agreement or prevent or delay the consummation of any of the transactions contemplated hereby; (c) made any material change to their respective accounting methods, principles or practices; (d) incurred any material liabilities, other than liabilities incurred in the ordinary course of business consistent with past practice, or discharged or satisfied any Lien material, or paid any material liabilities, other than in the ordinary course of business consistent with past practices, or failed to pay or discharge when due any liabilities of which the failure to pay or discharge has caused or will cause any material damage or risk of material loss to it or any of its material assets or properties; or (e) taken or been subject to any other action or event that would have required the consent of Parent pursuant to Section 4.1 hereof. Section 2.11. Indebtedness; Absence of Undisclosed Liabilities. The Company Schedule discloses as of the date hereof all indebtedness for money borrowed of the Company or any Subsidiary of the Company, accurately disclosing for each such indebtedness the payee, the original principal amount of the loan, the current unpaid balance of the loan, the interest rate and the maturity date. Neither the Company nor any of its Subsidiaries has any material indebtedness, liability or obligation of any kind (whether known or unknown, accrued, absolute, asserted or unasserted, contingent or otherwise) except (i) as and to the extent reflected, reserved against or otherwise disclosed in the Balance Sheet, or (ii) for liabilities and obligations incurred subsequent to the Balance Sheet Date in the ordinary course of business and which do not have a Company Material Adverse Effect or materially impair the ability of Parent to perform its obligations under this Agreement or prevent or materially delay the consummation of any of the transactions contemplated hereby. Section 2.12. Assets. Except as described in the Company Schedule, the Company and the Subsidiaries have good and marketable title to all their real and personal properties and assets, including without limitation those assets and properties reflected in the Balance Sheet in the amounts and categories reflected therein, free and clear of all Liens, except (a) the lien of current taxes not yet due and payable, (b) properties, interests, and assets disposed of by the Company or any Subsidiary since the Balance Sheet Date solely in the ordinary course of business consistent with past practice, (c) such secured indebtedness as is disclosed in the Balance Sheet covering the properties referred to therein, and -10- (d) such imperfections of title, easements and encumbrances, if any, as are not substantial in character, amount or extent and do not materially detract from the value, or interfere with the present or proposed use, of the properties subject thereto ("Permitted Liens"). Section 2.13. Contracts. (a) The Company Schedule lists each written or oral contract, agreement, arrangement, lease, instrument, mortgage or commitment to which the Company or a Subsidiary is a party or may be bound or to which their respective properties or assets may be subject ("Contract"). (b) All Contracts are valid and binding on the Company or its Subsidiaries, as applicable, and, to the knowledge of the Company, the other parties thereto, and are in full force and effect as to the Company on the date of this Agreement except to the extent they have previously expired in accordance with their terms or except to the extent that their invalidity would not have a Company Material Adverse Effect. None of the Company, any of its Subsidiaries nor, to the Company's knowledge, any other parties, have violated any provision of, or committed or failed to perform any act which with notice, lapse of time or both would constitute a default under the provisions of, any Contract, the termination or violation of which, or the default under which, might have a Company Material Adverse Effect. Section 2.14. Insurance. The Company Schedule accurately sets forth as of the day preceding the date hereof all policies of insurance, other than title insurance policies, held by or on behalf of the Company and all outstanding claims. All such policies of insurance are in full force and effect, and no notice of cancellation has been received. In the reasonable judgment of the Company, such policies are in amounts which are adequate in relation to the business and properties of the Company, and all premiums to date have been paid in full. Section 2.15. Authorizations; Compliance With Law. (a) The Company and the Subsidiaries hold all licenses, franchises, certificates, consents, permits, approvals, certificates of public convenience and necessity, and authorizations ("Authorizations") from all Governmental Entities and other persons which are necessary for the lawful conduct of their respective businesses and their use and occupancy of their assets and properties in the manner currently conducted, used and occupied, except where the failure to hold any of the foregoing would not have a Company Material Adverse Effect or materially impair the ability of the Company to perform its obligations under this Agreement or materially prevent or materially delay the consummation of any of the transactions contemplated hereby. (b) The Company and each of the Subsidiaries is in compliance with all applicable laws, statutes, ordinances, codes, rules and regulations of any Governmental Entities, except where such violations would not have a Company Material Adverse Effect. Section 2.16. Taxes. (a) All federal, state, local and foreign tax returns, reports, statements and other similar filings required to be filed by the Company or the Subsidiaries (the "Tax Returns") on or prior to the date hereof or with respect to taxable periods ending on or prior to the date hereof with respect to any federal, state, local or foreign taxes, assessments, deficiencies, fees and other governmental charges or impositions (including, without limitation, all income tax, unemployment compensation, social security, -11- payroll, sales and use, excise, privilege, property, ad valorem, transfer, franchise, license, school and any other tax or similar governmental charge or imposition (including interest, penalties or additions with respect thereto) under laws of the United States or any state or municipal or political subdivision thereof or any foreign country or political subdivision thereof ("Taxes") have been timely filed and all such Tax Returns are true, correct and complete in all material respects. (b) All Taxes called for by the Tax Returns have been fully paid. The accruals for Taxes contained in the Balance Sheet are adequate to cover the liabilities for Taxes of the Company and the Subsidiaries as of the Balance Sheet Date and include adequate provision for all deferred taxes, and nothing has occurred subsequent to that date to make any of such accruals inadequate. (c) Neither the Company nor the Subsidiaries have received any notice of assessment or proposed assessment in connection with any Taxes or Tax Returns and there are not pending tax examinations of or tax claims asserted against the Company or the Subsidiaries or any of their respective assets or properties. Neither the Company nor any Subsidiary has extended, or waived the application of, any statute of limitations of any jurisdiction regarding the assessment or collection of any Taxes. (d) There are no tax liens (other than any lien for current taxes not yet due and payable) on any of the assets or properties of the Company or the Subsidiaries. The Company has no knowledge of any basis for any additional assessment of any Taxes. The Company and the Subsidiaries have made all deposits required by law to be made with respect to employees' withholding and other employment taxes, including without limitation the portion of such deposits relating to taxes imposed upon the Company or the Subsidiaries. Section 2.17. Absence of Litigation; Claims. There are no claims, actions, suits, proceedings or investigations pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries, or any properties or rights of the Company or any of its Subsidiaries, or with respect to which any director, officer, employee or agent is or may be entitled to claim indemnification from the Company or any Subsidiary of the Company, before any Governmental Entity or arbitrator, nor is there any judgement, decree, injunction, rule or order of any Governmental Entity or arbitrator expressly applicable by its terms to the Company or any of its Subsidiaries. Section 2.18. Employee Benefit Plans; Employment Agreements. (a) The Company Schedule lists all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and all bonus, stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance and other similar fringe or employee benefit plans, programs or arrangements, and any current or former employment or executive compensation or severance agreements, written or otherwise, for the benefit of, or relating to, any employee of the Company, any trade or business (whether or not incorporated) which is a member of a controlled group including the Company or which is under common control with the Company (an "ERISA Affiliate") within the meaning of Section 414 of the Code, or any subsidiary of the Company, as well as each plan with respect to which the Company or an ERISA Affiliate could incur liability under Section 4069 (if such plan has been or were terminated) or Section 4212(c) of ERISA (together, the "Employee Plans"), excluding former agreements under which the Company has no remaining obligations and any of the foregoing that are required to be maintained by -12- the Company under the laws of any foreign jurisdiction. With respect to each Employee Plan, as applicable, a copy of (i) each such written Employee Plan (other than those referred to in Section 4(b)(4) of ERISA, together with all amendments, trust agreements, insurance policies and service agreements; (ii) the three most recently filed Forms 5500 or 5500 C/R and any financial statements attached thereto; (iii) the most recent Internal Revenue Service ("IRS") determination letter; (iv) the most recent summary plan description; (v) all reports submitted within the preceding three years by third-party administrators, actuaries, investment managers, consultants, or other independent contractors, has been made available to Parent; and (vi) all notices that were issued within the preceding three years by the IRS, Department of Labor, the Pension Benefit Guarantee Corporation, or any other Governmental Entity. (b) Except as set forth in the Company Schedule, (i) except as required by Section 4980B of the Code, none of the Employee Plans promises or provides retiree medical or other retiree welfare benefits to any person and none of the Employee Plans is a "multi employer plan" as such term is defined in Section 3(37) of ERISA; (ii) there has not been any breach of any fiduciary duty, as described in Section 404 of ERISA, or no "prohibited transaction", as such term is defined in Section 406 of ERISA or Section 4975 of the Code, with respect to any Employee Plan, which could result in any material liability of the Company or any of its subsidiaries; (iii) all Employee Plans are in compliance in all material respects with the requirements prescribed by any and all statutes (including ERISA and the Code), orders, or governmental rules and regulations currently in effect with respect thereto (including applicable requirements for notification to participants or the Department of Labor, IRS or Secretary of the Treasury), all employee plans have in all material respects been operated at all times in accordance with their terms and with ERISA and the Code, and the Company and each of its subsidiaries have performed all material obligations required to be performed by them under, are not in any material respect in default under or violation of, and have no knowledge of any default or violation by any other party to, any of the Employee Plans; (iv) each Employee Plan intended to qualify under Section 401(a) of the Code and each trust intended to qualify under Section 501(a) of the Code is the subject of a favorable determination letter from the IRS, and nothing has occurred which may reasonably be expected to impair such determination; (v) all contributions required to be made to any Employee Plan pursuant to Section 412 of the Code, or the terms of the Employee Plan or any collective bargaining agreement, have been made on or before their due dates; (vi) with respect to each Employee Plan, no "reportable event" within the meaning of Section 4043 of ERISA (excluding any such event for which the 30 day notice requirement has been waived under the regulations to Section 4043 of ERISA) nor any event described in Section 4062, 4063, 4604 or 4041 of ERISA has occurred; and (viii) neither the Company nor any ERISA Affiliate has incurred, nor reasonably expects to incur, any liability under Title IV of ERISA (other than liability for premium payments to the Pension Benefit Guaranty Corporation arising in the ordinary course); (ix) neither the Company nor any ERISA Affiliate has incurred any liability for any excise, income or other taxes or penalties with respect to any Employee Plan which has not been paid in full, and no event has occurred and no circumstance exists that could give rise to any such liability; (x) there are no pending or threatened claims against any Employee Plan (other than routine claims for benefits) or against any fiduciary or an Employee Plan with respect to such plan, nor is there any basis for such a claim; and (xi) no Employee Plan is presently under audit or examination (nor has notice been received of a potential audit or examination) by any governmental entity, and no matters are pending with respect to any Employee Plan under any governmental corrective or remedial program. (c) The Company Schedule sets forth a true and complete list of each current or former employee, officer or director of the Company or any of its Subsidiaries who holds any option to purchase Company Common Stock as of the date hereof, together with the number of shares of Company -13- Common Stock which are subject to such option, the date of grant of such option, the extent to which such option is vested (or will become vested within six months from the date hereof, or as a result of, the Merger), the option price of such option (to the extent determined as of the date hereof), whether such option is intended to qualify as an incentive stock option within the meaning of Section 422(b) of the Code (an "ISO"), and the expiration date of such option. The Company Schedule also sets forth the total number of such ISOs and such nonqualified options. (d) Except as set forth in the Company Schedule, any amount that could be received (whether in cash or property or the vesting of property) as a result of any of the transactions contemplated by this Agreement by any employee, officer or director of the Company or any of its affiliates who is a "disqualified individual" (as such term is defined in Proposed Treasury Regulation Section 1.280G-1) under any employment, severance or termination agreement, other compensation arrangement or Employee Plan currently in effect would not be characterized as an "excess parachute payment" (as such term is defined in Section 280G of the Code). Section 2.19. Labor Matters. There are no controversies pending or, to the knowledge of the Company, threatened, between the Company or any of its Subsidiaries or any of their respective employees, which controversies would have a Company Material Adverse Effect. Neither the Company nor any of its Subsidiaries is party to any collective bargaining agreement or other labor agreement with any union or labor organization and no union or labor organization has been recognized by the Company nor or any of its Subsidiaries as a bargaining representative for employees of the Company or any of its Subsidiaries. Section 2.20. Intellectual Property. Except for that which Casino Money Centers, Inc. ("CMC") is the registered owner (and as to which no representation or warranty is made by the Company), neither the Company nor any Subsidiary of the Company has any registered copyrights, patents, trademarks or applications for any registered copyrights, patents or trademarks. In conducting their respective business as presently conducted, neither the Company nor any Subsidiary of the Company (other than CMC, as to which no representation or warranty is made hereby) is infringing upon or unlawfully or wrongfully using any patent, trademark, trade name, service mark, copyright or any other form of intellectual property or trade secret, owned or claimed by another. Neither the Company nor any Subsidiary is in default under, nor has it received any notice of any claim of infringement or any other claim or proceeding relating to, any such patent, trademark, trade name, service mark, copyright, trade secret or any other form of intellectual property or any agreement relating thereto. Section 2.21. Adequacy of Disclosure. No representation or warranty by the Company in this Agreement, in any certificate or in the Company Schedule furnished or to be furnished to Parent pursuant hereto, or in connection with the negotiation, execution or performance of this Agreement, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact required to be stated herein or therein or necessary to make any statement herein or therein not misleading. Section 2.22. Registration Statement; Proxy Statement/Prospectus. The information supplied by the Company for inclusion or incorporation by reference in the registration statement of Parent on Form S-4 pursuant to which shares of Parent Common Stock to be issued in the Merger will be registered with the SEC (the "Registration Statement") shall not contain, at the time the Registration Statement is declared effective by the SEC, any untrue statement of a material fact or omit to state any material fact required to be stated in the Registration Statement or necessary in order to make the -14- statements in the Registration Statement not misleading. The information supplied by the Company for inclusion or incorporation by reference in the proxy statement/prospectus (the "Proxy Statement") to be sent to the stockholders of the Company in connection with the special meeting of the Company's stockholders to consider this Agreement (the "Stockholders Meeting") shall not, at the time the Proxy Statement is first mailed to stockholders, at the time of the Stockholders Meeting, or at the Effective Time, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Stockholders Meeting which has become false or misleading. If at any time prior to the Effective Time any event relating to the Company or any of its affiliates should be discovered by the Company which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement, the Company shall promptly inform Parent. Section 2.23. Tax Matters. Neither the Company nor, to the knowledge of the Company, any of its affiliates has taken or agreed to take any action that would prevent the Merger from constituting a reorganization qualifying under the provisions of Section 368(a) of the Code or make untrue any representation or warranty contained in the Company Tax Certificate. Section 2.24. Affiliates. Except for the persons listed on the Company Schedule there are no persons who, to the knowledge of the Company, may be deemed to be affiliates of the Company under Rule 1-02 of Regulation S-X of the SEC and Rule 145 under the Securities Act. Section 2.25. Board Action; Vote Required; Applicability of Section 203. (a) The Special Committee of the Board of Directors, and the entire Board of Directors of the Company, each has unanimously determined that the transactions contemplated by this Agreement are in the best interests of the Company and its stockholders and has resolved to recommend to such stockholders that they vote in favor thereof. (b) The provisions of Section 203 of the Delaware Law will not apply to this Agreement or any of the transactions contemplated hereby. (c) The Company represents and warrants that it has been advised by each of its directors and executive officers that each such person intends to vote his shares of Company Common Stock in favor of the approval and adoption of this Agreement. Section 2.26. Opinion of Financial Advisor. The Company has received the opinion of Janney Montgomery Scott Inc. (the "Company Financial Advisor"), dated September 3, 1998, to the effect that, as of such date, the Merger Consideration is fair from a financial point of view to the holders of Company Common Stock and a copy of such opinion has been made available to Parent. Section 2.27. Brokers and Finders. Neither the Company, any Subsidiary of the Company nor any of their respective officers, directors or employees has engaged any broker or finder or incurred any liability for any brokerage fees, commissions or finder's fees in connection with the transactions contemplated herein, except that the Special Committee of the Board of Directors of the Company has engaged the Company Financial Advisor as its financial advisor pursuant to the terms of an engagement letter, a true and complete copy of which has previously been furnished to Parent. -15- ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Parent and Merger Sub each represents and warrants to the Company as follows, except as set forth on a Disclosure Schedule delivered by Parent concurrently with the execution and delivery of this Agreement (the "Parent Schedule"), each of which exceptions shall specifically identify the relevant subsection hereof to which it relates and shall be deemed to be representations and warranties as if made hereunder: Section 3.1. Organization and Powers. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Each of Parent and the Merger Sub has all requisite corporate power and authority to carry on its business as it has been and is now being conducted and to own, lease and operate the properties and assets used in connection therewith. Section 3.2. Authority; Binding Effect. Parent has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All necessary action, corporate or otherwise, required to have been taken by or on behalf of it by applicable law, its charter document or otherwise to authorize (i) the approval, execution and delivery on its behalf of this Agreement and (ii) its performance of its obligations under this Agreement and the consummation of the transactions contemplated hereby has been taken. This Agreement constitutes Parent's valid and binding agreement, enforceable against it in accordance with its terms. Section 3.3. Conflict with Other Agreements; Approvals. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, (i) violate or conflict with the Parent's or any of its Subsidiaries charter or bylaws, or (ii) constitute a breach or default (or an event that with notice or lapse of time or both would become a breach or default) or give rise to any Lien, third party right of termination, cancellation, material modification or acceleration, or loss of any benefit, under any contract to which the Parent or any Subsidiary of the Parent is a party or by which it is bound, or (iii) subject to the consents, approvals, orders, authorizations, filings, declarations and registrations specified in Section 3.4 or in the Parent Schedule in response thereto, conflict with or result in a violation of any permit, concession, franchise or license or any law, rule or regulation applicable to the Parent or any of its Subsidiaries or any of their properties or assets, except, in the case of clauses (ii) and (iii), for any such breaches, defaults, liens, third party rights, cancellations, modifications, accelerations or losses of benefits, conflicts or violations which would not have a Parent Material Adverse Effect and do not materially impair the ability of the Parent to perform its obligations under this Agreement or prevent or materially delay the consummation of any of the transactions contemplated hereby. As used in this Agreement, "Parent Material Adverse Effect" shall mean any fact, condition, event, development or occurrence which, individually or when taken together with all other such facts, conditions, events, developments or occurrences, could reasonably be expected to have a material adverse effect on the financial condition, operating results of Parent and its Subsidiaries, taken as a whole. Section 3.4. Governmental Consents and Approvals. Except as set forth on the Parent Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will require any consent, approval, order, authorization, or permit of, or filing with -16- or notification to, any Governmental Entity, except (a) the filing of the Registration Statement with the SEC in accordance with the Securities Act and the entry of an order by the SEC permitting such Registration Statement to become effective, and compliance with applicable state securities laws, (b) notification pursuant to, and expiration or termination of the waiting period under the HSR Act, and (c) the filing and recording of the Certificate of Merger in accordance with the DGCL. Section 3.5. Capital Stock. Parent has authorized capital stock consisting of 200,000,000 shares of Parent Common Stock and 5,000,000 shares of Preferred Stock, par value $.01 per share ("Parent Preferred Stock"). As of August 1, 1998: (i) 25,671,205 shares of Parent Common Stock were issued and outstanding, (ii) no shares of Parent Preferred Stock were issued and outstanding, (iii) no shares of Parent Common Stock were held as treasury shares, (iii) no shares of Company Common Stock were held as treasury shares, (iv) 4,032,705 shares of the Parent Common Stock underlying outstanding stock options were granted under the Parent's 1996 Equity Compensation Plan (the "Parent Stock Plan"), (v) 2,467,295 shares of the Parent Common Stock were reserved for issuance under the Parent Stock Plan, and (vi) 2,426,733 shares of Company Common Stock were reserved for issuance upon the exercise of outstanding warrants and options issued outside of the Parent Stock Plan. Since June 1, 1998 until the date hereof, (i) no additional shares of capital stock have been reserved for issuance by Parent and (ii) the only issuances of shares of capital stock of the Parent have been issuances of Parent Common Stock upon the exercise of outstanding stock options. All of the issued and outstanding shares have been duly authorized and are validly issued and outstanding, fully paid and nonassessable, and were issued in compliance with all applicable Federal and state securities laws. No shares of capital stock issued by Parent are or were, at the time of their issuance, issued in violation of preemptive rights. There are no existing subscriptions, options, warrants, calls, commitments, agreements, conversion rights or other rights of any character (contingent or otherwise) to purchase or otherwise acquire from Parent at any time, or upon the happening of any stated event, any shares of the capital stock of Parent whether or not presently issued or outstanding, except as set forth on the Parent Schedule. Section 3.6. Registration Statement; Proxy Statement/Prospectus. The information supplied by the Parent for inclusion or incorporation by reference in the Registration Statement shall not contain, at the time the Registration Statement is declared effective by the SEC, any untrue statement of a material fact or omit to state any material fact required to be stated in the Registration Statement or necessary in order to make the statements in the Registration Statement not misleading. The information supplied by the Parent for inclusion or incorporation by reference in the Proxy Statement shall not, at the time the Proxy Statement is first mailed to stockholders, at the time of the Stockholders Meeting, or at the Effective Time, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. If at any time prior to the Effective Time any event relating to the Parent or any of its affiliates should be discovered by the Parent which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement, the Parent shall promptly inform the Company. Section 3.7. SEC Reports. Parent has filed all required forms, reports and documents with the SEC since January 1, 1997 (collectively, the "Parent's SEC Reports"), including without limitation Parent's Annual Report on Form 10-K for the year ended December 31, 1997 and Parent's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1998 and June 30, 1998. The Parent's SEC Reports have complied in all material respects with all applicable requirements of the Securities Act and the Exchange Act. As of their respective dates, none of Parent's SEC Reports, including, without -17- limitation, any financial statements or schedules included or incorporated by reference therein, contained any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Parent has heretofore delivered or made available to the Company, in the form filed with the SEC, all of Parent's SEC Reports. Section 3.8. Financial Statements. The (a) consolidated balance sheets of the Parent and its subsidiaries at December 31, 1997 and 1996 and the related consolidated statements of earnings, changes in stockholders' equity and statements of cash flow for the years then ended, together with the notes thereto, audited by Arthur Anderson LLP (the "Parent's Auditors"); and (b) unaudited consolidated balance sheets of the Parent and its subsidiaries at June 30, 1998 and related consolidated statements of income, changes in stockholders' equity and statements of cash flow for the six-month period ended June 30, 1998, have been prepared in accordance with GAAP. Such balance sheets, including the related notes, fairly present, in all material respects, the consolidated financial position, assets and liabilities (whether accrued, absolute, contingent or otherwise) of the Parent and its Subsidiaries at the dates indicated and such consolidated statements of income, changes in stockholders' equity and statements of cash flow fairly present the consolidated results of operations, changes in stockholders' equity and cash flow of the Parent and its Subsidiaries for the periods indicated. The unaudited consolidated financial statements as at and for the six-month period ending June 30, 1998 contain all adjustments, which are solely of a normal recurring nature, necessary to present, in all material respects, fairly the financial position at June 30, 1998, and the results of operations and changes in stockholders' equity and financial position for the periods then ended. Section 3.9. Absence of Certain Changes. Except as described in the Parent Schedule, since December 31, 1997, the Parent and its Subsidiaries have conducted their business solely in the ordinary course consistent with past practice. Except as otherwise disclosed on the Parent Schedule, or in Parents' SEC Reports, since December 31, 1997, the Parent and its Subsidiaries have not (a) suffered any Parent Material Adverse Effect; or (b) been subject to any other events or conditions of any character that would have a Parent Material Adverse Effect or impair the ability of Parent to perform its obligations under this Agreement or prevent or delay the consummation of any of the transactions contemplated hereby. Section 3.10. Absence of Litigation; Claims. Except as set forth on the Parent Schedule, there are no claims, actions, suits, proceedings or investigations pending or, to the knowledge of Parent, threatened against Parent or any of its Subsidiaries, or any properties or rights of Parent or any of its Subsidiaries, before any Governmental Entity or arbitrator, which, if decided adversely to Parent or such Subsidiary, would have a Parent Material Adverse Effect or impair the ability of Parent to perform its obligations under this Agreement or prevent or delay the consummation of any of the transactions contemplated hereby, nor is there any judgement, decree, injunction, rule or order of any Governmental Entity or arbitrator expressly applicable by its terms to the Parent or any of its Subsidiaries having or which, insofar as reasonably can be foreseen, in the future would have a Parent Material Adverse Effect. Section 3.11. Tax Matters. The representations and warranties contained in the Parent Tax Certificate (as defined in Section 4.13 hereof) are true and correct. Parent has not taken or agreed to take any action that would prevent the Merger from constituting a reorganization qualifying under the -18- provisions of Section 368(a) of the Code or make untrue any representation or warranty contained in the Parent. Section 3.12. Affiliates. Except for the persons listed on the Parent Schedule, there are no persons who, to the knowledge of Parent, may be deemed to be affiliates of Parent under Rule 1-02 of Regulation S-X of the SEC. Concurrently with the execution and delivery of this Agreement, Parent has delivered to the Company an executed letter agreement, substantially in the form of Exhibit B hereto, from each of such persons. Section 3.13. Adequacy of Disclosure. No representation or warranty by Parent in this Agreement, in any certificate or in the Parent Schedule furnished or to be furnished to the Company pursuant hereto, or in connection with the negotiation, execution or performance of this Agreement, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact required to be stated herein or therein or necessary to make any statement herein or therein not misleading. Section 3.14. Brokers and Finders. Neither the Parent nor any of its respective officers, directors or employees has engaged any broker or finder or incurred any liability for any brokerage fees, commissions or finder's fees in connection with the transactions contemplated herein, except that the Special Committee of the Board of Directors of Parent has engaged Legg Mason Wood Walker, Inc. as its financial advisor. ARTICLE IV OTHER AGREEMENTS Section 4.1. Conduct of the Company's Business. The Company covenants and agrees that, between the date of this Agreement and the Effective Time, unless Parent shall otherwise consent in writing, and except as otherwise expressly contemplated hereby, the business of the Company and its Subsidiaries shall be conducted only in, and such entities shall not take any action except in, the ordinary course of business. By way of amplification and not limitation, except as otherwise expressly contemplated by this Agreement or as otherwise set forth in the Company Schedule, the Company agrees on behalf of itself and its Subsidiaries (other than CMC, which shall not be subject to this Section 4.1) that, without the prior written consent of Parent, they will, between the date of this Agreement and the Effective Time: (a) not directly or indirectly do any of the following: (i) amend or propose to amend its Certificate of Incorporation or By-Laws; (ii) split, combine or reclassify any outstanding shares of its capital stock, or declare, set aside or pay any dividend payable in cash, stock, property or otherwise with respect to such shares; (iii) redeem, purchase, acquire or offer to acquire any shares of its capital stock; (iv) issue, sell, pledge or dispose of, or agree to issue, sell, pledge or dispose of, any additional shares of, or securities convertible or exchangeable for, or any options, warrants or rights of any kind to acquire any shares of, its capital stock, its shares of Parent Common Stock or of any class or other property or assets whether pursuant to any rights agreement, stock option plans described in the Company Schedule or otherwise, provided that the Company may issue shares of Company Common Stock pursuant to currently outstanding options, warrants and convertible securities and may issue one or more stock options (the "Replacement Options") to replace the conversion rights contained in such convertible -19- securities; (v) accelerate, amend or change the period of exerciseability of options or restricted stock granted under any of the Company Stock Plans or authorize cash payments in exchange for any options granted under any of such plans except as required by the terms of such plans or any related agreements in effect as of the date of this Agreement, (vi) hire, engage or otherwise retain any new employee, consultant or independent contractor or (vii) enter into any contract, agreement, commitment or arrangement with respect to any of the matters set forth in this paragraph (a); (b) not, directly or indirectly (i) acquire (by merger, consolidation or acquisition of stock or assets) any corporation, partnership, limited liability company or other business organization or division thereof or make any equity investments therein; provided, however, that Find Dad, Inc. and Kaplan & Kaplan Inc. may merge with and into CMC (the "CMC Merger"); (ii) issue, sell, pledge, dispose of or encumber any assets (including without limitation licenses, Authorizations or rights) of the Company or any of its Subsidiaries or enter into any securitization transactions,; (iii) incur any indebtedness for borrowed money or issue any debt securities, (iv) make any commitments or agreements for capital expenditures or capital additions; (v) except for the CMC Merger, enter into or modify any material contract, lease or agreement except in the ordinary course of business and consistent with past practice; (vi) terminate, modify, assign, waive, release or relinquish any material contract rights or amend any material rights or claims not in the ordinary course of business or except as expressly provided herein; or (vii) enter into any contract, agreement, commitment or arrangement with respect to any of the matters set forth in this paragraph (b); (c) not, directly or indirectly (i) initiate any litigation or arbitration proceeding, (ii) revalue any of its assets, including writing down the value of inventory or writing off notes or accounts receivable, other than in the ordinary course of business pursuant to arm's length transactions on commercially reasonable terms, (iii) make any material change to their respective accounting methods, principles or practices, or (iv) settle or compromise any Tax liability, or prepare or file any Tax Return inconsistent with past practice or, on any such Tax Return, take any position, make any election, or adopt any method that is inconsistent with positions taken, elections made or methods used in preparing or filing similar Tax Returns in prior periods; (d) not, directly or indirectly, (i) hire, engage or otherwise retain any new employee, consultant or independent contractor; (ii) grant any increase in the salary or other compensation of its employees or grant any bonus to any employee or enter into any employment agreement or make any loan to or enter into any material transaction of any other nature with any officer or employee of the Company; (iii) take any action to institute any new severance or termination pay practices with respect to any directors, officers or employees of the Company or to increase the benefits payable under its severance or termination pay practices; or (iv) adopt or amend, in any respect, except as may be required by applicable law or regulation, any bonus, profit sharing, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment or other employee benefit plan, agreement, trust, fund, plan or arrangement for the benefit or welfare of any directors, officers or employees; provided, however, that the Company may cause its 401(k) plan to be transfered to CMC; (e) not, directly or indirectly, take (and will use reasonable efforts to prevent any affiliate of the Company from taking) or agree in writing or otherwise to take, (i) any of the actions described in this Section 4.l, (ii) any action which would make any of the Company's representations or warranties in this Agreement, if made on and as of the date of such action or agreement, untrue or incorrect in any material respect, or (iii) any action which could prevent it from performing, or cause it -20- not to perform, its obligations under this Agreement, or (iv) any action that would cause the Merger not to be treated as a reorganization within the meaning of Section 368(a) of the Code; (f) promptly disclose to Parent any information contained in its representations and warranties or the Company Schedule which, because of an event occurring after the date hereof, is incomplete or is no longer correct as of all times after the date hereof until the Closing Date; provided, however, that none of such disclosures shall be deemed to modify, amend or supplement the representations and warranties of the Company or the Company Schedule hereto for the purposes of Article V hereof, unless Parent shall have consented thereto in writing; and (g) use reasonable efforts to obtain and deliver to the Parent at the Closing an executed letter in substantially the form of Exhibit A from each of the Company Affiliates; provided, however, notwithstanding the provisions of this Section 4.1, that the Company may make the Permitted Distribution as set forth in Section 5.1(f) and issue any Replacement Options. Section 4.2. Parent's Undertakings. Parent will not, directly or indirectly, take (and will use reasonable efforts to prevent any affiliate of the Company from taking) any action that would cause the Merger not to be treated as a reorganization within the meaning of Section 368(a) of the Code. Parent shall as promptly as practicable following the date hereof apply for approval for listing of Parent Common Stock to be issued pursuant to the Merger on the Nasdaq National Market ("NMS") upon official notice of issuance. Section 4.3. Access to Information. Between the date of this Agreement and the Closing Date, the Company will (a) give Parent and its authorized representatives reasonable access, during regular business hours upon reasonable notice, to all offices, warehouses and other facilities and to all of its books and records, (b) permit Parent to make such reasonable inspections as it may require, and (c) cause its officers and those of its subsidiaries to furnish Parent with such financial and operating data and other information with respect to the business and properties of the Company, as Parent may from time to time reasonably request and as the Company may have on hand or be able to produce without hardship. All such access and information obtained by Parent and its authorized representatives shall be subject to the terms and conditions of the letter agreement between the Company and Parent (the "Confidentiality Agreement") attached as Exhibit 4.3 hereto. Section 4.4. Stockholder Vote; Proxy Statement. (a) As promptly as practicable after the date hereof, the Company shall take all action necessary in accordance with Rules 14a-1 et. seq. of the Exchange Act, the DGCL, the rules of the Nasdaq Small-cap Market and its Certificate of Incorporation and By-laws to call, give notice of, convene and hold the Stockholders Meeting as promptly as practicable (unless such date shall be delayed due to circumstances reasonably beyond the control of the parties) to consider and vote upon the approval and adoption of this Agreement and the transactions contemplated hereby and for such other purposes as may be necessary or desirable. Subject to the fiduciary duties of the Board of Directors under applicable law, as determined by such directors in good faith after consultation with and based upon the written advice of independent legal counsel, the Board of Directors of the Company shall use its efforts to solicit and secure from its stockholders such approval and adoption of this Agreement and the transactions contemplated hereby. -21- (b) As promptly as practicable after the date hereof, the Company and Parent shall jointly prepare and file with the SEC preliminary proxy materials of the Company under the Exchange Act with respect to the Merger, and a preliminary prospectus of Parent with respect to Parent Common Stock to be issued in the Merger and will thereafter use their respective best efforts to respond to any comments of the SEC with respect thereto and to cause the Registration Statement to become effective, and the Proxy Statement and related proxy material to be mailed to the Company's stockholders, as promptly as practicable. The Proxy Statement shall include the unqualified recommendation of the Company's Board of Directors that the Company's stockholders vote in favor of the approval and adoption of this Agreement, unless otherwise necessary due to the applicable fiduciary duties of the directors of the Company, as determined by such directors in good faith after consultation with and based upon the written advice of independent legal counsel. (c) As soon as practicable after the date hereof, the Company and Parent shall prepare and file any other filings required to be filed by each under the Exchange Act or any other federal or state securities laws relating to the Merger and the transactions contemplated hereby (collectively, "Other Filings") and will use their respective reasonable best efforts to respond to any comments of the SEC or any other appropriate government official with respect thereto. (d) The Company and Parent shall cooperate with each other and provide to each other all information necessary in order to prepare, amend or supplement, to the extent required by the Securities Act the Registration Statement, the Proxy Statement and the Other Filings (collectively, the "SEC Transaction Filings"). (e) The Company and Parent will notify the other party promptly of the receipt of any comments from the SEC or its staff or any other appropriate government official and of any requests by the SEC or its staff or any other appropriate government official for amendments or supplements to any of the SEC Transaction Filings or for additional information and will supply the other party with copies of all correspondence between the Company or any of its representatives or Parent and any of its representatives, as the case may be, on the one hand, and the SEC or its staff or any other appropriate government official, on the other hand, with respect thereto. If at any time prior to the Effective Time, any event shall occur that should be set forth in an amendment of, or a supplement to, any of the SEC Transaction Filings, the Company and Parent agree promptly to prepare and file such amendment or supplement and to distribute such amendment or supplement as required by applicable law, including, in the case of an amendment or supplement to the Proxy Statement, mailing such supplement or amendment to the Company's stockholders. Parent will provide the Company with a reasonable opportunity to review and comment on any amendment or supplement to the Registration Statement or the Proxy Statement proposed to be made by it prior to filing such amendment or supplement with the SEC. No amendment or supplement to the information supplied by the Company for inclusion in the Proxy Statement shall be made without the approval of the Company, which approval shall not be unreasonably withheld or delayed. The Company will provide the Parent with a reasonable opportunity to review and comment on any amendment or supplement to the Proxy Statement proposed to be made by it prior to filing such amendment or supplement with the SEC. No amendment or supplement to the information supplied by Parent for inclusion in the Proxy Statement shall be made without the approval of the Parent, which approval shall not be unreasonably withheld or delayed. Parent shall not be required to maintain the effectiveness of the Registration Statement for the purpose of resale by stockholders of the Company who may be affiliates of the Company or Parent pursuant to Rule 145 under the Securities Act. -22- (f) The information provided and to be provided by the Company and Parent for inclusion or incorporation by reference in SEC Transaction Filings shall at the time such information was supplied be true and correct in all material respects and shall not omit to state any material fact required to be stated therein or necessary in order to make such information not false or misleading, and the Company and Parent each agree to promptly correct any such information provided by it for use in the SEC Transaction Filings that shall have become false or misleading. The SEC Transaction Filings, when filed with the SEC or any appropriate government official, shall comply as to form in all material respects with all applicable requirements of law. For purposes of the foregoing, information concerning or related to the Parent contained in the Proxy Statement shall be deemed to have been supplied by the Parent and information concerning or related to the Company and the Stockholders Meeting shall be deemed to have been supplied by the Company. Section 4.5. Reasonable Best Efforts. Subject to the fiduciary duties of the Company's Board of Directors, as determined by such directors in good faith after consultation with and based upon the written advice of independent legal counsel, and except as otherwise provided herein, each of the parties hereto agrees to use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws, statutes, ordinances, codes, rules and regulations to consummate and make effective the transactions contemplated by this Agreement in the most expeditious manner practicable, including but not limited to the satisfaction of all conditions to the Merger, and to consummate the Merger as promptly as practicable, but in no event later than December 31, 1998. Section 4.6. Public Announcements. No party hereto shall make any public announcements or otherwise communicate with any news media with respect to this Agreement or any of the transactions contemplated hereby without prior consultation with the other parties as to the timing and contents of any such announcement as may be reasonable under the circumstances; provided, that nothing contained herein shall prevent any party from promptly making all filings with Governmental Entities and all disclosure as may, in its good faith judgment, be required or advisable under applicable law, regulation or stock exchange rule in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby (in which case the disclosing party shall advise the other parties and provide them with a copy of the proposed disclosure or filing prior to making the disclosure or filing). Section 4.7. Notification. Each party hereto shall, or promptly after obtaining knowledge of the occurrence of any fact or circumstance that would cause or constitute a breach of any of its representations and warranties set forth herein, give notice thereof to the other parties and shall use its best efforts to prevent or promptly to remedy such breach; provided, however, that none of such notices shall be deemed to modify, amend or supplement the representations and warranties of the such party or the disclosure schedules of such party for the purposes of Article V hereof, unless the other party shall have consented thereto in writing. Section 4.8. Subsequent Financial Statements. Prior to the Effective Time, the Company and the Parent will timely file with the SEC, each Annual Report on Form 10-K, Quarterly Report on Form 10-Q and Current Report on Form 8-K required to be filed by such Party under the Exchange Act and the rules and regulations promulgated thereunder and will promptly deliver to the other copies of each such report filed with the SEC. -23- Section 4.9. Control of Operations. Nothing contained in this Agreement shall give Parent, directly or indirectly, the right to control or direct the Company's operations prior to the Effective Time. Prior to the Effective Time, each of the Company and Parent shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision over its respective operations. Section 4.10. Regulatory and Other Authorizations. Each party hereto agrees to use commercially reasonable efforts to comply with all legal requirements which may be imposed on such party with respect to the Merger and to obtain all Authorizations, consents, orders and approvals of Governmental Entities and non-governmental third parties that may be or become necessary for its respective execution and delivery of, and the performance of its respective obligations pursuant to, this Agreement, and each party will cooperate fully with the other parties in promptly seeking to obtain all such authorizations, consents, orders and approvals. Without limitation, the Company and Parent shall each make an appropriate filing of a Notification and Report Form pursuant to the HSR Act no later than 20 days after the date hereof and shall promptly respond to any request for additional information with respect thereto. Each such filing shall request early termination of the waiting period imposed by the HSR Act. Section 4.11. Takeover Statute. If any "fair price," "moratorium," "control share acquisition" or other form of antitakeover statute or regulation shall become applicable to the transactions contemplated hereby, each of the Company and Parent and the members of their respective Boards of Directors shall use their reasonable best efforts to grant such approvals and take such actions as are necessary so that the transactions contemplated hereby may be consummated as promptly as practicable on the terms contemplated hereby and otherwise use their reasonable best efforts to act to eliminate or minimize the effects of such statute or regulation on the transactions contemplated hereby. Section 4.12. Indemnification of Directors and Officers. For a period of six (6) years after the Effective Time, Parent shall cause the Company as the Surviving Corporation, and any successor in interest thereto (a) to maintain in effect the current provisions regarding indemnification of officers and directors contained in the charter and bylaws of the Company, and (b) to indemnify the directors and officers of the Company to the full extent to which the Company is permitted to indemnify such officers and directors under its charter and bylaws and applicable law; provided, that the Parent shall so indemnify such officers and directors upon any failure of the Company to so indemnify. Any claim for indemnification made prior to the expiration of the six-year (6) period set forth above shall survive until the final determination of such claim. Parent shall provide each individual who served as a director or officer of the Company at any time prior to the Effective Time with liability insurance for a period of thirty-six (36) months after the Effective Time no less favorable in coverage and amount than any applicable insurance in effect immediately prior to the Effective Time, provided, however, that Parent shall not be obligated to provide such coverage to the extent that the cost of such coverage exceeds 150% of the cost of such coverage immediately prior to the Effective Time but will use its reasonable best efforts to obtain as much liability insurance as can be obtained for the remainder of such period for a premium not in excess (on an annualized basis) of 150% of the last annual premium paid prior to the date hereof. Section 4.13. Tax-Free Reorganization. Each of Parent and the Company will use its best efforts to cause the Merger to qualify as a "reorganization" within the meaning of Section 368(a) of the Code, and to enable Arthur Andersen LLP to render its opinion contemplated by Section 5.2(f) hereof. Each party shall make and shall use its best efforts to cause those of its respective officers and -24- stockholders that counsel to the parties shall reasonably request to make, such representations and certifications as counsel to the parties shall reasonably request to enable them to render such opinion, including, without limitation, the representations of Parent contained in a certificate of Parent (the "Parent Tax Certificate") substantially in the form of the Parent Tax Certificate attached as Item 4.13 of the Parent Letter and representations of the Company contained in a certificate of the Company (the "Company Tax Certificate") substantially in the form of the Company Tax Certificate attached as Item 4.13 to the Company Schedule. Section 4.14. No Solicitation. (a) Until the termination of this Agreement, without the prior written consent of Parent, from and after the date hereof, the Company will not, and will not authorize or permit any of its Subsidiaries or their officers, directors, employees, financial advisors and agents ("Representatives") to, directly or indirectly, (i) solicit, initiate or encourage (including by way of furnishing information) or take any other action to facilitate knowingly any inquiries or the making of any proposal which constitutes or may reasonably be expected to lead to an Acquisition Proposal (as defined herein) from any person, (ii) engage in any discussion or negotiations relating thereto or (iii) enter into any agreement with respect to, agree to, approve or recommend any Acquisition Proposal; provided, however, that notwithstanding any other provision hereof, the Company may, (A) at any time prior to the time the Company's stockholders shall have voted to approve this Agreement engage in discussions or negotiations with a third party (and may furnish such third party information concerning the Company and its business, properties and assets to such party) who (without any solicitation, initiation, encouragement or negotiation, directly or indirectly, by or with the Company or the Representatives after the date hereof) makes an unsolicited bona fide written Acquisition Proposal if, and only to the extent that, (1) after having received the advice of an independent financial advisor, that such Acquisition Proposal, if consummated, could result in a transaction that is more favorable from financial point of view to the Company's stockholders than the Merger (such an Acquisition Proposal, a "Superior Proposal"), and the Special Committee of the Company's Board of Directors shall conclude in good faith, after considering applicable provisions of state law, on the basis of oral or written advice of outside counsel that such action is necessary for the Board of Directors of the Company to act in a manner consistent with its fiduciary duties under applicable law, and (2) prior to furnishing such information to or entering into discussions or negotiations with such person or entity, the Company receives from such person or entity an executed confidentiality agreement in customary form, and (3) the Company shall have fully complied with this Section 4.13; (B) comply with Rule 14e-2 promulgated under the Exchange Act with regard to a tender or exchange offer, and/or (C) accept a Superior Proposal from a third party, provided the Company terminates this Agreement pursuant to Section 6.1(h) hereof. As used herein, "Acquisition Proposal" shall mean a proposal or offer for a tender or exchange offer, merger, consolidation or other business combination involving the Company or any proposal to acquire in any manner a substantial equity interest in, or a substantial portion of the Parent Common Stock beneficially owned by the Company. (b) The Company shall immediately cease and terminate any existing solicitation, initiation, encouragement, activity, discussion or negotiation with any parties conducted heretofore by the Company or its Representatives with respect to an Acquisition Proposal. The Company shall notify Parent orally and in writing of any such inquiries, offers or proposals (including, without limitation, the terms and conditions of any such proposal and the identity of the person making it), promptly after the receipt thereof, shall keep Parent informed of the status and details of any such inquiry, offer or proposal, and shall give Parent at least five (5) business days prior written notice of (i) any meeting of the Board of Directors of the Company to take any action with respect to an Acquisition Proposal or to withdrawing or -25- modifying, in a manner adverse to Parent, its recommendation to the Company's stockholders in favor of approval of the Merger, and (ii) any agreement to be entered into with any person making such inquiry, offer or proposal. (c) Prior to accepting a Superior Proposal, the Company shall, and shall cause its financial and legal advisors to, negotiate in good faith with Parent, for a period of not less than five (5) business days, to make such changes to the terms and conditions of this Agreement as would enable the Company to proceed with the transactions contemplated hereby. ARTICLE V CONDITIONS TO CLOSING Section 5.1. Conditions to the Obligations of the Company and Parent and Merger Sub. The respective obligations of the Company, on the one hand, and Parent and Merger Sub, on the other hand, to consummate the transactions contemplated hereby are subject to the requirements that: (a) Stockholder Approval. This Agreement shall have been approved and adopted by the requisite vote of the stockholders of the Company in accordance with the DGCL and the Certificate of Incorporation and Bylaws of the Company. (b) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or prohibition shall have been issued and be in effect (i) restraining or prohibiting the consummation of the Merger or any of the transactions contemplated hereby or (ii) prohibiting or limiting the ownership, operation or control by the Company, Parent or any of their respective Subsidiaries of any portion of the business or assets of the Company, Parent or any of their respective Subsidiaries, or compelling the Company, Parent or any of their respective Subsidiaries to dispose of, grant rights in respect of, or hold separate any portion of the business or assets of the Company, parent or any of their respective Subsidiaries (except as contemplated by Section 4.8(b) hereof); nor shall any action have been taken by a Governmental Entity or any federal, state or foreign statute, rule, regulation, executive order, decree or injunction shall have been enacted, entered, promulgated or enforced by any Governmental Entity or arbitrator, which is in effect and has the effect of making the Merger illegal or otherwise prohibiting the consummation of the Merger. (c) HSR Act. Any waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated. (d) Registration Statement. The Registration Statement shall have been declared effective under the Securities Act and no stop orders with respect thereto shall have been issued, or threatened to be issued, and Parent shall have received all requisite authorizations under all applicable state securities or blue sky laws necessary to consummate the transaction, copies of which shall have been provided to the Company. (e) Nasdaq National Market. Approval for listing by the NMS upon official notice of issuance of Parent Common Stock to be issued in the Merger shall have been received by Parent and remain in full force and effect. -26- (f) Permitted Distribution. The Company shall have made the Permitted Distribution. For purposes hereof, "Permitted Distribution" means the total cash and cash equivalents of the Company minus the total liabilities (each as calculated in accordance with GAAP, consistently applied) of the Company, each as of the closing of business on the day prior to the Closing Date. The Company shall provide Parent with the opporunity to review its preliminary calculation of the Permitted Distribution not less than five business days prior to any payment of the Permitted Distribution and will provide Parent with advance notice of any material changes from such preliminary calculation prior to any payment thereof. Section 5.2. Conditions to the Obligations of the Company. The obligations of the Company to consummate the transactions contemplated hereby are subject to the further requirements that: (a) Representations and Warranties. The representations and warranties of Parent and Merger Sub contained in this Agreement or in any other document delivered pursuant hereto shall be true and correct in all material respects on and as of the Closing Date with the same effect as if made on and as of the Closing Date and at the Closing Parent shall have delivered to the Company a certificate to that effect. (b) Performance of Obligations. Each of the obligations of Parent and the Merger Sub to be performed on or before the Closing Date pursuant to the terms of this Agreement shall have been duly performed in all material respects on or before the Closing Date and at the Closing Parent shall have delivered to the Company a certificate to that effect. (c) Absence of Material Adverse Effect. No Parent Material Adverse Effect shall have occurred, and no fact or circumstance shall exist which could reasonably be expected to result in a Parent Material Adverse Effect. (d) Litigation. There shall not be any litigation or other proceeding pending or threatened to restrain or invalidate the transactions contemplated by this Agreement, which in the reasonable judgment of the Company would make the consummation of the Merger imprudent or inadvisable in light of applicable law. (e) Fairness Opinion. The fairness opinion issued by the Company Financial Advisor shall not have been rescinded by such Advisor. (f) Tax Opinion. The opinion of Arthur Andersen LLP dated on or prior to the Closing Date in form and substance reasonably satisfactory to the Company (the "Tax Opinion") shall be in full force and effect and shall not have been withdrawn. Section 5.3. Conditions to the Obligations of Parent and Merger Sub. The obligations of Parent and Merger Sub to consummate the transactions contemplated hereby are subject to the further requirements that: (a) Representations and Warranties. The representations and warranties of the Company contained in this Agreement or in any other document delivered pursuant hereto shall be true and correct in all material respects on and as of the Closing Date with the same effect as if made on and -27- as of the Closing Date and at the Closing the Company shall have delivered to Parent a certificate to that effect. (b) Performance of Obligations. Each of the obligations of the Company to be performed on or before the Closing Date pursuant to the terms of this Agreement shall have been duly performed in all material respects on or before the Closing Date and at the Closing the Company shall have delivered to Parent a certificate to that effect. (c) Sale of CMC. The Company shall have consummated the sale of all of its capital stock of CMC pursuant to the terms of an agreement that imposes no continuing indemnification obligation or other liability on the Company that survives the closing of such transactions. (d) Absence of Material Adverse Effect. No Company Material Adverse Effect shall have occurred, and no fact or circumstance shall exist which could reasonably be expected to result in a Company Material Adverse Effect. (e) No Litigation. There shall not be any proceeding pending or threatened to restrain or invalidate the transactions contemplated by this Agreement, which in the reasonable judgment of Parent would make the consummation of the Merger imprudent or inadvisable in light of applicable law or the defense of which would involve material expense. (f) No Equity Rights in Surviving Corporation. There shall not be any securities, rights, warrants, options, or other instruments outstanding which, after consummation of the Merger, would be convertible into or exercisable for securities of the Surviving Corporation, and Parent shall be satisfied that all outstanding options, warrants and convertible securities of the Company will become options, warrants and convertible securities solely with respect to Parent Common Stock on the terms described in Section 1.5 hereof; (g) Appraisal Shares. The Appraisal Shares, if any, shall not represent more than 10% of the aggregate outstanding shares of Company Common Stock; (h) Consents. All authorizations, consents, orders or approvals of, or declarations or filings with, and all expirations of waiting periods imposed by, any governmental body, agency or official (all of the foregoing, "Consents") which are necessary for the consummation of the transactions contemplated hereby, other than Consents the failure to obtain which would not have (i) a material adverse effect on the consummation of the transactions contemplated hereby or (ii) a Company Material Adverse Effect, shall have been filed, have occurred or have been obtained (all such permits, approvals, filings and consents and the lapse of all such waiting periods being referred to as the "Requisite Regulatory Approvals") and all such Requisite Regulatory Approvals shall be in full force and effect, provided, however, that a Requisite Regulatory Approval shall not be deemed to have been obtained if in connection with the grant thereof there shall have been an imposition by any state or federal governmental body, agency or official of any condition, requirement, restriction or change of regulation, or any other action directly or indirectly related to such grant taken by such governmental body, which would reasonably be expected to either have a Company Material Adverse Effect or prevent Parent from exercising authority and control over the shares of Parent Common Stock owned by the Company expected to be acquired by Parent by virtue of the Merger. -28- ARTICLE VI TERMINATION, AMENDMENT AND WAIVER Section 6.1. Termination. This Agreement may be terminated (by written notice by the terminating party to the other party effective on the date such notice is deemed to have been given) and the transactions contemplated hereby may be abandoned at any time prior to the Closing Date: (a) By mutual written consent of each of Parent and the Company; (b) By either Parent or the Company if the Merger shall not have been consummated on or before December 31, 1998 (the "Termination Date"); provided, however, that the right to terminate this Agreement under this Section 6.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before the Termination Date; (c) By either Parent or the Company if a Governmental Entity or arbitrator shall have issued an order, decree or ruling or taken any other action (which order, decree or ruling the parties shall use their commercially reasonable efforts to lift), in each case permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such order, decree, ruling or other action shall have become final and nonappealable; (d) By (i) Parent if the Company shall have breached, or failed to comply with, in any material respect any of its obligations under this Agreement or any representation or warranty made by the Company shall have been incorrect in any material respect when made or shall have since ceased to be true and correct in any material respect, and such breach, failure or misrepresentation is not cured within thirty (30) days after notice thereof or (ii) by the Company if the Parent shall have breached, or failed to comply with, in any material respect any of its obligations under this Agreement or any representation or warranty made by the Parent shall have been incorrect in any material respect when made or shall have since ceased to be true and correct in any material respect, and such breach, failure or misrepresentation is not cured within thirty (30) days after notice thereof; (e) By Parent if the Board of Directors of the Company or any committee of the Board of Directors of the Company (i) shall withdraw or modify in any adverse manner its approval and recommendation of this Agreement to its stockholders, (ii) within ten (10 ) days after Parent's request, shall fail to reaffirm such approval or recommendation referred to in clause (i), (iii) shall approve or recommend any acquisition of the shares of Parent Common Stock owned by it (other than pursuant to the TLSP/CRW Warrants) or any tender offer for shares of its capital stock, in each case, other than by Parent or an affiliate thereof, (iv) shall have recommended that the stockholders of the Company tender their shares or publicly announced its intention to take no position with respect to a tender offer or exchange offer for any of the outstanding shares of the Company Common Stock that shall have been commenced or a registration statement with respect thereto shall have been filed (other than by Parent or an affiliate thereof), or (v) shall resolve to take any of the actions specified in this clause (e); (f) By either Parent or the Company if the Required Company Stockholder Approval shall not have been obtained at the Stockholders Meeting, including any adjournments thereof; -29- (g) By the Company, prior to the approval of this Agreement by the stockholders of the Company, upon five (5) days' prior notice to Parent, if, as a result of a Superior Proposal by a party other than Parent or any of its affiliates, the Board of Directors of the Company determines in good faith that their fiduciary obligations under applicable law require that such Superior Proposal be accepted provided, however, that the Company has fully complied with its obligations under Section 4.14 hereof and with all the applicable requirements of Section 6.2(b) hereof, including the payment of the Termination Fee and the Parent Expenses. Section 6.2. Effect of Termination. (a) In the event of termination of this Agreement as provided in Section 6.1 hereof, this Agreement shall forthwith become void and there shall be no liability on the part of any of the parties, except (i) as set forth in the last sentence of Section 4.3, the provisions of Section 4.6 hereof and the provisions of 6.2(b), and (ii) nothing herein shall relieve any party from liability for any willful breach hereof. (b) (i) If this Agreement (A) is terminated by the Parent pursuant to Section 6.1(e) or (f) hereof or by the Company pursuant to Section 6.1(g) hereof, or (B) is terminated as a result of the Company's breach of Section 4.14 hereof which is not cured within 10 days after notice thereof to the Company, and (ii) either (A) at the time of such termination or prior to the Stockholders Meeting there shall have been an Acquisition Proposal (whether or not such offer shall have been rejected or shall have been withdrawn prior to the time of such termination or of the Stockholders Meeting) or (B) within one (1) year after termination of the Agreement the Company shall have entered into an agreement with respect to, or consummated, an Acquisition Proposal, the Company shall pay to Parent an amount equal to (x) a cash termination fee of $1,800,000 (the "Termination Fee"), and (y) all expenses incurred by Parent in connection with the negotiation, execution and performance of the transactions contemplated hereby (including without limitation all fees and expenses payable to Parent's financial advisors, auditor and counsel) not to exceed $150,000 ("Parent Expenses") within one (1) business day after such termination or, in the case of (ii)(B), entering into an agreement with respect to, or consummating an Acquisition Proposal. (c) If the Company fails to promptly pay to Parent any Termination Fee or Parent Expenses due under Section 6.2(b), the Company shall pay the costs and expenses (including legal fees and expenses) in connection with any action, including the filing of any lawsuit or other legal action, taken to collect payment, together with interest on the amount of any unpaid fee at the publicly announced prime rate of Citibank, N.A. from the date such fee was required to be paid. Section 6.3. Amendment. This Agreement may be amended by Parent and the Company pursuant to a writing adopted by action taken by Parent and the Company at any time before the Effective Time; provided, however, that, after approval of this Agreement by the stockholders of the Company, no amendment may be made which would alter or change the amount or kinds of consideration to be received by the holders of Company Common Stock upon consummation of the Merger or which would materially and adversely affect the holders of Company Common Stock. This Agreement may not be amended except by an instrument in writing signed by the parties to this Agreement. -30- Section 6.4. Waiver. At any time before the Effective Time, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party to any such extension or waiver shall be valid only as against such party and only if set forth in an instrument in writing signed by such party. ARTICLE VII MISCELLANEOUS Section 7.1. Survival of Representations and Warranties. The representations and warranties contained herein shall not survive beyond the Closing Date. This Section 7.1 shall not limit any covenant or agreement of the parties hereto which by its terms requires performance after the Closing Date. Section 7.2. Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof. Section 7.3. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, by telecopy or by overnight courier service to the respective parties as follows: if to Parent or Merger Sub: TeleSpectrum Worldwide Inc. 443 S. Gulph Road King of Prussia, PA 19406 Telecopy: (610) 878-7475 Attention: Mr. Keith E. Alessi with copies to: Morgan, Lewis & Bockius LLP 2000 One Logan Square Philadelphia, PA 19103 Telecopy: (215) 963-5299 Attention: Stephen M. Goodman, Esq. -31- if to the Company: CRW Financial, Inc. 200 Four Falls Corporate Suite 415 W. Conshohocken, PA 19428 Telecopy: (610) 878-7466 Attention: Mr. Jonathan P. Robinson with a copy to: Pepper Hamilton LLP 3000 Two Logan Square Eighteenth and Arch Streets Philadelphia, PA 19103 Telecopy: (215) 981-4750 Attention: Barry M. Abelson, Esq. or to such other address as the party to whom notice is given may have previously furnished to the others in writing in the manner set forth above. Any notice or communication delivered in person shall be deemed effective on delivery. Any notice or communication sent by telecopy shall be deemed effective on the first business day at the place of which such notice or communication is received following the day on which such notice or communication was sent. Section 7.4. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware regardless of the laws that might otherwise govern under principles of conflicts of laws applicable thereto. Section 7.5. Descriptive Headings. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. Section 7.6. Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to confer upon any other person (including without limitation any employee of the Company or any Subsidiary) any rights or remedies of any nature whatsoever under or by reason of this Agreement except for Section 1.5 and Section 4.10 (which are intended to be for the benefit of the persons provided for therein, and may be enforced by such persons.) Section 7.7. Counterparts; Facsimile Signatures. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. This Agreement may be executed by facsimile signature which, for all purposes, shall be deemed to be an original signature. Section 7.8. Expenses. Except as otherwise provided herein, all costs and expenses incurred in connection with the transactions contemplated by this Agreement shall be paid by the party incurring such expenses except that Parent and the Company shall share equally (i) the filing fees payable with respect to the required filings under the HSR Act, (ii) the registration fees payable with respect to filing -32- the Registration Statement, and (iii) all printing expenses incurred with respect to the Proxy Statement and the Registration Statement. Section 7.9. Personal Liability. This Agreement shall not create or be deemed to create or permit any personal liability or obligation on the part of any direct or indirect stockholder of any party hereto or any officer, director, employee, agent, representative or investor of any party hereto. Section 7.10. Binding Effect; Assignment. This Agreement shall inure to the benefit of be binding upon the parties hereto and their respective legal representatives and successors. This Agreement may not be assigned by any party hereto without the prior written consent of the other party. Section 7.11. Severability. If any provision of this Agreement or the application thereof to any person or circumstance is held invalid or unenforceable in any jurisdiction, the remainder hereof, and the application of such provision to such person or circumstance in any other jurisdiction or to other persons or circumstances in any jurisdiction, shall not be affected thereby, and to this end the provisions of this Agreement shall be severable. -33- IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized on the day and year first above written. TELESPECTRUM WORLDWIDE INC. By: /s/ Keith Alessi ---------------------------- Name: Keith Alessi Title: President CRW ACQUISITION CORP. By: /s/ Keith Alessi ---------------------------- Name: Keith Alessi Title: President CRW FINANCIAL, INC. By: /s/ Jonathan P. Robinson ---------------------------- Name: Jonathan P. Robinson Title: Vice President -34- TABLE OF DEFINED TERMS Page Defined Term No. ------------------ ---- Acquisition Proposal......................................................25 Agreement..................................................................1 Appraisal Shares...........................................................3 Authorizations............................................................11 Balance Sheet Date.........................................................9 Certificate of Merger......................................................2 Certificates...............................................................3 Closing....................................................................2 Closing Date...............................................................2 CMC.......................................................................14 CMC Merger................................................................20 Code.......................................................................1 Company....................................................................1 Company 1997 Form 10-K.....................................................9 Company Audit Date........................................................10 Company Balance Sheet.....................................................10 Company Common Stock.......................................................1 Company Financial Advisor.................................................16 Company Form S-3...........................................................6 Company Forms 10-Q.........................................................9 Company Material Adverse Effect............................................6 Company Preferred Stock....................................................7 Company Schedule...........................................................6 Company Stock Plans........................................................7 Company Tax Certificate...................................................25 Company's SEC Reports......................................................9 Company's Auditors.........................................................9 Confidentiality Agreement.................................................21 Consents..................................................................28 Contract..................................................................11 DGCL.......................................................................1 Effective Time.............................................................2 Employee Plans............................................................12 ERISA.....................................................................12 ERISA Affiliate...........................................................12 Exchange Act...............................................................6 Exchange Agent.............................................................3 Exchange Ratio.............................................................2 Fully-Diluted Common Stock.................................................2 GAAP.......................................................................9 Governmental Entity........................................................9 HSR Act....................................................................9 -35- IRS.......................................................................13 ISO.......................................................................14 Joint Venture..............................................................6 Liens......................................................................7 Merger.....................................................................1 Merger Consideration.......................................................2 Merger Stock...............................................................3 Merger Sub.................................................................1 Merger Sub Common Stock....................................................3 NMS.......................................................................21 Other Filings.............................................................22 Parent.....................................................................1 Parent Common Stock........................................................1 Parent Expenses...........................................................30 Parent Form S-3............................................................6 Parent Material Adverse Effect............................................16 Parent Preferred Stock....................................................17 Parent Stock Plan.........................................................17 Parent Schedule...........................................................16 Parent Tax Certificate....................................................25 Parent's SEC Reports......................................................17 Parent's Auditors.........................................................18 Permitted Distribution....................................................27 Permitted Liens...........................................................11 Proxy Statement...........................................................15 Registration Statement....................................................14 Replacement Options.......................................................19 Representatives...........................................................25 Required Company Stockholder Approval......................................8 Requisite Regulatory Approvals............................................28 SEC........................................................................9 SEC Transaction Filings...................................................22 Securities Act.............................................................9 Stockholders Meeting......................................................15 Subsidiary.................................................................6 Superior Proposal.........................................................25 Surviving Corporation......................................................1 Surviving Corporation Common Stock.........................................3 Tax Opinion...............................................................27 Tax Returns...............................................................11 Taxes.....................................................................12 Termination Date..........................................................29 Termination Fee...........................................................30 TLSP/CRW Warrants..........................................................5 -36- EX-23 3 CONSENT CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report, included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File No. 333-10615) and on Form S-3 (File No. 333-10871). Philadelphia, Pa., March 22, 1999 EX-27 4 FDS
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 2,118 0 339 0 0 2,457 40 0 18,425 596 0 0 0 69 11,965 18,425 0 0 539 539 0 0 17 (483) (150) (333) 196 0 0 (197) (0.03) (0.03)
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