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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 [Fee Required]
For the fiscal year ended September 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 [No Fee Required]
Commission File Number 0-21333
RMH TELESERVICES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2250564
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
40 MORRIS AVENUE
BRYN MAWR, PA 19010
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (610) 520-5300
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, NO PAR VALUE PER SHARE
(Title of each 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 that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [x]
As of December 16, 1996, 8,120,000 shares of common stock were outstanding.
The aggregate market value of the shares of common stock owned by
non-affiliates of the Registrant as of December 16, 1996 was approximately
$60.9 million (based upon the closing sale price of these shares as reported by
the Nasdaq's Stock Market's National Market). Calculation of the number of
shares held by non-affiliates is based on the assumption that the affiliates of
the Company include only directors, executive officers and stockholders filing
Schedules 13D or 13G with the Company. The information provided shall in no
way be construed as an admission that any person whose holdings are excluded
from the figure is an affiliate or that any person whose holdings are included
is not an affiliate and any such admission is hereby disclaimed. The
information provided is included solely for record keeping purposes by the
Securities and Exchange Commission.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement for Annual Meeting of
Shareholders to be held on February 25, 1997 (the "1997 Proxy Statement") are
incorporated by reference in Part III.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item
No. Page
PART I
<S> <C> <C>
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4. Submissions of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . 7
Executive Officers of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II
5. Market for Registrant's Common Equity and Related Shareholder Matters . . . . . . . . . . . . . . . . 10
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 11
8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . 17
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . 18
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . 18
13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 18
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
RMH Teleservices, Inc. (the "Company") provides outbound teleservices
predominantly to major corporations in the insurance and financial services
industries. The Company distinguishes itself through its high quality service
and disciplined management approach which has led to long-term client
relationships and sustained profitable growth. The Company originated
relationships with Mass Marketing Insurance Group ("MMIG"), J.C. Penney Life
Insurance Company ("J.C.Penney"), AT&T/Universal Card Services ("AT&T") and
Advanta Corp. ("Advanta") over five years ago and, since fiscal 1991, the
Company's aggregate volume with these clients has grown each year. The Company
believes its innovative approach to producing quality service distinguishes it
from its competitors and has led to the Company's rapid growth rate and its
retention of key clients. RMH's net revenue has increased 88.9 % over the last
two years.
The Company was founded in 1983 by Raymond J. Hansell, Vice Chairman
and Chief Executive Officer, and MarySue Lucci, Director, President and Chief
Operating Officer (the "Founders"). In May 1996, the Company completed a
leveraged recapitalization (the "Recapitalization") pursuant to which Advanta
Partners LP ("Advanta Partners"), a venture capital affiliate of Advanta,
became the largest equity holder of the Company. The Company completed the
Recapitalization to permit Advanta Partners to invest substantial financial and
other resources in the Company and to permit the Founders to realize a portion
of the economic value of their initial investment in the Company. In
connection with the Recapitalization (I) the Company redeemed 8,500,000 shares
of Common Stock held by the Founders, (ii) Advanta Partners purchased 1,594,112
shares of Class A Common Stock, 1,279,573 shares of Class B Common Stock and
6,226,316 shares of the Company's Series B Preferred Stock (the "Series B
Preferred Stock"), (iii) Glengar International Investments Limited ("Glengar")
purchased 126,315 shares of Class A Common Stock and 273,684 shares of Series B
Preferred Stock and (iv) the Company borrowed $11.2 million under a credit
facility entered into with a bank. See "Certain Transactions -
Recapitalization." The Company is a Pennsylvania corporation and its principal
business office is located at 40 Morris Avenue, Bryn Mawr, Pennsylvania 19010.
Its telephone number is (610) 520-5300.
In September 1996, the Company completed an initial public offering of
3,220,000 shares of its Common Stock from which it realized aggregate proceeds,
after deduction of underwriting discounts and commissions, of $37,448,000 (the
"Initial Public Offering"). On September 18, 1996 the Company's Common Stock
was included on the Nasdaq Stock Market's National Market under the symbol
"RMHT".
The Company's revenue and income from operations, exclusive of the
special compensation expense for fiscal 1996, were $32.3 million and $3.4,
respectively. This represents increases of 26.5% and 69.7% respectively,
compared to fiscal 1995.
OVERVIEW OF THE TELESERVICES INDUSTRY
The teleservices industry includes outbound and inbound telephone
marketing, as well as customer support and service programs and other
value-added services. Teleservices provide customized service with higher
response rates and higher customer acquisition and retention rates at a lower
cost per transaction than other marketing media. As a result, call centers
have become robust channels for the marketing and sale of a wide variety of
products and services as sophisticated telemarketers are able to market
effectively and collect valuable customer data. According to Direct Marketing
Magazine, telemarketing expenditures in the United States grew from
approximately $34 billion in 1984 to approximately $77 billion in 1994. The
call center services industry is extremely fragmented and includes a large
number of small, independent organizations. A small percentage of teleservices
business is currently being outsourced to independent
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providers, and the Company believes that both the total market and the
percentage of this market that is outsourced will increase as businesses
continue to recognize the benefits of such services.
Many large companies have begun to outsource their telemarketing and
customer support services in order to access the industry expertise, breadth of
services and specialized capabilities of large-scale,
technologically-sophisticated teleservices providers such as the Company.
Using such providers enables these companies to concentrate on their core
businesses and improve the quality and cost-effectiveness of their customer
contact functions. As a result, the Company believes that the enhanced quality
and economic advantages provided by independent teleservices companies will
accelerate the outsourcing trend in the industry. In addition, the Company
believes that the deregulation of the telecommunications industry and the
expected deregulation of the public utilities industry will significantly
increase the demand for telemarketing services.
The Company believes that businesses considering outsourcing their
telemarketing activities increasingly are seeking to partner with a
teleservices company that possesses industry expertise and the resources to
serve their long-term needs efficiently. Additionally, because teleservices
involve direct interaction with a client's customers, the teleservices
provider's reputation for quality is critical to winning new clients. As a
recognized provider of high quality teleservices, the Company has positioned
itself as an attractive partner to large users of call center services.
THE COMPANY'S SERVICES
Outbound Teleservices
Historically, the Company has concentrated on providing outbound
business-to-consumer teleservices. In this market, the Company has sought and
established relationships with large corporate clients, many of which have been
clients of the Company for over five years.
Outbound teleservices refers to the service the Company performs when
its telephone service representatives (TSRs), place calls to parties targeted
by the client to offer products or services or to obtain information. At the
beginning of a typical outbound program, the Company receives customer data
files that the client has selected to match the demographic profile of the
targeted customer for the product or service being offered. These files
contain each targeted customer's name, address, phone number and other relevant
data. The Company's data management system sorts the records, removes
information regarding customers whom the Company is prohibited from contacting
and assigns each file electronically to one of its outbound call centers.
Actual telephone calling at the centers is controlled by computerized call
management systems that utilize predictive dialers to automatically dial the
telephone numbers in the files. The call management system then forwards all
connected calls, along with the customer's name and other information,
electronically to the workstation of a TSR who has been trained for the
client's program. The TSR then uses a prepared script to solicit an order for
the product or service or to request information that will be added to the
client's database. Information regarding sales and other aspects of the
program is captured by the Company's proprietary software systems and made
available to clients in customized report formats.
Insurance. The Company is a major telemarketer of insurance products
throughout the United States. Management believes this sector to be the most
attractive area in business-to-consumer telemarketing from the perspective of
the teleservices provider due to its large size, relative predictability and
relative lack of seasonality. The Company works with large consumer insurance
companies and their agents to market such products as accidental death and
dismemberment policies, graded benefit life insurance and other niche insurance
products primarily to credit card customers. The Company has also assisted
clients in marketing supplemental dental and vision coverage to credit card
holders.
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As of September 30, 1996, the Company employed 169 insurance agents
licensed to sell insurance in a total of 44 states. The Company's significant
relationships in this industry include those with MMIG, AT&T, J.C. Penney and
Advanta, which were responsible for 44.9%, 17.6%, 12.2% and 11.2%,
respectively, of the Company's revenues for fiscal 1996 (including services to
Advanta related to financial services products). The Company originated its
relationship with MMIG over eight years ago and originated its relationship
with J.C. Penney, AT&T and Advanta over five years ago. The Company's
aggregate revenues from these key clients have grown respectively, each year
since fiscal 1991. In fiscal 1996, 74.8% of the Company's revenues were
generated from services related to insurance products.
Financial Services. The Company provides teleservices to several of
the largest credit card issuers, banks and other financial institutions in the
United States. The Company's services include customer account acquisition,
customer retention programs, and programs to sell credit card enhancement
features such as higher credit limits, lower interest rates and lower fees.
The Company also cross-sells additional services such as home equity loans and
related banking services. In fiscal 1996, 19.7% of the Company's revenues
were generated from services related to financial services products.
Telecommunications. The Company expects the demand for teleservices
within the telecommunications industry to increase as the industry continues to
be deregulated and as the number of products (e.g., long distance, cellular,
paging and "800" services) and call features (e.g., call waiting, caller
identification and voice mail) increases. The Company recently completed
several programs for a major telecommunications client and is in discussions
with this client and a number of prospective clients in the industry to provide
outbound business-to-consumer and business-to-business services.
Other Industries. The Company is currently marketing travel club and
dining club programs to credit card holders on behalf of one of its clients.
Inbound Teleservices
Inbound teleservices involves the processing of incoming calls, often
placed by customers using toll-free numbers, to a customer service
representative for service, order fulfillment or product information. Inbound
teleservices include activities such as customer care services, credit card and
loan application processing and catalog sales. More sophisticated inbound
programs assist clients in responding to customer inquiries, offering technical
and product support services and assessing overall customer satisfaction.
The Company currently operates a 24-seat dedicated inbound customer
service center in its Lansdowne, Pennsylvania call center facility and intends
to install additional inbound facilities as the Company's inbound business
expands. The Company has developed an inbound customer service program for
Blue Cross/Blue Shield Florida (BC/BS-FL) pursuant to which the Company's TSRs
respond to customer inquiries and complaints following important changes in
certain of BC/BS-FL's group medical plans.
Business-to-Business Teleservices
The Company believes that the dynamics of the business-to-business
teleservices marketplace have now changed so as to permit the development of
the type of long-term client relationships and large-scale campaigns that have
formed the core of the Company's business-to-consumer services. The Company
expects that the demand for business-to-business applications will grow
rapidly, especially among telecommunications companies, as many large companies
recognize that telemarketing is a more efficient method of reaching business
customers than a field sales force. Growth in the business-to-business
teleservices market will enable the Company to leverage its existing
workstation capacity because such services are provided primarily during the
day while business-to-consumer services are provided primarily during the
evening. The Company believes that its prior experience in
business-to-business teleservices and current expertise in business-to-consumer
teleservices position it to take advantage of the growth in this market.
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THE COMPANY'S OPERATIONS
Sales, Marketing and Account Management
During fiscal 1996, the Company initiated a national account sales
program to focus its direct sales efforts on developing relationships with the
leading users of teleservices in its targeted industries. As part of this
initiative, the Company hired a new Vice President of Sales and Marketing with
extensive experience in directing a national account sales program and expanded
its sales and marketing staff. Supporting this initiative, the Company will
continue to market its services by attending trade shows, advertising in
industry publications, responding to requests for proposals, pursuing client
referrals and cross-selling to existing clients.
A critical element of the Company's effort to build long-term client
relationships is its account management program. To improve the effectiveness
of the client's program, account managers offer proactive advice and consulting
services. The account managers initially provide advice on all aspects of
program implementation, including scripting, performance specifications and
reporting, and then manage the process on behalf of the client through
interaction with each of the Company's internal departments. Periodic internal
audits are performed by the account manager to determine compliance with the
applicable program specifications. The Company believes that this detailed
attention to account management has contributed significantly to retaining
clients, expanding business from existing clients and attracting new clients.
Personnel and Training
The Company emphasizes the recruitment, training and development of
its TSRs, which management believes enables the Company to increase
productivity, reduce employee turnover and enhance the quality of its services.
TSRs are selected through a three-step process that includes an initial
telephone screening interview, followed by an in-person interview and extensive
testing to gauge competence, suitability for telemarketing projects and
integrity.
Newly-hired TSRs receive an intensive three-day training course that
emphasizes modeling and role-playing as well as instruction on effective sales
techniques and product knowledge. New TSRs are closely monitored for an
initial 30-day period and thereafter receive ongoing coaching and training. As
of September 30, 1996, the Company employed 169 licensed insurance agents
specializing in the marketing of insurance-related products. These licensed
agents receive continuing insurance-related education to comply with applicable
state licensing requirements. To further assure the continuity and consistency
of management practices, each call center has dedicated recruiting and training
personnel who report directly to corporate management. The Company also
provides significant ongoing training to its supervisory and management
personnel on coaching, counseling and total quality management techniques.
The Company has developed an innovative compensation and performance
recognition plan in order to motivate employees and reduce turnover. The
Company generally targets base TSR compensation at higher levels than is paid
by other businesses competing for the same labor pool. In addition, the
Company recently implemented a benefits package, including health insurance,
for qualifying full-time TSRs. For performance recognition, the Company pays
cash bonuses to TSRs who achieve sales targets and quality benchmarks and also
offers non-cash incentives and creative programs to improve performance and
maintain morale. Although it is typical in the teleservices industry for TSRs
to be part-time employees, over 70% of the Company's TSRs are full-time
employees (working at least 33 hours per week.). The Company believes that its
relatively high proportion of full-time employees provides a more stable
workforce and reduces the Company's recruiting and training expenditures.
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As of September 30, 1996, the Company employed 1,518 persons, of whom
more than 1,300 were TSRs. None of the Company's employees are represented by
a labor union. The Company considers its relations with its employees to be
good.
Quality Assurance
The Company believes that its reputation for quality services is
critical to acquiring and retaining clients. The Company is committed to the
principles of total quality management in order to continuously improve its
operational processes. The Company establishes both internal and external
benchmarks as a means to measure continuous improvement. The Company measures
the quality of its services on the basis of sales per hour, level of customer
inquiries, call abandonment rates and other quality performance criteria. In
order to provide ongoing improvement to the TSRs' performance and to assure
compliance with the Company's quality standards, quality assurance personnel
monitor each TSR on a frequent basis and provide coaching to the TSR based on
this review. Clients also participate in the monitoring process. Sales
confirmations are recorded with the customer's consent to ensure accuracy and
to provide a record of the sale. Company personnel review all sales
confirmation tapes for compliance with client specifications. In addition,
these tapes are selectively reviewed in order to provide additional coaching to
TSRs. The Company's information systems enable it to provide its clients with
customized reports on the status of an ongoing telemarketing campaign and can
transmit information electronically to clients if desired. Access to this data
enables the Company's clients to modify or enhance an ongoing campaign in order
to improve its effectiveness. Each Company call center has dedicated quality
assurance personnel who provide on-going employee training and coaching to the
center's TSRs.
Technology
The Company was an early user of predictive dialing technology and was
an early adopter of centralized management systems. The Company continues to
invest strategically in proven systems and software technologies in order to
enhance operational efficiency and maintain high quality services. These
technologies reduce the cost per call and improve sales and customer service by
providing the Company's TSRs and account management personnel with enhanced
real-time access to customer and production information. As of September 30,
1996, the Company's management information systems department consisted of 32
technical professionals who maintain, upgrade and expand the Company's systems.
The Company's call management and database systems have been designed to ensure
quality service to its clients and to provide effective tools for the
management of the Company's business.
The Company uses UNIX-based predictive dialing systems at each call
center, which are linked via a wide-area network to network servers at the
Company's corporate headquarters. The Company's call center and network
systems both use a flexible database architecture permitting the easy sharing
of data among users of the system. As a result, the Company's scaleable
systems can be configured to work cost-effectively at low and high volumes and
permit the efficient addition of capacity.
To effectively manage and control calling campaigns, the Company has
developed its own proprietary software. The Company uses its Track System to
monitor the status and performance of each client program throughout its life
cycle. Information relating to each customer file (including a complete record
of each sale transaction) is archived to the Customer Information System, which
includes a dedicated server and an optical disk storage system. This system is
designed to respond to a client request to review details of a particular sales
call in minutes and is able to identify the program, the date and time of the
call and the TSR who recorded the sale. The Company has implemented procedures
to protect the integrity of data against power loss, fire and other casualty.
COMPETITION
The teleservices industry is intensely competitive and the Company's
principal competition in its primary markets comes from large teleservices
organizations, including APAC TeleServices, Inc., ICT
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Group, Inc., SITEL Corporation, ITI Marketing Services, Inc. and Ed Blank
Associates, Inc. In addition, the Company competes with the in-house
telemarketing operations of many of its clients or potential clients. The
Company also competes with direct mail, television, radio and other advertising
media, as well as emerging direct marketing channels, such as interactive
shopping and data collection through the television, the Internet and other
media.
Competition with other teleservices organizations is based primarily
upon performance (measures include sales per hour, contact rate, conversion
ratio and cost per sale), technological and reporting capabilities, industry
experience, quality of client services and staff and price. The Company
believes that it generally compares favorably with its competitors with respect
to each of these factors.
GOVERNMENT REGULATION
Telemarketing sales practices are regulated at both the federal and
state level. The TCPA, enforced by the FCC, imposes restrictions on
unsolicited automated telephone calls to residential telephone subscribers.
Under the TCPA and the regulations promulgated thereunder, it is unlawful to
initiate telephone solicitations to residential telephone subscribers before
8:00 a.m. or after 9:00 p.m., local time at the subscriber's location, or to
use automated telephone dialing systems or artificial or prerecorded voices to
call certain subscribers. Additionally, the TCPA regulations require
telemarketing firms to develop a written policy implementing a "do not call"
list and to train its telemarketing personnel to comply with these
restrictions. The TCPA creates a right of action for both consumers and state
attorneys general. A court may award damages or impose penalties of $500 per
violation, which may be trebled for willful or knowing violations. Currently,
the Company trains its service representatives to comply with the regulations
of the TCPA and programs its call management system to avoid initiating
telephone calls during restricted hours or to individuals maintained on the
Company's "do not call" list.
The FTC regulates both general sales practices and telemarketing
specifically. Under the Federal Trade Commission Act (the "FTC Act"), the FTC
has broad authority to prohibit a variety of advertising or marketing practices
that may constitute "unfair or deceptive acts and practices." Pursuant to its
general enforcement powers, the FTC can obtain a variety of types of equitable
relief, including injunctions, refunds, disgorgement, the posting of bonds, and
bars from continuing to do business for a violation of the acts and regulations
it enforces.
The FTC also administers the TCFAPA under which the FTC has issued
regulations prohibiting a variety of deceptive, unfair or abusive practices in
telemarketing sales. Generally, these rules prohibit misrepresentations of the
cost, quantity, terms, restrictions, performance or characteristics of products
or services offered by telephone solicitation or of refund, cancellation or
exchange policies. The regulations also regulate the use of prize promotions
in telemarketing to prevent deception and require that a telemarketer identify
promptly and clearly the seller on whose behalf the telemarketer is calling,
the purpose of the call, the nature of the goods or services offered and, if
applicable, that no purchase or payment is necessary to win a prize. The
regulations also require that a telemarketer maintain records on various
aspects of its business.
Most states have enacted statutes similar to the FTC Act prohibiting
unfair or deceptive acts and practices. For example, telephone sales in
certain states are not final until a written contract is delivered to and
signed by the buyer, and such a contract often may be canceled within three
business days. At least one state also prohibits telemarketers from requiring
credit card payment, and several other states require certain telemarketers to
obtain licenses, post bonds or submit sales scripts to the state's attorney
general. Under these general enabling statutes, depending on the willfulness
and severity of the violation, penalties can include imprisonment, fines and a
range of equitable remedies such as consumer redress or the posting of bonds
before continuing in business. Additionally, some states have enacted laws and
others are considering enacting laws targeted directly at telemarketing
practices. Most of these statutes allow a private right of action for the
recovery of damages or provide for enforcement by state agencies permitting the
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recovery of significant civil or criminal penalties, costs and attorneys' fees.
There can be no assurance that any such laws, if enacted, will not adversely
affect or limit the Company's current or future operations.
The industries served by the Company are also subject to government
regulation, and, from time to time, bills are introduced in Congress which, if
enacted, would affect the Company's operations. The Company and its employees
who sell insurance products are required to be licensed by various state
insurance commissions for the particular type of insurance product to be sold
and to participate in regular continuing education programs, which currently
are paid for by the Company.
The Company believes that it is in compliance with all applicable
regulations.
ITEM 2. PROPERTIES
The Company's corporate headquarters facility is located in Bryn Mawr,
Pennsylvania in an approximately 45,000 square-foot building leased to the
Company through December 1998.
The Company also leases all of the facilities used in its call center
operations. The Company believes that its existing facilities are suitable and
adequate for its current operations, but additional facilities will be required
to support growth.
As of November 30, 1996, the Company operated the following call
centers.
<TABLE>
<CAPTION>
DATE OF
DATE OF INITIAL MOST RECENT CURRENT
LOCATION OPENING WORKSTATIONS EXPANSION WORKSTATIONS
- -------- ------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Bryn Mawr, PA(1) . . . . . March 1985 15 November 1996 112
Lansdowne, PA(2) . . . . . October 1990 80 November 1996 120
Pleasantville, NJ . . . . . November 1992 64 February 1996 96
Scranton, PA . . . . . . . July 1993 64 May 1996 96
Wilkes-Barre, PA . . . . . April 1994 64 March 1996 96
Reading, PA . . . . . . . . February 1995 64 October 1996 96
Ocean Township, NJ . . . . November 1995 80 November 1996 96
Allentown, PA . . . . . . . April 1996 80 October 1996 96
Harrisburg, PA . . . . . . October 1996 80 October 1996 80
---
Total: 888
===
</TABLE>
(1) Facilities transferred from Wynnewood, PA (the original headquarters) to
Bryn Mawr in September 1995.
(2) Includes a 24-seat inbound capability.
The Company believes that suitable additional or alternative space
will be available as needed on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation incidental to
its business. In the view of management, no litigation to which the Company is
currently a party is likely to have a material adverse effect on the Company,
if decided adversely to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company has not submitted any matters to a vote of its
shareholders since the Company completed its initial public offering.
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EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Raymond J. Hansell . . . . . . 47 Vice Chairman of the Board and Chief Executive Officer
MarySue Lucci . . . . . . . 48 Director, President and Chief Operating Officer
Michael J. Scharff . . . . . . 50 Executive Vice President
Richard C. Altus . . . . . . . 38 Vice President and Chief Financial Officer
Richard P. Keenan . . . . . . . 50 Vice President of Sales and Marketing
William D. Mulvihill . . . . . 55 Vice President of Account Management
David Clautice . . . . . . . 55 Vice President of Management Information Systems
</TABLE>
Mr. Hansell currently serves as Vice Chairman and Chief Executive
Officer of the Company. From November 1994 until the Recapitalization in May
1996, Mr. Hansell served as the Chairman of the Board of Directors of the
Company and from the Company's founding in 1983 until November 1994, he served
as the Company's President. Mr. Hansell has been an active industry leader and
served on the operating committee of the Direct Marketing Association's
Telephone Marketing Council from 1993 to 1995. Mr. Hansell was named a Top Ten
Telepro by Teleprofessional Magazine in October 1995 for his contributions to
the industry. Prior to co-founding the Company, Mr. Hansell served in various
managerial sales and marketing positions at Shared Medical Systems, NCR and
Automatic Data Processing.
Ms. Lucci has served as the Company's President since November 1994
and Chief Operating Officer since December 1995, prior to which she had served
as an Executive Vice President for more than five years and as the Company's
Treasurer from the Company's founding in 1983 until November 1994. Ms. Lucci
also has acted as a director and the Secretary of the Company since its
founding in 1983. Ms. Lucci was recently a recipient of the 1996
Distinguished Women in Telemarketing Award by Telemarketing Magazine. From 1981
to 1983, Ms. Lucci was Vice President of New Product Publications Development
for Clement Communications, a national business marketing publisher. From 1969
to 1981, Ms. Lucci was employed by Colonial Penn Insurance Company, a leading
direct marketer of insurance products, where she managed marketing, training
and customer service functions, most recently as a Vice President.
Mr. Hansell and Ms. Lucci are husband and wife.
Mr. Scharff is the Company's Executive Vice President and, since
November 1994, has been Treasurer of the Company. Mr. Scharff was Senior Vice
President of Finance of the Company from November 1995 to September 1996 and
Vice President of Finance of the Company from November 1994 to November 1995.
From January 1994 to November 1994, Mr. Scharff was an Assistant Vice President
of the Company and, from the time he joined the Company in October 1988 until
January 1994, Mr. Scharff served as the Company's Controller. From 1984 until
joining the Company, Mr. Scharff was the President of Audobon Automotive Supply
Co., an automotive parts distributor. Mr. Scharff was a divisional controller
of Safeguard Business Systems from 1979 to 1984.
Mr. Altus joined the Company as Vice President and Chief Financial
Officer in September 1996. From April 1996 until he joined the Company, Mr.
Altus served as Executive Vice President and Chief Financial Officer of Nobel
Education Dynamics, Inc., a provider of child care and elementary education
services. From 1988 to March 1996, Mr. Altus served as Vice President of
Finance and Chief Financial Officer of GBC Technologies, Inc., a wholesale
distributor of computer products. Prior to 1988, he was employed by KPMG Peat
Marwick for seven years in various accounting and consulting positions.
Mr. Keenan is the Company's Vice President of Sales and Marketing.
For 18 years prior to joining the Company in March 1996, Mr. Keenan was
employed by Tektronix, Inc., a computer software and
8
<PAGE> 11
graphics company serving most recently as Tektronix's Regional Sales Manager
for the Eastern United States in charge of a national account sales program for
that region. For seven years prior thereto, Mr. Keenan served in various sales
and management capacities at NCR.
Mr. Mulvihill is the Company's Vice President of Account Management.
From August 1994 until he joined the Company in June 1996, Mr. Mulvihill was an
independent consultant. From October 1993 until August 1994, Mr. Mulvihill
served as a Team Leader in the telemarketing group at Towers Perrin, a national
management and benefits consulting firm. From 1982 until joining Towers
Perrin, Mr. Mulvihill served as Vice President of Customer Service for Users,
Inc., an information systems company.
Mr. Clautice serves as the Company's Vice President of Management
Information Systems. From June 1995 to December 1995, Mr. Clautice served as
the Company's Director of Methods and Procedures. Prior to joining the Company
in June 1995, Mr. Clautice was President of Clautice Associates, Inc., an
information systems consulting firm he founded in 1974. From 1974 to 1985, Mr.
Clautice was President of Electronic Processing Center, a data processing
service organization.
9
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company completed the Initial Public Offering on September 18,
1996 selling 3,220,000 shares of its Common Stock at a price of $12.50 per
share. Since the Initial Public Offering, the Company's Common shares have
been quoted on the Nasdaq National Market under the symbol "RMHT." Prior to
the Initial Public Offering, the Common Shares were not listed or quoted on any
organized market system. The following table sets forth for the periods
indicated the high and low closing sale prices of the Common Shares as reported
on the Nasdaq National Market during the twelve day period ended September 30,
1996.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fourth Quarter of 1996 (from September 18, 1996) . . . $17.25 $14.00
</TABLE>
As of December 10, 1996, there were 38 holders of record of the Common
Shares. The Company currently intends to retain future earnings to finance its
growth and development and therefore does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's credit
facilities restrict the payment of cash dividends by the Company. Payment of
any future dividends will depend upon the future earnings and capital
requirements of the Company and other factors which the Board of Directors
consider appropriate. For certain information regarding distributions made by
the Company prior to the Initial Public Offering, see Item 13 "Certain
Relationships and Related Transactions" (as incorporated by reference to the
registrant's 1997 Proxy Statement).
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and with the Financial Statements of the Company and notes
thereto included elsewhere in the Report.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 6,988 $10,292 $17,105 $25,545 $32,316
------- ------- ------- ------- -------
Operating expenses:
Cost of services . . . . . . . . . . . . . . . . . . . . 5,189 7,642 13,286 18,210 22,212
Selling, general and administrative (1) . . . . . . . . 1,428 2,076 3,007 5,312 6,669
Special bonuses (2) . . . . . . . . . . . . . . . . . . - - - - - - - - 6,087
-------- ------- ------- ------- --------
Total operating expenses . . . . . . . . . . . 6,617 9,718 16,293 23,522 34,968
-------- ------- ------- ------- --------
Operating income (loss) . . . . . . . . . . . . . . . . . 371 574 812 2,023 (2,652)
Interest expense (3) . . . . . . . . . . . . . . . . . . 125 137 170 261 1,893
-------- ------- ------- ------- --------
Income (loss) before income taxes and extraordinary
item . . . . . . . . . . . . . . . . . . . . . . . 246 437 642 1,762 (4,545)
Income taxes (benefit) (4) . . . . . . . . . . . . . . . - - - - 40 21 (1,222)
-------- ------- ------- ------- -------
Income (loss) before extraordinary item . . . . . . . . . 246 437 602 1,741 (3,323)
Extraordinary item, net of taxes (5) . . . . . . . . . . - - - - - - - - 582
-------- ------- ------- ------- ---------
Net income (loss) . . . . . . . . . . . . . . . 246 437 602 1,741 (3,905)
Preferred stock dividends . . . . . . . . . . . . . . . . - - - - - - - - 308
Net income (loss) available to Common . . . . . . . . . .
------- ------- ------- ------- --------
shareholders (4) . . . . . . . . . . . . . . . . . . . $ 246 $ 437 $ 602 $ 1,048 $(4,213)
======= ======= ======= ======= ========
Pro forma loss per common share: (i)
- --------------------------------
Pro forma loss before extraordinary item. . . . . . . . . $ ( .68)
Extraordinary item, net of taxes . . . . . . . . . . . . ( .12)
-------
Pro forma loss . . . . . . . . . . . . . . . . . . . . . $ (.80)
</TABLE>
(i) The pro forma net loss per common share includes the pro forma income
tax benefit for fiscal 1996 which would have been recorded on the
historical loss before income taxes if the Company had not been an S
corporation during such period at an effective rate of 36%. The pro
forma net loss per
10
<PAGE> 13
common share is computed by dividing the pro forma loss by the weighted
average number of shares outstanding during the period.
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 21 $ 282 $ 829 $1,061 $12,718
Total assets 2,364 3,743 5,576 8,757 22,555
Long-term debt, less current maturities 51 20 355 592 --
Capitalized lease obligations, less
current maturities 287 525 623 436 2
Loans payable to shareholders 125 125 125 133 --
Shareholders' equity 887 1,325 1,927 3,668 18,315
</TABLE>
- --------------------------
(1) Selling, general and administrative expenses include Founders'
compensation of $308,000, $386,000, $660,000, $766,000 and $597,684
for fiscal 1992 through fiscal 1996, respectively.
(2) Special bonuses in fiscal 1996 are bonuses and related payroll taxes
in the amount of $6,087,000 paid to the Founders. Pursuant to
employment contracts entered into and effective in May 1996, the
Founders' compensation is fixed at a combined base amount of $400,000
per year for three years (subject to annual adjustment based on the
inflation rate), plus a discretionary bonus which at the present time
is not expected to exceed 20% of base compensation.
(3) In fiscal 1996 interest expense includes a one-time charge of
$1,177,000 relating to interest expense on a Founders' note.
(4) The Company operated as an S Corporation for income tax purposes since
April 1, 1990 and terminated such status in connection with the
Recapitalization. See Item 13 "Certain Relationships and Related
Transactions" (as incorporated by reference to the Registrant's proxy
statement for the 1997 Annual Meeting) and Note 8 of Notes to
Financial Statements, for information concerning computation and
realizability of the net operating loss carry forward generated in
fiscal 1996.
(5) The $582,000 extraordinary expense, net of an income tax benefit,
represents the write-off of certain deferred financing costs
associated with the early extinguishment of bank indebtedness.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's historical results of
operations and its liquidity and capital resources should be read in
conjunction with "Selected Financial Information" and the Financial Statements
of the Company and Notes thereto appearing elsewhere in this document.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
From time-to-time, the Company may publish statements which are not
historical facts but are forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provided a safe
harbor for forward-looking statements. In order to comply with the terms of
the safe harbor, the Company notes that a variety of
11
<PAGE> 14
factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. The risks and uncertainties that may
affect the operations, performance, development and results of the Company's
business include, but are not limited to: (i) reliance on principal client
relationships in the insurance and financial services industry; (ii)
fluctuations in quarterly results of operations due to the timing of clients'
telemarketing campaigns, the timing of opening of new call centers and
expansion of existing call centers and changes in competitive conditions
affecting the telemarketing industry; (iii) difficulties of managing growth
profitably; (iv) dependence on the services of the Company's executive officers
and other key operations and technical personnel; (v) changes in the
availability of qualified employees' (vi) performance of its automated
call-processing systems and other technological factors; (vii) reliance on
independent long-distance companies; (viii) changes in government regulations
affecting the teleservices and telecommunications industries; (ix) competition
from other outside providers of teleservices and in-house telemarketing
operations of existing and potential clients; and (x) competition from
providers of other marketing formats, such as existing formats such as direct
mail and emerging strategies such as interactive shopping and marketing over
the Internet.
OVERVIEW
The Company is a leading provider of outbound teleservices to major
corporations in the insurance and financial services industries. Founded in
1983 by Raymond J. Hansell and MarySue Lucci to provide direct marketing and
sales consulting, the Company opened its first call center focusing on
business-to-business teleservices in 1985 to support the marketing efforts of
its consulting customers. By the late 1980s, outbound business-to-consumer
teleservices had become the predominant business of the Company. On May 24,
1996, the Company completed a Recapitalization of the Company which included
the purchase of a significant equity interest in the Company by Advanta
Partners. On September 24, 1996 the Company completed the Initial Public
Offering from which it realized proceeds, after the deduction of underwriting
discounts and commissions of $37,448,600. Concurrently with the Initial Public
Offering, the Company issued an aggregate of 400,000 shares of the Company
Common Stock in exchange for all of the outstanding Series A Preferred Stock
and a 6% Subordinated Promissory Note held by the Founders' ("the Founders
Note") and redeemed an aggregate of 6,500,000 shares of Series B Preferred
Stock held by Advanta Partners and Glengar. See Item 13 "Certain Relationships
and Related Transactions"(as incorporated by reference to the Registrant's 1997
Proxy Statement).
The Company's business has grown rapidly, resulting in increases in
revenues and operating income during each of the last three fiscal years. The
increase in revenues from $17.1 million in fiscal 1994 to $ 32.3 million in
fiscal 1996, has largely been driven by increases in call volumes from existing
clients, primarily in the insurance industry, coupled with the development of
new clients primarily in the financial services industry. There is no
assurance that the Company will be able to maintain its historical profit
margins, which may be adversely affected by, among other factors, the pricing
of such business and additional technological and other costs involved in
servicing such business. Operating income, exclusive of special compensation
expenses, increased from $812,000 or 4.7% of revenues in fiscal 1994 to
$3,435,000, or 10.6 % of revenues in fiscal 1996.
The increase in operating income over the three-year period resulted
from both the growth in revenues and the reduction in cost of services as a
percentage of revenues. Cost of services, which primarily consists of labor,
telephone and other call center-related operating and support expenses,
declined from 77.7% of revenues in fiscal 1994 to 68.7 % of revenues in fiscal
1996. These costs have decreased as a percentage of revenues as the Company
has expanded its call center locations to lower cost geographic areas, improved
its operating efficiencies and negotiated more favorable long distance rates.
Selling, general and administrative expenses are comprised principally of
corporate expenses, including management, sales and marketing activities,
account management services, accounting and finance, human resources,
information services and other administrative costs. Corporate expenses
include, among other items, compensation to Founders which amounted to
$660,000, $766,000 and $597,684 for fiscal 1994,
12
<PAGE> 15
fiscal 1995 and fiscal 1996, respectively. See Item 13 "Certain Relationships
and Related Transactions" (as incorporated by reference to the Registrant's
1997 Proxy Statement).
The Company was subject to taxation under Subchapter S of the Internal
Revenue Code of 1986, as amended, from April 1, 1990 to May 24, 1996. As a
result, the net income of the Company, for federal and certain state tax
purposes, was taxed directly to the Company's Founders rather than the Company.
Upon completion of the Recapitalization, the Company terminated its Subchapter
S status. In fiscal 1996, certain charges were incurred in connection with
the Recapitalization of the Company and the Initial Public Offering. As a
result of these charges the Company incurred a net operating loss for fiscal
1996. In accordance with the provisions of SFAS 109, a calculation as to the
realizability of the net operating loss carry forward was made for the purposes
of taking into account the Company's ability to generate sufficient taxable
income and thereby realize the benefit of the net operating loss prior to its
expiration. As a result of this analysis, the Company recorded a deferred tax
asset of $1,111,840 in fiscal 1996. In future periods the Company will be
subject to, and accrue, both federal and state income taxes.
RESULTS OF OPERATIONS
The following table sets forth statements of operations and other data
as a percentage of revenues from services provided by the Company for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
------ ------ -----
Operating expenses:
Cost of services 77.7 71.3 68.8
Selling, general and administrative (1) 17.6 20.8 20.6
Special Bonuses (2) -- -- 18.8
------ ------ ------
Total operating expense 95.3 92.1 108.2
------ ------ -----
Operating income (loss) 4.7 7.9 (8.2)
Interest expense (3) 1.0 1.0 5.9
------ ------ -----
Income (loss) before income taxes (benefit) and
extraordinary item 3.7 6.9 (14.1)
Income taxes (benefit) .2 .1 (3.8)
Extraordinary item, net of taxes (4) -- -- 1.8
Net income (loss) 3.5% 6.8% (12.1)%
====== ====== ======
</TABLE>
(1) Compensation to Founders represents 3.9%, 3.0% and 2% of revenues for
fiscal 1994, fiscal 1995 and fiscal 1996, respectively.
(2) Special Bonuses in fiscal 1996 include cash bonuses and related
payroll taxes in the amount of $6,087,000 paid to the Founders.
(3) During 1996, 3.6% of revenues represents interest expense incurred as
the result of the exchange of a the Founders' Note for common stock.
(4) During 1996, the Company incurred an extraordinary loss of $582,000,
net of taxes, on the early extinguishment of bank indebtedness.
13
<PAGE> 16
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1995
Revenues. Revenues increased to $32.3 million in fiscal 1996 from
$25.5 million in fiscal 1995, an increase of $6.8 million or 26.7%. Of such
increase in revenues, approximately $4 million was attributable to increased
calling volumes from existing clients, $1.2 million to new clients in the
financial services industry and $1.6 million to new clients in the
telecommunications industry. To meet the demands of increased call volumes,
the Company added a new 80-workstation call center in November 1995 and another
80-workstation call center in April 1996 and expanded capacity in four existing
call centers by an aggregate of 64 workstations during February, March and May
1996, respectively. Additionally, in October 1996, the Company added a new
80-workstation call center in Harrisburg, PA.
Cost of Services. Cost of services increased to $22.2 million in
fiscal 1996 from $18.2 million in fiscal 1995. As a percentage of revenues,
cost of services decreased to 68.8% in fiscal 1996 from 71.3% in fiscal 1995.
This decrease was the result of the spreading of fixed costs over a larger
revenue base coupled with greater utilization of the call centers on a year to
year comparative basis.
Selling, General and Administrative. Selling, general and
administrative expenses increased to $6.7 million in fiscal 1996 from $5.3
million in fiscal 1995. As a percentage of revenues, selling, general and
administrative expenses decreased to 20.6% in 1996 from 20.8% in 1995. The
dollar increase was primarily the result of increased staffing and expanding
facility costs required to support the growth in the Company's revenues.
Special Bonuses. Special Bonuses are bonuses and related payroll taxes
in the amount of $6,087,000 paid to the Founders. Under their employment
contracts, the Founders' compensation is fixed at a combined base amount of
$400,000 per year for three years (subject to annual adjustment based on the
inflation rate), plus a discretionary bonus which at the present time is not
expected to exceed 20% of base compensation.
Interest Expense. Interest expense rose to $1,893,000 for fiscal 1996
from $262,000 in fiscal 1995. Of such increase, $1,177,000 relates to interest
expense on the Founders' Note, $448,000 reflects interest on debt incurred in
connection with the Recapitalization, and $7,000 reflects the financing of
equipment purchases related primarily to the opening of two additional call
centers and the expansion of four other call centers.
Income Tax Benefit. During fiscal 1996 the Company generated a net
operating loss carry-forward. In accordance with SFAS 109, a calculation as to
the realizability of the net operating loss carry forward was made for purposes
of taking into account the Company's ability to generate sufficient taxable
income and thereby realize the benefit of the net operating loss prior to its
expiration. As a result of this analysis, the Company recorded a tax benefit
of $1,549,586 in fiscal 1996.
Extraordinary Item. On September 30, 1996 the Company incurred an
extraordinary loss of $582,000, net of taxes, on the early extinguishment of
bank indebtedness.
In fiscal 1995 the Company was an S Corporation for Federal and
Pennsylvania income tax purposes and, accordingly, income was passed through to
the shareholders and taxed at the individual level. The Company was not an S
Corporation in New Jersey, and therefore charged against income $21,000 for
such taxes.
FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1994
Revenues. Revenues increased to $25.5 million for fiscal 1995 from
$17.1 million for fiscal 1994, an increase of $8.4 million or 49.3%. Of such
increase in revenues, $2.7 million was attributable primarily to increased
calling volumes from existing insurance clients and $5.7 million was
attributable to the
14
<PAGE> 17
addition of new clients in the financial services industry. To meet the
demands of increased call volumes, the Company added two new 64-workstation
call centers in April 1994 and February 1995, respectively.
Cost of Services. Cost of services increased to $18.2 million for
fiscal 1995 from $13.3 million for fiscal 1994. As a percentage of revenues,
cost of services decreased to 71.3% in fiscal 1995 from 77.7% in fiscal 1994.
This decrease was primarily the result of realizing substantial operating
efficiencies, the most significant of which, resulting in a $1.4 million
decrease in such costs, was a reduction in long distance telephone rates.
Selling, General and Administrative. Selling, general and
administrative expenses increased to $5.3 million for fiscal 1995 from $3.0
million for fiscal 1994. As a percentage of revenues, selling, general and
administrative expenses increased to 20.8% for fiscal 1995 from 17.6% for
fiscal 1994. Of such increase, $427,000 was due to the addition of 31
administrative personnel, $1.7 million was due to corporate expenses associated
with the Company's growth and $223,000 was due to an increase in Founders'
compensation.
Interest Expense. Interest expense rose to $262,000 for fiscal 1995
from $170,000 for fiscal 1994. The increase reflects the financing of
equipment purchases related to the opening of two additional call centers and
related to the relocation of the Company's corporate headquarters.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of liquidity have
been cash flow from operations and borrowings under its credit facilities.
These funds, combined with borrowings under capitalized lease obligations, have
provided the liquidity to finance the growth of the Company.
On May 24, 1996, the Company completed the Recapitalization, which
included the purchase of a significant equity interest in the Company by
Advanta Partners. See Item 13 (Certain Relationships and Related Transactions"
as incorporated by reference to the Registrant's 1997 Proxy Statement).
In conjunction with the Recapitalization, the Company distributed to
the Founders $4.6 million of accounts receivable. As part of the
Recapitalization, the Company also distributed $16.0 million in cash, $1.0
million in Series A Preferred Stock, and a Founders' Note in the initial
principal amount of $3.0 million, (which was subsequently increased by $1.0
million) all for the redemption of an aggregate of 8,500,000 shares of Common
Stock owned by the Founders. In addition, Advanta Partners and Glengar
invested $9.5 million in Series B Preferred Stock and Class A and Class B
Common Stock.
On September 24, 1996 the Company completed an initial public
offering and raised net proceeds of approximately $37.4 million. The Company
used approximately $27.9 million of these proceeds to repay all bank
indebtedness, redeem its Series B Preferred Stock and pay the Special Bonuses.
The remaining $9.5 will be used for working capital and general corporate
purposes. Upon completion of the Company's initial public offering, the
Founders exchanged the Series A Preferred Stock and the Founders' Note for
400,000 shares of Common Stock.
In conjunction with the Recapitalization, the Company entered into a
Credit Facility with Chemical Bank, which provides for the $14.0 million Term
Loan and the $6.0 million Revolver. The Term Loan and Revolver are secured by
all of the assets of the Company. In addition, the loan agreement contains
financial covenants and certain restrictions on the Company's ability to pay
dividends on the Common Stock, incur debt and make capital expenditures and
acquisitions. Borrowings on the Revolver are limited to 85% of eligible
accounts receivable. The Term Loan and Revolver bear interest at the bank's
base rate plus 1.5% or LIBOR plus 3.0%. The Revolver expires on May 24, 2001.
As of September 30, 1996, the Company had retired the full $14.0 million
amount of the Term Loan and had no draws outstanding on the Revolver.
15
<PAGE> 18
Cash used by operating activities was approximately $1.7 million for
the fiscal year ended 1996 compared to cash provided by operations of $1.7
million for the same period in 1995. The change in the utilization of cash
within operating activities was due to the Company's net loss for the year,
which was primarily caused by the Special Bonuses of $6.1 million paid to the
Founders.
The Company's teleservices operations will continue to require
significant capital expenditures. Capital expenditures, including capitalized
leases, were $1.1 million in fiscal 1994, $2.4 million in fiscal 1995 and $2.9
million in fiscal 1996. The Company expects to spend approximately $5.0
million on capital expenditures in fiscal 1997, primarily for the addition of
two call centers, capacity expansion and where available, enhancement of
technology used throughout its call center operations. However, in
conjunction with such expenditures, the Company is evaluating certain lease
versus buy decisions and may decide to lease such assets under five year
operating leases.
The Company believes that funds generated from operations, together
with the remaining proceeds of its initial public offering and available credit
under the Revolver, will be sufficient to finance its current operations and
planned capital expenditures at least through the end of fiscal 1997.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth statement of operations data for each
of the four quarters of fiscal 1995 and 1996, as well as such data expressed as
a percentage of revenues. This quarterly information is unaudited, but has
been prepared on a basis consistent with the audited Financial Statements of
the Company presented elsewhere and, in the Company's opinion, includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the information for the quarters presented. The results
for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1994 1995 1995 1995 1995 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $5,632 $5,683 $7,132 $7,098 $7,278 $7,506 $8,778 $8,754
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Cost of services 3,941 4,240 4,921 5,107 5,127 5,309 5,889 5,887
Selling, general and administrative 1,064 1,208 1,348 1,693 1,575 1,545 1,688 1,861
Special Bonuses -- -- -- -- -- -- -- 6,087
------ ------ ------ ------ ------ ------ ------- -------
Total operating expenses 5,005 5,448 6,269 6,800 6,702 6,854 7,577 13,835
------ ------ ------ ------ ------ ------ ------- -------
Operating income (loss) 627 235 863 298 576 652 1,201 (5,081)
Interest expense 54 57 71 80 75 71 227 1,520
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) before income
taxes (benefit) $ 573 $ 178 $ 792 $ 218 $ 501 $ 581 $ 974 $(6,601)
====== ====== ====== ====== ====== ======= ====== ========
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1994 1995 1995 1995 1995 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Cost of services 70.0 74.6 69.0 72.0 70.5 70.7 67.1 67.2
Selling, general and administrative 18.9 21.3 18.9 23.8 21.6 20.6 19.2 21.3
Special bonuses -- -- -- -- -- -- -- 69.5
----- ---- ---- ----- ----- ----- ----- ----
Total operating expenses 88.9 95.9 87.9 95.8 92.1 91.3 86.3 158.0
----- ---- ---- ----- ----- ----- ----- -----
Operating income (loss) 11.1 4.1 12.1 4.2 7.9 8.7 13.7 (58.0)
Interest expense 1.0 1.0 1.0 1.1 1.0 1.0 2.6 17.4
----- ----- ---- ------ ----- ----- ----- ----
Income (loss) before income
taxes (benefit) 10.1% 3.1% 11.1% 3.1% 6.9% 7.7% 11.1% (75.4)%
===== ===== ===== ===== ===== ===== ===== ======
</TABLE>
The Company has experienced and expects to continue to experience
quarterly variations in operating results, principally as a result of the
timing of clients' telemarketing campaigns, the commencement and expiration of
contracts, the timing and amount of new business generated by the Company, the
Company's revenue mix, the timing of the opening of call centers or expansion
of existing centers, the timing of additional selling, general and
administrative expenses and competitive conditions in the teleservices
industry. The variations in quarterly results during fiscal 1995 are primarily
due to the opening of the Reading, Pennsylvania call center in February 1995,
an increase in management compensation and the write-off of leasehold
improvements associated with the relocation of the Company's headquarters in
September 1995.
In connection with the Initial Public Offering, the Company incurred
certain pre-tax charges of approximately $8.2 million in the quarter ended
September 30, 1996. These charges consist of the Special Bonuses and related
payroll taxes of $6,087,000 paid to the Founders pursuant to their
employment agreements, interest expense on the Founders' Note of approximately
$1,177,000 and an extraordinary charge of approximately $909,507 resulting from
the early extinguishment of the Term Loan. These charges caused the Company to
incur a net loss for the quarter and for fiscal 1996. See Item 13 "Certain
Relationships and Related Transactions" (as incorporated by reference to the
Registrant' 1997 Proxy Statement and Notes 3 and 4 of Notes to Financial
Statements).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary financial information specified
by this Item, together with the Reports of the Company's independent
accountants thereon, are included in this Annual Report on Form 10-K on pages
F-1 through F-17 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In June 1996, the Company engaged Arthur Andersen LLP as independent
public accountants to audit the Company's financial statements for fiscal 1995,
replacing the firm of Asher & Company, Ltd., which had previously served as the
Company's independent public accountants and had completed its audit of the
Company's financial statements for fiscal 1993 and fiscal 1994. The Company's
decision to change accountants was ratified by the Board of Directors of the
Company.
In connection with the audit of the Company's financial statements for
fiscal 1993 and fiscal 1994, there were no disagreements with Asher & Company,
Ltd. during such two years or during the period through the date of such firm's
replacement on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which if not resolved to
its satisfaction would have caused Asher & Company, Ltd. to make reference
thereto in connection with its report. Asher & Company, Ltd.'s reports on the
Company's financial statements for fiscal 1993 and fiscal 1994 contained no
adverse
17
<PAGE> 20
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the directors of
the Company is incorporated herein by reference to the information set forth in
the Registrant's 1997 Proxy Statement. The information required by the Item
with respect to executive officers of the Company is furnished in a separate
item captioned "Executive Officers of the Company" and included in Part I of
this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the information set forth in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference to the information set forth in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the information set forth in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
(1) Financial Statements. Page
----
Reports of Independent Accountants-----------------F-1
Consolidated Balance Sheets------------------------F-3
Consolidated Statements of Operations--------------F-4
Consolidated Statements of Shareholders' Equity----F-5
Consolidated Statements of Cash Flows--------------F-6
Notes to Consolidated Financial Statements---------F-7
(2) Exhibits
See attached
18
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No.
<S> <C>
2 - Recapitalization and Stock Purchase Agreement among the Company, Advanta Partners,
Glengar and the Founders, dated May 24, 1996 (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 333-07501).
3.1 - Articles of Incorporation of the Company, as amended (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 333-07501).
3.2 - Form of Amended and Restated Bylaws of the Company (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 333-07501).
9 - Voting Agreement among the Founders and Advanta Partners dated as of July 2, 1996
(incorporated by reference to the Company's Registration Statement on Form S-1,
File No. 333-07501).
*10.1 - 1996 Stock Incentive Plan.
10.2 - Shareholders' Agreement by and among the Company, the Founders, Advanta Partners and
Glengar, dated May 24, 1996 (incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 333-07501).
10.3 - Employment Agreement by and between the Company and Raymond J. Hansell, dated
May 24, 1996 (incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 333-07501).
10.4 - Employment Agreement by and between the Company and MarySue Lucci Hansell, dated
May 24, 1996 (incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 333-07501).
10.5 - Warrant for the Purchase of Class B Non-Voting Common Stock of the Company in favor of
Chemical Bank (incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 333-07501).
10.6 - Management Fee Agreement by and between Advanta Partners and the Company, dated
May 24, 1996 (incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 333-07501).
10.7 - Credit Agreement among the Company and Chemical Bank, as agent, and as lender, dated
May 24, 1996 (incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 333-07501).
10.8 - Revolving Credit Note made by the Company in favor of Chemical Bank, as agent, and as
lender, dated May 24, 1996 (incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 333-07501).
10.9 - Term Note made by the Company in favor of Chemical Bank, as agent, and as lender, dated
May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form
S-1, File No. 333-07501).
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
Exhibit
No.
<S> <C>
10.10 - Security Agreement between the Company and Chemical Bank, as agent (incorporated by
reference to the Company's Registration Statement on Form S-1, File No. 333-07501).
10.11 - 6% Subordinated Note made by the Company, in favor of the Founders, dated May 24, 1996
(incorporated by reference to the Company's Registration Statement on Form S-1, File No.
333-07501).
10.12 - Exchange and Conversion Agreement among the Company, the Founders, Advanta Partners
and Glengar dated as of July 2, 1996 (incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 333-07501).
*10.13 - Consulting Agreement between the Company and Advanta Partners dated August 20, 1996.
10.14 - Letter Agreement between the Company and Chemical Bank, dated as of June 28, 1996
(incorporated by reference to the Company's Registration Statement on Form S-1, File No.
333-07501).
*10.15 - Agreement on Post-Closing Adjustments, among the Company, Advanta Partners, the Founders
and Glengar dated August 20, 1996.
11 - Statement re Computation of Per Share Earnings.
16 - Letter Regarding Change in certifying accountant, dated July 2, 1996 (incorporated by
reference to the Company's Registration Statement on Form S-1, File No. 333-07501).
*21 - Subsidiaries of the Registrant.
*27.1 - Financial Data Schedule for year ended September 30, 1996.
</TABLE>
- -----------------
* Filed herewith
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RMH TELESERVICES, INC.
Dated: December 12, 1996 By: /s/ Raymond J. Hansell
-----------------------------------------
Raymond J. Hansell
Vice-Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURES TITLE DATE
---------- ----- ----
/s/ MarySue Lucci President December 12, 1996
- --------------------------
MarySue Lucci
/s/ Richard C. Altus Chief Financial Officer December 12, 1996
- -------------------------- (principal Financial and
Richard C. Altus Accounting Officer)
/s/ Anthony P. Brenner Chairman December 12, 1996
- --------------------------
Anthony P. Brenner
/s/ Mitchell L. Hollin Director December 12, 1996
- --------------------------
Mitchell L. Hollin
/s/ Herbert Kurtz Director December 12, 1996
- --------------------------
Herbert Kurtz
/s/ David P. Madigan Director December 12, 1996
- --------------------------
David P. Madigan
21
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RMH Teleservices, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of RMH
Teleservices, Inc. (a Pennsylvania corporation) and Subsidiaries as of September
30, 1995 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of RMH Teleservices,
Inc. and subsidiaries as of September 30, 1995 and 1996, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
November 6, 1996
F-1
<PAGE> 25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To RMH Teleservices, Inc.:
We have audited the accompanying balance sheet of RMH Teleservices,
Inc. (a Pennsylvania corporation) as of September 30, 1994, and the related
statements of operations, shareholders' equity and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of RMH Teleservices,
Inc. as of September 30, 1994, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ ASHER & COMPANY, Ltd.
-------------------------
ASHER & COMPANY, Ltd.
Philadelphia, Pennsylvania
June 27, 1996
F-2
<PAGE> 26
RMH TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30
--------------------------------
ASSETS 1995 1996
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 322,024 $ 10,046,647
Accounts receivable, net of allowance for doubtful
accounts of $47,000 and $2,500 in 1995 and 1996
4,449,351 5,549,234
Prepaid expenses 182,518 327,531
Receivables from Founders 34,500 --
Deferred income taxes -- 1,111,840
------------ ------------
Total current assets 4,988,393 17,035,252
------------ ------------
PROPERTY AND EQUIPMENT:
Communications and computer equipment 4,959,500 7,272,564
Furniture and fixtures 732,135 1,112,208
Leasehold improvements 322,106 509,269
------------ ------------
6,013,741 8,894,041
Less- Accumulated depreciation and amortization
(2,349,792) (3,438,700)
------------ ------------
Net property and equipment 3,663,949 5,455,341
------------ ------------
OTHER ASSETS 104,841 64,168
------------ ------------
$ 8,757,183 $ 22,554,761
============ ============
</TABLE>
<TABLE>
<CAPTION>
September 30
LIABILITIES AND SHAREHOLDERS' -------------------------------
-----------------------------
EQUITY 1995 1996
------ ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Borrowings on lines of credit $ 975,000 $ --
Current portion of long-term debt 205,006 --
Current portion of capitalized lease obligations
353,716 45,632
Accounts payable 1,126,768 1,682,249
Accrued expenses 1,206,226 2,409,257
Deferred income taxes 61,000 --
------------ ------------
Total current liabilities 3,927,716 4,137,138
------------ ------------
LONG-TERM DEBT 592,105 --
------------ ------------
CAPITALIZED LEASE OBLIGATIONS 436,338 2,118
------------ ------------
LOANS PAYABLE TO FOUNDERS 132,975 --
------------ ------------
DEFERRED INCOME TAXES -- 100,085
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Common Stock 80,200 48,637,756
Common Stock warrant outstanding -- 450,000
Retained earnings (deficit) 3,587,849 (30,772,336)
------------ ------------
Total shareholders' equity 3,668,049 18,315,420
------------ ------------
$ 8,757,183 $ 22,554,761
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 27
RMH TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended
September 30
---------------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES $ 17,105,333 $ 25,544,790 $ 32,316,039
------------ ------------ ------------
OPERATING EXPENSES:
Cost of services 13,285,998 18,209,525 22,212,117
Selling, general and administrative 3,007,363 5,311,905 6,669,016
Special bonuses -- -- 6,087,000
------------ ------------ ------------
Total operating expenses 16,293,361 23,521,430 34,968,133
------------ ------------ ------------
Operating income (loss) 811,972 2,023,360 (2,652,094)
INTEREST EXPENSE 169,641 261,546 1,892,996
------------ ------------ ------------
Income (loss) before income taxes and extraordinary
item 642,331 1,761,814 (4,545,090)
INCOME TAXES (BENEFIT) 40,000 21,000 (1,222,163)
------------ ------------ ------------
Income (loss) before extraordinary item 602,331 1,740,814 (3,322,927)
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, net of $327,423
tax benefit
-- -- 582,084
------------ ------------ ------------
NET INCOME (LOSS) 602,331 1,740,814 (3,905,011)
PREFERRED STOCK DIVIDENDS -- -- 308,361
------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
$ 602,331 $ 1,740,814 $ (4,213,372)
============ ============ ============
PRO FORMA DATA (UNAUDITED) (Note 2):
Historical loss before income taxes and extraordinary item
$ (4,545,090)
Pro forma income tax benefit (1,636,232)
Extraordinary item, net of tax 582,084
Preferred Stock dividends 308,361
-------------
Pro forma net loss available to Common shareholders
$ (3,799,303)
------------
Pro forma loss per Common share-
Pro forma loss before extraordinary item $ (.68)
Extraordinary item (.12)
------------
Pro forma net loss $ (.80)
============
Shares used in computing pro forma net loss per Common
share 4,749,247
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 28
RMH TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Voting Class B Non-Voting
Common Stock Common Stock
---------------------------- ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------ -------------
<S> <C> <C> <C) <C>
BALANCE, SEPTEMBER 30, 1993 10,000,000 $ 80,200 -- $ --
Net income -- -- -- --
---------- ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1994 10,000,000 80,200 -- --
Net income -- -- -- --
---------- ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1995 10,000,000 80,200 -- --
Distribution of accounts receivable -- -- -- --
Sale of Class A and Class B Common Stock 1,720,427 3,278,666 1,279,573 2,438,275
Redemption of Class A Common Stock (8,500,000) (68,170) -- --
Reclassification of Redeemable Class A
Common Stock outside of shareholders'
equity (1,500,000) (12,030) -- --
Cancellation of redemption features of
warrant -- -- -- --
Conversion of Redeemable Class A Common
Stock to Class A Common Stock 1,500,000 2,865,000 -- --
Conversion of Class B to Class A Common Stock 1,279,573 2,438,275 (1,279,573) (2,438,275)
Conversion of Series A Preferred Stock to Common Stock
80,000 539,082 -- --
Conversion of Founders' Note to Common Stock 320,000 3,200,000 -- --
Initial public offering of Common Stock,
net of expenses 3,220,000 36,316,733 -- --
Redemption of Series B Preferred Stock -- -- -- --
Net loss -- -- -- --
Dividends on Series A and Series B Preferred Stock -- -- -- --
---------- ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1996 8,120,000 $ 48,637,756 -- $ --
========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Common Retained Total
Stock Earnings Shareholders'
Warrants (Deficit) Equity
--------------- ---------------- -----------
<S> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1993 $ -- $ 1,244,704 $ 1,324,904
Net income -- 602,331 602,331
------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1994 -- 1,847,035 1,927,235
Net income -- 1,740,814 1,740,814
------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1995 -- 3,587,849 3,668,049
Distribution of accounts receivable -- (4,600,000) (4,600,000)
Sale of Class A and Class B Common Stock -- -- 5,716,941
Redemption of Class A Common Stock -- (20,068,351) (20,136,521)
Reclassification of Redeemable Class A
Common Stock outside of shareholders'
equity -- (2,852,970) (2,865,000)
Cancellation of redemption features of
warrant 450,000 -- 450,000
Conversion of Redeemable Class A Common
Stock to Class A Common Stock -- -- 2,865,000
Conversion of Class B to Class A Common Stock -- -- --
Conversion of Series A Preferred Stock to Common Stock
-- -- 539,082
Conversion of Founders' Note to Common Stock -- -- 3,200,000
Initial public offering of Common Stock,
net of expenses -- -- 36,316,733
Redemption of Series B Preferred Stock -- (2,625,492)
(2,625,492)
Net loss -- (3,905,011)
(3,905,011)
Dividends on Series A and Series B Preferred Stock -- (308,361) (308,361)
------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1996 $ 450,000 $(30,772,336) $ 18,315,420
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 29
RMH TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
September 30
----------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 602,331 $ 1,740,814 $ (4,213,372)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities-
Extraordinary loss on early extinguishment of debt, net -- -- 582,084
Depreciation and amortization 638,734 786,065 1,088,908
Loss on disposal of equipment -- 73,230 --
Deferred income taxes 40,000 21,000 (1,020,993)
Imputed interest and dividends -- -- 185,919
Amortization of deferred financing costs -- -- 10,522
Imputed interest on Founders' Note -- -- 1,135,634
Changes in operating assets and liabilities-
Accounts receivable (965,764) (1,783,749) (1,099,883)
Prepaid expenses (69,726) (18,056) (145,013)
Other assets (23,549) (21,601) 40,673
Accounts payable 486,062 332,355 555,481
Accrued expenses (48,699) 592,423 1,203,031
------------- ------------- -------------
Net cash provided by (used in) operating activities 659,389 1,722,481 (1,677,009)
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchases of property and equipment (338,564) (2,197,482) (2,774,865)
------------- ------------- -------------
FINANCING ACTIVITIES:
Net borrowings (repayments) on lines of credit 300,000 275,000 (975,000)
Proceeds from long-term debt 513,847 500,000 15,100,000
Repayments on long-term debt (85,322) (182,901) (15,897,111)
Repayments on capitalized lease obligations (740,700) (311,766) (847,739)
Deferred financing costs -- -- (505,630)
Borrowings from Founders -- -- 1,006,251
Repayments to Founders (32,000) 5,027 (1,104,726)
Proceeds from sale of Preferred and Common Stock -- -- 9,500,000
Redemption of Common Stock -- -- (17,112,601)
Distribution to Founders -- -- (4,600,000)
Redemption of Preferred Stock -- -- (6,500,000)
Net proceeds from initial public offering -- -- 36,316,733
Dividends paid -- -- (203,680)
------------- ------------- -------------
Net cash provided by (used in) financing activities (44,175) 285,360 14,176,497
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
276,650 (189,641) 9,724,623
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 235,015 511,665 322,024
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 511,665 $ 322,024 $ 10,046,647
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 30
RMH TELESERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. BACKGROUND:
RMH Teleservices, Inc. (the Company) provides outbound teleservices to major
corporations in the insurance and financial services industries. The Company was
founded in 1983 by two individuals (the Founders). On May 24, 1996, the Company
completed a leveraged recapitalization (the Recapitalization) pursuant to which
a portion of the Common Stock owned by the Founders was redeemed and two
investors (the Investors) purchased Preferred and Common Stock (see Note 3).
These transactions were accounted for as a sale of newly issued stock by the
Company and a redemption of previously outstanding shares. Accordingly, the
historical bases of the Company's assets and liabilities have been retained.
On September 18, 1996, the Company completed an initial public offering of 3.22
million shares of Common Stock, raising net proceeds of approximately $36.3
million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Teleservices Management Company and Teleservices
Technology Company. All intercompany transactions have been eliminated.
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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenues on programs as services are performed, generally
based on hours incurred.
F-7
<PAGE> 31
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
provided over the estimated useful lives of the applicable assets using the
straight-line method. The lives used are as follows:
<TABLE>
<CAPTION>
<S> <C>
Computer equipment 5 years
Communications equipment 5-7 years
Furniture and fixtures 7 years
Leasehold improvements Lesser of lease term or useful
life
</TABLE>
Repairs and maintenance are charged to expense as incurred, while additions and
betterments are capitalized. Gains or losses on the disposition of property and
equipment are charged to operations.
Equipment under capital leases included in property and equipment is $2,425,250
and $2,530,685, with accumulated depreciation of $1,265,307 and $1,653,539 as of
September 30, 1995 and 1996, respectively.
Income Taxes
Prior to May 24, 1996, the Company was an S Corporation for federal and
Pennsylvania income tax purposes and, accordingly, income was passed through to
the shareholders and taxed at the individual level. The Company was not an S
Corporation in New Jersey and, therefore, the Company paid income taxes on its
taxable income in that state. The S Corporation status was terminated on May 24,
1996 (see Note 8).
On October 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." SFAS No. 109 requires a change
from the deferred method of accounting for income taxes to the liability method
of accounting for income taxes. Under the liability method, deferred tax assets
and liabilities are recognized for the future tax consequences, measured by
enacted tax rates, attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards, for years
which taxes are expected to be paid or recovered. The impact of adopting SFAS
No. 109 was not material to the statement of operations for the year ended
September 30, 1994.
Supplemental Cash Flow Information
For the years ended September 30, 1994, 1995 and 1996, the Company paid interest
of $165,207, $252,828 and $1,992,512, respectively. Capitalized lease
obligations of $765,689, $220,782 and $105,435 were incurred on equipment leases
entered into in fiscal 1994, 1995 and 1996, respectively.
F-8
<PAGE> 32
Major Customers and Concentration of Credit Risk
The Company is dependent on several large customers for a significant portion of
its revenues. Four customers accounted for 23.7%, 19.2%, 18.8% and 16.2% of
revenues for the year ended September 30, 1994, and four customers accounted for
29.2%, 18.8%, 14.6% and 12.7% of revenues for the year ended September 30, 1995.
Three customers accounted for 45.0%, 17.6% and 12.2% of revenues for the year
ended September 30, 1996. The loss of one or more of these customers could have
a materially adverse effect on the Company's business.
As a result of the issuance of the Preferred and Common Stock to one of the
Investors (see Note 3), the Company is now affiliated with one of its customers.
This customer represented 3.6%, 8.3% and 11.2% of revenues for the year ended
September 30, 1994, 1995 and 1996, respectively.
In fiscal 1994, 1995 and 1996, revenues from customers within the insurance
industry accounted for 63.3%, 59.3% and 74.8% of revenues, respectively, and
customers within the financial services industry accounted for 36.4%, 39.7% and
19.7% of revenues, respectively.
Concentration of credit risk is limited to accounts receivable and is subject to
the financial conditions of the Company's customers. Three of the Company's
largest customers are engaged in transactions with each other and represent a
single credit risk to the Company. The Company does not require collateral or
other securities to support customer receivables. At September 30, 1996, the
accounts receivable from the customers that represent a single credit risk were
$4,675,031 and the accounts receivable from the customer affiliated with one of
the Investors were $690,280.
Cash and Cash Equivalents
The Company maintains cash accounts, which, at times, may exceed federally
insured limits. The Company has not experienced any losses from maintaining cash
accounts in excess of federally insured limits. Management believes that it is
not exposed to any significant credit risks on its cash accounts.
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents at
September 30, 1996 consist of $9,452,897 invested in domestic money market
accounts.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at fair value due to the short-term nature
of those instruments. The carrying amount of the long-term debt and capitalized
lease obligations approximates fair value at September 30, 1995 and 1996,
respectively.
F-9
<PAGE> 33
New Accounting Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 123, "Accounting
for Stock-Based Compensation." The Company is required to adopt this standard
for the year ending September 30, 1997. The Company has elected to adopt the
disclosure requirement of this pronouncement. Accordingly, this pronouncement
will have no impact on the Company's reported financial position or results of
operations.
The Financial Accounting Standards Board has issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The Company is required to adopt this standard at the beginning of the
fiscal year ending September 30, 1997. Management believes that the adoption of
this standard will have no impact on the Company's reported financial position
or results of operations.
Pro Forma Net Loss Per Share
Prior to May 24, 1996, the Company was an S Corporation for federal and
Pennsylvania income tax purposes. The pro forma income tax benefit for fiscal
1996 reflects taxes which would have been recorded on the historical loss before
income taxes if the Company had not been an S Corporation during such period at
an effective rate of 36%. The pro forma net loss per share is computed by
dividing the pro forma loss by the weighted average number of shares outstanding
during the period.
3. RECAPITALIZATION:
On May 24, 1996, the Company authorized (i) 20,000,000 shares of Common Stock,
no par value, consisting of 10,000,000 shares of Class A Voting Common Stock
(the Class A Common) and 10,000,000 shares of Class B Non-Voting Common Stock
(the Class B Common), and (ii) 10,000,000 shares of Preferred Stock, of which
1,000,000 shares were designated as Series A Preferred Stock (the Series A
Preferred) and 6,500,000 shares were designated as Series B Preferred Stock (the
Series B Preferred). The previously outstanding Common Stock was converted into
10,000,000 shares of Class A Common. All references in the accompanying
financial statements to the number of Common shares have been retroactively
restated to reflect the recapitalization.
F-10
<PAGE> 34
Common Stock Redemption
On May 24, 1996, the Company redeemed 8,500,000 shares of Class A Common for
$20,136,521, as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash payment $16,001,646
Final redemption price adjustment
(paid in August 1996) 436,980
Issuance of 6%, $3,000,000 subordinated note payable to
Founders (the "Founders' Note") 2,022,639
Issuance of 1,000,000 shares of 6%, Series A
Preferred 524,450
Deferred tax liability for difference in basis of
Founders' Note 476,831
Transaction costs 673,975
-----------
$20,136,521
===========
</TABLE>
The face amounts of the Founders' Note and Series A Preferred have been
discounted at estimated market rates of 14% and 15% for interest and dividends,
respectively, on similar-type instruments. The original issue discounts are
being amortized over the terms of the Founders' Note and the Series A Preferred.
On May 23, 1996, the Company distributed $4,600,000 of accounts receivable to
the Founders as a Subchapter S distribution of previously taxed income. The
Company is collecting these receivables on behalf of the Founders.
The Founders' Note initially had a face amount of $3,000,000 and was
subordinated to all other liabilities. The face amount of the Founders' Note was
increased to $4,000,000 due to the achievement of certain financial goals as
defined in the note, with the $1,135,634 difference in the estimated fair market
value of the new note versus the carrying value of the original note being
charged to interest expense. The Founders' Note bore interest at an annual rate
of 6%, payable quarterly, and was due in two equal installments on May 24, 2003
and 2004, subject to acceleration upon the occurrence of certain defined events.
Upon the completion of the initial public offering, the Founders' Note was
satisfied through the issuance of 320,000 shares of Common Stock at the offering
price.
The Series A Preferred had 1,000,000 shares outstanding, a face amount of
$1,000,000 and required a dividend of 6% per year, payable quarterly. The Series
A Preferred had no voting rights, was senior to the Series B Preferred upon
liquidation and contained certain put features. Upon completion of the initial
public offering, the Series A Preferred was converted into 80,000 shares of
Common Stock at the offering price and accrued dividends of $21,324 were paid.
F-11
<PAGE> 35
Sale of Preferred and Common Stock
On May 24, 1996, the Company issued Preferred and Common Stock for $9,500,000 to
the Investors, as follows:
<TABLE>
<CAPTION>
<S> <C>
Series B Preferred Stock $3,783,059
Class A Voting Common Stock 3,278,666
Class B Non-Voting Common Stock 2,438,275
----------
$9,500,000
==========
</TABLE>
The Company issued 6,500,000 shares of Series B Preferred for an aggregate of
$6,500,000 or $1.00 per share. The Series B Preferred required a dividend of 8%
per year, payable quarterly. The face amount of the Series B Preferred was
discounted at the estimated market dividend rate of 15% and the discount of
$2,716,941 was amortized over the expected term. Due to the discount applied to
the face amount of the Series B Preferred, its value for accounting purposes was
$.58 per share. The Series B Preferred had no voting rights, was senior to the
Common Stock upon liquidation and had a liquidation value of $6,500,000 plus
unpaid dividends. The holders of the Series B Preferred could have required the
Company to redeem their shares on May 24, 2004, subject to acceleration upon the
occurrence of certain defined events, including an initial public offering. Upon
completion of the initial public offering, the Series B Preferred was redeemed
for $6,500,000 plus accrued dividends of $182,356.
The Company issued 1,720,427 shares of Class A Common and 1,279,573 shares of
Class B Common for an aggregate of $3,000,000 or $1.00 per share. The Common
Stock was valued at $1.91 per share based on the relative estimated fair values
of the Series B Preferred and Class A and B Common Stock issued to the
Investors. The Class B Common shares were converted into an equal number of
Class A Common shares upon the completion of the initial public offering and the
division of Common Stock between two classes was eliminated.
4. BANK DEBT:
The Company had available lines of credit with a bank of $2,600,000 as of
September 30, 1995, with interest ranging from the prime rate plus 1/2% to 1%.
The average interest rate on outstanding borrowings was 8.17% and 9.60% for the
years ended September 30, 1994 and 1995, respectively, and was 9.08% through May
24, 1996. The highest outstanding borrowings during fiscal 1995 were $1,575,000
and through May 24, 1996 were $1,475,000. All amounts outstanding under the
lines of credit were repaid on May 24, 1996, with the proceeds from a credit
facility with a new bank.
On May 24, 1996, the Company and its shareholders entered into an agreement with
a bank (the Credit Agreement), which provides the Company with a $14,000,000
term loan (the Term Loan) and $6,000,000 in revolving credit loans (the
Revolver). On May 24, 1996, the Company borrowed $11,200,000 on the Term Loan
and incurred $505,630 in financing costs, which were deferred and to be
amortized over the term of the Credit Agreement. In June 1996, the Company
borrowed the final $2,800,000 on the Term Loan. The borrowings on
F-12
<PAGE> 36
the Term Loan were used to fund a portion of the Common Stock redemption, to
repay a bank line of credit and to buy out certain leases. The Credit Agreement
required an annual administrative fee of $15,000 and an annual commitment fee of
one-half of 1% on the average unused portion of the Revolver.
All borrowings under the Credit Agreement are collateralized by the assets of
the Company and the pledge by the shareholders of their Preferred and Common
Stock in the Company. The interest rate varies based on whether the borrowing is
designated as a Eurodollar loan, the level of market interest rates such as the
prime or LIBO rates, and the ratio of the Company's debt to earnings, as
defined.
Borrowings on the Revolver are limited to the lesser of $6,000,000 or 85% of
eligible accounts receivable, as defined, less outstanding letters of credit
which cannot exceed $1,000,000. In certain circumstances, amounts outstanding
under the Revolver can be converted to term loans. The Revolver expires on May
24, 2001.
The Company is subject to certain covenants described in the Credit Agreement.
Such covenants, among other things, restrict the Company's ability to incur
debt, pay dividends, or make capital expenditures and acquisitions. The Company
is also subject to a number of restrictive financial covenants, which include
ratios related to debt service, total debt to earnings and interest coverage, as
defined.
In connection with the Credit Agreement, the bank received a warrant to purchase
236,842 shares of Class B Common for $.01 per share. The warrant expires on May
31, 2006, and is exercisable upon the earlier of an initial public offering or a
change in control of the Company, as defined. The number of shares which can be
purchased upon exercise of the warrant is 142,105. For financial reporting
purposes, the warrant has been valued at $450,000 based on the estimated fair
value of the Class B Common, and was recorded as original issue discount on the
Term Loan.
Upon completion of the Company's initial public offering, a portion of the net
proceeds were used to repay the outstanding Term Loan. In connection with this
repayment, the Company recorded an extraordinary loss, net of income tax
benefit, in the statement of operations. The extraordinary loss consists of the
write-off of the unamortized deferred financing costs and the unamortized
discount on the Term Loan.
F-13
<PAGE> 37
The Company's long-term debt is comprised of the following:
<TABLE>
<CAPTION>
September 30
--------------------------
1995 1996
------------- ---------
<S> <C> <C>
Note payable to a bank, interest at 7.5%,
collateralized by the assets of the
Company and the personal guarantees of
the Founders (repaid on May 24, 1996) $ 350,000 $ --
Note payable to a bank, interest at 9.5%,
collateralized by all assets of the Company
(repaid on May 24, 1996) 441,667 --
Other 5,444 --
------------- ---------
797,111 --
Less- Current portion (205,006) --
------------- ---------
$ 592,105 $ --
============= =========
</TABLE>
5. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
September 30
------------------------------
1995 1996
------------- -------------
<S> <C> <C>
Payroll and related benefits $ 751,315 $ 663,555
Telecommunications expense 393,480 435,300
Other 61,431 1,310,402
------------- -------------
$ 1,206,226 $ 2,409,257
============= =============
</TABLE>
6. CAPITALIZED LEASE OBLIGATIONS:
The Company has various capitalized lease obligations payable to several finance
companies. The obligations mature between 1997 and 1998, and are collateralized
by computer and other equipment with an aggregate cost of $186,121 as of
September 30, 1996.
F-14
<PAGE> 38
Minimum future lease payments and imputed interest on the obligations under the
capital leases, together with the present value of the net minimum lease
payments as of September 30, 1996, are as follows:
<TABLE>
<S> <C>
Years Ending September 30,
1997 $ 48,045
1998 1,808
--------
Total minimum lease payments 49,853
Less- Imputed interest (2,103)
--------
Present value of net minimum lease payments 47,750
Less- Current portion (45,632)
--------
$ 2,118
========
</TABLE>
7. LOANS PAYABLE TO FOUNDERS:
The Founders made long-term unsecured loans to the Company. There were no
repayment terms established on these loans, which were subordinated to bank debt
and bore interest at a variable rate. These loans were repaid in connection with
the payment of the final redemption price adjustment in August 1996 (see Note
3).
8. INCOME TAXES:
As a result of the sale of Preferred and Common Stock, the Company's S
Corporation status was terminated on May 24, 1996, and a net deferred income tax
liability of $241,500 was recorded as additional income tax expense on that
date. The net income tax benefit for the year ended September 30, 1996, consists
of a deferred federal benefit of $1,262,376 and deferred state benefit of
$287,210. The income tax benefit reflects a deferred tax asset recorded based
upon the realizability of the net operating loss carryforward. The deferred tax
asset takes into account the Company's ability to generate taxable income
sufficient to realize the net operating loss before its expiration. For state
income tax purposes, the loss carryforward is limited to three years and
$1,000,000 per year.
F-15
<PAGE> 39
The net deferred income tax assets represent the tax effect of the cumulative
differences between the financial reporting and income tax bases of certain
assets and liabilities, as follows:
<TABLE>
<CAPTION>
September 30
------------------------------
1995 1996
------------- -------------
<S> <C> <C>
Current deferred income tax asset (liability):
Other nondeductible expenses $ -- $ 23,027
Net operating loss carryforward -- 1,059,403
Cash basis of accounting (61,000) 29,410
------------- -------------
(61,000) 1,111,840
------------- -------------
Noncurrent deferred income tax asset (liability):
Cash basis of accounting -- 58,820
Depreciation of property and equipment -- (284,082)
Other nondeductible expenses (54,823)
Net operating loss -- 180,000
------------- -------------
-- (100,085)
------------- -------------
Net deferred income tax asset (liability) $ (61,000) $ 1,011,755
============= =============
</TABLE>
9. COMMITMENTS AND CONTINGENCIES:
The Company leases its offices and communications and computer equipment under
noncancellable operating leases which expire through 2001. The rental payments
for fiscal 1994, 1995 and 1996 were approximately $753,000, $911,000 and
$808,000, respectively.
Aggregate minimum rental payments under the noncancellable operating leases at
September 30, 1996, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $1,113,321
1998 765,431
1999 406,394
2000 245,714
2001 194,714
----------
$2,725,574
==========
</TABLE>
The Company entered into agreements with its telephone long distance carriers
which currently range from one to three years, which provide for, among other
things, annual minimum purchases and termination penalties. The annual minimum
purchases under such agreements total approximately $1,377,000.
The Founders have entered into employment contracts which expire on May 31,
1999. The contracts require an annual base compensation of $200,000 per employee
subject to an annual inflation adjustment, plus a discretionary annual bonus not
expected to exceed 20%
F-16
<PAGE> 40
of base compensation. In addition, in 1996 the Founders each received a one-time
$3,000,000 bonus based upon the successful completion of the Company's initial
public offering. Payroll taxes of approximately $87,000 were recorded in
connection with the bonus payments.
The Company entered into an agreement with one of the Investors which required
the payment of an annual management fee of $100,000, payable quarterly. The
management agreement was terminated upon completion of the initial public
offering. Beginning at that time, the Investors will provide consulting services
to the Company pursuant to a consulting agreement and will receive annual fees
of $50,000. The consulting agreement expires on May 24, 2001.
From time to time, the Company is involved in certain legal actions arising in
the ordinary course of business. In management's opinion, the outcome of such
actions will not have a material adverse effect on the Company's financial
position, results of operations or liquidity.
10. PROFIT SHARING PLAN:
In fiscal 1995, the Company adopted a defined contribution savings plan
available to substantially all employees under Section 401(k) of the Internal
Revenue Code. Employee contributions are generally limited to 15% of
compensation. On an annual basis, the Company may match a portion of the
participating employee's contribution. The Company's contributions in 1995 and
1996 were $8,317 and $32,852, respectively. Employees are fully vested in their
contributions, while vesting for the Company's contributions occurs ratably over
seven years beginning in year three.
11. STOCK OPTION PLAN:
In 1996 the Company established the 1996 Stock Incentive Plan (the "Plan"),
which reserves 950,000 shares of Common Stock for issuance in connection with a
variety of awards including stock options, stock appreciation rights and
restricted and unrestricted stock grants. The Plan is administered by a
committee, which is comprised of two or more non-employee directors as
designated by the Board of Directors. The committee will determine the price and
other terms upon which awards shall be made. The exercise price of incentive
stock options may not be less than the fair market value of Common Stock on the
date of grant. In September 1996, options to purchase 278,200 shares of Common
Stock were granted under the Plan to employees and directors at an exercise
price of $12.50 per share. No options were exercisable at September 30, 1996.
F-17
<PAGE> 1
Exhibit 10.1
RMH TELESERVICES, INC.
1996 STOCK INCENTIVE PLAN
1. Purpose. RMH Teleservices, Inc., a Pennsylvania corporation
(the "Company"), hereby adopts the RMH Teleservices, Inc. 1996 Stock Incentive
Plan (the "Plan"). The Plan is intended to recognize the contributions made to
the Company by employees (including employees who are members of the Board of
Directors) of the Company or any Affiliate, to provide such persons with
additional incentive to devote themselves to the future success of the Company
or an Affiliate, and to improve the ability of the Company or an Affiliate to
attract, retain, and motivate individuals upon whom the Company's sustained
growth and financial success depend, by providing such persons with an
opportunity to acquire or increase their proprietary interest in the Company
through receipt of rights to acquire the Company's Common Stock, no par value
(the "Common Stock"), and through the transfer or issuance of Common Stock. In
addition, the Plan is intended as an additional incentive to directors of the
Company who are not employees of the Company or an Affiliate to serve on the
Board of Directors and to devote themselves to the future success of the Company
by providing them with an opportunity to acquire or increase their proprietary
interest in the Company through the receipt of rights to acquire Common Stock.
Furthermore, the Plan may be used to encourage consultants and advisors of the
Company to further the success of the Company.
2. Definitions. Unless the context clearly indicates
otherwise, the following terms shall have the following meanings:
(a) "Act" means the Securities Act of 1933.
(b) "Affiliate" means a corporation which is a parent
corporation or a subsidiary corporation with respect to the Company within the
meaning of Section 424(e) or (f) of the Code.
(c) "Award" shall mean a transfer of Common Stock
made pursuant to the terms of the Plan.
(d) "Award Agreement" shall mean the agreement
between the Company and a Grantee with respect to an Award made pursuant to the
Plan.
(e) "Board of Directors" means the Board of Directors
of the Company.
(f) "Change of Control" shall have the meaning as set
forth in Section 9 of the Plan.
(g) "Code" means the Internal Revenue Code of 1986,
as amended.
(h) "Committee" shall have the meaning set forth in
Section 3 of the Plan.
(i) "Common Stock" shall have the meaning set forth
in Section 1 of the Plan.
(j) "Company" means RMH Teleservices, Inc., a
Pennsylvania corporation.
<PAGE> 2
(k) "Disability" shall have the meaning set forth in
Section 22(e)(3) of the Code.
(l) "Employee" means an employee of the Company or an
Affiliate.
(m) "Exchange Act" means the Securities Exchange Act
of 1934, as amended.
(n) "Fair Market Value" shall have the meaning set
forth in Subsection 8(b) of the Plan.
(o) "Grantee" shall mean a person to whom an Award
has been granted pursuant to the Plan.
(p) "ISO" means an Option granted under the Plan
which is intended to qualify as an "incentive stock option" within the meaning
of Section 422(b) of the Code.
(q) "Non-Employee Director" shall mean a member of
the Board of Directors of the Company who is a "non-employee" of the Company
within the meaning of Rule 16b-3.
(r) "Non-qualified Stock Option" means an Option
granted under the Plan which is not intended to qualify, or otherwise does not
qualify, as an "incentive stock option" within the meaning of Section 422(b) of
the Code.
(s) "Option" means either an ISO or a Non-qualified
Stock Option granted under the Plan.
(t) "Optionee" means a person to whom an Option has
been granted under the Plan, which Option has not been exercised and has not
expired or terminated.
(u) "Option Document" means the document described in
Section 8 of the Plan, as applicable, which sets forth the terms and conditions
of each grant of Options.
(v) "Option Price" means the price at which Shares
may be purchased upon exercise of an Option, as calculated pursuant to
Subsection 8(b) of the Plan.
(w) "Rule 16b-3" means Rule 16b-3 promulgated under
the Exchange Act.
(x) "SAR" shall have the meaning set forth in Section
11 of the Plan.
(y) "Section 16 Officers" means any person who is an
"officer" within the meaning of Rule 16a-1(f) promulgated under the Exchange Act
or any successor rule.
(z) "Shares" means the shares of Common Stock of the
Company which are the subject of Options or granted as Awards under the Plan.
3. Administration of the Plan. The Board of Directors may
designate a committee or committees composed of two or more of directors, each
of whom is a Non-Employee Director, to operate and administer the Plan with
respect to all or a designated portion of the participants. Any such committee
designated by the Board of Directors, and the Board of Directors itself in its
-2-
<PAGE> 3
administrative capacity with respect to the Plan, is referred to as the
"Committee." The provisions set forth herein, as it pertains to members of the
Committee, may be administered by the Board of Directors.
(a) Meetings. The Committee shall hold meetings at
such times and places as it may determine, shall keep minutes of its meetings,
and shall adopt, amend and revoke such rules or procedures as it may deem
proper; provided, however, that it may take action only upon the agreement of a
majority of the whole Committee. Any action which the Committee shall take
through a written instrument signed by a majority of its members shall be as
effective as though it had been taken at a meeting duly called and held.
(b) Exculpation. No member of the Board of Directors
shall be personally liable for monetary damages for any action taken or any
failure to take any action in connection with the administration of the Plan or
the granting of Options under the Plan, provided that this Subsection 3(b) shall
not apply to (i) any breach of such member's duty of loyalty to the Company, an
Affiliate, or the Company's shareholders, (ii) acts or omissions not in good
faith or involving intentional misconduct or a knowing violation of law, (iii)
acts or omissions that would result in liability under applicable law, and (iv)
any transaction from which the member derived an improper personal benefit.
(c) Indemnification. Service on the Committee shall
constitute service as a member of the Board of Directors of the Company. Each
member of the Committee shall be entitled, without further act on his or her
part, to indemnity from the Company and limitation of liability to the fullest
extent provided by applicable law and by the Company's Articles of Incorporation
and/or By-laws in connection with or arising out of any action, suit or
proceeding with respect to the administration of the Plan or the granting of
Options thereunder in which he or she may be involved by reason of his or her
being or having been a member of the Committee, whether or not he or she
continues to be such member of the Committee at the time of the action, suit or
proceeding.
(d) Interpretation. The Committee shall have the
power and authority to interpret the Plan and to adopt rules and regulations for
its administration that are not inconsistent with the express terms of the Plan.
Any such actions by the Committee shall be final, binding and conclusive on all
parties in interest.
4. Grants under the Plan. Grants under the Plan may be in the
form of a Non-qualified Stock Option, an ISO or a combination thereof, at the
discretion of the Committee.
5. Eligibility. All Employees, members of the Board of
Directors and consultants and advisors to the Company shall be eligible to
receive Options and Awards hereunder. Consultants and advisors shall be eligible
only if they render bona fide services to the Company unrelated to the offer or
sale of securities; provided, however, that the limitation contained in this
sentence shall not apply to the extent that the inapplicability of such
limitation will not disqualify the Common Stock from being eligible for
registration on Form S-8 (or any successor form) under the Act. The Committee,
in its sole discretion, shall determine whether an individual qualifies as an
employee.
6. Shares Subject to Plan. The aggregate maximum number of
Shares for which Awards or Options may be granted pursuant to the Plan is nine
hundred fifty thousand (950,000). The number of Shares which may be issued under
the Plan shall be further subject to adjustment in accordance with Section 10.
The Shares shall be issued from authorized and unissued Common Stock or Common
Stock held in or hereafter acquired for the treasury of the Company. If an
Option terminates or expires without having been fully exercised for any reason
or if Shares subject to an Award have been conveyed back to the Company pursuant
to the terms of an Award Agreement, the Shares for
-3-
<PAGE> 4
which the Option was not exercised or the Shares that were conveyed back to the
Company may again be the subject of one or more Options or Awards granted
pursuant to the Plan.
7. Term of the Plan. The Plan is effective as of August 20,
1996, the date on which it was adopted by the Board of Directors, subject to the
approval of the Plan within one year after such date by the shareholders in the
manner required by state law. If the Plan is not so approved by the
shareholders, all ISO's granted under the Plan shall be null and void. No ISO
may be granted under the Plan after August 19, 2006.
8. Option Documents and Terms. Each Option granted under the
Plan shall be a Non-qualified Stock Option unless the Option shall be
specifically designated at the time of grant to be an ISO for Federal income tax
purposes. If any Option designated an ISO is determined for any reason not to
qualify as an incentive stock option within the meaning of Section 422 of the
Code, such Option shall be treated as a Non-qualified Stock Option for all
purposes under the provisions of the Plan. Options granted pursuant to the Plan
shall be evidenced by the Option Documents in such form as the Committee shall
from time to time approve, which Option Documents shall comply with and be
subject to the following terms and conditions and such other terms and
conditions as the Committee shall from time to time require which are not
inconsistent with the terms of the Plan.
(a) Number of Option Shares. Each Option Document
shall state the number of Shares to which it pertains. An Optionee may receive
more than one Option, which may include Options which are intended to be ISO's
and Options which are not intended to be ISO's, but only on the terms and
subject to the conditions and restrictions of the Plan. Notwithstanding anything
herein to the contrary, no Optionee shall be granted Options during one fiscal
year of the Company for more than one hundred thousand (100,000) Shares (such
number to be subject to adjustment in accordance with Section 10).
(b) Option Price. Each Option Document shall state
the Option Price which, for a Non-qualified Stock Option, may be less than,
equal to, or greater than the Fair Market Value of the Shares on the date the
Option is granted and, for an ISO, shall be at least 100% of the Fair Market
Value of the Shares on the date the Option is granted as determined by the
Committee in accordance with this Subsection 8(b); provided, however, that if an
ISO is granted to an Optionee who then owns, directly or by attribution under
Section 424(d) of the Code, shares possessing more than ten percent of the total
combined voting power of all classes of stock of the Company or an Affiliate,
then the Option Price shall be at least 110% of the Fair Market Value of the
Shares on the date the Option is granted. If the Common Stock is traded in a
public market, then the Fair Market Value per share shall be, if the Common
Stock is listed on a national securities exchange or included in the NASDAQ
System, the last reported sale price thereof on the relevant date, or, if the
Common Stock is not so listed or included, the mean between the last reported
"bid" and "asked" prices thereof on the relevant date, as reported on NASDAQ or,
if not so reported, as reported by the National Daily Quotation Bureau, Inc. or
as reported in a customary financial reporting service, as applicable and as the
Committee determines. If the Common Stock is not traded in a public market, Fair
Market Value shall be determined in good faith by the Committee.
(c) Exercise. No Option shall be deemed to have been
exercised prior to the receipt by the Company of written notice of such exercise
and (unless arrangements satisfactory to the Company have been made for payment
through a broker in accordance with procedures permitted by Regulation P of the
Federal Reserve Board) of payment in full of the Option Price for the Shares to
be purchased. Each such notice shall specify the number of Shares to be
purchased and shall (unless the Shares are covered by a then current
registration statement or a Notification under Regulation A under the Act),
contain the Optionee's acknowledgment in form and substance satisfactory to the
Company that (a) such Shares are being purchased for investment and not for
distribution or resale (other than
-4-
<PAGE> 5
a distribution or resale which, in the opinion of counsel satisfactory to the
Company, may be made without violating the registration provisions of the Act),
(b) the Optionee has been advised and understands that (i) the Shares have not
been registered under the Act and are "restricted securities" within the meaning
of Rule 144 under the Act and are subject to restrictions on transfer and (ii)
the Company is under no obligation to register the Shares under the Act or to
take any action which would make available to the Optionee any exemption from
such registration, (c) such Shares may not be transferred without compliance
with all applicable federal and state securities laws, and (d) an appropriate
legend referring to the foregoing restrictions on transfer and any other
restrictions imposed under the Option Documents may be endorsed on the
certificates. Notwithstanding the foregoing, if the Company determines that
issuance of Shares should be delayed pending (A) registration under federal or
state securities laws, (B) the receipt of an opinion of counsel satisfactory to
the Company that an appropriate exemption from such registration is available,
(C) the listing or inclusion of the Shares on any securities exchange or an
automated quotation system or (D) the consent or approval of any governmental
regulatory body whose consent or approval is necessary in connection with the
issuance of such Shares, the Company may defer exercise of any Option granted
hereunder until any of the events described in this sentence has occurred.
(d) Medium of Payment. Subject to the terms of the
applicable Option Document, an Optionee shall pay for Shares (i) in cash, (ii)
by certified or cashier's check payable to the order of the Company, or (iii) by
such other mode of payment as the Committee may approve, including payment
through a broker in accordance with procedures permitted by Regulation P of the
Federal Reserve Board. The Optionee may also exercise the Option in any manner
contemplated by Section 11. Furthermore, the Committee may provide in an Option
Document that payment may be made in whole or in part in shares of the Company's
Common Stock held by the Optionee. If payment is made in whole or in part in
shares of the Company's Common Stock, then the Optionee shall deliver to the
Company certificates registered in the name of such Optionee representing the
shares owned by such Optionee, free of all liens, claims and encumbrances of
every kind and having an aggregate Fair Market Value on the date of delivery
that is at least as great as the Option Price of the Shares (or relevant portion
thereof) with respect to which such Option is to be exercised by the payment in
shares of Common Stock, endorsed in blank or accompanied by stock powers duly
endorsed in blank by the Optionee. In the event that certificates for shares of
the Company's Common Stock delivered to the Company represent a number of shares
in excess of the number of shares required to make payment for the Option Price
of the Shares (or relevant portion thereof) with respect to which such Option is
to be exercised by payment in shares of Common Stock, the stock certificate or
certificates issued to the Optionee shall represent (i) the Shares in respect of
which payment is made, and (ii) such excess number of shares. Notwithstanding
the foregoing, the Committee may impose from time to time such limitations and
prohibitions on the use of shares of the Common Stock to exercise an Option as
it deems appropriate.
(e) Termination of Options.
(i) No Option shall be exercisable after the
first to occur of the following:
(A) Expiration of the Option term
specified in the Option Document, which, in the case of an ISO, shall not occur
after (1) ten years from the date of grant, or (2) five years from the date of
grant if the Optionee on the date of grant owns, directly or by attribution
under Section 424(d) of the Code, shares possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of the Company or of
an Affiliate;
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(B) Except to the extent otherwise
provided in an Optionee's Option Document, a finding by the Committee, after
full consideration of the facts presented on behalf of both the Company and the
Optionee, that the Optionee has been engaged in disloyalty to the Company or an
Affiliate, including, without limitation, fraud, embezzlement, theft, commission
of a felony or proven dishonesty in the course of the Optionee's employment or
service, or has disclosed trade secrets or confidential information of the
Company or an Affiliate. In such event, in addition to immediate termination of
the Option, the Optionee shall automatically forfeit all Shares for which the
Company has not yet delivered the share certificates upon refund by the Company
of the Option Price. Notwithstanding anything herein to the contrary, the
Company may withhold delivery of share certificates pending the resolution of
any inquiry that could lead to a finding resulting in a forfeiture;
(C) The date, if any, set by the
Board of Directors as an accelerated expiration date in the event of the
liquidation or dissolution of the Company;
(D) The occurrence of such other
event or events as may be set forth in the Option Document as causing an
accelerated expiration of the Option; or
(E) Except as otherwise set forth in
the Option Document and subject to the foregoing provisions of this Subsection
8(e), three months after the Optionee's employment or service with the Company
or its Affiliates terminates for any reason other than Disability or death or
one year after such termination due to Optionee's Disability or death. With
respect to this Subsection 8(e)(i)(E), the only Options that may be exercised
during the three-month or one-year period, as the case may be, are Options which
were exercisable on the last date of such employment or service and not Options
which, if the Optionee were still employed or rendering service during such
three-month or one-year period, would become exercisable, unless the Option
Document specifically provides to the contrary. The terms of an executive
severance agreement or other agreement between the Company and an Optionee,
approved by the Committee, whether entered into prior or subsequent to the grant
of an Option, which provide for Option exercise dates later than those set forth
in Subsection 8(e)(i) shall be deemed to be Option terms approved by the
Committee and consented to by the Optionee.
(ii) Notwithstanding the foregoing, the
Committee may extend the period during which all or any portion of an Option may
be exercised to a date no later than the Option term specified in the Option
Document pursuant to Subsection 8(e)(i)(A), provided that any change pursuant to
this Subsection 8(e)(ii) which would cause an ISO to become a Non-qualified
Stock Option may be made only with the consent of the Optionee.
(iii) Notwithstanding anything to the
contrary contained in the Plan or an Option Document, an ISO shall be treated as
a Non-qualified Stock Option to the extent such ISO is exercised at any time
after the expiration of the time period permitted under the Code for the
exercise of an ISO.
(f) Transfers. No Option granted under the Plan may
be transferred, except by will or by the laws of descent and distribution except
as otherwise set forth in the Option Document or to the extent that the
Committee otherwise determines.
(g) Limitation on ISO Grants. To the extent that the
aggregate fair market value of the shares of Common Stock (determined at the
time the ISO is granted) with respect to which ISO's under all incentive stock
option plans of the Company or its Affiliates are exercisable for the first
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time by the Optionee during any calendar year exceeds $100,000, such ISO's
shall, to the extent of such excess, be treated as Non-qualified Stock Options.
(h) Other Provisions. Subject to the provisions of
the Plan, the Option Documents shall contain such other provisions including,
without limitation, provisions authorizing the Committee to accelerate the
exercisability of all or any portion of an Option granted pursuant to the Plan,
additional restrictions upon the exercise of the Option or additional
limitations upon the term of the Option, as the Committee shall deem advisable.
(i) Amendment. Subject to the provisions of the Plan,
the Committee shall have the right to amend any Option Document or Award
Agreement issued to an Optionee or Award holder, subject to the Optionee's or
Award holder's consent if such amendment is not favorable to the Optionee or
Award holder, or if such amendment has the effect of changing an ISO to a
Non-Qualified Stock Option, except that the consent of the Optionee or Award
holder shall not be required for any amendment made pursuant to Subsection
8(e)(i)(C) or Section 9 of the Plan, as applicable.
9. Change of Control. In the event of a Change of Control,
the Committee may take whatever actions it deems necessary or desirable with
respect to any of the Options outstanding which need not be treated identically,
including, without limitation, accelerating (a) the expiration or termination
date in the respective Option Documents to a date no earlier than thirty (30)
days after notice of such acceleration is given to the Optionees, or (b) the
exercisability of the Option. Notwithstanding the foregoing, in the event of a
Change of Control, Options granted pursuant to the Plan will become
automatically exercisable in full but only with respect to those Optionees who,
in the good faith determination of the Board of Directors, are likely to have
their relationship with the Company or any Affiliate of the Company terminated
(including constructive termination through a significant decrease in authority,
responsibility or overall total compensation) as a result of such Change of
Control.
A "Change of Control" shall be deemed to have
occurred upon the earliest to occur of the following events:
(i) any "person" as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company, any subsidiary of the
Company, any "person" (as hereinabove defined) acting on behalf of the Company
as underwriter pursuant to an offering who is temporarily holding securities in
connection with such offering, any trustee or other fiduciary holding securities
under an employee benefit plan of the Company, or any "person" (as hereinabove
defined) who, on the date the Plan is effective, shall have been the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of or have voting
control over shares of capital stock of the Company possessing more than thirty
percent (30%) of the combined voting power of the Company's then outstanding
securities) is or becomes the "beneficial owner" (as hereinabove defined),
directly or indirectly, of securities of the Company representing thirty percent
(30%) or more of the combined voting power of the Company's then outstanding
securities;
(ii) during any period of not more than two consecutive years
(not including any period prior to the date the Plan is effective), individuals
who at the beginning of such period constitute the Board of Directors, and any
new director (other than a director designated by a "person" (as hereinabove
defined) who has entered into an agreement with the Company to effect a
transaction described in clause (i), (iii) or (iv) of this Section 9) whose
election by the Board of Directors or nomination for election by the Company's
shareholders was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the beginning of the period or
whose
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<PAGE> 8
election or nomination for election was previously so approved, cease for any
reason to constitute at least a majority thereof;
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation or other legal entity,
other than (1) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than fifty percent (50%) of the
combined voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation or (2) a
merger or consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no "person" (as hereinabove defined) (other
than a "person" who, on the date the Plan is effective, shall have been the
"beneficial owner" (as hereinabove defined) of or have voting control over
shares of capital stock of the Company possessing more than thirty percent (30%)
of the combined voting power of the Company's then outstanding securities)
acquires more than thirty percent (30%) of the combined voting power of the
Company's then outstanding securities;
(iv) the shareholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets (or any
transaction having a similar effect); or
(v) a "change of control" as hereinafter defined by the Board
of Directors for the express purposes of this Plan has occurred.
10. Adjustments on Changes in Capitalization.
(a) In the event that the outstanding Shares are
changed by reason of a reorganization, merger, consolidation, recapitalization,
reclassification, stock split-up, combination or exchange of shares and the like
(not including the issuance of Common Stock on the conversion of other
securities of the Company which are outstanding on the date of grant and which
are convertible into Common Stock) or dividends payable in Shares, an equitable
adjustment shall be made by the Committee in the aggregate number of shares
available under the Plan and in the number of Shares and price per Share subject
to outstanding Options. Unless the Committee makes other provisions for the
equitable settlement of outstanding Options, if the Company shall be
reorganized, consolidated, or merged with another corporation or other legal
entity, or if all or substantially all of the assets of the Company shall be
sold or exchanged, an Optionee shall at the time of issuance of the stock under
such corporate event be entitled to receive upon the exercise of his or her
Option the same number and kind of shares of stock or the same amount of
property, cash or securities as he or she would have been entitled to receive
upon the occurrence of any such corporate event as if he or she had been,
immediately prior to such event, the holder of the number of Shares covered by
his or her Option.
(b) Any adjustment under this Section 10 in the
number of Shares subject to Options shall apply proportionately to only the
unexercised portion of any Option granted hereunder. If fractions of a Share
would result from any such adjustment, the adjustment shall be revised to the
next lower whole number of Shares.
(c) The Committee shall have authority to determine
the adjustments to be made under this Section, and any such determination by the
Committee shall be final, binding and conclusive.
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<PAGE> 9
11. Stock Appreciation Rights (SARs).
(a) In General. Subject to the terms and conditions
of the Plan, the Committee may, in its sole and absolute discretion, grant to an
Optionee the right to surrender an Option to the Company, in whole or in part,
and to receive in exchange therefor payment by the Company of an amount equal to
the excess of the Fair Market Value of the shares of Common Stock subject to
such Option, or portion thereof, so surrendered (determined in the manner
described in section 8(b) as of the date the SARs are exercised) over the
exercise price to acquire such shares (which right shall be referred to as an
"SAR"). Except as may otherwise be provided in an Option Document, such payment
may be made, as determined by the Committee in accordance with subsection 11(c)
below and set forth in the Option Document, either in shares of Common Stock or
in cash or in any combination thereof.
(b) Grant. Each SAR shall relate to a specific Option
granted under the Plan and shall be granted to the Optionee concurrently with
the grant of such Option by inclusion of appropriate provisions in the Option
Document pertaining thereto. The number of SARs granted to an Optionee shall not
exceed the number of shares of Common Stock which such Optionee is entitled to
purchase pursuant to the related Option. The number of SARs held by an Optionee
shall be reduced by (i) the number of SARs exercised under the provisions of the
Option Document pertaining to the related Option, and (ii) the number of shares
of Common Stock purchased pursuant to the exercise of the related Option.
(c) Payment. The Committee shall have sole discretion
to determine whether payment in respect of SARs granted to any Optionee shall be
made in shares of Common Stock, or in cash, or in a combination thereof. If
payment is made in Common Stock, the number of shares of Common Stock which
shall be issued pursuant to the exercise of SARs shall be determined by dividing
(i) the total number of SARs being exercised, multiplied by the amount by which
the Fair Market Value (as determined under section 8(b)) of a share of Common
Stock on the exercise date exceeds the exercise price for shares covered by the
related Option, by (ii) the Fair Market Value of a share of Common Stock on the
exercise date of the SARs. No fractional share of Common Stock shall be issued
on exercise of an SAR; cash may be paid by the Company to the individual
exercising an SAR in lieu of any such fractional share. If payment on exercise
of an SAR is to be made in cash, the individual exercising the SAR shall receive
in respect of each share to which such exercise relates an amount of money equal
to the difference between the Fair Market Value of a share of Common Stock on
the exercise date and the exercise price for shares covered by the related
Option.
(d) Limitations. SARs shall be exercisable at such
times and under such terms and conditions as the Committee, in its sole and
absolute discretion, shall determine; provided, however, that an SAR may be
exercised only at such times and by such individuals as the related Option under
the Plan and the Option Agreement may be exercised.
12. Terms and Conditions of Awards. Awards granted pursuant to
the Plan shall be evidenced by written Award Agreements in such form as the
Committee shall from time to time approve, which Award Agreements shall comply
with and be subject to the following terms and conditions and such other terms
and conditions which the Committee may from time to time require which are not
inconsistent with the terms of the Plan.
(a) Number of Shares. Each Award Agreement shall
state the number of shares of Common Stock to which it pertains.
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<PAGE> 10
(b) Purchase Price. Each Award Agreement shall
specify the purchase price, if any, which applies to the Award. If the Board
specifies a purchase price, the Grantee shall be required to make payment on or
before the date specified in the Award Agreement. A Grantee shall pay for Shares
(i) in cash, (ii) by certified check payable to the order of the Company, or
(iii) by such other mode of payment as the Committee may approve.
(c) Grant. In the case of an Award which provides for
a grant of Shares without any payment by the Grantee, the grant shall take place
on the date specified in the Award Agreement. In the case of an Award which
provides for a payment, the grant shall take place on the date the initial
payment is delivered to the Company, unless the Committee or the Award Agreement
otherwise specifies. Stock certificates evidencing Shares granted pursuant to an
Award shall be issued in the sole name of the Grantee. Notwithstanding the
foregoing, as a precondition to a grant, the Company may require an
acknowledgment by the Grantee as required with respect to Options under Section
8.
(d) Conditions. The Committee may specify in an Award
Agreement any conditions under which the Grantee of that Award shall be required
to convey to the Company the Shares covered by the Award. Upon the occurrence of
any such specified condition, the Grantee shall forthwith surrender and deliver
to the Company the certificates evidencing such Shares as well as completely
executed instruments of conveyance. The Committee, in its discretion, may
provide that certificates for Shares transferred pursuant to an Award be held in
escrow by the Company or an officer of the Company until such time as each and
every condition has lapsed and that the Grantee be required, as a condition of
the Award, to deliver to such escrow agent or Company officer stock powers
covering the Award Shares duly endorsed by the Grantee. Unless otherwise
provided in the Award Agreement, distributions made on Shares held in escrow
will be deposited in escrow, to be distributed to the party becoming entitled to
the Shares on which the distribution was made. Stock certificates evidencing
Shares subject to conditions shall bear a legend to the effect that the Common
Stock evidenced thereby is subject to repurchase or conveyance to the Company in
accordance with an Award made under the Plan and that the Shares may not be sold
or otherwise transferred.
(e) Lapse of Conditions. Upon termination or lapse of
each and every forfeiture condition, if any, the Company shall cause
certificates without the legend referring to the Company's repurchase right (but
with any other legends that may be appropriate) evidencing the Shares covered by
the Award to be issued to the Grantee upon the Grantee's surrender of the
legended certificates held by him or her to the Company.
(f) Rights as Shareholder. Upon payment of the
purchase price, if any, for Shares covered by an Award and compliance with the
acknowledgment requirement of subsection 12(c), the Grantee shall have all of
the rights of a shareholder with respect to the Shares covered thereby,
including the right to vote the Shares and receive all dividends and other
distributions paid or made with respect thereto, except to the extent otherwise
provided by the Committee or in the Award Agreement.
13. Amendment of the Plan. The Board of Directors of the
Company may amend the Plan from time to time in such manner as it may deem
advisable. Nevertheless, the Board of Directors of the Company may not change
the class of individuals eligible to receive an ISO or increase the maximum
number of Shares as to which Options may be granted without obtaining approval,
within twelve months before or after such action, by the shareholders in the
manner required by state law. Notwithstanding anything herein to the contrary,
the Committee may, at its sole discretion, amend the Plan and any outstanding
Option or Award to (i) eliminate any provision it determines is no longer
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<PAGE> 11
required to comply with Rule 16b-3 as a result of revisions to Rule 16b-3 which
are generally effective after the date the Plan is effective or (ii) provide the
holder of the Option or Award an exemption from potential liability under
Section 16(b) of the Exchange Act and the rules and regulations thereunder.
14. No Commitment to Retain. The grant of an Option or Award
pursuant to the Plan shall not be construed to imply or to constitute evidence
of any agreement, express or implied, on the part of the Company or any
Affiliate to retain the Optionee or Grantee as an employee, consultant or
advisor of the Company or any Affiliate, as a member of the Board of Directors
or in any other capacity.
15. Withholding of Taxes. In connection with any event
relating to an Option or Award, the Company shall have the right to (a) require
the recipient to remit or otherwise make available to the Company an amount
sufficient to satisfy any federal, state and/or local withholding tax
requirements prior to the delivery or transfer of any certificate or
certificates for such Shares or (b) take whatever other action it deems
necessary to protect its interests with respect to tax liabilities. The
Company's obligations under the Plan shall be conditioned on the Optionee's or
Grantee's compliance, to the Company's satisfaction, with any withholding
requirement.
16. Interpretation. The Plan is intended to enable
transactions under the Plan with respect to directors to satisfy the conditions
of Rule 16b-3; to the extent that any provision of the Plan would cause a
conflict with such conditions or would cause the administration of the Plan as
provided in Section 3 to fail to satisfy the conditions of Rule 16b-3, such
provision shall be deemed null and void to the extent permitted by applicable
law. This section shall not be applicable if no class of the Company's equity
securities is then registered pursuant to Section 12 of the Exchange Act.
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Exhibit 10.13
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement"), effective as of
this 20th day of August, 1996, is entered into by and between ADVANTA PARTNERS
LP, a Pennsylvania limited partnership ("Advanta Partners"), and RMH
TELESERVICES, INC., a Pennsylvania corporation ("the Company").
WHEREAS, Advanta Partners purchased a substantial portion of
the capital stock of the Company on May 24, 1996, in connection with a
recapitalization of the Company (the "Recapitalization");
WHEREAS, in connection with the Company's Recapitalization,
the Company and Advanta Partners entered into a Management Fee Agreement
pursuant to which the Company agreed to pay Advanta Partners a management fee in
exchange for Advanta Partners' agreement to provide certain consulting services
to the Company;
WHEREAS, the Company intends to complete an initial public
offering of shares of its common stock, no par value, on or about September 15,
1996 (the "IPO"), pursuant to a Registration Statement, File No. 333-07501,
first filed with the U.S. Securities and Exchange Commission on July 3, 1996;
WHEREAS, Advanta Partners and the Company wish to terminate
the Management Fee Agreement and enter an agreement to govern the providing of
consulting services by Advanta Partners to the Company upon completion of the
IPO.
NOW, THEREFORE, in consideration of the foregoing recitals and
the terms and conditions stated below, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, Advanta Partners and
the Company, intending to be legally bound, agree as follows:
SECTION 1: CONSULTING SERVICES TO BE PERFORMED.
In consideration of the fee set forth in Section 2, Advanta
Partners agrees to perform the following services for the Company, upon the
Company's request:
Provide assistance to the Company, including: (i) causing
representatives of Advanta Partners to perform duties as board members and
officers of the Company without separate compensation therefor; and (ii)
providing guidance and advice on such subjects as strategic direction,
budgeting, recruiting, financing, and establishing a management compensation
system.
<PAGE> 2
SECTION 2: FEES.
The Company shall pay an annual fee of $50,000 to Advanta
Partners for the services provided pursuant to this Agreement. Such fee shall be
paid in quarterly installments in arrears, with the first $12,500 installment
being due and payable on September 30, 1996; provided, however, that no such
installment or installments shall be paid if an Event of Default, as that term
is defined in that certain Credit Agreement between the Company and Chemical
Bank, individually and as Agent, dated as of May 24, 1996, shall have occurred
and be continuing; provided, further, that if such Event of Default is
subsequently cured, all such fees that were not paid by reason of the first
proviso herein may be paid on the next installment date or dates to the extent
such payment would not cause an Event of Default.
SECTION 3: EXTRAORDINARY SERVICES.
In the event Advanta Partners is required to perform
extraordinary services, including without limitation, investment banking
services, or undertake an extraordinary project in carrying out those services
contemplated in Section 1, Advanta Partners and the Company shall, in good
faith, negotiate an additional fee that shall be paid to Advanta Partners by the
Company, and in the event the parties are unable to agree upon the amount of
such extra fee, Advanta Partners shall not be obligated to perform such
extraordinary services.
SECTION 4: OUT-OF-POCKET EXPENSES.
All reasonable and necessary out-of-pocket expenses incurred
by Advanta Partners in carrying out its foregoing obligations under Section 1
shall be reimbursed by the Company promptly upon demand by Advanta Partners.
SECTION 5: ADVANTA PARTNERS' PERFORMANCE STANDARD.
Advanta Partners shall perform all of its obligations set
forth in Section 1 with all due care, in a commercially reasonable manner, and
in a manner consistent with its own administrative practices and standards or
the standards prevailing in the telemarketing industry, whichever standard is
more stringent.
SECTION 6: COMPLIANCE WITH THE LAW.
Each party represents, warrants and covenants to the other
party that all of its practices and acts in connection with this Agreement are,
and at all times will be, in compliance with all applicable federal, state and
local laws, statutes, rules and regulations.
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SECTION 7: LIABILITY.
(a) Indemnification. The Company agrees to indemnify
and hold Advanta Partners harmless from all claims and liabilities (including
attorney's fees) incurred or assessed against it in connection with the
performance of services, except such as may arise from Advanta Partner's own
negligent action, negligent failure to act, willful misconduct or willful
violation of applicable law.
(b) No Personal Liability. No liability shall attain
in favor of one party to this Agreement against any officer, director or
employee of the other party. The party attaining such liability agrees to look
solely to the assets of the other party for satisfaction.
SECTION 8: TERM.
This Agreement shall extend for a term commencing with the IPO
and ending at midnight on May 24, 2001.
SECTION 9: INDEPENDENT CONTRACTOR STATUS OF Advanta Partners.
The relationship of Advanta Partners to the Company is that of
independent contractor. Nothing herein shall be construed as constituting a
partnership, joint venture or agency between Advanta Partners and the Company.
SECTION 10: CONFIDENTIALITY.
It is understood between the parties hereto that during the
term of this Agreement, each of the parties may be dealing with confidential
information and processes that are the other party's property, used in the
course of its respective business. Each of the parties agrees that it will not
intentionally disclose any such confidential information to anyone, directly or
indirectly, without the prior consent of the other party.
SECTION 11: MISCELLANEOUS.
(a) No Assignment. This Agreement may not be assigned
by either party without the prior written consent of the other party, which,
because of the nature of the parties' respective obligations hereunder, may be
declined by such party for any reason or for no reason whatsoever.
(b) Notices. Any notice or other communication
required or permitted to be given under this Agreement must be in writing and
will be deemed effective when
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<PAGE> 4
delivered in person or sent by facsimile, cable, telegram or telex, or by
overnight courier or registered or certified mail, postage prepaid, return
receipt requested, to the following addresses:
If to Advanta Partners:
Advanta Partners LP
Five Horsham Business Center
300 Welsh Road
Horsham, PA 19044
Attention: Senior Managing Director
Telephone: (215) 830-6450
Telecopier: (215) 830-6499
If to the Company:
RMH Teleservices, Inc.
40 Morris Avenue
Bryn Mawr, PA 19010
Attention: Chief Executive Officer
Telephone: (610) 520-5300
Telecopier: (610) 520-5354
(c) Amendment. This Agreement may be amended, and the
observance of any term hereof may be waived (either prospectively or
retroactively and either generally or in a particular instance) only by written
amendment signed by authorized representatives of the parties hereto.
(d) Choice of Law. This Agreement will be governed by
and construed in accordance with the laws of the Commonwealth of Pennsylvania
without regard to doctrines of conflicts of laws. Any and all legal actions
brought by one party against the other shall be brought in the state or federal
courts of the Commonwealth of Pennsylvania.
(d) Entire Agreement. This Agreement constitutes the
entire agreement between the parties hereto and supersedes any and all prior
oral or written understandings and agreements between the parties regarding the
subject matter addressed in this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered, effective as of the date specified
at the beginning hereof.
ADVANTA PARTNERS LP RMH TELESERVICES, INC.
By AP Capital, Inc., general partner
By:/s/ Mitchell L. Hollin By: /s/ MarySue Lucci Hansell
------------------------------- -------------------------------
Name: Mitchell L. Hollin Name: MarySue Lucci Hansell
Title: Vice President Title: President
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Exhibit 10.15
AGREEMENT ON POST-CLOSING ADJUSTMENTS
This AGREEMENT is entered into as of the 20th day of August,
1996, among RMH TELESERVICES, INC., a Pennsylvania corporation formerly known as
RMH Sales and Marketing Consulting, Inc. ("the Company"), Raymond J. Hansell
("Hansell"), MarySue Lucci Hansell ("Lucci"), ADVANTA PARTNERS LP, a
Pennsylvania limited partnership and GLENGAR INTERNATIONAL INVESTMENTS LIMITED,
a limited liability company organized in the British Virgin Islands. Hansell and
Lucci are sometimes referred to herein as the "Principals."
BACKGROUND
WHEREAS, on May 24, 1996, the parties to this Agreement
entered into a Recapitalization and Stock Purchase Agreement (the
"Recapitalization Agreement") (Capitalized terms not otherwise defined herein
shall have the meanings ascribed to them in the Recapitalization Agreement. All
capitalized section headings referred to herein shall refer to the appropriate
sections of the Recapitalization Agreement).
WHEREAS, on the Closing Date, the Company paid the Principals
$15,436,975 in cash, reflecting the Cash Redemption Price, as adjusted in
accordance with Section 2.2(c) less $500,000 in funds deposited in escrow
pursuant to Section 10.5, as determined based upon the Preliminary Closing
Balance Sheet as required under Section 2.2(c).
WHEREAS, in accordance with the procedures set forth in
Section 2.2(c), the parties hereto have agreed that the balance sheet prepared
after Closing by Asher & Company, Ltd. as of and for the period ending on the
Closing Date shall constitute the Closing Balance Sheet and now wish that the
closing adjustments to the Cash Redemption Price be finally reconciled.
WHEREAS, pursuant to the Closing Balance Sheet and the
workpapers relevant to the calculation of adjustments, all attached hereto as
Exhibit A, the actual Cash Redemption Price is $436,980 greater than the
estimated amount paid to the Principals at the Closing Date. The parties hereto
now wish that the Company pay such difference to the Principals as required by
the terms of the Recapitalization Agreement.
WHEREAS, the Recapitalization Agreement contemplated that the
Company would repay any and all amounts of outstanding shareholder loans,
including loans by the Principals to the Company (the "Principal Loans"), and
that the Principals would repay any indebtedness of the Principals to the
Company (the "Company Loans") at or prior to the Closing Date; however, neither
the Principal Loans nor the Company Loans were satisfied at or prior to the
Closing Date.
WHEREAS, the Closing Balance Sheet reveals that as of the
Closing Date the amount of the outstanding indebtedness of the Company under the
Principal Loans exceeded the
<PAGE> 2
amount of indebtedness of the Principals under the Company Loans by $56,117 (the
"Net Loan Amount").
WHEREAS, the parties hereto wish to resolve any remaining
issues with respect certain covenants regarding tax matters set forth in Section
9.3.
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, the parties to this Agreement, intending
to be legally bound, hereby agree as follows:
1. Agreement on Facts. The recitals to this Agreement are
hereby agreed to and incorporated herein by reference.
2. Payment of Balance of Cash Redemption Price. Subject to the
terms of this Agreement, the Company shall pay to the Principals the aggregate
of Four Hundred Thirty-six Thousand Nine Hundred Eighty Dollars ($436,980) by
check or wire transfer of funds to an account or accounts designated by the
Principals. All of the parties hereto agree and acknowledge that such payment is
in full satisfaction of the Company's obligation to pay the Cash Redemption
Price under the Recapitalization Agreement.
3. Repayment of Shareholder Loans. Subject to the terms of this
Agreement, the Company shall pay to the Principals the aggregate of Fifty-six
Thousand One Hundred Seventeen Dollars ($56,117) representing the Net Loan
Amount, by check or wire transfer of funds to an account or account designated
by the Principals. All of the parties hereto agree and acknowledge that such
payment by the Company of the Net Loan Amount is in full satisfaction of the
Company's obligation to repay any and all outstanding principal and interest
with respect to the Principal Loans and the Principal's obligation to repay any
and all outstanding principal and interest with respect to the Company Loans.
4. Agreement With Respect to Tax Distributions. Each of the
parties hereto agrees and acknowledges that the Company has fully satisfied its
obligations with respect the Tax Distribution under the terms of Section 9.3(b)
and has no further obligation to distribute, as a dividend or otherwise, any
amount to the Principals in connection therewith. Each of the parties hereto
further agrees and acknowledges that the Principals remain liable to the Company
for the Transition Tax in accordance with the terms of Section 9.3(c).
5. Effective Time. This Agreement shall be effective upon
execution by all of the parties hereto (the "Effective Date"). All amounts to be
paid hereunder shall be paid in the manner contemplated herein as soon as
practicable but not later than the close of business on the third day following
the Effective Date.
2
<PAGE> 3
6. Miscellaneous.
(a) Entire Agreement. This Agreement contains the
entire understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
(b) Binding Nature of Agreement. This Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and assigns.
(c) Controlling Law. This Agreement and all questions
relating to its validity, interpretation, performance and enforcement
(including, without limitation, provisions concerning limitations of actions),
shall be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania.
(d) Execution in Counterparts. This Agreement may be
executed in any number of counterparts, each of which shall be deemed to be an
original as against any party whose signature appears thereon, and all of which
shall together constitute one and the same instrument. This Agreement shall
become binding when one or more counterparts hereof, individually or taken
together, shall bear the signatures of all of the parties reflected hereon as
the signatories.
(e) Provisions Separable. The provisions of this
Agreement are independent of and separable from each other, and no provision
shall be affected or rendered invalid or unenforceable by virtue of the fact
that for any reason any other or others of them may be invalid or unenforceable
in whole or in part.
(f) Paragraph Headings. The paragraph headings in
this Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
(g) Exhibits. All exhibits attached hereto are
incorporated by reference into and made a part of this Agreement.
(h) Number of Days. In computing the number of days
for purposes of this Agreement, all days shall be counted, including Saturdays,
Sundays and holidays; provided, however, that if the final day of any time
period falls on a Saturday, Sunday or holiday on which federal banks are or may
elect to be closed, then the final day shall be deemed to be the next day which
is not a Saturday, Sunday or such holiday.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed and
delivered this Agreement as of the date first above written.
<TABLE>
<S> <C>
/s/ Raymond J. Hansell GLENGAR INTERNATIONAL
- -------------------------- INVESTMENTS LIMITED
Raymond J. Hansell
By: /s/ Ian C. Crosby
--------------------------
Ian C. Crosby
Director: Montblanc (Directors) Limited
Sole corporate director: Glengar
/s/ Mary Sue Lucci Hansell International Investments Limited
- --------------------------
MarySue Lucci Hansell
RMH TELESERVICES, INC
ADVANTA PARTNERS LP
By: AP CAPITAL, INC., managing
general partner By: /s/ Anthony P. Brenner
--------------------------
By: /s/ Mitchell L. Hollin Anthony P. Brenner,
---------------------------------- Chairman
Mitchell L. Hollin, Vice President
</TABLE>
4
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Teleservices Management Company, a Delaware corporation
Teleservices Technology Company, a Delaware corporation
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 10,046,647
<SECURITIES> 0
<RECEIVABLES> 5,551,734
<ALLOWANCES> 2,500
<INVENTORY> 0
<CURRENT-ASSETS> 17,035,252
<PP&E> 8,894,041
<DEPRECIATION> 3,438,700
<TOTAL-ASSETS> 22,554,761
<CURRENT-LIABILITIES> 4,137,138
<BONDS> 0
0
0
<COMMON> 48,637,756
<OTHER-SE> (30,322,336)
<TOTAL-LIABILITY-AND-EQUITY> 22,554,761
<SALES> 0
<TOTAL-REVENUES> 32,316,039
<CGS> 0
<TOTAL-COSTS> 34,968,133
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,892,996
<INCOME-PRETAX> (4,545,090)
<INCOME-TAX> (1,222,163)
<INCOME-CONTINUING> (3,322,927)
<DISCONTINUED> 0
<EXTRAORDINARY> 582,084
<CHANGES> 0
<NET-INCOME> (3,905,011)
<EPS-PRIMARY> (.80)
<EPS-DILUTED> (.80)
</TABLE>
