10-Q 1 w63231qe10vq.txt FORM 10-Q FOR TELESPECTRUM WORLDWIDE INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO __________________ COMMISSION FILE NO. 0-21107 TELESPECTRUM WORLDWIDE INC. (Exact name of registrant as specified in its charter) DELAWARE 23-2845501 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 443 SOUTH GULPH ROAD KING OF PRUSSIA, PENNSYLVANIA 19406 (Address of principal executive offices) (ZIP Code) 610-878-7400 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of outstanding shares of the Registrant's Common Stock, par value $.01 per share, on September 24, 2002 was 192,067,847. Table of Contents

~~PAGES~~Page ---- PART I -- FINANCIAL INFORMATION Item 1. Financial Statements ~~(unaudited)~~: Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2001~~2002 (unaudited) and December 31, ~~2000~~2001 3 Condensed Consolidated Statements of Operations (unaudited) For the Three Months Ended ~~September~~June 30, ~~2001~~2002 and ~~2000~~2001 and For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2001~~2002 and ~~2000~~2001 4 Condensed Consolidated Statement of Stockholders' Equity (Deficit) 5 For the Six Months Ended June 30, 2002 (unaudited) Condensed Consolidated Statements of Cash Flows (unaudited) For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2001~~2002 and ~~2000~~2001 56 Notes to Condensed Consolidated Unaudited Financial Statements 67-1314 Item 2. Management's Discussion and Analysis of Results of Operations 14and Financial Condition 15-2524 Item 3. Quantitative and Qualitative ~~Disclosures~~Disclosure ~~About~~about Market Risk 2625 PART II - OTHER INFORMATION Item 1. Legal Proceedings 26 Item 2. Changes in Securities 26 Item 3. Defaults Upon Senior Securities 2726 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 5. Other Information 26 Item 6. Exhibits and Reports on Form 8-K 2726

2 TeleSpectrum Worldwide Inc. and Subsidiaries Condensed Consolidated Balance Sheets (In Thousands - Except Per Share Amounts)

~~September~~June 30, 2002 December 31, (unaudited) 2001 ~~2000~~ ---------~~----~~ ---------~~---~~ ASSETS CURRENT ASSETS: Cash and cash equivalents 7$ 5,~~728~~600 $ 56,~~258~~391 Accounts receivable, net 3819,~~240~~596 5433,~~745~~333 Prepaid expenses and other 41,~~221~~782 62,~~173~~067 --------- --------- Total current assets 5026,~~189~~978 6641,~~176~~791 PROPERTY AND EQUIPMENT, net 289,~~034~~960 3911,~~967~~478 INTANGIBLES ~~AND GOODWILL~~, net 141,~~136~~955 152,~~003~~347 OTHER NONCURRENT ASSETS 2740 1,043 ~~3,721~~ --------- --------- Total ~~Assets~~assets $ 9439,~~402~~633 $ ~~124~~56,~~867~~659 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current maturities of long-term debt $ ~~138~~1,~~780~~284 $ 3,~~844~~608 Accounts payable 112,~~235~~539 155,~~457~~435 Accrued expenses ~~26,476~~and ~~34,339~~other ~~Other~~ current liabilities 1821,~~753~~086 127,~~086~~118 --------- --------- Total current liabilities ~~195~~24,~~244~~909 5436,~~726~~161 --------- --------- LONG-TERM DEBT 7(Term Facility $25 million face value) 31,~~673~~027 ~~132~~159,~~413~~063 ~~---------~~CAPITAL ~~---------~~LEASES AND OTHER 1,312 7,525 OTHER NONCURRENT LIABILITIES ~~127~~631 ~~2,001~~615 --------- --------- STOCKHOLDERS' DEFICIT: Series A Preferred stock, $.01 par value, 5100,000~~,000~~ shares authorized, no-- ~~shares~~-- 40,000 issued orand outstanding --Series B Convertible Preferred stock, $.01 par value, 90,000 shares 174 -- authorized and issued and 71,097 outstanding Common stock, $.01 par value, 200,000,000 shares authorized, 401,~~022~~994 400 199,~~656~~352,688 shares issued and 33192,~~076~~067,~~073~~847 shares outstanding at ~~September~~June 30, ~~2001~~2002, and ~~December~~40,022,656 31shares issued and 32,737,815 ~~2000~~shares ~~400~~outstanding ~~400~~at December 31, 2001 Additional paid-in capital ~~339~~337,~~113~~565 339,~~099~~113 ~~Common~~Additional ~~stock~~paid-in ~~purchase~~capital ~~warrants~~- Warrants 7,840 7,840 ~~Treasury~~Accumulated ~~stock,~~other ~~6,946,583~~comprehensive ~~shares~~loss ~~at cost~~ (481,~~810~~556) (481,~~810~~562) Accumulated deficit (~~404~~315,~~442~~453) (~~360~~443,~~524~~686) ~~Due~~--------- ~~from~~--------- ~~stockholders~~30,564 (~~952~~97,895) ~~(952)~~Less ~~Cumulative~~treasury ~~currency~~stock, ~~translation~~7,284,841 ~~adjustment~~shares at cost (148,~~791~~810) (148,~~326~~810) --------- --------- Total stockholders' deficit (~~108~~18,~~642~~246) (64146,~~273~~705) --------- --------- Total liabilities and stockholders' deficit $ 9439,~~402~~633 $ ~~124~~56,~~867~~659 ========= =========

3 TeleSpectrum Worldwide Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) (In Thousands - Except Per Share Amounts)

Three Months Ended ~~Nine~~Six Months Ended ------------------------------ ------------------------------- ~~September~~June 30, ~~September~~June 30, ~~September~~June 30, ~~September~~June 30, 2002 2001 ~~2000~~2002 2001 ~~2000~~ ---------~~---~~ ---------~~---~~ ---------~~---~~ ---------~~---~~ REVENUES $ 5225,~~349~~074 $ 7357,~~119~~523 $ ~~172~~60,~~687~~734 $ ~~231~~120,~~057~~338 --------- --------- --------- --------- OPERATING EXPENSES: Cost of services 4220,~~406~~499 5743,~~541~~444 ~~133~~51,~~676~~133 ~~179~~91,~~128~~270 Selling, general and administrative 117,~~682~~213 1813,~~605~~145 3914,~~503~~006 5228,~~489~~399 Restructuring (credit)/charge and other 2(3,~~493~~563) --689 64,~~531~~178 ~~-- Goodwill amortization 301 2~~4,~~488~~038 ~~879 6,429~~ --------- --------- --------- --------- Total operating expenses 5624,~~882~~149 7857,~~634~~278 ~~180~~69,~~589~~317 ~~238~~123,~~046~~707 --------- --------- --------- --------- Operating income /(loss) 925 245 (48,~~533~~583) (53,~~515~~369) GAIN/(7LOSS) ON EXTINGUISHMENT OF DEBT 141,~~902~~655 (20,286) 141,655 (620,~~989~~286) INTEREST EXPENSE, net (41,~~623)~~146 (4,~~137)~~634 ~~(15~~4,~~729)~~173 (11,~~513)~~106 --------- --------- --------- --------- ~~Loss~~INCOME/(LOSS) ~~before~~BEFORE ~~income~~INCOME ~~taxes,~~TAXES ~~minority interest and extraordinary loss (9~~141,~~156)~~434 (924,~~652~~675) ~~(23~~128,~~631)~~899 (1834,~~502~~761) ~~MINORITY INTEREST -- 960 -- 1,966~~ INCOME TAXES -- -- -- -- ~~EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, net of tax effect of $0~~ -- -- ~~(20,286)~~ -- ---~~-----~~ --------- --------- --------- ~~Net~~NET ~~Loss~~INCOME/(LOSS) $ (9141,~~156)~~434 $ (824,~~692~~675) $ ~~(43~~128,~~917)~~899 $ (1634,~~536~~761) ========= ========= ========= ========= ~~Loss~~BASIC ~~Per Share~~ INCOME/(~~Basic and Diluted~~LOSS) ~~Before~~PER ~~Extraordinary~~SHARE ~~Loss~~ $ (1.~~28)~~01 $ (0.2778) $ (1.~~74)~~49 $ (01.5209) ~~Extraordinary~~========= ~~Loss~~========= --========= --========= DILUTED INCOME/(~~.63~~LOSS) --PER ~~--------~~SHARE ~~-------- --------- --------- Net Loss~~ $ (0.~~28)~~27 $ (0.2778) $ (10.~~37)~~46 $ (01.5209) ========= ========= ========= ========= ~~Weighted~~WEIGHTED-~~Average~~AVERAGE ~~Shares~~SHARES ~~Outstanding~~OUTSTANDING ~~Basic~~- 32BASIC 139,~~714~~788 31,~~764~~795 3286,~~105~~263 31,~~764~~795 ========= ========= ========= ========= ~~Diluted~~WEIGHTED-AVERAGE 32SHARES OUTSTANDING - DILUTED 532,~~714~~575 31,~~764~~795 32282,~~105~~657 31,~~764~~795 ========= ========= ========= =========

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4 TeleSpectrum Worldwide Inc. and Subsidiaries Condensed Consolidated Statement Stockholders' Equity (Deficit) (In Thousands - Except Per Share Amounts)

~~Nine~~Series ~~Months~~A ~~Ended~~Preferred Series B Preferred Common Stock Stock Stock ------------------ ---------------------- ~~September 30, September 30, 2001 2000~~ ------------ -------------- ~~Cash~~Shares ~~Flows~~Amount ~~From~~Shares ~~Operating~~Amount ~~Activities:~~Shares ~~Net~~Amount ~~loss~~------ ~~$(43,917)~~-------- ~~$(16,536)~~------ ~~Adjustments~~----------- to----------- ~~reconcile~~----------- ~~net~~Balance ~~loss~~@ to12/31/01 ~~net cash flows from operating activities: Depreciation and amortization 11~~40,~~442 13~~022,~~712~~656 ~~Provision~~$ ~~for~~400 ~~bad~~Issuance ~~debts~~of ~~1,433~~Series ~~2,346~~A ~~Restructuring~~Preferred ~~charge~~Stock ~~and other 5~~40,~~480~~000 ~~6,429~~-- ~~Extraordinary~~-- ~~loss~~-- ~~20,286~~ -- ~~Minority interest~~ -- ~~(1,966)~~Issuance ~~Gain on sale~~ of ~~assets~~Series ~~and~~B ~~other~~Convertible ~~(172)~~Preferred ~~163~~Stock ~~Changes~~-- in-- ~~operating~~90,000 ~~assets~~220 ~~and~~-- ~~liabilities~~-- ~~net~~Conversion of ~~acquisitions:~~Series ~~Accounts~~B ~~receivable~~Convertible ~~15,106~~Preferred ~~7,938~~Stock ~~Prepaid~~-- ~~expenses~~-- ~~and other 2,616~~ (118,~~593~~903) ~~Accounts payable~~ (~~4,222~~46) 3155,~~833~~435,035 ~~Accrued~~1,555 ~~and~~Issuance ~~other~~of ~~liabilities~~Common ~~(4,689)~~Stock ~~(5,339)~~ -- -- ---- --~~------~~ ~~Net cash provided by operating activities~~ 3,~~363 8~~894,~~987~~997 39 Dividends -- -- -- -- -- --~~----~~ ~~Cash~~Net ~~Flows~~Income ~~From Investing Activities: Purchases of property and equipment (1,303) (18,217) Proceeds from disposal of assets 1,120 71~~ -- -- -- -- -- --~~----~~ ~~Net~~Foreign ~~cash~~Currency ~~used~~Translation inAdjustment ~~investing activities (183) (18,146)~~ -- -- -- -- -- --~~----~~ ~~Cash~~Total ~~Flows~~Comprehensive ~~From~~Income ~~Financing~~-- ~~Activities:~~-- ~~Exercise~~-- of-- ~~stock options and sale of common stock~~ -- ~~1,725 Debt issuance costs (1,538) (5,668) Net borrowings on credit facilities 1,247 13,733 Net payments of capital lease obligations (419) (588)~~ -- ------ -------- ~~Net cash provided by (used in) financing activities (710) 9,202~~ ------ -- --------- ~~Net increase in cash and cash equivalents 2,470 43 Cash and cash equivalents, beginning of period 5,258~~ -- --------- ----------- ~~Cash~~Balance ~~and~~@ ~~cash~~6/30/02 ~~equivalents~~40,000 ~~end of period~~ $ 7-- 71,~~728~~097 $ 43174 ~~======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid during the period $ 7~~199,~~175 $ 10~~352,~~001~~688 ~~======== ======== Income taxes paid during the period~~ $ ~~-- $ -- ======== ========~~1,994

~~Balance~~Accumulated asAdditional ~~Balance~~Other asTotal ofPaid of- ~~December~~In ~~Additional~~Treasury ~~September~~Accumulated ~~31,~~Comprehensive ~~2000~~Stockholders ~~Charge~~Capital ~~Payments~~Stock ~~30,~~Equity ~~2001~~(Deficit) Income (Deficit) ------------ ----------- ----------- ----------- ----------- ~~Obligations~~Balance ~~assumed~~@ on12/31/01 ~~closed~~$ ~~leased facilities~~346,953 ~~net~~ $5 (48,~~659~~810) $1 (443,~~851~~686) $ (1,~~765~~562) $5 (146,~~745~~705) ~~Severance~~Issuance ~~and~~of ~~employee~~Series ~~related~~A ~~costs~~Preferred Stock -- -- -- -- -- Issuance of Series B Convertible Preferred Stock -- -- -- -- 220 Conversion of Series B Convertible Preferred Stock (1,~~670~~509) 2-- -- -- -- Issuance of Common Stock (39) -- -- -- -- Dividends -- -- (666) -- (666) Net Income -- -- 128,~~151~~899 3-- 128,~~121~~899 ~~700~~Foreign ~~Other~~Currency ~~125~~Translation ~~551~~Adjustment ~~260~~-- ~~416~~-- -- 6 6 Total Comprehensive Income -- -- -- -- 128,905 ----------- ----------- ----------- ~~Total~~----------- ~~Restructuring~~----------- ~~Accrual~~Balance @ 6/30/02 $7 345,~~454~~405 $~~4,553~~ (148,810) $5 (315,~~146~~453) $6 (1,~~861~~556) ~~======~~$ ~~====== ====== ======~~(18,246)

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 TeleSpectrum Worldwide Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) (In Thousands - Except Per Share Amounts)

~~Three~~Six Months Ended ~~Nine Months Ended~~ --------------------------- -- June 30, June 30, 2002 2001 --------- ---------~~-------~~ ~~September~~Cash 30Flows From Operating Activities: Net Income/(Loss) $ 128,899 ~~September~~$ 30(34,761) ~~September~~Adjustments 30to reconcile net income/(loss) to net cash flows from operating activities: Depreciation and amortization 1,965 ~~September~~7,777 30Provision for bad debts 235 1,234 ~~2001~~Restructuring ~~2000~~charge ~~2001~~and ~~2000~~other 4,178 3,910 (Gain)/loss on extinguishment of debt, net of cash transfers (142,220) 20,286 (Gain)/loss on sale of assets and other (1) (172) Changes in operating assets and liabilities net of acquisitions: Accounts receivable 12,782 7,119 Prepaid expenses and other (597) 3,202 Accounts payable (964) (1,816) Accrued and other liabilities (3,430) (7,921) ---------~~----~~ ---------~~----~~ Net cash provided by (used in) operating activities 847 (1,142) ---------~~----~~ ---------~~----~~ ~~Revenues~~Cash Flows From Investing Activities: ~~Teleservices~~Purchases $of ~~51,193~~property $and ~~71,652~~equipment $(595) ~~168,618~~(497) $Proceeds ~~226,348~~from ~~e-Satisfy~~disposal ~~1,156~~of ~~1,467~~assets ~~4,069~~-- 41,~~709~~120 --------- --------- Net cash (used in) provided by investing activities (595) 623 --------- --------- ~~Total~~Cash $Flows ~~52,349~~From $Financing ~~73,119~~Activities: $Debt ~~172,687~~issuance $costs ~~231~~-- (1,~~057~~538) ~~========~~Net ~~========~~(payments) ~~=========~~borrowings ~~=========~~on ~~Operating~~credit ~~income~~facilities (~~loss~~729): ~~Teleservices~~999 $Net ~~8,316~~payments $of ~~13,498~~capital $lease ~~32,062~~obligations ~~$ 44,993 e-Satisfy~~ (~~139~~240) (~~408~~342) ~~(230)~~--------- ~~507~~--------- ~~Corporate~~Net ~~(12,710)~~cash ~~(18,605)~~used in financing activities (~~39,734~~969) (~~52,489~~881) --------- --------- Effect of exchange rate change on cash and cash equivalents (77) -- Net decrease in cash and cash equivalents (794) (1,400) Cash and cash equivalents, beginning of period 6,391 5,258 --------- --------- ~~Total~~Cash $and (4cash equivalents,~~533)~~ end of period $ (5,~~515)~~597 $ (73,~~902)~~858 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid during the period $ (6595 $ 3,~~989)~~253 ========= ========= Income taxes paid during the period $ -- $ -- ========= =========

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. BASIS OF PRESENTATION: The accompanying unaudited consolidated financial statements of Telespectrum Worldwide Inc. and subsidiaries ("Telespectrum" or the "Company") have been prepared on the basis of accounting principles applicable to a going concern, which contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. All significant intercompany transactions have been eliminated in consolidation. These interim financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations. The information reflects all normal and recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position of the Company, and its results of operations for the interim periods set forth herein. The results for the six months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year. 2. EXTINGUISHMENT OF DEBT AND OTHER RESTRUCTURING: On April 29, 2002, the Company entered into an agreement with its bank lenders that resulted in a recapitalization of its balance sheet and a reduction of its debt. As a result of the recapitalization, the amounts due under its existing credit facilities totaling approximately $162.2 million at the time of recapitalization, which consisted of outstanding debt, accrued interest and fees, were converted into (a) a three-year term facility of $25 million (face amount) under an amended and restated credit agreement, (b) $40 million (stated value) of the Company's Series A Preferred Stock, and (c) shares of the Company's Series B Convertible Preferred Stock which will convert into common stock representing 95% of the Company's common outstanding after such conversion. The three year term facility is secured by, among other things, the Company's assets and outstanding trade receivables, bears interest at a base rate as defined in the agreement plus 400 basis points, and matures in May 2005. Under the terms of the Agreement, the Company is required to meet certain financial covenants, including a fixed charge coverage ratio and Earnings Before Interest Taxes, Depreciation, and Amortization (EBITDA) targets. The Series A Preferred Stock has a 10% annual dividend rate, which accrues and is payable either in cash or in additional shares of Series A Preferred Stock. Approximately 18,903 shares of the Series B Convertible Preferred Stock was converted into 155,435,035 shares of the Company's common stock immediately after the closing of the recapitalization, and the remainder will convert into shares of common stock as soon as the Company amends its Certificate of Incorporation to increase the authorized number of shares of common stock. Such amendment requires approval of the Company's shareholders. In accordance with Statement of Financial Accounting Standard No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings" (SFAS No. 15), the Company has accounted for the effects of the restructuring prospectively, recording the carrying amount of the new term facility at approximately $31.6 million, which includes approximately $6.6 million of future amounts that would otherwise be designated as interest. For future financial statement purposes, the effective interest rate of this facility is 0%. In addition, the amount of the gain, in part, was determined based on an independent appraisal of the fair value of the Series A and Series B Preferred Stock issued in connection with the recapitalization. In addition to entering into the amended credit agreement and completing the recapitalization with its bank lenders on April 29, 2002, other debt balances outstanding to unsecured creditors were restructured from $15.2 million to approximately $0.7 million, with cash payments of $1.6 million. Certain 7 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) commercial liabilities, primarily accounts payable, which had a carrying value of $3.0 million were also settled through cash payments of $1.0 million and notes payable of $0.3 million. Additional settlements were reached on certain real estate lease obligations that will result in a reduction of $4.9 million of future lease commitments through cash payments of $0.5 million and notes payable of $0.4 million. As part of the debt restructuring, the Company divested itself of its ownership interest in eSatisfy.com. The Company recorded a gain on the above for approximately $11.2 million. As a result of these transactions, we recorded a gain on the extinguishment of debt and restructuring of the above obligations for approximately $141.7 million. During May 2002, J. Peter Pierce announced his resignation from the Company's Board of Directors and as Chief Executive Officer of the Company and Christopher Williams also announced his resignation from the Company's Board of Directors and as Chief Operating Officer. In addition, during May 2002 Joe Nezi, Executive Vice President of Sales announced his resignation from the Company and was later replaced by William Pieper. In early June, Price Brannon, Executive Vice President, Technology Services, resigned from the Company and was subsequently replaced by James Wallace as Senior Vice President of Information Technology. As a result of the recapitalization, the Company's Board of Directors is now comprised of four individuals. They are: Kevin Flannery (Chairman of the Board), Brad Scher, Gene Davis, and Charles Sweet. As a result of the resignations of Peter Pierce and Chris Williams, an Operating Committee was created to run the day-to-day operations of the Company. This Committee is comprised of five individuals of the Company's management. They are: Kurt Dinkelacker - Executive Vice President and Chief Financial Officer, Susan Parker - Executive Vice President of Customer Service, Glenn Smith - Executive Vice President of Call Center Operations, William Pieper - Executive Vice President of Sales, and James Wallace - Senior Vice President of Information Technology. The Committee assists with developing and implementing the strategic and tactical goals of the Company. At June 30, 2002, the Company had a stockholders' deficit of $18.2 million, and reported net income of approximately $128.9 million during the first six months of 2002. The amended agreement requires compliance with stipulated covenants, including EBITDA, fixed charge, and capital expenditures, which was based on the Company's updated business plan for 2002. During the second quarter of 2002, the Company failed to meet the financial covenant terms of the Amended and Restated Credit Agreement dated April 29, 2002. The Company obtained a limited waiver from the bank group for the non-compliance with EBITDA and fixed charge coverage covenant for the second quarter. The Company also obtained an amendment from the bank group to modify future quarterly covenants. Management believes based on the revised forecast levels that these covenants are attainable. Management believes that the restructuring of its bank debt and other liabilities that occurred on April 29, 2002, together with existing working capital and projected results for 2002, should enable the Company to generate sufficient cash flow to meet its operating cash needs, fund required capital expenditures, and satisfy its debt service and other financing requirements. As a result of continuing customer losses and a declining revenue base, the Company implemented a significant cost reduction plan in January 2002. This plan included the reduction of corporate overhead and the closure of five additional contact centers. As of June 30, 2002, the Company estimates that it will save over $15 million in connection with this plan for 2002. On an annualized basis, this plan will reduce fixed expenses by 8 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) approximately $19 million. Subsequent to the January plan, the Company instituted additional cost reductions in March to include the reduction of additional corporate overhead and the closure of one additional contact center. The Company estimates these savings will total $1.5 million in 2002 and $2.5 million annually thereafter. The impact of these reductions was first realized in June 2002. The Company does not have a line of credit or other short-term borrowing facility available. In addition, covenants in its amended credit agreement restrict the Company's ability to pledge assets as collateral for other borrowings. The Company's 2002 operating plan assumes a stabilization of the Company's revenue base and an improvement in operating profit margins from historical levels. The Company's ability to meet its obligations in the ordinary course of business is dependent upon successful implementation of its operating plan and stabilization of its operations. Uncertainties exist with respect to management's plans, because events and circumstances frequently do not occur as expected, and those differences may be material. These uncertainties raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. 3. NEW ACCOUNTING PRONOUNCEMENTS: In June 2001, Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141), and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), were issued. These standards change the accounting principles governing business combinations, goodwill and other intangible assets by, among other things, requiring the use of the purchase method in accounting for business combinations and eliminating the requirement to amortize goodwill. Instead, SFAS No. 142 establishes a method to test for impairment of goodwill on at least an annual basis. These standards became effective for the Company beginning in the first quarter of 2002. The effect of adopting SFAS 142 was not material to the Company's financial statements. In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 applies to all entities, including rate-regulated entities, which have legal obligations associated with the retirement of a tangible long-lived asset that result from acquisition, construction or development and (or) normal operations of the long-lived asset. The application of this Statement is not limited to certain specialized industries, such as the extractive or nuclear industries. A liability for an asset retirement obligation should be recognized if the obligation meets the definition of a liability and can be reasonably estimated. The initial recording should be at fair value. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002, with earlier application encouraged. The provisions of the Statement are not expected to have a material impact on the financial condition or results of operations of the Company. In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 retains the existing requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. However, SFAS 144 makes changes to the scope and certain measurement requirements of existing accounting guidance. SFAS 144 also changes the requirements relating to reporting the effects of a disposal or discontinuation of a segment of a business. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 9 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 15, 2001 and interim periods within those fiscal years. The adoption of this Statement did not have a significant impact on the financial condition or results of operations of the Company. In April 2002, Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB No. 13, and Technical Corrections" (SFAS No. 145) was issued. This standard changes the accounting principles governing extraordinary items by, among other things, providing more definitive criteria for extraordinary items by clarifying and, to some extent, modifying the existing definition and criteria, specifying disclosure for extraordinary items and specifying disclosure requirements for other unusual or infrequently occurring events and transactions that are not extraordinary items. SFAS 145 is effective for financial statements issued for fiscal years beginning after June 15, 2002, with early adoption encouraged. The Company has chosen to early adopt the provisions of this statement, and has classified its gain on extinguishments of debt in accordance with SFAS 145, and has reclassified prior period balances to comply with the new standard. 4. INCOME PER SHARE: Basic income per share does not assume dilution and is computed by dividing net income/(loss) by the weighted average number of shares of common stock outstanding for the period. Diluted income per share reflects the effects of common shares issuable upon the conversion of preferred stock and the exercise of stock options and warrants, but only if the effect is dilutive. 10 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. RESTRUCTURING CHARGES AND OTHER: As part of its continuing analysis of the Company's operational strategies, the Board of Directors of the Company approved a restructuring plan designed to streamline operations, enhance results of operations and improve cash flow by closing underutilized customer contact centers and reducing overhead costs. As a result, the Company recorded pre-tax charges totaling $17.8 million through December 31, 2001 for costs associated with exiting certain facilities, terminating employees and recognizing related asset impairments. During the first six months of 2002, the Company expanded the restructuring to include the closure or consolidation of additional facilities and identification of additional workforce reductions. As a result, the Company recorded a pre-tax charge of $4.2 million during the period. The following summarizes the costs and liabilities associated with the Company's restructuring plan through March 31, 2002 and June 30, 2002 (in thousands):

~~September~~Balance ~~30,~~as of Balance as of December 31, Additional March 31, 2001 ~~2000~~Charge Payments 2002 ------- ------- ------- ------- ~~Total~~Obligations ~~assets:~~assumed ~~Teleservices~~on ~~$72,197~~closed ~~$101~~leased facilities,~~605~~ ~~e-Satisfy~~net ~~1,232~~$ 5,~~216~~514 ~~Corporate~~$ 206,~~973~~280 18$ (499) $11,~~046~~295 Severance and employee related costs 479 962 (884) 557 Other 518 500 (167) 851 ------- ------- ------- ------- Total Restructuring Accrual $94 6,~~402~~511 $~~124~~ 7,~~867~~742 $(1,550) $12,703 ======= ======= ======= =======

~~Three~~Balance ~~Months~~as ~~Ended~~of ~~Nine~~Balance ~~Months~~as ~~Ended~~of March 31, Additional June 30, 2002 Charge a Payments 2002 ------- ------- -------~~---------~~ -------~~----------------------~~ ~~September~~Obligations ~~30,~~assumed ~~September~~on 30closed leased facilities, ~~September~~net 30$11,295 ~~September~~$(4,939) 30$ (296) $ 6,060 ~~2001~~Severance ~~2000~~and ~~2001~~employee ~~2000~~related costs 557 606 (161) 1,002 Other 851 -- (216) 635 -------~~----~~ -------~~------~~ -------~~------~~ -------~~------~~ ~~Customer~~Total 1Restructuring ~~16.4%~~Accrual ~~10.7%~~$12,703 ~~14.3%~~$(4,333) ~~10.6%~~$ ~~Customer~~(673) 2$ ~~14.~~7%,697 ~~12.0%~~======= ~~12.2%~~======= ~~7.5%~~======= =======

a - The increase in obligations assumed on closed leased facilities does not include approximately $769,000 of additional write-offs for abandoned leasehold items and restructured settlements that were included in the restructuring charge in the accompanying income statement. 11 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Accrued liabilities for closed facilities of $6.1 million as of June 30, 2002 relate to leased customer contact center locations that have been closed in connection with the Company's restructuring plans. The amount is computed as the remaining contractual obligation and associated restructuring charges in each closed center, net of estimated income from subletting. On April 29, 2002 and as part of the restructuring of the debt, the Company reduced the remaining contractual obligation by $4.1 million through negotiated settlements with certain real estate leases. Subsequent to June 30, 2002 the Company successfully negotiated a settlement on a closed center lease obligation. This settlement will reduce future restructuring liabilities by approximately $3.4 million, with a settlement payment of $0.2 million. Employee separation costs relate to both administrative personnel at the closed customer contact centers and corporate personnel, affecting all functional areas. Approximately 265 employees have been separated in 2002. The accrual of $1.0 million as of June 30, 2002 relates to ongoing severance payments in accordance with the severance obligations for these employees. 6. SEGMENTS: As part of the debt restructuring, the Company divested itself of its ownership interest in eSatisfy.com and accordingly is only reporting the segment for comparative purposes. During 2001 and for the first three months of 2002, the Company classified its operations into two segments: Teleservices and eSatisfy. These two operating segments were managed separately because each operating segment represented a strategic business unit that offered different services. The business segments are described in further detail below. Segment assets include amounts specifically with the Teleservices and eSatisfy segments. Corporate assets consist primarily of property and equipment. The Teleservices segment provides business-to-consumer and business-to-business telemarketing services, which are primarily direct sales initiated by the Company on behalf of its clients, as well as customer service expertise to clients. The Company's customer service expertise includes the more traditional inbound services of customer care support, typically through toll-free numbers, for activities such as responses to clients' customer service inquires, catalogue sales and electronic order processing and consulting services to a wide range of clients. The eSatisfy segment performed baseline and tracking customer satisfaction surveys for both Internet and traditional companies. Corporate operations include the selling, general and administrative functions of the Company. 12 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Business segment information is as follows (in thousands):

Three Months AsEnded aSix ~~Three~~ Months ~~As a~~ Ended ~~Percentage~~June ~~Ended Percentage (Dollars in Millions) September~~ 30, ofJune ~~September~~ 30, ~~of 2001 Revenues 2000 Revenues~~ ------------ ------------------- ------------ -------------- ~~(Dollars in Millions) Revenues: Teleservices $ 51.2 97.7% $ 71.6 97.9% e~~-~~Satisfy~~---- ~~1.2~~2002 ~~2.3%~~2001 ~~1.5~~2002 ~~2.1%~~2001 --------- --------- --------- --------- ~~Total~~Revenues: ~~Revenue~~Teleservices ~~52.4~~$ ~~100.0%~~25,074 ~~73.1~~$ ~~100.0%~~56,221 ~~Cost~~$ of60,734 ~~services:~~$ ~~Teleservices~~117,425 ~~41.9 81.8% 55.9 78.1%~~ e-Satisfy ~~0.5~~-- ~~41.7%~~ 1.6,302 ~~107.7%~~-- 2,913 --------- --------- --------- --------- Total ~~cost~~$ of25,074 ~~services~~$ ~~42.4~~57,523 ~~80.9%~~$ ~~57.5~~60,734 ~~78.7%~~$ ~~Selling~~120,338 ~~general~~========= ~~and~~========= ~~administrative~~========= ~~11.7~~========= ~~22.3%~~Operating ~~18.6~~income/(loss): ~~25.~~Teleservices $ 4%,575 ~~Restructuring~~$ ~~charge~~11,791 ~~2.5~~$ ~~4.2%~~9,601 $ 23,746 e-Satisfy -- (39) 0~~.0%~~ ~~Goodwill~~(91) ~~amortization~~Corporate 0.(3,650) ~~0.6%~~(11,507) ~~2.5~~(18,184) ~~3.4%~~(27,024) ------- --~~----~~ ------- --~~-----~~ ~~Total operating expenses 56.8 108.0% 78.6 107.5%~~ ------- --~~----~~ ------- --~~-----~~ ~~Operating~~Total ~~profit~~$ ~~(loss)~~925 $ ~~(4.5)~~245 $ (8.0,583)% $ (~~5.5~~3,369) ~~(7.5)%~~ ========= ========= ========= =========

~~Nine~~June ~~Months~~December ~~As a Nine Months As a Ended Percentage Ended Percentage (Dollars in Millions) September~~ 30, Of2002 ~~September 30~~31, of 2001 ~~Revenues 2000 Revenues~~ ---------~~---~~ ---------- ~~-------------~~Total ~~---------- (Dollars in Millions) Revenues~~assets: Teleservices $~~168.6~~ ~~97.6%~~29,892 $~~226.4~~ ~~98.0%~~38,086 e-Satisfy ~~4.1 2.4% 4.7 2.0%~~ --~~---~~ ~~---- ----- ---- Total Revenue 172.7 100.0% 231.~~1 ~~100.0% Cost of services: Teleservices 132.3 78.5% 175.7 77.6% e-Satisfy 1.4 34.1% 3.4 72.3% ----- ---- ----- ---- Total cost of services 133.7 77.4% 179.1 77.5% Selling~~,913 ~~general~~Corporate ~~and administrative 39.5 22.~~9%,741 ~~52.5~~16,660 ~~22.7% Restructuring charge 6.5 3.6%~~ -- ~~0.0% Goodwill amortization 0.9 0.5% 6.4 2.8%~~ ----- ---- ----- ---- Total ~~operating~~$ ~~expenses~~39,633 ~~180.6~~$ ~~104.4%~~56,659 ~~238.0 103.0%~~ ----- ---- ----- ---- ~~Operating loss $ (7.9) (4.4)% $ (6.9) (3.0)% ===== ==== ===== ====~~

Information About Major Customers The following table summarizes those customers with revenues in excess of 10% of total revenue for the three months ended June 30, 2002 and 2001 and the six months ended June 30, 2002 and 2001:

~~Nine~~Three Months Ended Six Months Ended June 30, June 30, ---------------------- ------- ~~September 30, September 30, 2001 2000~~ --------------- 2002 2001 2002 2001 ---- ---- ---- ---- ~~Operating~~Customer ~~activities~~1 $20.4% 13.6% 24.18% 13.3~~,363~~% $Customer ~~8,987~~2 ~~Investing~~-% ~~activities~~12.3% $-% ~~(183)~~11.1% $Customer ~~(18,146)~~3 ~~Financing~~13.76% ~~activities~~-% $11.31% ~~(710)~~-% $Customer ~~9,202~~4 11.27% -% 12.05% -% Customer 5 10.97% -% 10.12% -%

13 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. SUBSEQUENT EVENT: On July 1, 2002 the Company implemented a cost reduction plan by announcing the closure of a contact center (effective September 15, 2002) and completed full time employee terminations of 60 call center administrative and 35 corporate employees. These reductions were in response to cost overruns during the first six months of the year. Savings for this contact center will approximate $1.0 million annually and will first be realized during the third quarter. The call center administrative and corporate reductions will reduce salary expenses by $4.0 million annually and will also be realized during the third quarter. Subsequent to June 30, 2002 the Company successfully negotiated a settlement on a closed center lease obligation. This settlement will reduce future restructuring liabilities by approximately $3.4 million, with a settlement payment of $0.2 million. Subsequent to June 30, 2002, the Company obtained a limited waiver from the bank group for the non-compliance with EBITDA and fixed charge coverage for the second quarter. The Company also obtained an amendment from the bank group to modify future quarterly covenants. Management believes based on the revised forecast levels that these covenants are attainable. 14 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION We have made forward-looking statements in this Form 10-Q including the information concerning possible or assumed future results of our operations, and such statements include those preceded by, followed by or that include words such as "anticipates," "believes," "expects," "intends" or similar expressions. For those forward-looking statements, we claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. You should understand that the following important factors, in addition to those discussed elsewhere in this document could affect our future results and could cause those results to differ materially from those expressed in our forward-looking statements: - our overall financial condition, which has made it difficult for us to retain clients; - the effects of the change of control as a result of the recapitalization described herein; - our need to obtain additional financing to pursue our business objectives; - our results of operations being dependent on one or more significant clients; - adverse effects on results of operations if we do not maintain sufficient capacity utilization; - adverse effects on our Company if we do not obtain and implement new or enhanced technology; - adverse effects on our results of operations if we do not avoid high personnel turnover; - our reliance on telecommunications companies; - changes in laws regulating our industry; - fluctuations in quarterly operating results causing our stock price to change; and - events directly or indirectly relating to our Company causing our stock price to be volatile. CRITICAL ACCOUNTING POLICIES Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America that require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenues and expenses during the reporting period. Actual results could differ from those estimates. Our significant accounting policies are described in Note 3 to our consolidated financial statements in Form 10-K for the fiscal year ended December 31, 2001. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Revenue recognition Our revenue recognition policy is significant because our revenue is a key component of our results of operations. Our revenue recognition policies are in accordance with the SEC's Staff Accounting Bulletin No. 101 (SAB 101). The Company recognizes revenues on Outbound Teleservices programs as services are performed, generally based on hours incurred. For certain of these programs, revenues are reduced for estimated customer cancellations. In addition, the Company defers certain up-front fees that are received from its customers and related costs and recognizes the up-front fees, net of costs, over the term of the applicable contract. 15 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Restructuring Charges As discussed in note 5, we have recorded significant restructuring charges in connection with the closure of underutilized customer contact centers and the reduction of overhead costs which were initiated in prior years and continued through the end of this quarter. For the three months ended June 30, 2002, we revised our estimates and expectations based on successfully restructuring some of these obligations. Each reporting period we review these estimates and, to the extent our assumptions change, the restructuring expenses could vary significantly from current estimates. EXINGUISHMENT OF DEBT AND OTHER RESTRUCTURING On April 29, 2002, the Company entered into an agreement with its bank lenders that resulted in a recapitalization of its balance sheet and a reduction of its debt. As a result of the recapitalization, the amounts due under its existing credit facilities totaling approximately $162.2 million at the time of recapitalization, which consisted of outstanding debt, accrued interest and fees, were converted into (a) a three-year term facility of $25 million (face amount) under an amended and restated credit agreement, (b) $40 million (stated value) of the Company's Series A Preferred Stock, and (c) shares of the Company's Series B Convertible Preferred Stock which will convert into common stock representing 95% of the Company's common outstanding after such conversion. The three year term facility is secured by, among other things, the Company's assets and outstanding trade receivables, bears interest at a base rate as defined in the agreement plus 400 basis points, and matures in May 2005. Under the terms of the Agreement, the Company is required to meet certain financial covenants, including a fixed charge coverage ratio and Earnings Before Interest Taxes, Depreciation, and Amortization (EBITDA) targets. The Series A Preferred Stock has a 10% annual dividend rate, which accrues and is payable either in cash or in additional shares of Series A Preferred Stock. Approximately 18,903 shares of the Series B Convertible Preferred Stock was converted into 155,435,035 shares of the Company's common stock immediately after the closing of the recapitalization, and the remainder will convert into shares of common stock as soon as the Company amends its Certificate of Incorporation to increase the authorized number of shares of common stock. Such amendment requires approval of the Company's shareholders. In accordance with Statement of Financial Accounting Standard No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restrucutrings" (SFAS No. 15), the Company has accounted for the effects of the restructuring prospectively, recording the carrying amount of the new term facility at approximately $31.6 million, which includes approximately $6.6 million of future amounts that would otherwise be designated as interest. For future financial statement purposes, the effective interest rate of this facility is 0%. In addition, the amount of the gain, in part, was determined based on an independent appraisal of the fair value of the Series A and Series B Preferred Stock issued in connection with the recapitalization. In addition to entering into the amended credit agreement and completing the recapitalization with its bank lenders on April 29, 2002, other debt balances outstanding to unsecured creditors were restructured from $15.2 million to approximately $0.7 million, with cash payments of $1.6 million. Certain commercial liabilities, primarily accounts payable, which had a carrying value of $3.0 million were also settled through cash payments of $1.0 million and notes payable of $0.3 million. Additional settlements were reached on certain real estate lease obligations that will result in a reduction of $4.9 million of future lease commitments through cash payments of $0.5 million and notes payable of $0.4 million. As 16 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) part of the debt restructuring, the Company divested itself of its ownership interest in eSatisfy.com. The Company recorded a gain on the above for approximately $11.2 million. As a result of these transactions, we recorded a gain on the extinguishment of debt and restructuring of the above obligations for approximately $141.7 million. During May 2002, J. Peter Pierce announced his resignation from the Company's Board of Directors and as Chief Executive Officer of the Company and Christopher Williams also announced his resignation from the Company's Board of Directors and as Chief Operating Officer. In addition, during May 2002 Joe Nezi, Executive Vice President of Sales announced his resignation from the Company and was later replaced by William Pieper. In early June, Price Brannon, Executive Vice President, Technology Services, resigned from the Company and was subsequently replaced by James Wallace as Senior Vice President of Information Technology. As a result of the recapitalization, the Company's Board of Directors is now comprised of four individuals. They are: Kevin Flannery (Chairman of the Board), Brad Scher, Gene Davis, and Charles Sweet. As a result of the resignations of Peter Pierce and Chris Williams, an Operating Committee was created to run the day-to-day operations of the Company. This Committee is comprised of five individuals of the Company's management. They are: Kurt Dinkelacker - Executive Vice President and Chief Financial Officer, Susan Parker - Executive Vice President of Customer Service, Glenn Smith - Executive Vice President of Call Center Operations, William Pieper - Executive Vice President of Sales, and James Wallace - Senior Vice President of Information Technology. The Committee assists with developing and implementing the strategic and tactical goals of the Company. At June 30, 2002, the Company had a stockholders' deficit of $18.2 million, and reported net income of approximately $128.9 million during the first six months of 2002. The amended agreement requires compliance with stipulated covenants, including EBITDA, fixed charge, and capital expenditures, which was based on the Company's updated business plan for 2002. During the second quarter of 2002, the Company failed to meet the financial covenant terms of the Amended and Restated Credit Agreement dated April 29, 2002. The Company obtained a limited waiver from the bank group for the non-compliance with EBITDA and fixed charge coverage covenant for the second quarter. The Company also obtained an amendment from the bank group to modify future quarterly covenants. Management believes based on the revised forecast levels that these covenants are attainable. Management believes that the restructuring of its bank debt and other liabilities that occurred on April 29, 2002, together with existing working capital and projected results for 2002, should enable the Company to generate sufficient cash flow to meet its operating cash needs, fund required capital expenditures, and satisfy its debt service and other financing requirements. As a result of continuing customer losses and a declining revenue base, the Company implemented a significant cost reduction plan in January 2002. This plan included the reduction of corporate overhead and the closure of five additional contact centers. As of June 30, 2002, the Company estimates that it will save over $15 million in connection with this plan for 2002. On an annualized basis, this plan will reduce fixed expenses by approximately $19 million. Subsequent to the January plan, the Company instituted additional cost reductions in March to include the reduction of additional corporate overhead and the closure of one additional contact center. The Company estimates these savings will total $1.5 million in 2002 and $2.5 million annually thereafter. The impact of these reductions was first realized in June 2002. 17 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The Company does not have a line of credit or other short-term borrowing facility available. In addition, covenants in its amended credit agreement restrict the Company's ability to pledge assets as collateral for other borrowings. The Company's 2002 operating plan assumes a stabilization of the Company's revenue base and an improvement in operating profit margins from historical levels. The Company's ability to meet its obligations in the ordinary course of business is dependent upon successful implementation of its operating plan and stabilization of its operations. Uncertainties exist with respect to management's plans, because events and circumstances frequently do not occur as expected, and those differences may be material. These uncertainties raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. RESULTS OF OPERATIONS The following discussions should be read in connection with the Condensed Consolidated Financial Statements contained elsewhere within this report. A comparison of the results of operations follows: 18 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the three months ended June 30, 2002 and 2001

Revenues Total revenues for the three months ended June 30, 2002 were $25.1 million, representing a $32.4 million or 56.4% decrease in comparison to the prior year total of $57.5 million. The decrease in revenue resulted from a decrease in production volumes, the economic environment in 2001 and 2002 and customer revenue erosion as a result of the Company's financial condition. Cost of Services Cost of services for the three months ended June 30, 2002 were $20.5 million, representing a $22.9 million or 52.7% decrease in comparison to the prior year total of $43.4 million. As a percentage of total 19 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) revenues, cost of services increased to 81.6% during the second quarter of 2002 from 75.5% during the second quarter of 2001. The increase in cost of services as a percentage of revenue can be attributed to lower revenue per hour due to competitive pricing pressures and lower utilization of call center capacity. Selling, General and Administrative Selling, general and administrative expenses was $7. 2 million for the three months ended June 30, 2002, representing a $6.0 million or 45.5% decrease from the $13.2 million total recorded during the same period last year. The decrease in expense is a result of several cost reductions aimed at lowering the Company's overhead structure. Restructuring Charge During the three months ended June 30, 2002, the Company expanded the restructuring program initiated during 2001 to include the closure or consolidation of additional facilities and identification of additional employees for separation. In addition, the Company recorded reductions in amounts previously accrued in prior quarters for restructured settlements on leased facilities. This reversal approximated $4.1 million for the three months. As a result, the Company recorded a pre-tax credit of $3.6 million during the second quarter. (See Note 4 to the Condensed Consolidated Financial Statements included elsewhere in this report.) Interest Expense, net The Company incurred net interest expense of $1.1 million for the three months ended June 30, 2002, a decrease of $3.5 million in comparison to interest expense during the same period last year. Interest in the prior period was significantly higher due to increased debt levels and fees incurred as a result of the Company's default on its credit agreement. Gain/(Loss) on Extinguishment of Debt In connection with the April 29, 2002 Credit Agreement the company entered into with its bank lenders, the company recorded a gain on extinguishments of debt of $141.6 million. The restructuring also resulted in the divestiture of its ownership interest in eSatisfy.com. 20 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the Six months ended June 30, 2002 and 2001

Revenues Total revenues for the six months ended June 30, 2002 were $60.7 million, representing a $59.6 million or 49.5% decrease in comparison to the prior year total of $120.3 million. The decrease in revenue resulted from a decrease in production volumes, the economic environment in 2001 and 2002 and customer revenue erosion as a result of the Company's financial condition. Cost of Services Cost of services for the six months ended June 30, 2002 was $51.1 million, representing a $40.2 million or 44.0% decrease in comparison to the prior year total of $91.3 million. As a percentage of total 21 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) revenues, cost of services increased to 84.2% during the second quarter of 2002 from 75.9% during the second quarter of 2001. The increase in cost of services as a percentage of revenue can be attributed to lower revenue per hour due to competitive pricing pressures and lower utilization of call center capacity. Selling, General and Administrative Selling, general and administrative expenses were $14.0 million for the six months ended June 30, 2002, representing a $14.4 million or 50.7% decrease from the $28.4 million total recorded during the same period last year. The decrease in expense is a result of several cost reductions aimed at lowering the Company's overhead structure. Restructuring Charge During the six months ended June 30, 2002, the Company expanded the restructuring program initiated during 2001 to include the closure or consolidation of additional facilities and identification of additional employees for separation. In addition, the Company recorded reductions in amounts previously accrued in prior quarters for restructured settlements on leased facilities. This reversal approximated $4.1 million for the six months. As a result, the Company recorded a pre-tax charge of $4.2 million through June 30, 2002. (See Note 4 to the Condensed Consolidated Financial Statements included elsewhere in this report.) Interest Expense, net The Company incurred net interest expense of $4.2 million for the six months ended June 30, 2002, a decrease of $7.0 million in comparison to interest expense during the same period last year. Interest in the prior period was significantly higher due increased debt levels and the fees incurred as a result of the Company's prior default on its credit agreement. Gain/(Loss) on Extinguishment of Debt In connection with the April 29, 2002 Credit Agreement the company entered into with its bank lenders, the company recorded a gain on extinguishments of debt and restructuring of $141.6 million. The restructuring also resulted in the divestiture of its ownership interest in eSatisfy.com. 22 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) LIQUIDITY AND CAPITAL RESOURCES Cash flows provided by (used in) (dollars in thousands):

Six Months Ended June 30, 2002 The Company's cash flows from operations resulted in a $0.9 million source of cash, reflecting $128.8 million income for the period before $135.8 million in non-cash charges and income items for depreciation, amortization, restructuring charge, gain on extinguishment of debt and accrued interest. The Company's cash flows from investing activities resulted from $0.6 million of capital expenditures for property and equipment, primarily technology related. The Company's cash flow from financing activities resulted in a use of $1.0 million payment of capital leases and other debt. Six Months Ended June 30, 2001 The Company's cash flows from operations resulted in a $1.1 million use of cash, reflecting a $1.5 million loss for the period before $33.2 million in non-cash charges for depreciation and amortization, the restructuring charge, the provision for bad debts and extraordinary loss. Working capital during the period remained fairly constant, resulting in a $0.4 million reduction representing the net effect of the changes in current assets and liabilities, as well as a small gain on the sale of assets. The Company's cash flows from investing activities reflect capital expenditures and disposals for property and equipment, primarily technology related. The Company's cash flows from financing activities reflect the Company's net borrowings under its credit facilities, used to fund operations and capital expenditures and the third party costs associated with these borrowings. NEW DEVELOPMENTS In addition to completing the restructuring and recapitalization transactions described above, management has also developed and has begun to implement a plan to improve the Company's operating margins, cash flows from operations and liquidity position. Management's plan includes the following steps, among others: - Develop account management and business development initiatives in order to improve retention rates for existing customers and generate new revenue sources; 23 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - Develop incentive compensation plans to provide incentives to key employees; - Increase emphasis on winning and retaining higher-margin inbound contracts; - Reduce the number of the Company's call centers; and - Reduce expenses through employee attrition, planned headcount reductions and other non-salary cost reduction programs. The Company believes that all of the above changes, together with existing working capital and projected results for 2002, should enable it to generate sufficient cash flow to meet its operating cash needs, fund required capital expenditures and satisfy its debt service and other financing requirements. However, the Company does not have a line of credit or other short-term borrowing facility available. In addition, covenants in its amended credit agreement restrict its ability to pledge assets as collateral for other borrowings. The Company's 2002 operating plan assumes a stabilization of its revenue base and an improvement in operating profit margins from historical levels. The Company's ability to meet its obligations in the ordinary course of business is dependent upon successful implementation of its operating plan and stabilization of its operations. Uncertainties exist with respect to management's plans because events and circumstances frequently do not occur as expected, and those differences may be material. These uncertainties raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. 24 TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk As of June 30, 2002, the Company had approximately $25 million outstanding under the term loan with our senior bank group. Interest on those facilities was based on a floating interest rate, either the prime rate or LIBOR. Based on the outstanding balance under the facilities at June 30, 2002, we would be required to pay an additional $0.3 million in interest annually for every 1.0% increase in the average prime rate or LIBOR. To reduce the risk associated with a large increase in interest rates, we have placed two derivative financial instruments known as interest rate caps each with notional amounts of $29.5 million as of June 30, 2002. Under the terms of the interest rate cap agreements, we would receive quarterly cash payments when the 3-month LIBOR rate at the end of any quarter exceeded 7.5%. The payment would be determined by multiplying the difference between the actual LIBOR rate and 7.5% by the notional amounts. Due to the current low interest rate environment, the interest rate cap agreements currently have no recorded value. The interest rate cap agreements are scheduled to expire on September 30, 2002. The three-month LIBOR interest rate was approximately 1.860% at June 30, 2002. Foreign Currency Risk We have subsidiaries in Canada and the United Kingdom, which are subject to foreign currency fluctuations. As currency rates change, translation of income statements of these subsidiaries from local currencies to U.S. dollars affects year-over-year comparability of our operating results. Gains and losses on translation are recorded as a separate component of stockholders' equity. Approximately $13.5 million has been loaned to our Canadian subsidiary. The loan proceeds have been converted to Canadian dollars. Under the terms of our credit agreement, large principal payments due in 2002 may require conversion of all or a portion of our Canadian dollar loan to U.S. dollars. An unfavorable change in the Canadian dollar exchange rate at the time of the conversion could cause a foreign currency exchange loss. At this time, we do not believe that such a conversion would be required. The other foreign subsidiaries are limited in their operations and the level of investment by the parent company so that risk of foreign currency fluctuations is not expected to be material. 25 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES In connection with the recapitalization of the Company's balance sheet on April 29, 2002, the Company issued 40,000 shares of its Series A Preferred Stock and 90,000 shares of Series B Convertible Preferred Stock to its bank group in exchange for the cancellation of substantially all of its outstanding bank debt, which totaled approximately $161 million at the time of the recapitalization. The Series A Preferred Stock has a 10% annual dividend rate, which accrues and is payable either in cash or in additional shares of Series A Preferred Stock. The Series B Convertible Preferred Stock is convertible into shares of the Company's Common Stock representing 95% of the Common Stock outstanding after such conversion. The issuance of the Series A Preferred Stock and Series B Convertible Preferred Stock was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. ITEM 3. DEFAULTS UPON SENIOR SECURITIES See Management's Discussion and Analysis of the Condensed Consolidated Financial Statements included elsewhere in this report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS

99.1 Certification pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 26 (b) FORM 8-K On May 14, 2002, Telespectrum filed a Current Report on Form 8-K under Item 1 disclosing the recapitalization. 27 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TeleSpectrum Worldwide Inc. ------------------------------------------ (Registrant) Date: September 24, 2002 /s/ Kevin Flannery ------------------------------------------ Kevin Flannery TeleSpectrum Worldwide Inc. Chairman of the Board & President Date: September 24, 2002 /s/ Kurt Dinkelacker ------------------------------------------ Kurt Dinkelacker TeleSpectrum Worldwide Inc. Chief Financial Officer 28 CERTIFICATIONS I, Kevin Flannery, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TeleSpectrum Worldwide Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: September 24, 2002 /s/ Kevin Flannery --------------------------------- Kevin Flannery Chairman of the Board & President I, Kurt Dinkelacker, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TeleSpectrum Worldwide Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: September 24, 2002 /s/ Kurt Dinkelacker --------------------------------- Kurt Dinkelacker Chief Financial Officer 29

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