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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTIONS 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 0-23489
ACCESS WORLDWIDE COMMUNICATIONS, INC.
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 52-1309227
__________________________________ _________________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
2200 Clarendon Blvd., 12th Floor
Arlington, Virginia 22201
__________________________________ _________________________________________
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (800) 437-5200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class. Name of Each Exchange on Which
- ------------- Registered.
None. None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required 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 as 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 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. [_]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference
to the price at which the stock was sold, or the average bid and asked prices
of such stock, as of a specified date within 60 days prior to the date of the
filing.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 1999 was approximately $44,263,873.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of March 15, 1999 was 9,027,730 shares.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents, all or portions of which are incorporated by
reference herein, and the Part of the Form 10-K into which the document is
incorporated:
Part III incorporates information by reference from the Registrant's Proxy
Statement to be filed with respect to the 1999 Annual Meeting of Stockholders
scheduled to be held on or about April 27, 1999.
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TABLE OF CONTENTS
Part I
1. Business............................................................. 1
2. Properties........................................................... 9
3. Legal Proceedings.................................................... 9
4. Submission of Matters to a Vote of Security Holders.................. 9
Part II
5. Market for Registrant's Common Equity and Related Shareholder
Matters.................................................................. 10
6. Selected Financial Data.............................................. 11
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 12
7A. Quantitative and Qualitative Disclosures about Market Risk............ 18
8. Financial Statements and Supplementary Data.......................... 18
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 41
Part III
10. Directors and Executive Officers of the Registrant................... 41
11. Executive Compensation............................................... 41
12. Security Ownership of Certain Beneficial Owners and Management....... 41
13. Certain Relationships and Related Transactions....................... 41
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 10-K...... 41
Signatures.............................................................. 43
Index to Exhibits....................................................... 45
PART I
Item 1. Business
General
Access Worldwide Communications, Inc. ("Access Worldwide" or the "Company")
is a leading provider of outsourced sales, marketing and medical education
services to Fortune 500 companies in the pharmaceutical, telecommunications,
financial services and consumer products industries. The Company offers a
broad, integrated array of targeted sales, marketing and customer support
services designed to achieve an attractive return on investment ("ROI") for
its clients. In the sales and marketing area, these services include market
research, database management, direct marketing programs, tele-detailing and
tele-sales, sample fulfillment and sales force automation. In the medical
education area, the Company provides comprehensive medical education services
including scientific symposia, medical meetings management and patient
education program development. Leveraging its portfolio of capabilities, the
Company, on behalf of its clients, has a proven record of accessing and
influencing high-value and hard-to-reach audiences including physicians,
pharmacists, and patients in the healthcare arena and multicultural consumers
("Hispanic, Asian and African-American"). The Company believes that it is a
leader in developing multicultural marketing programs that target the
approximately 30% of the U.S. population represented by minorities.
Founded in 1983, the Company has many long-standing customer relationships
with the world's largest pharmaceutical companies and an extensive blue-chip
customer list that includes large and mid-sized pharmaceutical companies,
biotechnology companies, specialty and generic pharmaceutical companies,
medical devices companies and retail pharmacists. The Company's pharmaceutical
customers include Astra Pharmaceuticals, Knoll Pharmaceuticals Inc., Johnson &
Johnson, Novartis Pharmaceutical Corp., Parke-Davis SPA, Pfizer Inc., Procter
& Gamble Co., Roche Pharmaceutical Division of Roche Holding Ltd. and
Schering-Plough Corp. Through its consumer capabilities and multicultural
expertise, the Company also provides services to Fortune 500
telecommunications, financial services and consumer goods companies, of which
Sprint Corp. ("Sprint") is its largest customer.
The Company provides clients with innovative marketing programs, systems and
technologies that help generate incremental sales, market share and profit
growth. These programs are designed to target the Pharmaceutical Marketing
Services Segment ("Pharmaceutical") as well as the Consumer and Business
Services Segment ("Consumer"). For financial information about the Company's
segment reporting, see Note 18 to the Company's Financial Statements.
Forward-looking Statements
This report contains forward-looking statements (within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended), representing
the Company's current expectations and beliefs concerning future events. When
used in this report, the words "believes," "estimates," "plans," "expects,"
"intends," "anticipates," and similar expressions as they relate to the
Company or its management are intended to identify forward-looking statements.
The actual results of the Company could differ materially from those indicated
by the forward-looking statements because of various risks and uncertainties
related to and including, without limitation, the Company's effective and
timely initiation and development of new client relationships and programs,
the maintenance of existing client relationships and programs (particularly
since the Company's agreements with its clients generally do not assure the
Company that it will generate a specific level of revenue, do not designate
the Company as the exclusive service provider and are terminable on short
notice), the successful marketing of the Company's sales, marketing and
medical education services, the achievement of satisfactory levels of both
gross and operating margins, the recruitment and retention of qualified
personnel, the continued enhancement of telecommunications, computer and
information technologies and operational and financial systems, the
achievement by the Company and its suppliers and customers of Year 2000
compliance in a timely and cost efficient manner, the continued and
anticipated growth in industry trends towards outsourcing sales, marketing and
medical education services, changes in competition and the forms of direct
sales and marketing techniques, customer interest in, and use of, the
Company's clients' products and services, general
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economic conditions, costs of telephone services, financing and leasing of
equipment, the adequacy of cash flows from operations and available financings
to fund capital needs and future growth, changes in governmental rules and
regulations applicable to the Company, and other risks set forth in this
report and in the Company's other filings with the Securities and Exchange
Commission. These risks and uncertainties are beyond the ability of the
Company to control, in many cases, the Company cannot predict the risks and
uncertainties that could cause actual results to differ materially from those
indicated by the forward-looking statements.
Pharmaceutical Marketing Services Segment
The Company's broad scope of services and capabilities enables it to
influence physicians, inform pharmacists, involve patients and impact sales.
Specific services are described below:
.Market Research and Database Management. Access Worldwide specializes in
collecting physician and pharmacy data to help its clients better target their
marketing efforts. This data includes physician office information, optimal
sales call times and locations, frequency of procedures performed and pharmacy
personnel. Its data collection and reporting capabilities enhance customers'
productivity.
Access Worldwide is one of a limited number of companies that has a long-
term licensing agreement to access the American Medical Association ("AMA")
master database of 840,000 physicians in the United States. Access Worldwide
provides enhanced database management services to pharmaceutical companies
using its licensed AMA data, along with its proprietary files, state license
files, and Drug Enforcement Administration ("DEA") files. This Medical
Professional Library houses over seven million records, and is used to improve
the performance of pharmaceutical sales force operations.
The Company believes that it has the most comprehensive and accurate
pharmacy database in the United States, comprising 24,000 independent
pharmacists. With this data, Access Worldwide can deliver essential access to
those often uncovered pharmacies that fill approximately 30% of retail
prescriptions in the United States.
.Physician and Pharmacy Direct Marketing. Access Worldwide has exclusive
rights to market and distribute National Football League-branded and
Professional Golf Association Tour-branded single source, direct marketing
publications to healthcare and insurance audiences. The Company's
pharmaceutical clients use these single source publications for targeted
marketing messages to their customers.
The second component of the Company's direct marketing business is its
personalized physician mail programs, used by pharmaceutical sales forces as a
follow-up to physician sales calls. These high-volume letter programs involve
detailed messages to the physician about precise product indications. The
Company mailed in excess of 400,000 letters on behalf of pharmaceutical sales
representatives in the last 12 months.
.Physician and Pharmacy Tele-detailing. The Company communicates with an
average of 15,000 physicians and 24,000 pharmacists every week with targeted
physician and pharmacy telemarketing and direct marketing, vacant territory
management and remote physician coverage programs that influence target
physician prescribing habits and increase market share. This capability is
essential to pharmaceutical companies who are increasingly compelled to
dedicate their field force coverage to a narrower group of blockbuster drugs.
In addition, Access Worldwide plays a critical role in detailing pharmacists
on new products and new indications for existing products. The Company's tele-
driven pharmacy programs reach non-warehousing chain pharmacies, as well as
regional chains, hospitals, nursing home providers and independent retail
pharmacies. Key program components include professional product detailing
presentations, clinical information and literature delivery. The Company
believes that its new product stocking programs are more comprehensive than
any autoship or autocheck program, securing distribution in two-to-four times
the number of pharmacies than traditional wholesaler programs. All orders are
shipped through the pharmacist's preferred wholesaler or, on multi-source
products, the generic distributor. Every pharmacy stocking order is followed-
up and verified as received by the ordering pharmacy.
Access Worldwide simplifies vacant territory management without disruption
of targeted field sales force activities. Pharmaceutical drug representatives
on average miss four to six weeks of work each year due to maternity leave,
temporary reassignments, illnesses, etc. To maintain coverage during these
absences, pharmaceutical companies hire Access Worldwide to provide qualified,
well-trained representatives to
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telephonically replace absent drug representatives. The Company's dedicated
tele-detailing teams are proficient in making product presentations that
provide effective remote coverage, with full reporting and follow-through.
.Ethical Drug Sample and Literature Fulfillment. In 1998, the Company
shipped more than 10 million ethical drug product samples to physicians. It
has the nation's largest outsourced Prescription Drug Marketing Act of 1987
("PDMA") compliant and DEA approved sample fulfillment center in the United
States, located in Lincoln Park, New Jersey. Access Worldwide's customers
benefit from sophisticated sample fulfillment services that dramatically
reduce sample turnaround time, while providing comprehensive accountability
and tracking programs. A recent client audit found zero defaults and zero
unaccounted for samples. The Company also ships large volumes of product
literature to pharmaceutical sales representatives in the field. The Company's
Electronic Territory Management System ("ETMS") technology links to its
product sample and literature fulfillment operations to deliver fully
integrated sales support systems.
.Sales Force Productivity Systems. Access Worldwide improves the efficiency
of its clients' sales forces by providing them with a variety of outsourced
sales services as well as an integrated technological infrastructure and
support system designed to maximize sales force productivity in the field. The
Company's ETMS system allows geographically dispersed pharmaceutical sales
forces to report and track their efforts electronically. The ETMS system is
integrated into the Company's product sample and fulfillment facility,
physician database management systems, and direct mail systems. These
integrated field force automation systems typically require the Company to be
also integrated into the systems and sales force management structure of the
client's organization, thus raising the switching costs for the Company's
clients.
Access Worldwide also provides vacant territory management and remote
physician coverage to prevent disruption of planned field sales force
activities. The Company's dedicated tele-detailing teams are proficient in
making product presentations that assure effective and efficient virtual field
force coverage, with full reporting and follow-through.
. Medical Education Services. As the globalization of the healthcare
industry in this era of electronic communications redefines the pace of
scientific interchange, the Company's international experience and
capabilities are particularly valuable. Access Worldwide is highly experienced
in successful scientific program development, program planning, faculty
recruitment and support, meeting logistics, management and audience
generation.
The Company's scientific and medical expertise creates access to opinion
leaders in medicine. The Company has conducted more than 250 international
medical education meetings in more than 30 countries. With medical education
clients that include five of the top ten pharmaceutical companies, the Company
is knowledgeable about the changing regulatory requirements in countries
around the world.
The Company has excellent communications with medical societies and
journals, and has established relationships with medical schools and
continuing medical education offices. The Company delivers medical education
services in these varied meeting venues:
. Scientific Symposia
. Interactive Workshops
. University Programs
. Fellows Programs
. Investigator/Research Meetings
. Roundtables
. Advisory Board Meetings
. Sales Training Programs
.Patient Education Program Development. The Company develops patient
education communications programs in key therapeutic categories as part of its
medical education and medical publishing services.
.Patient Profiling and Data Collection. Access Worldwide has the capability
to capture product usage, frequency and satisfaction data from patient and
consumer contacts. The Company also captures patient data from its two new
patient prescription starter programs, which are described below.
3
.Prescription Starter Programs. The Company recently added two new
proprietary patient prescription starter programs to the Company's family of
product sample systems: FirstRx(TM), a direct-to-patient product starter
program; and ScriptBuilder(TM), a coupon-based patient starter system that
delivers free trial starters to patients at the pharmacy. Both systems are
used to correctly begin patient treatment and compliance. These two programs
are already being used by three of the Company's pharmaceutical customers.
.Crisis Management Services. The Company provides crisis response
communications services for its pharmaceutical clients. The Company recently
managed an extensive product recall program for one of its medical device
clients, connecting directly to the client's website to update patient product
use information. The Company responds to patient questions and interfaces
electronically with its customers' databases to update patient files.
.Patient Customer Service and Support. Access Worldwide's inbound tele-
services capabilities can support patient information services, and the
delivery of resource information for patients and their families who are
enrolled in patient care and caregiver support programs. In addition, the
Company has arranged the replacement of medical devices, updating client
databases with patient product information.
Consumer and Business Services Segment
The Company delivers innovative marketing programs, systems and technologies
in the consumer and business services arena which enable its clients to access
new markets, acquire new customers, and activate current customers. Specific
services include the following:
.Consumer and Business Sales and Promotion Programs. The Company performs
targeted, consumer marketing and sales programs to improve customer
acquisition, customer retention and customer win-back performance for its
clients. The Company leverages its systems and technologies to improve
customer satisfaction and to support key sales and customer care needs.
.Customer Service and Support. Access Worldwide's inbound technology
infrastructure enables the Company to provide customer service and support
service to its clients on an outsourced basis. On behalf of its clients, the
Company responds to customer service inquiries, resolves customer billing
issues, registers consumers in media-driven promotional programs, and arranges
for replacement products when required.
.Multicultural Marketing Services. In light of the continued growth of
multicultural populations in the United States, the Company's multicultural
and multilingual expertise, resources and technology represent a powerful
differentiator to its telecommunications, financial services and consumer
products clients. Access Worldwide provides analysis and strategic direction
as to how its clients should most effectively target and approach high-
potential customers in high-value market segments. Strategic planning is
supported by the Company's research capabilities, which offer detailed
definitions and analyses of the market segments targeted by its clients,
including pharmaceutical companies and healthcare providers. The Company's
research group has been recognized by American Demographics Magazine as one of
the Best 100 Sources of Marketing Information.
The Company conducts qualitative and quantitative market research throughout
North and South America. The Company's research services encompass market area
profiles, target audience segmentation, marketing and advertising
effectiveness, culture market opportunity assessment, new product concepting
and testing, awareness, attitude and usage studies, opinion polling,
readership and viewership studies, and customer satisfaction surveys.
The Company also has significant expertise in collecting, analyzing,
organizing and communicating data. The Company has proprietary Hispanic and
Asian surname algorithm that its customers use to analyze their current
customer and prospect files. The Company works with data owned or acquired by
its clients for its patient and consumer services programs.
The Company's multicultural and multilingual staff executes consumer
services programs in over 15 non-English languages, including Arabic,
Cantonese, French, German, Hindi, Japanese, Khmer, Korean, Mandarin,
Portuguese, Russian, Spanish, Tagalog, Urdu and Vietnamese. For its healthcare
clients, the Company has the capability to deliver in-language, in-culture
direct-to-patient communications programs as well as patient monitoring and
compliance programs.
4
Recent Developments
On June 15, 1998, the Company moved from the Fort Lauderdale facility into a
34,500 square foot facility located in Boca Raton, FL.
On August 13, 1998, the Company moved from the Dallas facility into a 26,000
square foot facility located in Plano, TX.
On October 24, 1998, the Company acquired all of the outstanding capital
stock of A M Medica Communications Ltd. ("A M Medica"). In consideration for
such stock, the Company paid to the stockholder of A M Medica $22.2 million in
cash, 122,045 shares of the Company's common stock, $.01 par value ("Common
Stock"), and a three year 6.5% subordinated promissory note in the principal
amount of $5.5 million. In addition, the purchase agreement called for cash in
excess of certain financial thresholds to be measured at various intervals
throughout 1998 and 1999. Any cash in excess of the financial thresholds is to
be paid to the original stockholder.
On November 2, 1998, the Company changed its name from
CulturalAccessWorldwide, Inc. to Access Worldwide Communications, Inc. and its
trading symbol from "CAWW" to "AWWC".
On February 23, 1999, the Company agreed to pay down $2.5 million of the
outstanding $6.5 million owed to holders of the mandatorily redeemable
preferred stock, series 1998 upon the closing of the new bank Credit Facility
described below.
On March 12, 1999, the Company entered into a three year, $65 million
revolving line of credit and term loan facility with a syndicate of banks led
by NationsBank, N.A. ("NationsBank") (the "Credit Facility"). The syndicate of
banks is also comprised of Fleet Bank, N.A., European American Bank and Summit
Bank. The Credit Facility bears interest at formula rates ranging from either
(i) the higher of (a) the Federal Funds Effective Rate plus 0.50% and (b) the
prime lending rate charged by NationsBank, N.A. from time to time, plus an
applicable margin ranging from 0.0% to 1.0% or (ii) LIBOR, plus an applicable
margin ranging from 1.25% to 2.50%. The Company is required to pay a
commitment fee on the unused portions of the Credit Facility. The Credit
Facility is secured by substantially all of the assets of the Company.
Industry Overview
The pharmaceutical outsourced marketing and the consumer and business
outsourced marketing services industries in which Access Worldwide operates
are high growth, high opportunity business environments driven by favorable
business trends. Key external growth drivers in these industries are:
.Growth in Outsourcing. The demand for outsourced marketing services is
growing rapidly as pharmaceutical companies look to outside service
organizations to supplement their internal product marketing, product sales
and direct-to-consumer activities. Outsourcing has proven to enable
pharmaceutical marketers to focus on core competencies, gain market share more
quickly, avoid incremental infrastructure costs and evaluate programs that
might be too costly to test internally. As companies outsource their marketing
or sales activities, they tend to develop dependent relationships with
outsourced marketing services firms. These relationships and high switching
costs tend to deter companies from moving such functions in-house.
In addition, recent regulatory changes in the pharmaceutical industry have
created a window of opportunity for growth-minded companies, leading them to
outsource marketing services to enhance their competitive position. For
example, industry consolidation and changes in Food and Drug Administration
("FDA") regulations regarding advertising directly to consumers have
drastically increased the amount of outsourced marketing services. In the
telecommunications industry, where large companies compete fiercely for
customers, increased outsourcing has allowed these companies to react nimbly
to competitive pressures in order to capture and maintain market share.
. Growth in Pharmaceutical Marketing Spending. Industry analysts project
that worldwide sales and marketing spending by pharmaceutical companies is
expected to increase from $5 billion in 1995 to approximately $8 billion in
2000, a 60% increase. Concurrently, outsourced sales and marketing by
pharmaceutical companies is expected to increase from $400 million in 1995 to
almost $1.5 billion in 2000, a 300% increase. The growth in pharmaceutical
industry outsourcing is driven in part by the desire for cost-effective,
measurable sales and marketing programs.
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.Growth in Multicultural Healthcare and Pharmaceutical Outreach Programs
Focused on High-Risk Disease Conditions. Presently, almost one-third of the
U.S. population is comprised of ethnic minorities and the number will continue
to grow according to the U.S. Census Bureau. Importantly, pharmaceutical and
healthcare marketers are recognizing that among the fastest growing segments
for their products and services in the United States are the Hispanic and
Asian populations. The U.S. Census Bureau has projected that the Hispanic and
Asian populations in the United States, which were comprised of approximately
27.8 million and 9.1 million people, respectively, in 1996, will grow at rates
of approximately 48% and 57%, respectively, by 2010, compared to a 12% growth
rate for the general population during the same period.
Leading pharmaceutical companies have introduced disease management programs
focused specifically on the Hispanic and African-American patient populations,
which tend to be at higher risk for conditions such as diabetes, hypertension,
stroke, coronary heart disease, certain forms of cancer, asthma, and seasonal
allergies. In addition, managed care organizations and hospitals have an
increasing need to reach their multilingual patients with in-language patient
education and follow-up programs to maintain their patients' confidence and
compliance with prescribed treatment. Access Worldwide's capabilities in
multilingual patient communications add value to managed care organizations,
hospitals and pharmaceutical companies who have embarked upon multilingual
patient disease management and outreach programs.
.Growth in Demand for Pharmaceutical and Healthcare Marketing Services that
Demonstrate a Clear and Measurable Return on Investment. Throughout the
pharmaceutical and healthcare industry, marketing executives are under
intensified pressure to prove that their plans and programs are cost-
effective. This pressure, coupled with the ability to measure results, has
been instrumental in the dramatic growth in the utilization of direct
marketing, direct-to-patient communications programs, sample fulfillment and
telesales/services.
The Direct Marketing Association ("DMA") reports that U.S. direct marketing
driven sales in 1992 were approximately $830.4 billion. By 1997, the DMA set
this figure at an estimated $1,226.2 billion with an annualized increase of
8%. That growth is expected to accelerate by the year 2002, increasing 8.7% a
year to $1,858.7 billion. Pharmaceutical marketers are increasing their
utilization of direct marketing services. In 1997, according to Dain Rauscher
Wessels, the pharmaceutical industry spent approximately $7.0 billion
promoting, marketing and selling its products through direct channels. This
spending is projected to grow at approximately 10% per year through the end of
the decade.
Growing pressures within companies in these industries to demonstrate a high
return on their marketing and sales investments have forced them to seek
outsourced services that provide a high level of accountability and
measurability. Outsourced marketing services firms that offer highly
measurable, database-driven direct marketing services and programs, including
teleservices and product sample fulfillment, are benefiting from this growing
need for corporate accountability.
.Growth in Importance of Customer Service and Loyalty Programs. Companies
operating in marketing-intensive industries are focused on protecting their
existing customer base and growing the lifetime value of individual customer
relationships as a means of improving both revenue growth and profitability.
There is an increasing recognition of the fundamental need to speak the
language of the customer in order to improve customer sales, retention and
win-back performance.
Quality Assurance
Access Worldwide uses its proprietary software and systems to monitor
carefully the progress of client projects. For example, management maintains
an ongoing oversight of the duration of customer teleservices presentations,
time between presentations, response time, number of queries resolved after
the first call and other statistics important in measuring and enhancing
productivity and service levels. Clients have daily access to a variety of
measures of service performance tracked by the Company's technology and can
monitor presentations directly through the Company's remote monitoring
systems. The Company's pharmaceutical sample dispensing and tracking systems
are designed to verify order accuracy and to audit data integrity.
6
Contractual Arrangements
The Company operates under both multi-year and month-to-month contractual
relationships.
In the pharmaceutical/healthcare business, the compensation system is
divided into long-term and short-term programs. The long-term ("multi-year")
programs generate monthly fees and occasionally, bonuses based on specific
performance criteria such as market share increases or prescription order
growth. The short-term programs are primarily billed on a completed unit of
service basis, such as presentations delivered or pharmaceutical samples
forwarded. The medical education and meetings programs are invoiced with
progress billings.
In the multicultural teleservices business, hourly rate structures reflect
the specialized nature of the multilingual skills that exist throughout the
organization, as well as the extensive systems integration that the Company
has created with its clients.
Sprint is the only client that represented over 10% of the Company's total
revenues. The Company currently has a master service agreement with Sprint,
supported by numerous work orders each with their own pricing terms. The
Company's work for Sprint is spread throughout several different divisions of
Sprint ranging from outbound telemarketing to inbound customer service. The
master contract with Sprint expires on June 30, 1999 and is automatically
renewable for additional 12-month periods provided each party to the contract
remains satisfied with the contract terms. The Company was recently awarded
additional business to help Sprint grow and maintain its Asian-American market
share.
Competition
Access Worldwide competes in the outsourced marketing services industry,
which is highly competitive and fragmented. It competes with other outsourced
marketing services firms, ranging in size from very small firms offering
specialized applications or short-term projects to large independent firms.
The industry is beginning to consolidate and, as a result of competitive
pressures, factors such as quality of service, responsiveness to client
issues, reliability, flexibility, reputation and record of timeliness are
becoming increasingly important. While many companies provide outsourced
marketing services, management believes that no single company dominates the
industry.
The highly fragmented outsourced marketing services industry in which the
Company operates includes many independent and captive direct marketing
providers. In the direct marketing industry, no single company dominates the
market and many of the participants offer limited services. Conversely, in the
pharmaceutical teleservices industry alone, industry analysts have estimated
that there are relatively few providers who reach physicians and pharmacists.
Other areas in which the Company competes such as market research, medical
education and medical meetings management are particularly fragmented.
Alternatively, the ethical drug sample fulfillment industry is highly
specialized, with a limited number of quality competitors due to the high cost
and regulatory requirements for entry. Currently, there is a trend toward
consolidation, and Access Worldwide is capitalizing on this trend through
strategic acquisitions. These acquisitions increase the Company's ability to
provide Fortune 500 companies with integrated outsourced marketing solutions
for high-growth market segments.
The Company believes that it competes successfully based on its ability to
deliver an effective combination of resources, people, expertise, systems,
data and technologies that provide innovative, measurable and cost-effective
services which increase client sales, market share and profits. The Company
provides differentiated value-added services that help its clients attract new
customers, protect existing client relationships and increase the lifetime
value of all customer relationships. The Company believes that its ability to
provide both strategic and tactical solutions, supported by systems and
technology, differentiates it in the highly fragmented marketing services
industry.
7
Government Regulation
Several industries in which the Company's clients operate are subject to
varying degrees of governmental regulation, particularly the pharmaceutical,
healthcare and telecommunications industries. Generally, compliance with these
regulations is the responsibility of the Company's clients. However, the
Company could be subject to a variety of enforcement or private actions for
its failure or the failure of its clients to comply with such regulations.
Pharmaceutical companies, in particular, and the healthcare industry, in
general, are subject to significant federal and state regulation. The
Company's handling and distribution of samples of pharmaceutical products are
subject to regulation by its clients, the DEA, the FDA and other applicable
federal, state and local laws and regulations, including the PDMA. Currently,
the healthcare industry is monitoring potential passage of new regulations
under the PDMA which would impose even stricter requirements in the areas of
storage, inventory control and lot number tracking.
In addition, the Company must comply with regulations promulgated by
professional associations such as the AMA. The AMA has established ethical
guidelines which govern receipts of gifts to physicians from health related
entities, including any items received during peer-to-peer meetings and
symposia sponsored by pharmaceutical companies.
The pharmaceutical industry is also subject to federal regulation by the
FDA. The Federal Food, Drug and Cosmetics Act regulates the approval,
labeling, advertising, promotion, sales and distribution of drugs, which
includes the distribution of product samples to physicians. The FDA also
regulates all promotional activities involving prescription drugs. There can
be no assurance that additional federal or state legislation regulating the
pharmaceutical or healthcare industries would not limit the scope of the
Company's product sampling services or significantly increase the cost of
regulatory compliance.
The Federal Communications Commission ("FCC") rules under the Federal
Telephone Consumer Act of 1991, limit the hours during which telemarketers may
call consumers and prohibit the use of automated telephone dialing equipment
to call certain telephone numbers. The Federal Telemarketing and Consumer
Fraud and Abuse Protection Act of 1994 ("TCFAPA") broadly authorizes the
Federal Trade Commission ("FTC") to issue regulations prohibiting
misrepresentation in telephone sales. In August 1995, the FTC issued
regulations under the TCFAPA, which, among other things, require telemarketers
to make certain disclosures when soliciting sales. The Company believes its
operating procedures comply with the telephone solicitation rules of the FCC
and FTC. However, there can be no assurance that additional federal or state
legislation, or changes in regulatory implementation, would not limit the
activities of the Company or its clients in the future or significantly
increase the cost of regulatory compliance.
Two bills recently introduced in Congress included provisions requiring
parental consent to any sale of lists of minors. Though neither of these bills
was reported out of committee, there can be no assurance that similar
legislation will not be passed in the future at the federal or state level.
Any substantial legal restriction on the use or sale of marketing lists could
have a material adverse effect on the Company.
One of the significant regulations of the FCC applicable to long distance
carriers, such as Sprint, prohibits the unauthorized switching of subscribers'
long distance carriers, known in the industry as "slamming." A fine of up to
$100,000 may be imposed by the FCC for each instance of slamming. In order to
prevent unauthorized switches, federal law requires that switches authorized
over the telephone, such as through the Company's teleservices, be verified
contemporaneously by a third party. The Company believes its procedures comply
with this third-party verification requirement.
Third-party verification generally is not required for switches obtained in
person, such as those obtained by members of a direct field sales force. The
Company's training and other procedures are designed to prevent
8
unauthorized switching. However, as with any sales force, the Company cannot
completely ensure that each employee will always follow the Company's mandated
procedures. Accordingly, it is possible that employees may in some instances
engage in unauthorized activities, including slamming. The Company
investigates customer complaints reported to it by its telecommunications
clients and reports the results to such clients. To the Company's knowledge,
no FCC complaint has been brought against any of its clients as a result of
the Company's services, although the Company believes that the FCC is
examining the sales activities of long distance telecommunications providers,
including the Company's clients, and the activities of outside vendors, such
as the Company, used by such providers. If any complaints were brought, the
Company's client might assert that such complaints constituted a breach of its
agreement with the Company and, if material, seek to terminate the contract.
Any termination by Sprint would be likely to have a material adverse effect on
the Company. If such complaints resulted in fines being assessed against a
client of the Company, the client could seek to recover such fines from the
Company.
Employees
As of December 31, 1998, the Company had approximately 1,400 employees. None
of the Company's employees is represented by a labor union and the Company is
not aware of any current activity to organize any of its employees. Management
considers relations between the Company and its employees to be good.
Item 2. Properties
Access Worldwide's principal executive offices are located in Arlington,
Virginia. The Company's segments operate in California, Florida, New York, New
Jersey, Texas and Virginia.
Approx.
Location Principal Use Square Feet
---------------- ----------------------------------------------- -----------
Arlington, VA Corporate Offices 5,000
Consumer and Business Services Segment:
Arlington, VA Customer Sales and Service Programs 25,300
Plano, TX Customer Sales and Service Programs 21,400
Pharmaceutical Marketing Services Segment:
Physician and Pharmacy Tele-detailing;
Boca Raton, FL Patient/Customer Services 34,500
Lincoln Park, NJ Ethical Drug Sample and Literature Fulfillment,
Sales Force Productivity Systems 120,000
New York, NY Medical Education Services 7,000
Market Research:
Los Altos, CA Market Research 4,088
Los Angeles, CA Market Research 1,395
Item 3. Legal Proceedings
From time to time, the Company is party to certain claims, suits and
complaints which arise in the ordinary course of business. Currently, there
are no such claims, suits or complaints which, in the opinion of management,
would have a material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1998.
9
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
(a) Market Information
On February 13, 1998, the Company completed the initial public offering
("Offering") of its Common Stock at an initial public offering price of $12.00
per share. The Common Stock trades on the NASDAQ National Market ("Nasdaq")
under the symbol "AWWC." The following table sets forth the high and low
closing sale prices for the Company's Common Stock as reported by Nasdaq for
the periods indicated:
Market Prices
-------------
1998 Fiscal Quarters High Low
-------------------- -------------
First Quarter............................................... 16.00 10.88
Second Quarter.............................................. 16.38 8.13
Third Quarter............................................... 10.13 3.00
Fourth Quarter.............................................. 9.75 2.63
(b) Holders
The number of holders of Common Stock as of March 15, 1999 was approximately
1,750. The Company included individual participants in security position
listings in calculating the number of holders.
(c) Dividends
The Company did not pay cash dividends on its Common Stock during the year
ended December 31, 1998 and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future. The Company's Credit Facility
prohibits the payment of cash dividends.
Recent Sales of Unregistered Securities
1. Simultaneously with the consummation of the Company's Offering on
February 13, 1998, Abbingdon Venture Partners Limited Partnership-II and
Abbingdon Venture Partners Limited Partnership-III (collectively, the
"Partnerships") (x) exchanged (a) 18,000 shares of 8% Cumulative Preferred
Stock and (b) 18,000 shares of 8% Preferred Stock, Series 1997 and (y)
converted $2.9 million of the principal amount of promissory notes due to the
Partnerships for an aggregate of 65,000 shares of Preferred Stock, Series 1998
(the "1998 Preferred Stock"). The shares of 1998 Preferred Stock were issued
exclusively at the time to existing security holders of the Company where no
commission or other remuneration was paid and such issuance was therefore made
in reliance on Section 3(a)(9) of the Securities Act of 1933 (the "Securities
Act").
2. On July 28, 1998, as part of the contingent payments due to the seller of
certain assets of the TeleManagement Services business, which the Company
acquired in January 1997, the Company issued an aggregate of 70,851 shares of
Common Stock. Registration under the Securities Act of the Common Stock issued
in this transaction was not required because such securities were issued in a
transaction not involving any "public offering" within the meaning of Section
4(2) of the Securities Act, in reliance on Rule 506 under the Securities Act.
In connection therewith, the Company has obtained a representation from the
stockholder to the effect that it was an "accredited investor" as defined in
Rule 501(a) under the Securities Act. In addition, there was no general
solicitation or general advertising in connection with such issuance.
3. On October 24, 1998, as part of the purchase price for all of the common
stock of A M Medica, the Company issued 122,045 shares of Common Stock out of
the treasury of the Company to the sole stockholder of A M Medica.
Registration under the Securities Act of the Common Stock issued in this
transaction was not required because such securities were issued in a
transaction not involving any "public offering" within the meaning of Section
4(2) of the Securities Act, in reliance on Rule 506 under the Securities Act.
In connection therewith, the Company has obtained a representation from the
stockholder to the effect that she was an "accredited investor" as defined in
Rule 501(a) under the Securities Act. In addition, there was no general
solicitation or general advertising in connection with such issuance.
10
Item 6. Selected Financial Data (In Thousands Except for Per Share Data)
The selected statement of operations data for the quarters ended March 31,
June 30, and September 30, 1998 and 1997 have been derived from unaudited
Financial Statements of the Company, included in Forms 10-Q filed by the
Company. December 31, 1998 and 1997 statement of operations data have been
derived from audited Financial Statements of the Company included elsewhere in
this Report on Form 10-K. The following selected financial data should be read
in conjunction with the Financial Statements and the Notes thereto of the
Company, and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Form 10-K.
Quarters Ended
---------------------------------------------
June
March 31, 30, September 30, December 31,
1998 1998 1998 1998
--------- ------- ------------- ------------
Statements of Operations Data:
Revenues........................ $15,691 $15,325 $16,381 $25,837
Cost of revenues................ 9,110 8,491 8,652 14,839
------- ------- ------- -------
Gross profit.................... 6,581 6,834 7,729 10,998
Selling, general and
administrative................. 4,804 4,678 5,551 6,550
Amortization expense............ 400 309 368 654
------- ------- ------- -------
Income from operations.......... 1,377 1,847 1,810 3,794
Interest (expense) income....... (466) (116) 117 (293)
Other income.................... -- -- -- 4
------- ------- ------- -------
Income before income taxes...... 911 1,731 1,927 3,505
Tax expense..................... 398 767 845 1,542
------- ------- ------- -------
Net income...................... $ 513 $ 964 $ 1,082 $ 1,963
======= ======= ======= =======
Earnings per share
Basic......................... $ 0.07 $ 0.11 $ 0.12 $ 0.22
======= ======= ======= =======
Diluted....................... $ 0.07 $ 0.11 $ 0.12 $ 0.21
======= ======= ======= =======
Quarters Ended
---------------------------------------------
June
March 31, 30, September 30, December 31,
1997 1997 1997 1997
--------- ------- ------------- ------------
Statements of Operations Data:
Revenues........................ $ 6,962 $ 8,063 $ 9,013 $12,615
Cost of revenues................ 4,064 4,766 5,605 7,378
------- ------- ------- -------
Gross profit.................... 2,898 3,297 3,408 5,237
Selling, general and
administrative................. 1,392 1,910 2,029 3,578
Amortization expense............ 209 147 191 354
------- ------- ------- -------
Income from operations.......... 1,297 1,240 1,188 1,305
Interest (expense).............. (577) (507) (393) (851)
Other (expense) income.......... (300) (156) 153 6
------- ------- ------- -------
Income before income taxes...... 420 577 948 460
Tax expense..................... 241 253 447 240
------- ------- ------- -------
Net income...................... $ 179 $ 324 $ 501 $ 220
======= ======= ======= =======
Earnings per share
Basic......................... $ 0.04 $ 0.07 $ 0.11 $ 0.06
======= ======= ======= =======
Diluted....................... $ 0.04 $ 0.07 $ 0.10 $ 0.05
======= ======= ======= =======
11
The selected statement of operations data and the selected balance sheet
data have been derived from the audited Financial Statements of the Company.
The following selected financial data should be read in conjunction with the
Financial Statements and the Notes thereto of the Company and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Form 10-K.
Five Months
Year Ended Ended Years Ended December 31,
July 31, December 31, ---------------------------------------------------
1994 1994 1995 1996 1997 1998
---------- ------------ ------------ ------------ ------------ ------------
Statement of Operations
Data:
Revenues................ $4,397 $2,728 $9,047 $16,286 $36,653 $73,234 (2)
Cost of revenues........ 1,720 1,437 4,396 8,639 21,813 41,091
------ ------ ------ ------- ------- --------
Gross profit............ 2,677 1,291 4,651 7,647 14,840 32,143
Selling, general and
administrative......... 2,715 807 4,540 7,754 9,810 23,315
------ ------ ------ ------- ------- --------
Income (loss) from
operations............. (38) 484 111 (107) 5,030 8,828
Interest (expense)
income................. (3) (2) 24 (101) (2,327) (759)
Other income (expense).. -- -- 5 (200) (297) 4
------ ------ ------ ------- ------- --------
Income (loss) before
income taxes........... (41) 482 140 (408) 2,406 8,073
Tax (expense)
benefit(1)............. -- -- -- 88 (1,181) (3,552)
------ ------ ------ ------- ------- --------
Net (loss) income....... $ (41) $ 482 $ 140 $ (320) $ 1,225 $ 4,521
------ ------ ------ ------- ------- --------
Net income (loss) per
common share
-- basic(3)............ $ (0.07) $ 0.26 $ 0.52
======= ======= ========
Net income (loss) per
common share
-- diluted(3).......... $ (0.07) $ 0.26 $ 0.51
======= ======= ========
As of
---------------------------------------------------------------------------
July 31, December 31, December 31, December 31, December 31, December 31,
1994 1994 1995 1996 1997 1998
---------- ------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Current assets.......... $1,110 $ 994 $2,463 $16,963 $12,384 $ 23,914
Total assets............ 1,240 1,152 2,749 29,454 52,680 104,422
Current liabilities..... 996 429 2,159 16,757 17,336 21,945
Long-term debt, less
current maturities..... 10 6 -- 16,201 34,319 29,847
Mandatorily redeemable
preferred stock........ -- -- -- 1,800 3,888 6,500
Common stockholders'
equity (deficit)....... 234 717 590 (5,304) (2,863) 46,130
- --------
(1) In December 1996, the Company became a C Corporation for income tax
purposes. Prior to that, the Company was an S Corporation.
(2) On October 24, 1998, the Company acquired all of the outstanding capital
stock of A M Medica in a transaction accounted for as a purchase.
(3) The earnings per share information has been excluded for the years ended
July 31, 1994 and December 31, 1995 and the five months ended December 31,
1994. Prior to the Recapitalization on December 6, 1996, the information
is not meaningful.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with Selected
Financial Data and the Financial Statements and the Notes thereto included
elsewhere in this Form 10-K.
12
OVERVIEW
Access Worldwide Communications, Inc., formerly known as
CulturalAccessWorldwide, Inc. and /or CulturalAccess, is an outsourced
marketing services company that assists more than 100 clients in the
pharmaceutical, telecommunications, financial services and consumer products
industries. The Company designs and delivers innovative, data-driven sales and
marketing solutions that maximize clients' sales and profits. The Company has
particular expertise in reaching key pharmaceutical audiences--physicians,
pharmacists and patients--and targeted consumer groups. Access Worldwide's
resources include proprietary databases of targeted consumers, physicians and
pharmacies; strategic planning and market research services; medical
education; medical meetings management; medical publications; inbound and
outbound teleservices in 15 different languages; ETMS and DEA approved drug
sample fulfillment and direct mail capabilities. Access Worldwide has over
1,400 employees and representatives in offices throughout the United States.
REVENUES
The Company provides a variety of services for a diverse client base. The
major forms of revenue collection and recognition are as follows:
. The Company leases ETMS equipment to clients on a per salesperson basis.
Revenues are recognized either under an operating or sales-type lease.
. For customized or non-standard database projects, the Company bills
either on a fixed fee or on a per item basis, and revenues are
recognized upon delivery of data. Monthly or scheduled data services are
billed and revenue recognized upon delivery of data.
. For sampling and fulfillment activities, the Company bills and
recognizes revenue on a per item basis.
. For teleservices projects, the Company bills clients and recognizes
revenue on one of the following bases: production hours, completed
presentations, phone calls placed or received, and sales made per hour
or a fixed monthly fee. Revenues are recognized as the services are
completed.
. For medical education and meeting programs, the Company generally bills
and collects fixed project fees over the life of the project including a
percentage of the total project cost at the execution of the work order.
Revenues are recognized on the percentage of completion method.
. For market research projects, the Company generally bills and collects
fixed project fees in periodic installments over the life of the project
including a percentage of the total project costs at the execution of a
contract. Revenues are recognized on the percentage of completion
method.
COST OF REVENUES
Cost of revenues consists of expenses specifically associated with client
service revenues. The cost of revenues includes salaries and benefits,
commissions paid to sales personnel, purchased services for clients and
telephone charges.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses include staff functions such as
accounting, information technology and human resources, as well as expenses
not directly linked to client service revenues, such as depreciation,
amortization and rental expenses.
RESULTS OF OPERATIONS BY SEGMENT FOR 1998 AND 1997
The following table sets forth, for the periods indicated, certain
statements of operations data by segment obtained from the Company's
statements of operations. See Note 18 of the Notes to the Company's Financial
Statements for the definition of the segments. There can be no assurance that
trends in operating results will continue in the future.
13
Consumer Pharmaceutical
---------------------- -----------------------
1997 1998 Change 1997 1998 Change
------- ------- ------ ------- ------- -------
Statements of Operations Data
in Thousands:
Revenues....................... $23,527 $30,033 $6,506 $12,349 $39,747 $27,398
Cost of revenues............... 14,648 17,654 3,006 6,811 21,916 15,105
------- ------- ------ ------- ------- -------
Gross profit................... 8,879 12,379 3,500 5,538 17,831 12,293
Selling, general and
administrative................ 4,472 7,301 2,829 3,033 9,305 6,272
Amortization expense........... 333 339 6 539 1,309 770
------- ------- ------ ------- ------- -------
Operating profit............... $ 4,074 $ 4,739 $ 665 $ 1,966 $ 7,217 $ 5,251
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues for the Company increased $36.6 million, or 99.8%, to $73.2 million
for the year ended December 31, 1998, compared to $36.6 million for the year
ended December 31, 1997. Revenues for the Consumer Segment increased $6.5
million, or 27.6%, to $30.0 million for the year ended December 31, 1998,
compared to $23.5 million for the year ended December 31, 1997. The increase
in the Consumer Segment is primarily the result of continued growth in the
business with Sprint. Revenues for the Pharmaceutical Segment increased $27.4
million, or 222%, to $39.7 million for the year ended December 31, 1998,
compared to $12.3 million, for the year ended December 31, 1997. The increase
in revenues for the Pharmaceutical Segment is primarily the result of twelve
months of revenues included in 1998 for Phoenix Marketing Group ("Phoenix") as
compared to two months in 1997, and the acquisition of A M Medica in October
1998. Approximately $25.1 million of the $27.4 million increase in revenues
for the Pharmaceutical Segment was the result of the acquisitions of Phoenix
and A M Medica.
Cost of revenues for the Company increased $19.3 million, or 88.4%, to $41.1
million for 1998, compared to $21.8 million in 1997. Cost of revenues as a
percentage of revenues for the Company declined to 56.1% for 1998, from 59.5%
for 1997. Cost of revenues as a percentage of revenues for the Consumer
Segment declined to 58.8% for 1998, from 62.3% for 1997. The decrease was the
result of better utilization of the Company's existing work force because of
improved facilities and work practices changes. Cost of revenues as a
percentage of revenues for the Pharmaceutical Segment for 1998 compared to
1997 did not materially change. However, a decrease of 4.8% resulted primarily
due to reductions in the existing work force at the Florida telemarketing
facility, and the decrease in the ratio of supervisory personnel to total
telemarketers. The decrease of 4.8% was offset primarily by the acquisition of
A M Medica.
Selling, general and administrative expenses for the Company increased $12.7
million, or 142.3%, to $21.6 million for 1998, compared to $8.9 million for
1997. Selling, general and administrative expenses as a percentage of revenues
increased to 29.5% for 1998, when compared to 24.3% for 1997. Selling, general
and administrative expenses as a percentage of revenues for the Consumer
Segment increased to 24.3% for 1998, from 19.0% for 1997. The increase was
primarily the result of increases in personnel related costs needed to support
the growth of this segment. Selling, general and administrative expenses as a
percentage of revenues for the Pharmaceutical Segment decreased slightly to
23.4% for 1998, compared to 24.6% for 1997. The acquisition of A M Medica
resulted in a decrease of 5.7% in the selling, general and administrative
expenses as a percentage of revenues. The decrease of 5.7% was partially
offset by an increase in the selling, general and administrative expenses as a
percentage of revenues due to the acquisition of the Company's sample
fulfillment/sales productivity business, which has a different cost structure
than the other businesses, and the expansion of the Florida telemarketing
facility. Corporate expenses as a percentage of revenues increased to 4.6% in
1998, from 2.8% in 1997. The increase is due to the creation of the corporate
infrastructure in the later part of 1997, needed to support the Company's
future growth.
Amortization expense for the Company increased $831,000, or 92.2%, to $1.7
million for 1998, from $901,000 for 1997. The Consumer Segment amortization
expense did not materially increase from 1997 to 1998. Amortization expense
for the Pharmaceutical Segment increased by approximately $770,000.
Approximately
14
$416,000 of the increase is due to the acquisition of Phoenix that did not
occur until October 1997. The acquisition of A M Medica in October 1998
resulted in additional amortization expense of approximately $287,000.
Net interest expense for the Company decreased $1.6 million, to $759,000 for
1998 compared with interest expense of $2.3 million for 1997 as proceeds from
the Offering were used to reduce borrowings.
The income tax provision for the Company for 1998 increased to $3.6 million,
from $1.2 for 1997. The increase is due primarily to the increase in pretax
earnings, allowing the Company to benefit from an effective tax rate of 44%
for 1998, as opposed to 48% for 1997.
RESULTS OF OPERATIONS BY SEGMENT FOR 1997 AND 1996
The following table sets forth, for the periods indicated, certain
statements of operations data for the Consumer Segment obtained from the
Company's statements of operations. The table excludes the Pharmaceutical
Segment since it was established in 1997 and did not exist in 1996. See Note
18 of the Company's Financial Statements for the definition of the segments.
There can be no assurance that trends in operating results will continue in
the future.
Consumer
-----------------------
1996 1997 Change
------- ------- ------
Statements of Operations Data in Thousands:
Revenues.............................................. $16,286 $23,527 $7,241
Cost of revenues...................................... 8,640 14,648 6,008
------- ------- ------
Gross profit.......................................... 7,646 8,879 1,233
Selling, general and administrative................... 7,727 4,472 (3,255)
Amortization expense.................................. 27 333 306
------- ------- ------
Operating (loss) profit............................... $ (108) $ 4,074 $4,182
======= ======= ======
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues for the Company increased $20.4 million, or 125.1%, from $16.3
million for the year ended December 31, 1996 to $36.7 million for the year
ended December 31, 1997. Revenues for the Consumer Segment increased $7.2
million, or 44.5%, from $16.3 million for 1996 to $23.5 million in 1997. The
increase was primarily the result of continued growth in the demand for
services from existing clients for whom the Company markets long distance
services to residential customers in certain multicultural groups. The
Pharmaceutical Segment was established during 1997 with the acquisitions of
Telemanagement Services, Inc. ("TMS") and Phoenix. The revenues contributed by
this Segment during 1997 were approximately $12.3 million.
Cost of revenues for the Company increased $13.2 million, or 152.5%, from
$8.6 million in 1996 to $21.8 million in 1997. Cost of revenues as a
percentage of revenues increased from 53.0% for 1996 to 59.5% for 1997. Cost
of revenues as a percentage of revenues for the Consumer Segment increased to
62.3% in 1997, from 53.1% in 1996. This increase was primarily due to the
addition of new and temporary employees to support the Company's expanded
programs. In addition, short lead times on new projects required the Company
to utilize overtime and higher-priced contract labor to complement existing
personnel. The Pharmaceutical Segment cost of revenues as a percentage of
revenues for 1997 was approximately 55.1%. The establishment of this Segment
resulted in a decrease in the cost of revenues as a percentage of revenues for
the Company of approximately 2.2%.
Selling, general and administrative expenses for the Company increased $2.1
million, or 26.5%, from $7.8 million for 1996 to $9.8 million for 1997.
Selling, general and administrative expenses as a percentage of revenues
decreased from 47.6% for 1996 to 26.8% for 1997. Selling, general and
administrative expenses as a
15
percentage of revenues for the Consumer Segment decreased from 47.6% for 1996,
to 20.4% for 1997. Prior to the Recapitalization (see Note 2 of Notes to the
Company's Financial Statements), many of the services used by the Consumer
Segment, were provided by related-party companies. The Company has since
entered into new contracts that have reduced the costs of such services.
Interest expense increased to $2.3 million for 1997, compared with interest
expense of $101,000 for 1996, primarily due to interest expense related to
certain indebtedness incurred to finance the Recapitalization (see Note 2 of
Notes to the Company's Financial Statements) and the acquisitions of TMS,
Cultural Access Group ("CAG"), and Phoenix.
Income tax expense for 1997 was $1.2 million. Prior to December 31, 1996,
the Company had elected to be subject to taxation under Subchapter S of the
Internal Revenue Code of 1986, as amended, and, therefore, no federal income
tax expense was recorded for the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had working capital of $2.0 million, an
increase of $7.0 million from ($5.0) million at December 31, 1997. As
described below, substantially all of the Company's working capital resulted
from the completion of its Offering in February 1998. The Company's primary
resources of liquidity consist of cash and cash equivalents, and accounts
receivable.
Net cash provided by operating activities during 1998 was $5.5 million,
compared to $2.4 provided by operating activities during 1997. Accounts
receivable increased by $11.9 million to $20.0 million for 1998, compared to
$8.1 million for 1997. The increase in accounts receivable is primarily the
result of the increase in sales and the acquisition of A M Medica's accounts
receivable of $7.0 million. The Company's accounts receivable turnover
averaged 57 days for the year ended December 31, 1998, compared to 58 days for
the year ended December 31, 1997. Accounts payable and accrued expenses as of
December 31, 1998, increased to $11.8 million, compared to $2.8 million as of
December 31, 1997. The increase in accounts payable and accrued expenses is
primarily related to the A M Medica acquisition. A M Medica's accounts payable
and accrued expenses at December 31, 1998 were approximately $7.6 million.
Net cash used in investing activities for 1998 was $42.6 million, compared
to $6.8 million in 1997. Cash of approximately $5.7 million was used for the
expansion of the Company's facilities, and for upgrading computer and
telephone systems. During 1998, the Company used approximately $33.2 million
for the acquisition of A M Medica. In addition, the Company recorded
approximately $3.7 million of additional purchase price due to former owners
of acquired businesses because specified financial criteria indicated in the
purchase agreements were attained during 1998.
Net cash provided by financing activities was $36.9 million for 1998,
compared to $6.1 million in 1997. During 1998, the Company raised additional
capital of $44.6 million in the Offering. Approximately $36.4 million of the
proceeds was used to retire long term related party debt. In addition, the
Company drew approximately $25.6 million against the prior Credit Facility (as
defined in Note 8 of the Notes to the Company's Financial Statements)
established in January, 1998. Approximately $22.0 million of the $25.6 million
draw was used to finance the acquisition of A M Medica, and the remainder was
used to finance the expansion of the facilities and fund working capital.
The Company expects to meet its short term liquidity requirements through
net cash provided by operations and borrowing under the new Credit Facility
(as defined in Note 20 of the Notes to the Company's Financial Statements)
entered into on March 12, 1999. Management believes that these sources of cash
will be sufficient to meet the Company's operating needs and planned capital
expenditures for at least the next twelve months.
MARKET RISK
Access Worldwide is exposed to certain market risks arising from
transactions that are entered into in the normal course of business or from
acquisitions made. The primary market risk to which the Company is exposed
16
is interest rate changes. The Company's objective in managing its exposure to
interest rate changes is to limit the impact of these changes on earnings and
cash flow. The Company manages interest rate exposure through the debt to
equity ratio required by the loan covenants in its credit agreements and its
ability to convert interest rate from the banks Base Rate to the Eurodollar
rate (see Notes 8 and 20 of Notes to the Company's Financial Statements). A
10% increase in interest rates would affect the Company's debt obligations and
reduce future earnings by approximately $167,000. However, a 10% reduction in
interest rates would increase the future earnings by approximately the same
amount.
YEAR 2000 ISSUE
As a rapidly growing outsourced marketing service company, the Company is
dependent on computer systems and applications to conduct its business. Some
computer systems and applications include programming code in which calendar
year data is abbreviated to only two digits. As a result of this design
decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are commonly referred to as the "Millennium Bug" or "Year 2000
Problem."
The Company has developed and is currently executing a comprehensive risk-
based plan designed to make its computer systems, applications and facilities
Year 2000 ready. The plan covers four stages including (i) identification,
(ii) assessment, (iii) remediation, and (iv) testing.
The Company has completed the process of identifying all of the major
computers, software applications, and related equipment used in connection
with its internal operations that must be modified, upgraded, or replaced to
minimize the possibility of a material disruption to its business. The Company
is currently in the process of the assessment and remediation stages of
modifying, upgrading, and replacing major systems that have been identified as
adversely affected, and expects to complete this process before the end of the
second quarter of 1999. The testing stage is projected to be completed by the
third quarter of 1999.
In addition to computers and related systems, the operation of office
equipment, such as fax machines, photocopiers, telephone switches, security
systems, elevators and other common devices may be affected by the Year 2000
Problem. The Company continues to assess the potential effects of, and cost of
remediating, the Year 2000 Problem on its office equipment.
The Company has incurred costs to date of $98,000 and estimates the total
cost of any required modifications, upgrades, or replacements of its internal
systems to be $200,000. While the estimated cost of these efforts is not
expected to be material to the Company's financial position or any year's
results of operations, there can be no assurance to this effect. The estimated
cost will be monitored and will be revised as additional information becomes
available.
The Company is communicating with its major clients and suppliers to
determine the extent to which the Company's interface systems are vulnerable
to those third parties' failure to remediate their own Year 2000 Problems.
There can be no assurance that these clients and suppliers will resolve any or
all Year 2000 Problems with their systems before the occurrence of a material
disruption to the business of the Company. Any failure of these clients and
suppliers to resolve Year 2000 Problems with their systems in a timely manner
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
The Company expects to identify and resolve all Year 2000 Problems that
could materially adversely affect its business operations. However, since the
number of devices that could be effected and the interactions among these
devices are numerous, management believes that it is not possible to determine
with complete certainty that all Year 2000 Problems affecting the Company have
been identified or corrected.
The Company is developing contingency plans to be implemented as part of its
efforts to identify and correct Year 2000 Problems affecting its internal
systems. The Company expects to complete its contingency plans by second
quarter 1999. Depending on the systems affected, these plans could include
accelerated
17
replacement of affected equipment or software, short to medium-term use of
backup equipment and software, increased work hours for Company personnel or
use of contract personnel to correct on an accelerated schedule any Year 2000
Problems that arise or to provide manual workarounds for information systems,
and similar approaches. If the Company is required to implement any of these
contingency plans, it could have a material adverse effect on the Company's
financial condition and results of operations.
The discussion of the Company's efforts, and management's expectations,
related to Year 2000 compliance are forward-looking statements. The Company's
ability to achieve Year 2000 compliance and the level of incremental costs
associated therewith, could be adversely impacted by, among other things, the
availability and cost of programming and testing resources, vendors' ability
to modify proprietary software, and unanticipated problems identified in the
ongoing compliance review.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
None.
Item 8.Financial Statements and Supplementary Data
Index to Financial Statements
Page
----
Report of Independent Accountants..................................... 19
Balance Sheets........................................................ 20
Statements of Operations.............................................. 21
Statements of Changes in Common Stockholders' Equity (Deficit)........ 22
Statements of Cash Flows.............................................. 23
Notes to Financial Statements......................................... 24
18
Report of Independent Accountants
To the Board of Directors and Stockholders of Access Worldwide Communications,
Inc.
In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) and (2) on page 41 present fairly, in all material respects, the
financial position of Access Worldwide Communications, Inc. and its
subsidiaries at December 31, 1998 and 1997 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. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PriceWaterhouseCoopers LLP
Philadelphia, PA
February 24, 1999
19
ACCESS WORLDWIDE COMMUNICATIONS, INC.
BALANCE SHEETS
(See Note 1 regarding Basis of Presentation)
As of December 31,
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 1,912,219 $ 2,014,711
Accounts receivable, net of allowance for doubtful
accounts of
$184,801, and $279,935, respectively.............. 20,046,495 8,077,462
Deferred issuance costs............................ -- 1,350,594
Other assets....................................... 1,955,322 941,686
------------ -----------
Total current assets............................... 23,914,036 12,384,453
Property and equipment, net........................ 8,565,188 4,171,806
Other assets....................................... 917,197 265,110
Intangible assets, net............................. 71,025,795 35,858,750
------------ -----------
Total assets....................................... $104,422,216 $52,680,119
============ ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Amount due on line of credit facility.............. $ -- $ 5,810,000
Current portion of indebtedness.................... 63,431 69,940
Current portion of indebtedness--related parties... 2,421,770 3,203,819
Accounts payable and accrued expenses.............. 11,787,231 2,831,463
Accrued interest and other related party expenses.. 3,623,293 2,974,661
Accrued salaries, wages and related benefits....... 2,007,827 1,308,446
Due to related parties............................. 42,303 471,925
Deferred revenue................................... 1,998,486 666,082
------------ -----------
Total current liabilities.......................... 21,944,341 17,336,336
Long-term portion of indebtedness.................. 25,609,170 80,013
Long-term portion of indebtedness--related
parties........................................... 4,238,310 34,238,666
Mandatorily redeemable preferred stock, $.01 par
value: 8%
cumulative as of February 10, 1998 and December 31,
1997,
respectively, 2,000,000 shares authorized, 65,000
shares and
36,000 shares issued and outstanding,
respectively...................................... 6,500,000 3,888,000
------------ -----------
Total liabilities and mandatorily redeemable
preferred stock................................... 58,291,821 55,543,015
------------ -----------
Commitments and contingencies (Notes 9 and 16)
Common stockholders' equity (deficit):
Common stock, $.01 par value: voting: 20,000,000
shares
authorized; 9,043,185 and 4,264,000 shares issued,
at December 31,
1998 and 1997, respectively; 9,027,730 and
4,261,500 shares outstanding at December 31, 1998
and 1997, respectively............................ 90,432 42,640
Common stock, $.01 par value: non-voting: 500,000
shares authorized, issued and outstanding ........ -- 5,000
Additional paid-in capital......................... 58,490,848 14,013,092
Accumulated deficit................................ (12,392,763) (16,913,595)
Less: cost of treasury stock 15,455 and 2,500
shares, respectively.............................. (52,530) (143)
Deferred compensation.............................. (5,592) (9,890)
------------ -----------
Total common stockholders' equity (deficit)........ 46,130,395 (2,862,896)
------------ -----------
Total liabilities, mandatorily redeemable preferred
stock and
common stockholders' equity (deficit)............. $104,422,216 $52,680,119
============ ===========
The accompanying notes are an integral part of these financial statements.
20
ACCESS WORLDWIDE COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(See Note 1 regarding Basis of Presentation)
For the Years Ended December 31,
1998 1997 1996
---- ---- ----
Revenues................................ $73,234,285 $36,652,889 $16,286,280
Cost of revenues (exclusive of
depreciation).......................... 41,091,313 21,812,960 8,639,578
----------- ----------- -----------
Gross profit........................... 32,142,972 14,839,929 7,646,702
Selling, general and
administrative expenses (selling,
general and administrative expenses to
related parties are $1,020,702,
$258,665, and $2,196,094,
respectively).......................... 21,583,716 8,909,475 7,727,072
Amortization expense.................... 1,731,372 900,696 27,055
----------- ----------- -----------
Income (loss) from operations.......... 8,827,884 5,029,758 (107,425)
Interest income......................... 193,985 113,204 --
Interest expense-related party.......... (569,538) (1,999,009) (100,733)
Interest expense........................ (382,953) (440,453) --
Other expense-related party............. -- (301,841) --
Other income (expense).................. 3,537 4,757 (200,322)
----------- ----------- -----------
Income (loss) before income taxes...... 8,072,915 2,406,416 (408,480)
Income tax (expense) benefit............ (3,552,083) (1,181,484) 87,533
----------- ----------- -----------
Net income (loss)...................... $ 4,520,832 $ 1,224,932 $ (320,947)
=========== =========== ===========
Earnings (loss) per share of common
stock
Basic.................................. $ 0.52 $ 0.26 $ (0.07)
=========== =========== ===========
Diluted................................ $ 0.51 $ 0.26 $ (0.07)
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
21
ACCESS WORLDWIDE COMMUNICATIONS, INC.
STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(See Note 1 regarding Basis of Presentation)
For the Years Ended December 31, 1996, 1997 and 1998.
Common Stock Additional
------------------- Paid-in Treasury Retained Earnings/ Deferred
Shares Amount Capital Stock Accumulated (Deficit) Compensation Total
---------- ------- ----------- ----------- --------------------- ------------ -----------
Balance, December 31,
1995.................... 2,000 $ 2,000 $ 217,000 $ -- $ 370,820 $ -- $ 589,820
Stock split effective
December 6, 1996........ 4,298,000 41,000 (41,000) -- -- -- --
Merger of TelAc, Inc and
Telephone Access, Inc... -- -- 11,170,882 -- -- -- 11,170,882
Assumption of net
liabilities by Former
Principal
Stockholders............ -- -- 936,500 -- -- -- 936,500
Sale of common stock to
management.............. 130,000 1,300 6,110 -- -- -- 7,410
Sale of common stock to
Investors............... 3,500,000 35,000 277,000 -- -- -- 312,000
Purchase of common
shares.................. -- -- -- (18,000,000) -- -- (18,000,000)
Retirement of treasury
stock................... (3,500,000) (35,000) (147,420) 18,000,000 (17,817,580) -- --
Revocation of S
Corporation status...... -- -- 370,820 -- (370,820) -- --
Net loss for the year
ended December 31,
1996.................... -- -- -- -- (320,947) -- (320,947)
---------- ------- ----------- ----------- ------------ ------- -----------
Balance, December 31,
1996.................... 4,430,000 44,300 12,789,892 -- (18,138,527) -- (5,304,335)
Sale of common stock to
management.............. 234,000 2,340 25,588 -- -- (9,890) 18,038
Purchase of TMS by TLM
(Note 1)................ -- -- 164,500 -- -- -- 164,500
Purchase of common
stock................... -- -- -- (143) -- -- (143)
Merger of TLM and Access
Worldwide (Note 1)...... 100,000 1,000 1,033,112 -- -- -- 1,034,112
Net income for the year
ended December 31,
1997.................... -- -- -- -- 1,224,932 -- 1,224,932
---------- ------- ----------- ----------- ------------ ------- -----------
Balance, December 31,
1997.................... 4,764,000 47,640 $14,013,092 (143) (16,913,595) (9,890) (2,862,896)
Common stock issued at
Offering................ 4,000,000 40,000 41,335,532 -- -- -- 41,375,532
Convertible promissory
note converted to common
stock................... 208,334 2,083 2,497,917 -- -- -- 2,500,000
Contingent payments made
in the form of common
stock................... 70,851 709 694,347 -- -- -- 695,056
Purchase of common
stock................... -- -- -- (602,812) -- -- (602,812)
Issuance of treasury
stock................... -- -- (50,040) 550,425 -- -- 500,385
Amortization of deferred
compensation............ -- -- -- -- -- 4,298 4,298
Net income for the year
ended December 31,1998.. -- -- -- -- 4,520,832 -- 4,520,832
---------- ------- ----------- ----------- ------------ ------- -----------
Balance, December 31,
1998.................... 9,043,185 $90,432 $58,490,848 $ (52,530) $(12,392,763) $(5,592) $46,130,395
========== ======= =========== =========== ============ ======= ===========
The accompanying notes are an integral part of these financial statements.
22
ACCESS WORLDWIDE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(See Note 1 regarding Basis of Presentation)
For the Years Ended December 31,
1998 1997 1996
----------- ------------ ------------
Cash flows from operating activities
Net income (loss)................... $ 4,520,832 $ 1,224,932 $ (320,947)
Adjustments to reconcile net income
(loss)
to net cash provided by operating
activities:
Depreciation and amortization....... 3,131,788 1,330,159 184,056
Deferred tax provision.............. (740,979) 92,115 (87,533)
Interest expense on mandatorily
redeemable
preferred stock.................... 46,142 288,000 --
Loss on disposition of property..... -- -- 200,238
Changes in operating assets and
liabilities,
excluding effects from
acquisitions:
Accounts receivable................ (12,105,461) (2,088,329) (2,351,438)
Due to related parties and
affiliates......................... (407,411) 1,603,990 288,438
Other assets........................ (1,830,700) (865,375) 186,596
Accounts payable and accrued
expenses........................... 11,459,644 315,949 2,573,539
Deferred revenue.................... 1,467,635 496,244 --
----------- ------------ ------------
Net cash provided by operating
activities........................ 5,541,490 2,397,685 672,949
----------- ------------ ------------
Cash flows from investing activities:
Additions to property and equipment,
net................................ (5,672,131) (1,545,518) (1,045,073)
(Funding) use of letter of credit... -- 15,000,000 (15,000,000)
Business acquisitions, net of cash
acquired........................... (36,904,338) (20,238,495) (60,000)
----------- ------------ ------------
Net cash used in investing
activities........................ (42,576,469) (6,784,013) (16,105,073)
----------- ------------ ------------
Cash flows from financing activities:
Deferred stock issuance and debt
issuance costs..................... (2,128,191) (892,211) --
Payments on capital lease........... (74,109) (220,494) (6,186)
Proceeds from notes payable......... 11,000,000 15,446,248 13,021,000
Distribution to former principal
stockholders....................... -- -- (175,000)
Proceeds from sale of common and
preferred stock.................... 45,135,802 1,999,500 2,119,410
Net borrowings under line of credit
facility........................... 19,986,952 5,810,000 --
Repayment of related party debt..... (36,385,155) (16,042,248) --
Purchase of common shares........... (602,812) (143) --
----------- ------------ ------------
Net cash provided by financing
activities........................ 36,932,487 6,100,652 14,959,224
----------- ------------ ------------
Net (decrease) increase in cash.... (102,492) 1,714,324 (472,900)
Cash and cash equivalents, beginning
of period.......................... 2,014,711 300,387 773,287
----------- ------------ ------------
Cash and cash equivalents, end of
period............................. $ 1,912,219 $ 2,014,711 $ 300,387
=========== ============ ============
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest........................... $ 1,903,931 $ 651,822 $ 8,335
=========== ============ ============
Income taxes....................... $ 2,438,299 $ 1,296,000 $ --
=========== ============ ============
The accompanying notes are an integral part of these financial statements.
23
ACCESS WORLDWIDE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Business Description and Significant Accounting Policies
Business Description
Access Worldwide Communications, Inc. ("Access Worldwide" or the "Company"),
formerly known as CulturalAccessWorldwide, Inc. and /or CulturalAccess, is an
outsourced marketing services company that assists more than 100 clients in
the pharmaceutical, telecommunications, financial services and consumer
products industries. The Company designs and delivers innovative, data-driven
sales and marketing solutions that maximize clients' sales and profits. The
Company has particular expertise in reaching key pharmaceutical audiences--
physicians, pharmacists and patients--and targeted consumer groups. Access
Worldwide's resources include proprietary databases of targeted consumers,
physicians and pharmacists; strategic planning and market research services;
medical education; medical meetings management; medical publications; inbound
and outbound teleservices in 15 different languages; ETMS; and DEA approved
drug sample fulfillment and direct mail capabilities. Access Worldwide has
over 1,400 employees and representatives in offices throughout the United
States.
Basis of Presentation
The financial statements present the financial position and results of
operations of Access Worldwide Communications, Inc. and its subsidiaries.
Access Worldwide (formerly Telephone Access, Inc.), was incorporated in
Delaware in 1983, and operates in Arlington, Virginia. Access Worldwide was
formed and was wholly owned by several individuals (the "Former Principal
Stockholders"). In addition, certain of the Former Principal Stockholders
formed and owned the majority of another corporation, TelAc, Inc., which
operated in Dallas, Texas. On December 6, 1996, the Company and TelAc, Inc.
were merged. The merger was effected through a one-for-one share exchange,
with the stockholders of TelAc, Inc. receiving one Access Worldwide share for
every TelAc, Inc. share. The fair value of the consideration paid was based on
the fair value of shares of Access Worldwide, which was determined based on
the price being paid by third parties, at the time, to acquire shares of
Access Worldwide. The merger was accounted for using the purchase method of
accounting. TelAc, Inc. is included on a combined basis with the Company from
the date of its inception (July 1995) through December 6, 1996 due to common
ownership, common management and the integrated nature of business
activities/operations. All intercompany operations have been eliminated in the
Company's combined financial statements.
On December 6, 1996, the Company was recapitalized. The recapitalization
(the "Recapitalization") was effected by (i) the Company's issuance of common
and preferred shares to a group of investors, previously unaffiliated with the
Company (the "Investors"), for $2,100,000; (ii) the Company's issuance of
common shares to the then current management of the Company for $7,410; (iii)
the Company's borrowing of $13,000,000 from the Investors; and (iv) the
purchase and cancellation of common shares from the individuals owning common
shares before the Recapitalization (the Former Principal Stockholders) for
$18,000,000. After the Recapitalization, the Former Principal Stockholders of
the Company retained 18% of the outstanding common shares. See Note 2 for a
more complete description of these transactions.
On January 1, 1997, TLM Holdings Corp. ("TLM"), an inactive corporation with
no assets, liabilities or operations, was formed by the Investors to purchase,
through a subsidiary, certain assets and assume certain liabilities of
TeleManagement Services, Inc. ("TMS") for $7.8 million. In connection with the
initial capitalization of TLM, the Investors purchased (a) 3,500,000 shares of
common stock of TLM for an aggregate purchase price of $199,500 and (b) 18,000
shares of mandatorily redeemable preferred stock of TLM for an aggregate
purchase price of $1,800,000. Since Access Worldwide and TLM were commonly
controlled companies effective with the acquisition on January 1, 1997, the
financial statements as of and for the year ended December 31, 1997 are
presented on a combined basis. All intercompany transactions and balances have
been eliminated.
24
ACCESS WORLDWIDE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
1. Business Description And Significant Accounting Policies -- (Continued)
On October 21, 1997, the Investors merged their interests in Access
Worldwide and TLM. As part of the merger, the Investors made a capital
contribution to the Company of the 3,500,000 shares of TLM common stock which
the Investors held. In addition, the 18,000 shares of TLM mandatorily
redeemable preferred stock held by the Investors were converted into 18,000
shares of Access Worldwide mandatorily redeemable preferred stock. The
remaining TLM stockholders received a one-for-one share exchange of 100,000
shares of TLM voting common stock for Access Worldwide voting common stock.
The merger of commonly controlled interests, was accounted for using the
historical costs of the respective businesses in a manner similar to a pooling
of interests. The acquisition of the minority interest in TLM was accounted
for using the purchase method.
Based on the merger of commonly controlled interests, the Company's
financial statements as of December 31, 1998 have been consolidated and all
intercompany transactions and balances have been eliminated.
Cash and Cash Equivalents
All highly liquid investments with maturities of three months or less when
purchased are considered cash and cash equivalents.
Deferred Revenues and Issuance Costs
Deferred revenues represent customer deposits for services that have been
contracted for but have not been fully performed. Deferred issuance costs are
costs incurred directly related to the Company's initial public offering,
which occurred on February 13, 1998, and were netted against the proceeds
received.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets ranging from three to seven years. Leasehold
improvements are amortized over the remaining term of the facilities' lease.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the period. Expenditures for maintenance and repairs
are expensed as incurred, while expenditures for major renewals that extends
the useful lives are capitalized.
Computer Software
The Company has developed certain computer software and technically derived
procedures intended to maximize the quality and efficiency of its services.
Costs of purchased internal-use computer and telephone software are
capitalized and costs of internally developed internal-use computer software
are expensed as incurred.
Intangible Assets
Assets and liabilities acquired in connection with business combinations are
accounted for under the purchase method of accounting and are recorded at
their respective fair values. The excess of the purchase price over the fair
value of net assets acquired consists of noncompete agreements, customer
lists, assembled workforce and goodwill (the intangible assets). The
intangible assets are amortized on a straight-line basis over the estimated
useful lives of the assets, which range from three to thirty-five years. The
Company reviews the recoverability of its long-lived assets, including
intangible assets, when events or changes in circumstances occur that indicate
that the carrying value of the assets may not be recoverable in accordance
with Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of.
25
ACCESS WORLDWIDE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
1. Business Description and Significant Accounting Policies -- (Continued)
Treasury Stock
The Company's treasury stock was accounted for using the cost basis method
of accounting.
On September 10, 1998, the Board of Directors approved a 300,000 common
stock buyback program. At December 31, 1998, the Company had 165,000 shares of
common stock left to be repurchased under this program.
Revenue Recognition
Revenues received from database analysis, strategic planning, tele-
sales/services, direct mail, sales force support systems, sales territory
management and product sampling, fulfillment and medical education services
are recognized when the services are rendered. Revenues received from market
research and contract services are recognized using the percentage of
completion method as services are delivered. Expenses related to marketing and
contract services are recognized on the accrual basis of accounting. Revenues
received from medical education and medical meetings management services are
recognized using the percentage of completion method as milestones are
achieved. Expenses related to medical education and medical meetings
management services are recognized using standard cost accounting. The Company
does not require collateral or other security to support credit sales.
Income Taxes
Beginning August 1, 1994 and through December 7, 1996, the Company elected
to be taxed as an S Corporation for Federal and State income tax purposes. As
a result, the stockholders paid taxes on their respective shares of taxable
income, even if such income was not distributed. Accordingly, no taxes or
income tax provision has been recorded for the period ended December 6, 1996
(see Note 7).
Effective December 7, 1996, the Company discontinued its election to be
treated as an S Corporation and elected to be treated as a C Corporation. The
Company began to account for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
Accordingly, deferred tax assets and liabilities are recognized at applicable
income tax rates based upon future tax consequences of temporary differences
between the tax basis and financial reporting basis.
Earnings Per Share
Earnings per share are calculated in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
No. 128). SFAS No. 128 requires the Company to report both basic earnings per
share, which is based on the weighted-average number of common shares
outstanding, and diluted earnings per share, which is based on the weighted
average number of common shares outstanding and all potentially dilutive
common shares outstanding.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
based Compensation ("FASB Statement No. 123") encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for its
stock-based compensation plan using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25") and its related Interpretations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
26
ACCESS WORLDWIDE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
1. Business Description and Significant Accounting Policies -- (Continued)
Reclassifications
Certain reclassifications have been made to the December 31, 1997 and 1996
financial statements to conform to the December 31, 1998 presentation.
2. Leveraged Recapitalization
On December 6, 1996, the Company consummated a leveraged Recapitalization
pursuant to the Recapitalization and Investment Agreement (the "Agreement"),
with the Company, the Former Principal Stockholders and the Investors. The
principal elements of the Recapitalization included the following:
. Amendments to the certificate of incorporation to provide that the
authorized capital consists of 1,000,000 shares of $.01 par value
preferred stock of which 18,000 shares shall be designated as
cumulative mandatorily redeemable preferred stock; 19,500,000 shares of
$.01 par value voting common stock; and 500,000 shares of $.01 par
value non-voting common stock.
. The 2,000 shares of voting common stock held by the Former Principal
Stockholders were split at a rate of 2,150 shares for each share held
which resulted in 4,300,000 voting common shares issued and
outstanding.
. The sale of newly issued shares of common stock (3,000,000 shares of
voting stock and 500,000 shares of non-voting stock) and preferred
stock (18,000 shares of 8% cumulative redeemable stock) for cash of
$2,000,000 to the Investors. In addition, the Investors contributed
$112,000 to the Company.
. The borrowing of $13,000,000 in 8% subordinated promissory notes from
the Investors.
. The repurchase and cancellation of 3,500,000 shares of voting common
stock (out of 4,300,000 voting common shares) from the Former Principal
Stockholders for $15,000,000 promissory notes due January 2, 1997 and
$3,000,000 in 6% convertible subordinated notes. The Company
collateralized the promissory notes with an irrevocable letter of
credit and fully funded the letter of credit on December 6, 1996. The
$15,000,000 was paid to the Former Principal Stockholders on January 2,
1997.
3. Purchase Business Combinations
1997
Effective January 1, 1997, the Investors formed an inactive corporation,
TLM, to purchase, through a subsidiary, certain assets and to assume certain
liabilities of TMS. (See Note 1)
Effective October 1, 1997, the Company purchased all the outstanding and
issued shares of Hispanic Market Connections, Inc. (subsequently renamed
Cultural Access Group ("CAG")), a California company. The purchase price was
$1,500,000 in cash, $240,000 in the form of a 6.5% subordinated promissory
note, and specified contingent payments based on certain net revenues and pre-
tax earnings goals over the three full calendar year periods subsequent to the
date of acquisition. The cash portion of this purchase was funded by debt
financing provided by the Investors.
On October 21, 1997, the Investors merged their interests in Access
Worldwide and TLM. The acquisition of the 3% minority interest in TLM was
accounted for using the purchase method of accounting. The fair value of the
consideration paid was based on the fair value of shares of Access Worldwide
at that time.
27
ACCESS WORLDWIDE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
3. Purchase Business Combinations -- (Continued)
Effective November 1, 1997, the Company purchased assets and liabilities of
Phoenix Marketing Group, Inc. ("Phoenix"), a New Jersey company. The purchase
price was $10,000,000 in cash (including an assumption of $1,000,000 in debt),
a $2,500,000 redeemable note at 6.0% interest, a $2,500,000 convertible note
at 6.0% interest automatically convertible into 208,334 shares of common stock
at the closing of the Company's initial public offering (see Note 4), and
specified contingent payments based on certain net revenues and pre-tax
earnings goals over the three full calendar year periods subsequent to the
date of acquisition. The cash portion of this purchase was funded by debt
financing provided by the Investors.
1998
Effective October 1, 1998, Access Worldwide acquired all the outstanding
capital stock of A M Medica Communications, Ltd. ("A M Medica"), a New York
company. The purchase price was $22,512,700 in cash, 122,045 shares of the
Company's common stock, and a three year 6.5% subordinated promissory note in
the principal amount of $5,500,000. The purchase price also includes certain
future contingent payments of cash and shares of the Company's common stock
dependent on the achievement of certain financial goals by A M Medica. The
ultimate amount of cash to be paid and the ultimate number of shares of common
stock to be issued cannot be determined until the earn-out periods terminate
and achievement of criteria is established.
These acquisitions were accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated to assets and
liabilities acquired based on their estimated fair values. The financial
statements reflect the results of the acquisitions from their