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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, 1997
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 8, 1997, 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 8, 1997 was approximately $40.6 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 19, 1998 (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>
1. Business.................................................................................................1
2. Properties...............................................................................................8
3. Legal Proceedings........................................................................................8
4. Submissions of Matters to a Vote of Security Holders.....................................................8
Executive Officers of the Company.........................................................................9
PART II
5. Market for Registrant's Common Equity and Related Shareholder Matters...................................10
6. Selected Financial Data.................................................................................11
7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................12
8. Financial Statements and Supplementary Data.............................................................18
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................18
PART III
10. Directors and Executive Officers of the Registrant.....................................................18
11. Executive Compensation.................................................................................18
12. Security Ownership of Certain Beneficial Owners and Management.........................................19
13. Certain Relationships and Related Transactions.........................................................19
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................................19
</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, financial services,
telecommunications, and utility 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"),
JCPenney Life Insurance Company ("JCPenney") and AT&T/Universal Card Services
("AT&T") over six 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 growth rate and its retention of key
clients. RMH's net revenue has increased 42.1% over the last year.
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. In connection with the Recapitalization, the Company
also issued 1,000,000 shares of Series A Preferred Stock and a $4,000,000
subordinated Promissory Note (the "Founders' Note") to the Founders. 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".
In connection with the Initial Public Offering, Advanta Partners and Glengar
redeemed their shares of Series B Preferred Stock for an aggregate redemption
payment of $6,500,000 plus accrued dividends of $182,356 and the Founders
converted their Series A Preferred Stock and Founders' Note into an aggregate of
4,000,000 shares common stock.
The Company's revenue and income from operations for fiscal 1997 were
$45.9 million and $4.7 million, respectively. This represents increases of 42.1%
and 37.4% respectively, compared to fiscal 1996, after excluding special
one-time expenses in fiscal 1996.
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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. An increasing percentage
of teleservices business is currently being outsourced to independent 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.
Historically, the call center services industry has been extremely
fragmented and continues to include a large number of small, independent
organizations. However, over the past several years, the industry has further
segmented itself by the public or secondary offerings of common stock by ten
companies. Consequently, the sector has further defined itself by those
companies that have been able to raise monies in the public marketplace.
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 six 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
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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.
As of September 30, 1997, the Company employed 161 insurance agents
licensed to sell insurance in a total of 46 states. The Company's significant
relationships in this industry include those with MMIG, AT&T, and JCPenney,
which were responsible for 51.6%, 6.9%, and 15.5%, respectively, of the
Company's revenues for fiscal 1997. The Company originated its relationship with
MMIG over nine years ago and originated its relationship with JCPenney, and AT&T
over six years ago. The Company's aggregate revenues from this group of clients
have grown respectively, each year since fiscal 1991. In fiscal 1997, 74.0% 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 1997, 11.4% 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. On behalf of several telecommunication
companies, the Company completed several of these outbound campaigns during the
current fiscal year.
Utilities. The expected deregulation of the public utilities industry
has created several opportunities for the Company in fiscal 1997, and it
believes that future potential campaigns may emerge in the future.
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.
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During fiscal 1997, the Company opened a new call center facility in
Delran, NJ, that is capable of handling both outbound and inbound call volume
and has been designed utilizing the latest telephony technology. This technology
includes client server technology with fully featured PC workstations coupled
with Aspect's automated call distributor. In addition, the Company currently
operates an inbound customer service center in its Lansdowne, PA, call center
facility. During 1997, the Company grew its inbound business by servicing
Companies in the telecommunications and financial services industries, in
addition to servicing its existing customer base.
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,
especially among telecommunications and utility 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 has the potential for 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. Though this business has not
grown dramatically during 1997, the Company believes that the business-to-
business marketplace is embracing teleservices and opportunities may present
themselves in future periods.
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 his 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.
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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, 1997, the Company employed 161 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 attempts to target base TSR compensation at higher levels than is paid
by other businesses competing for the same labor pool. In addition, the Company
offers 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
69.5% 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. As of September 30, 1997, the Company employed 1,937
persons, of whom more than 1,650 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,
1997, the Company's management information systems department consisted of 49
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.
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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. During fiscal 1997, the Company continued to
expand its focus and invest its capital in the inbound teleservices marketplace.
Its tenth call center, which opened in March, 1997, includes client server
technology with fully featured PC workstations coupled with Aspect's automated
call distributor and Comverse's digital recording technology.
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 Group, Inc., and SITEL
Corporation, to name a few. 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 Telephone Consumer Protection Act (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.
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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 Telemarketing and Consumer Fraud and Abuse
Prevention Act of 1990 (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 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.
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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, 1997, 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 June 1997 106
Harrisburg, PA October 1996 80 March 1997 96
Delran, NJ March 1997 100 May 1997 130
York, PA June 1997 80 June 1997 80
-----
TOTAL 1,124
=====
</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
On September 17, 1997, the Company commenced an arbitration with the
American Arbitration Association in Philadelphia, Pennsylvania, against Kipany
Productions Ltd. seeking damages of over $1.4 million from Kipany for its breach
of contract and unjust enrichment. Kipany responded to the arbitration by filing
an action in the United States District Court for the Eastern District of New
York, seeking to enjoin the arbitration. That action was transferred to the
United States District Court for the Eastern District of Pennsylvania. The
Company commenced legal proceedings in the Court of Common Pleas of Montgomery
County, Pennsylvania, against Kipany to compel arbitration. The Montgomery
County proceedings were subsequently removed to the United States District Court
for the Eastern District of Pennsylvania.
On December 2, 1997, Kipany filed an answer and counterclaims in which
it denied all of the Company's allegations and counterclaimed for its alleged
damages including "not less than $3 million" for the damage allegedly suffered
to its business reputation and its business relationship with two of its
customers. The Company and legal counsel believe that Kipany's defenses and
counterclaims are frivolous and without merit and will continue to pursue its
original claims and to defend vigorously against Kipany's counterclaims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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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.............. 48 Vice Chairman of the Board and Chief Executive Officer
MarySue Lucci................... 49 Director, President and Chief Operating Officer
Michael J. Scharff.............. 51 Executive Vice President
Richard C. Altus................ 39 Executive Vice President and Chief Financial Officer
Robert Berwanger................ 41 Executive Vice President of Operations
Richard P. Keenan............... 51 Vice President of Sales and Marketing
William D. Mulvihill............ 56 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 and was named an Executive Vice President in February
1997. 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.
9
<PAGE> 12
Mr. Berwanger joined the Company as Senior Vice President of Operations
in March 1997 and was named an Executive Vice President in December 1997. For 14
years prior to joining the Company, Mr. Berwanger was employed by American
Transtech, a wholly-owned teleservices subsidiary of AT&T where he most recently
served as Director, New Business Development. Mr. Berwanger's tenure at AT&T
included oversight of American Transtech's outbound telemarketing operation,
start-up and oversight of a large-scale call center in Canada, and management of
the AT&T multi-lingual call centers in San Jose, California.
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 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.
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 fiscal year ended September 30, 1997.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fourth Fiscal Quarter of 1996 (from September 18, 1996)........... $17.25 $4.88
First Fiscal Quarter of 1997....................................... $17.00 $6.13
Second Fiscal Quarter of 1997...................................... $ 8.25 $5.00
Third Fiscal Quarter of 1997....................................... $ 8.50 $4.88
Fourth Fiscal Quarter of 1997...................................... $ 9.13 $6.25
</TABLE>
As of December 12, 1997, there were 37 shareholders 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. The Company sold no securities during fiscal 1997.
10
<PAGE> 13
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,
------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................................... $ 10,292 $ 17,105 $ 25,545 $ 32,316 $45,937
-------- -------- -------- -------- -------
Operating expenses:
Cost of services ........................ 7,642 13,286 18,210 22,212 31,749
Selling, general and administrative (1).. 2,076 3,007 5,312 6,669 9,469
Special bonuses (2) ..................... -- -- -- 6,087 --
-------- -------- -------- -------- -------
Total operating expenses .... 9,718 16,293 23,522 34,968 41,218
-------- -------- -------- -------- -------
Operating income (loss) .................... 574 812 2,023 (2,652) 4,719
Interest income (expense) (3) .............. (137) (170) (261) (1,893) 473
-------- -------- -------- -------- -------
Income (loss) before income taxes and
extraordinary item ...................... 437 642 1,762 (4,545) 5,192
Income taxes (benefit) (4) ................. -- 40 21 (1,222) 1,825
-------- -------- -------- -------- -------
Income (loss) before extraordinary item .... 437 602 1,741 (3,323) 3,367
Extraordinary item, net of taxes (5) ....... -- -- -- 582 --
-------- -------- -------- -------- -------
Net income (loss) ........... 437 602 1,741 (3,905) 3,367
Preferred stock dividends .................. -- -- -- 308 --
-------- -------- -------- -------- -------
Net income (loss) available to Common
shareholders (4) ........................ $ 437 $ 602 $ 1,741 $ (4,213) $ 3,367
======== ======== ======== ======== =======
Earnings per share ......................... -- -- -- -- $ .41
=======
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
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,
----------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 282 $ 829 $1,061 $12,899 $17,384
Total assets 3,743 5,576 8,757 22,555 25,286
Long-term debt, less current maturities 20 355 592 --- ---
Capitalized lease obligations, less current maturities 525 623 436 2 ---
Loans payable to shareholders 125 125 133 --- ---
Shareholders' equity 1,325 1,927 3,668 18,315 21,683
</TABLE>
(1) Selling, general and administrative expenses include Founders'
compensation of $386,000, $660,000, $766,000, $598,000 and $400,000 for
fiscal 1993 through fiscal 1997, 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.
11
<PAGE> 14
(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 7 of Notes to Financial
Statements, for information concerning computation and relizability 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
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
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.
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 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 and inbound teleservices
to major corporations in the insurance, financial services, telecommunications,
and utility 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 the Recapitalization which
included the purchase of a significant equity interest in the Company by Advanta
Partners LP. 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% Founders Note and redeemed an aggregate of 6,500,000 shares of Series B
Preferred Stock held by Advanta Partners and Glengar.
12
<PAGE> 15
The Company's business has grown rapidly, resulting in increases in
revenues and operating income (exclusive of any special compensation expenses
and one-time charges) during each of the last three fiscal years. The increase
in revenues from $25.5 million in fiscal 1995 to $45.9 million in fiscal 1997,
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 and telecommunications 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 increased from $2,023,000 or 7.9% of revenues in
fiscal 1995 to $4,719,000 or 10.3% of revenues in fiscal 1997.
The increase in operating income (exclusive of any special compensation
expenses and one-time charges) 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 71.3% of
revenues in fiscal 1995 to 69.1% of revenues in fiscal 1997. 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, negotiated more favorable long distance rates and maintained its
hourly wage rates over this time period. In 1997, Cost of Services increased as
a percentage of revenues compared with 1996 as the factors causing Cost of
Services to decline were offset by pricing pressures and the costs of opening
new call centers that were under utilized in 1997. 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.
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 $1,112,000 in fiscal 1996.
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,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Cost of services 71.3 68.8 69.1
Selling, general and administrative (1) 20.8 20.6 20.6
Special bonuses (2) --- 18.8 ---
------ ------ -------
Total operating expense 92.1 108.2 89.7
------ ------ -------
Operating income (loss) 7.9 (8.2) 10.3
Interest income (expense) (3) (1.0) (5.9) 1.0
------ ------ -------
Income (loss) before income tax (benefit) and extraordinary item 6.9 (14.1) 11.3
Income taxes (benefit) .1 (3.8) 4.0
Extraordinary item, net of tax benefit (4) --- 1.8 ---
Net income (loss) 6.8% (12.1)% 7.3%
====== ====== =======
</TABLE>
13
<PAGE> 16
- -------------------------
(1) Compensation to Founders represents approximately 3%, 2% and 1% of
revenues for fiscal 1995, fiscal 1996 and fiscal 1997, 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.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1996
Revenues. Revenues increased to $45.9 million in fiscal 1997 from $32.3
in fiscal 1996, an increase of $13.6 million or 42.1%. Of such increase in
revenues, approximately $9.0 million was attributable to increased calling
volumes from existing clients, $4.5 million to new clients in the
telecommunications industry, $1.7 million to new clients in the financial
services industry and $800,000 to new clients in other industries, which
together offset any decreases in revenues from other existing clients. To meet
the demands of increased call volumes, the Company added a total of 364
workstations during the year, spread across three new call centers in
Harrisburg, PA, Delran, NJ, and York, PA, and expanded capacity in three
existing call centers by 58 workstations.
Cost of Services. Cost of services increased to $31.7 million in fiscal
1997 from $22.2 million in fiscal 1996. As a percentage of revenues, cost of
services increased to 69.1% in fiscal 1997 from 68.8% in fiscal 1996. This
increase was the result of specific pricing pressures incurred in its insurance
business coupled with the costs of opening three new call centers, during the
year, which were less than fully utilized over the twelve-month period. The
Company anticipates that cost of services, as a percentage of revenues, may
increase during the next year to the degree that large volume opportunities
warrant the Company offering appropriate pricing discounts, to the extent that
the Company requires a longer period of time to generate acceptable levels of
utilization at its new call centers, and/or the Company experiences upward
pressures on hourly wages as a result of tighter or more competitive labor
markets.
Selling, General, and Administrative. Selling, general and
administrative expenses increased to $9.5 million in fiscal 1997 from $6.7
million in fiscal 1996. As a percentage of revenues, selling, general and
administrative expenses remained fixed at 20.6% during fiscal years 1997 and
1996. The dollar increase was primarily the result of increasing staffing and
operating costs required to support both the growth in the Company's revenues
and the on-going requirements of its customers with respect to technology and
programming requirements.
Interest Income (Expense). Interest income was $473,000 for fiscal 1997
and was earned by investing the remaining proceeds of the Company's initial
public offering in short term investments. Interest expense was $1,893,000 for
fiscal 1996 of which $1,625,000 relates to certain interest incurred as a result
of the Company's Recapitalization and interest paid on the Founders' Note.
Income Tax Expense (Benefit). Income tax expense was $1.8 million for
fiscal 1997 and represents income taxes based upon its effective tax rate. This
tax rate is reflective of both the federal tax rate in effect and those state
tax rates in effect where the Company does business coupled with certain tax
planning strategies implemented in fiscal 1996. During 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 $1,549,000 in fiscal 1996.
14
<PAGE> 17
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 26.5%. 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 $261,000 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 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
$1,549,000 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 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.
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.
15
<PAGE> 18
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 has been and will continue to 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.
On March 21, 1997, the Company entered into a new $4 million line of
credit facility (the "Credit Line") with PNC Bank (the "Bank"). The Credit Line
replaces the Company's former Term Loan and Credit Facility originated in
conjunction with the Recapitalization. The Credit Line expires on April 1, 1998,
or such later date, if extended by the Bank, and outstanding balances bear
interest either at the Company's option at the LIBOR rate plus 95 basis points
or at the Bank's prime rate minus fifty basis points. The Credit Line is secured
by all of the assets of the Company and contains financial covenants and certain
restrictions on the Company" ability to incur additional debt or dispose of its
assets. As of September 30, 1997, the Company had no draws outstanding on the
Credit Line.
This Credit Line compares favorably with the former Term Loan and
Credit Facility which bore interest at either the LIBOR rate plus 250 to 300
basis points or the prime rate plus 100 to 150 basis points and required an
annual fee of $15,000 and an annual commitment fee of one-half of 1% on the
average unused portion of the Revolver. Although total borrowing capability is
$4 million under the Company's Credit Line versus $6 million under its former
revolver, the Company believes that the existing line will be sufficient to
finance its current operations at least through the end of fiscal 1998.
Under a separate agreement dated February 22, 1997, with PNC Leasing
Corporation, the Company has up to $6 million available for purposes of leasing
call center equipment. The $6 million commitment expires on December 31, 1997,
and requires that such leases meet the accounting definition of an operating
lease with rent to be paid over a period not to exceed sixty months. As of
September 30, 1997, the Company has financed $3.2 million of equipment purchases
under this facility.
Cash provided by operating activities was approximately $2.5 million
for the fiscal year ended 1997 compared to cash used by operations of $1.7
million for the same period in 1996. The $2.5 million in cash provided by
operations in 1997, as compared to the cash used of $1.7 million in 1996, was
the result of the Company's net income in 1997 being further increased by
certain non-cash charges which were then partially offset by the Company's
growth in accounts receivable coupled with its decrease in accounts payable.
The Company's teleservices operations will continue to require
significant capital expenditures. Capital expenditures, including capitalized
leases, in applicable periods, were $2.4 million in fiscal 1995, $2.9 million in
fiscal 1996, and $1.1 million in fiscal 1997. The Company expects to spend
approximately $4.0 million on capital expenditures in fiscal 1998, primarily for
the enhancement of technology used throughout its call center operations and, if
warranted, additional call center expansion. However, in conjunction with such
expenditures, the Company is evaluating certain lease versus buy decisions and
may decide to lease such assets under 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 credit line, will be sufficient to finance its current operations and
planned capital expenditures at least through fiscal 1998.
16
<PAGE> 19
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth statement of operations data for each of
the four quarters of fiscal 1996 and 1997, 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,
1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- --------- -------- -------- -------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues .............................. $ 7,278 $ 7,506 $ 8,778 $ 8,754 $9,749 $11,322 $12,698 $12,168
------- ------- ------- -------- ------ ------- ------- -------
Operating expenses:
Cost of services ................. 5,127 5,309 5,889 5,887 6,623 7,580 8,858 8,688
Selling, general and admin ....... 1,575 1,545 1,688 1,861 2,032 2,437 2,553 2,447
Special bonuses .................. -- -- -- 6,087 -- -- -- --
------- ------- ------- -------- ------ ------- ------- -------
Total operating expenses .. 6,702 6,854 7,577 13,835 8,655 10,017 11,411 11,135
------- ------- ------- -------- ------ ------- ------- -------
Operating income (loss) .............. 576 652 1,201 (5,081) 1,094 1,305 1,287 1,033
Interest income (expense) ............. (75) (71) (227) (1,520) 111 102 133 127
------- ------- ------- -------- ------ ------- ------- -------
Income (loss) before income
taxes (benefit) .................. $ 501 $ 581 $ 974 $ (6,601) $1,205 $ 1,407 $ 1,420 $ 1,160
======= ======= ======= ======== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues .............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Cost of services ................. 70.5 70.7 67.1 67.2 67.9 67.0 69.8 71.4
Selling, general and admin ....... 21.6 20.6 19.2 21.3 20.8 21.5 20.1 20.1
Special bonuses .................. -- -- -- 69.5 -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses .. 92.1 91.3 86.3 158.0 88.7 88.5 89.9 91.5
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) .............. 7.9 8.7 13.7 (58.0) 11.3 11.5 10.1 8.5
Interest income (expense) ............. (1.0) (1.0) (2.6) (17.4) 1.1 .9 1.1 1.0
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income
taxes (benefit) .................. 6.9% 7.7% 11.1% (75.4)% 12.4% 12.4% 11.2% 9.5%
===== ===== ===== ===== ===== ===== ===== =====
</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. While the
effects of seasonality on the Company's business have historically been obscured
by its growing revenues, the Company's business tends to be slower in the fourth
quarter of its fiscal year due to a certain segment of its workforce turning
over coupled with a slowdown in client marketing programs during the summer
months.
17
<PAGE> 20
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 million 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 $909,000 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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-19 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
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 1998 Proxy Statement (the "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.
18
<PAGE> 21
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:
<TABLE>
<CAPTION>
(1) Financial Statements. Page
----
<S> <C>
Reports of Independent Accountants............................................F-1
Consolidated Balance Sheets...................................................F-2
Consolidated Statements of Operations.........................................F-3
Consolidated Statements of Shareholders' Equity ..............................F-4
Consolidated Statements of Cash Flows.........................................F-5
Notes to Consolidated Financial Statements....................................F-6
</TABLE>
(2) Financial Statement Schedules.
Schedule II - Valuation & Qualifying Accounts for the Three Years
Ended September 30, 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Additions Balance at
Beginning Charged to End of
of Period Expense Deductions (1) Period
--------- ------- ---------- ------
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts:
September 30, 1997 $10,000 $27,000 $ - $37,000
September 30, 1996 $47,000 $38,000 $75,000 $10,000
September 30, 1995 $ 3,000 $44,000 $ - $47,000
</TABLE>
(1) Represents accounts written off against the allowance.
(3) Exhibits
See attached
19
<PAGE> 22
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 15, 1997 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:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ MarySue Lucci
- ----------------------------
MarySue Lucci President December 15, 1997
/s/ Richard C. Altus
- ----------------------------
Richard C. Altus Chief Financial Officer December 15, 1997
(principal Financial and
Accounting Officer
/s/ William A. Rosoff
- ----------------------------
William A. Rosoff Chairman December 15, 1997
- ----------------------------
Derek Lubner Director December 15, 1997
/s/ Gary Neems
- ----------------------------
Gary Neems Director December 15, 1997
/s/ Herbert Kurtz
- ----------------------------
Herbert Kurtz Director December 15, 1997
/s/ David P. Madigan
- ----------------------------
David P. Madigan Director December 15, 1997
</TABLE>
20
<PAGE> 23
RMH TELESERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants
Consolidated Balance Sheets - September 30, 1997 and 1996
Consolidated Statements of Operations - For the Years
Ended September 30, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity - For the
Years Ended September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - For the Years
Ended September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RMH Teleservices, Inc.:
We have audited the accompanying consolidated balance sheets of RMH
Teleservices, Inc. (a Pennsylvania corporation) and subsidiaries as of September
30, 1997 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended September 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RMH Teleservices, Inc. and
subsidiaries as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
December 5, 1997
<PAGE> 25
RMH TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30
------------------------------------
ASSETS 1997 1996
---------------- ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,882,000 $ 10,047,000
Marketable securities 5,135,000 --
Accounts receivable, net of allowance for doubtful
accounts of $37,000 and $10,000 7,926,000 5,549,000
Prepaid expenses and other current assets 755,000 328,000
Deferred income taxes -- 1,112,000
---------------- ----------------
Total current assets 20,698,000 17,036,000
---------------- ----------------
PROPERTY AND EQUIPMENT:
Communications and computer equipment 7,198,000 7,273,000
Furniture and fixtures 1,354,000 1,112,000
Leasehold improvements 802,000 509,000
---------------- ----------------
9,354,000 8,894,000
Less- Accumulated depreciation and amortization
(4,878,000) (3,439,000)
Net property and equipment 4,476,000 5,455,000
---------------- ----------------
OTHER ASSETS 112,000 64,000
---------------- ----------------
$ 25,286,000 $ 22,555,000
================ ================
</TABLE>
<TABLE>
<CAPTION>
September 30
------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
---------------- ----------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of capitalized lease obligations
$ 8,000 $ 46,000
Accounts payable 583,000 1,682,000
Accrued expenses 2,379,000 2,409,000
Deferred income taxes 344,000 --
---------------- ----------------
Total current liabilities 3,314,000 4,137,000
---------------- ----------------
CAPITALIZED LEASE OBLIGATIONS -- 2,000
---------------- ----------------
DEFERRED INCOME TAXES 289,000 100,000
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, 10,000,000 shares
authorized, none issued and outstanding
-- --
Common stock, no par value, 20,000,000 shares
authorized, 8,120,000 shares issued and
outstanding 48,638,000 48,638,000
Common stock warrant outstanding 450,000 450,000
Accumulated deficit (27,405,000) (30,772,000)
---------------- ----------------
Total shareholders' equity 21,683,000 18,316,000
---------------- ----------------
$ 25,286,000 $ 22,555,000
================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 26
RMH TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended
September 30
----------------------------------------------------------
1997 1996 1995
--------------- ---------------- ----------------
<S> <C> <C> <C>
REVENUES $ 45,937,000 $ 32,316,000 $ 25,545,000
--------------- ---------------- ----------------
OPERATING EXPENSES:
Cost of services 31,749,000 22,212,000 18,210,000
Selling, general and administrative 9,469,000 6,669,000 5,312,000
Special bonuses -- 6,087,000 --
--------------- ---------------- ----------------
Total operating expenses 41,218,000 34,968,000 23,522,000
--------------- ---------------- ----------------
Operating income (loss) 4,719,000 (2,652,000) 2,023,000
INTEREST INCOME (EXPENSE) 473,000 (1,893,000) (261,000)
--------------- ---------------- ----------------
Income (loss) before income taxes (benefit) and
extraordinary item 5,192,000 (4,545,000) 1,762,000
INCOME TAXES (BENEFIT) 1,825,000 (1,222,000) 21,000
--------------- ---------------- ----------------
Income (loss) before extraordinary item 3,367,000 (3,323,000) 1,741,000
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, net of $327,000 tax benefit
-- 582,000 --
--------------- ---------------- ----------------
NET INCOME (LOSS) 3,367,000 (3,905,000) 1,741,000
PREFERRED STOCK DIVIDENDS -- 308,000 --
--------------- ---------------- ----------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
$ 3,367,000 $ (4,213,000) $ 1,741,000
=============== ================ ================
NET INCOME PER SHARE $ .41
===============
WEIGHTED AVERAGE SHARES OUTSTANDING (Note 2)
8,262,000
===============
PRO FORMA DATA (Note 2):
Historical loss before income tax benefit and
extraordinary item $ (4,545,000)
Pro forma income tax benefit (1,636,000)
Extraordinary item, net of tax 582,000
Preferred stock dividends 308,000
Pro forma net loss available to Common shareholders
$ (3,799,000)
================
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 4,749,000
================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 27
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, 1994 10,000,000 $ 80,000 -- $ --
Net income -- -- -- --
------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1995 10,000,000 80,000 -- --
Distribution of accounts receivable -- -- -- --
Sale of Class A and Class B Common stock 1,720,427 3,279,000 1,279,573 2,438,000
Redemption of Class A Common stock (8,500,000) (68,000) -- --
Reclassification of Redeemable Class A
Common stock outside of shareholders' equity (1,500,000) (12,000) -- --
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 2,438,000 (1,279,573) (2,438,000)
Conversion of Series A Preferred stock to Common stock
80,000 539,000 -- --
Conversion of Founders' Note to Common stock 320,000 3,200,000 -- --
Initial public offering of Common stock,
net of expenses 3,220,000 36,317,000 -- --
Redemption of Series B Preferred stock -- -- -- --
Net loss -- -- -- --
Dividends on Series A and Series B Preferred stock -- -- -- --
------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1996 8,120,000 48,638,000 -- --
Net income -- -- -- --
------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1997 8,120,000 $ 48,638,000 -- $ --
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Common Retained Total
Stock Earnings Shareholders'
Warrants (Deficit) Equity
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1994 $ -- $ 1,847,000 $ 1,927,000
Net income -- 1,741,000 1,741,000
------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1995 -- 3,588,000 3,668,000
Distribution of accounts receivable -- (4,600,000) (4,600,000)
Sale of Class A and Class B Common stock -- -- 5,717,000
Redemption of Class A Common stock -- (20,068,000) (20,136,000)
Reclassification of Redeemable Class A
Common stock outside of shareholders' equity -- (2,853,000) (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
-- -- 539,000
Conversion of Founders' Note to Common stock -- -- 3,200,000
Initial public offering of Common stock,
net of expenses -- -- 36,317,000
Redemption of Series B Preferred stock -- (2,626,000) (2,626,000)
Net loss -- (3,905,000) (3,905,000)
Dividends on Series A and Series B Preferred stock -- (308,000) (308,000)
------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1996 450,000 (30,772,000) 18,316,000
Net income -- 3,367,000 3,367,000
------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1997 $ 450,000 $(27,405,000) $ 21,683,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 28
RMH TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
September 30
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,367,000 $ (4,213,000) $ 1,741,000
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities-
Depreciation and amortization 1,439,000 1,089,000 786,000
Deferred income taxes 1,645,000 (1,021,000) 21,000
Extraordinary loss on early extinguishment of debt, net -- 582,000 --
Imputed interest and dividends -- 186,000 --
Amortization of deferred financing costs -- 10,000 --
Imputed interest on Founders' Note -- 1,136,000 --
Loss on disposal of equipment -- -- 73,000
Changes in operating assets and liabilities--
Accounts receivable (2,377,000) (1,100,000) (1,784,000)
Prepaid expenses and other current assets (427,000) (145,000) (18,000)
Other assets (48,000) 41,000 (22,000)
Accounts payable (1,099,000) 555,000 332,000
Accrued expenses (30,000) 1,203,000 593,000
------------ ------------ ------------
Net cash provided by (used in) operating activities 2,470,000 (1,677,000) 1,722,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,118,000) (2,775,000) (2,197,000)
Purchases of marketable securities (6,135,000) -- --
Maturities of marketable securities 1,000,000 -- --
------------ ------------ ------------
Net cash used in investing activities (6,253,000) (2,775,000) (2,197,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net borrowings (repayments) on lines of credit -- (975,000) 275,000
Proceeds from long-term debt -- 15,100,000 500,000
Repayments on long-term debt -- (15,897,000) (183,000)
Repayments on capitalized lease obligations (40,000) (848,000) (312,000)
Proceeds from refinanced equipment 658,000 -- --
Deferred financing costs -- (505,000) --
Borrowings from Founders -- 1,006,000 5,000
Repayments to Founders -- (1,105,000) --
Proceeds from sale of Preferred and Common stock -- 9,500,000 --
Redemption of Common stock -- (17,112,000) --
Distribution to Founders -- (4,600,000) --
Redemption of Preferred stock -- (6,500,000) --
Net proceeds from initial public offering -- 36,317,000 --
Dividends paid -- (204,000) --
------------ ------------ ------------
Net cash provided by financing activities 618,000 14,177,000 285,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(3,165,000) 9,725,000 (190,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 10,047,000 322,000 512,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,882,000 $ 10,047,000 $ 322,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 29
RMH TELESERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BACKGROUND:
RMH Teleservices, Inc. (the Company) provides outbound and inbound teleservices
to major corporations in the insurance, financial services, telecommunications
and utilities 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 3.2
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.
Cash and Cash Equivalents
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, 1997 consist of $5,693,000 invested in domestic money market
accounts.
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 such limits. Management believes that it is not exposed to
any significant credit risks on its cash accounts.
<PAGE> 30
Marketable Securities
Investments in marketable securities are categorized as either trading,
available-for-sale, or held-to-maturity. On September 30, 1997, marketable
securities consisted of debt securities of corporate commercial paper with
contractual maturities of less than one year which are being held to maturity.
The debt securities are stated at amortized cost.
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:
Computer equipment 5 years
Communications equipment 5-7 years
Furniture and fixtures 7 years
Leasehold improvements Lesser of lease term or useful
life
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 $66,000,
with accumulated depreciation of $33,000 and $20,000 as of September 30, 1997
and 1996, respectively.
During fiscal 1997, the Company entered into a refinancing transaction under
which certain of the Company's telecommunications equipment was sold at the
assets net book value of $658,000. Concurrently, the Company entered into a
five-year operating lease for the equipment.
Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," effective October 1, 1996. SFAS No. 121 requires that
long-lived assets to be held and used or disposed of by an entity be reviewed
for impairment whenever events or circumstances indicate that the carrying
amount of an asset may not be recoverable. An impairment is recognized to the
extent that the sum of undiscounted estimated future cash flows expected to
result from use of the assets is less than the carrying value. As of September
30, 1997, management has evaluated the Company's asset base, under the
guidelines established by SFAS No. 121, and believes that no impairment has
occurred.
Revenue Recognition
The Company recognizes revenues on programs as services are performed, generally
based on hours incurred.
<PAGE> 31
Advertising and Promotion
Costs associated with advertising and promotion are generally charged to expense
when incurred. Advertising and promotion expense was $182,000, $174,000 and
$187,000 in fiscal 1997, 1996, and 1995, 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 7).
The Company applies SFAS No. 109, "Accounting for Income Taxes," which requires
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.
Major Customers and Concentration of Credit Risk
The Company is dependent on several large customers for a significant portion of
its revenues. Two customers accounted for 51.6% and 15.5% of revenues for the
year ended September 30, 1997. Three customers accounted for 45.0%, 17.6% and
12.2% of revenues for the year ended September 30, 1996. Four customers
accounted for 29.2%, 18.8%, 14.6% and 12.7% of revenues for the year ended
September 30, 1995. 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 7.1%, 11.2% and 8.3% of revenues for the years ended
September 30, 1997, 1996 and 1995, respectively. As of September 30, 1997 and
1996, $503,000 and $690,000, respectively, were due from this customer and
included in accounts receivable in the accompanying consolidated balance sheets.
In fiscal 1997, 1996 and 1995, revenues from customers within the insurance
industry accounted for 74.0%, 74.8% and 59.3% of revenues, respectively, and
customers within the financial services industry accounted for 11.4%, 19.7% and
39.7% of revenues, respectively. In addition, during fiscal 1997, customers
within the telecommunications industry accounted for 12.8% of revenues.
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.
<PAGE> 32
At September 30, 1997, the accounts receivable from the customers that represent
a single credit risk were $4,684,000.
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.
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 marketable securities and
capitalized lease obligations approximates fair value at September 30, 1997 and
1996, respectively.
Net Income per Common Share
The Company utilizes the treasury stock method to compute net income per Common
share. Net income per Common share (primary net income per Common share) is
computed using the weighted average number of Common shares and Common share
equivalents (stock options and warrants) outstanding. Net income per Common
share, assuming full dilution (fully diluted net income per Common share), is
based upon an increased number of shares that would be outstanding assuming
exercise of stock options and warrants when the Company's stock price at the end
of the period is higher than the average price within the respective period. If
the inclusion of Common stock equivalents has an anti-dilutive effect in the
aggregate, it is excluded from the net income per share calculation. In fiscal
1997, the weighted average shares outstanding for primary net income per share
were 8,262,000. Shares used to calculate fully diluted net income per Common
share were not materially different from those used to calculate primary net
income per Common share.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share," which supersedes APB 15. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share for complex capital
structures on the face of the statements of operations. According to SFAS No.
128, basic earnings per share, which replaces primary earnings per share, is
calculated by dividing net income available to Common shareholders by the
weighted average number of Common shares outstanding for the period. Diluted
earnings per share, which replaces fully diluted earnings per share, reflects
the potential dilution from the exercise or conversion of securities into Common
stock, such as stock options. SFAS No. 128 is required to be adopted for the
Company's financial statements for the period ended December 31, 1997; earlier
application is not permitted. The adoption of SFAS No. 128 will not have a
material effect on the Company's earnings per share calculation.
<PAGE> 33
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.
Supplemental Cash Flow Information
For the years ended September 30, 1997, 1996 and 1995, the Company paid interest
of $3,000, $1,993,000 and $253,000, respectively. For the years ended September
30, 1997, 1996 and 1995, the Company paid income taxes of $103,000, $82,000 and
$2,000, respectively. There were no new capital leases entered into during
fiscal 1997. Capitalized lease obligations of $105,000 and $221,000, were
incurred on equipment leases entered into in fiscal 1996 and 1995, respectively.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS No. 129,
"Disclosure of Information about Capital Structure." This statement establishes
standards for disclosing information about an entity's capital structure and is
effective for periods ending after December 15, 1997. Management believes that
implementation of this standard will not have a material effect on the Company's
financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements and requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is required to be adopted for the Company's
fiscal year ending September 30, 1999. The adoption of this pronouncement is
expected to have no impact on the Company's financial position or results of
operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." This
statement establishes additional standards for segment reporting in the
financial statements and is effective for fiscal years beginning after December
15, 1997. Management believes that SFAS No. 131 will not have a material effect
on the Company's financial statements.
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
<PAGE> 34
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.
Common Stock Redemption
On May 24, 1996, the Company redeemed 8,500,000 shares of Class A Common for
$20,136,000, as follows:
Cash payment $ 16,002,000
Final redemption price adjustment
(paid in August 1996) 437,000
Issuance of 6%, $3,000,000 subordinated note payable to
Founders (the Founders' Note) 2,023,000
Issuance of 1,000,000 shares of 6%, Series A Preferred
524,000
Deferred tax liability for difference in basis of
Founders' Note 477,000
Transaction costs 673,000
-------------
$ 20,136,000
-------------
The face amounts of the Founders' Note and Series A Preferred were discounted at
estimated market rates of 14% and 15% for interest and dividends, respectively,
on similar-type instruments. The original issue discounts were 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 collected 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 $1,136,000 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
<PAGE> 35
into 80,000 shares of Common stock at the offering price and accrued dividends
of $22,000 were paid.
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:
Series B Preferred stock $ 3,783,000
Class A Voting Common stock 3,279,000
Class B Non-Voting Common stock 2,438,000
-------------
$ 9,500,000
=============
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
$2,717,000 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 $182,000.
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:
On May 24, 1996, the Company and its shareholders entered into an agreement with
a bank (the Credit Agreement), which provided the Company with a $14,000,000
term loan (the Term Loan) and $6,000,000 in revolving credit loans (the
Revolver). The Company incurred $505,000 in financing costs, which were deferred
and were to be amortized over the term of the Credit Agreement. The borrowings
on 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.
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 fully exercisable. 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.
<PAGE> 36
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.
On March 21, 1997, the Company entered into a new credit facility with a bank
(the Credit Facility), consisting of a line of credit, which replaces the
previous Credit Agreement and related Revolver. The credit facility is a
$4,000,000 revolving line of credit that expires on April 1, 1998. There were no
borrowings outstanding as of September 30, 1997. Borrowings bear interest at
either a base rate, or euro-rate option, as selected by the Company and is
payable either monthly under the base rate option or on the last day of the
related euro-rate interest period. The bank has a security interest in
essentially all assets of the Company and the credit facility provides for
certain covenants. 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 restrictive financial covenants,
which include levels of tangible net worth and a ratio related to debt service.
The Company did not incur interest expense under the Credit Agreement or Credit
Facility for the year ended September 30, 1997. Interest expense under the
Credit Agreement for the year ended September 30, 1996 was $470,000.
5. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
September 30
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Payroll and related benefits $ 1,738,000 $ 1,234,000
Telecommunications expense 308,000 435,000
Other 333,000 740,000
------------- -------------
$ 2,379,000 $ 2,409,000
============= =============
</TABLE>
6. CAPITALIZED LEASE OBLIGATIONS:
The Company has various capitalized lease obligations payable to several finance
companies. The obligations mature in 1998, and are collateralized by computer
and other equipment with an aggregate cost of $66,000 as of September 30, 1997.
The interest portion of the minimum future lease payments is $1,000.
7. 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 $242,000 was recorded as additional income tax expense on that
date.
<PAGE> 37
Net income tax expense (benefit) for the years ended September 30, is as
follows:
1997 1996
----------- -----------
Current:
Federal $ 89,000 $ --
State 91,000 --
----------- -----------
180,000 --
----------- -----------
Deferred:
Federal 1,571,000 (1,262,000)
State 74,000 (287,000)
----------- -----------
1,645,000 (1,549,000)
----------- -----------
$ 1,825,000 $(1,549,000)
=========== ===========
A reconciliation of the U.S. Federal Income Tax rate to the effective income tax
rate is as follows:
<TABLE>
<CAPTION>
For the Year Ended
September 30
---------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
Federal statutory rate 34.0% 34.0%
Income not subject to corporate taxes due to
S Corporation status -- 3.7
Reinstatement of deferred taxes upon
conversion to C Corporation status -- (11.3)
State taxes 3.2 5.3
Other (2.0) (3.3)
--------------- --------------
35.2% 28.4%
=============== ==============
</TABLE>
<PAGE> 38
Deferred income tax assets and liabilities are classified as current and
noncurrent based on the financial reporting classification of the related assets
and liabilities which gave rise to the temporary difference. Significant
components of the deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
September 30
-----------------------------
1997 1996
------------- ------------
<S> <C> <C>
Current deferred income tax asset (liability):
Other nondeductible expenses $ (517,000) $ 23,000
Net operating loss carryforward 106,000 1,059,000
Cash basis of accounting 67,000 30,000
------------- ------------
(344,000) 1,112,000
------------- ------------
Noncurrent deferred income tax asset (liability):
Cash basis of accounting -- 59,000
Depreciation of property and equipment (379,000) (284,000)
Other nondeductible expenses -- (55,000)
Net operating loss carryforward 90,000 180,000
------------- ------------
(289,000) (100,000)
------------- ------------
Net deferred income tax asset (liability) $ (633,000) $ 1,012,000
============= ============
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases its offices and communications and computer equipment under
noncancellable operating leases which expire through 2002. The rental payments
for fiscal 1997, 1996 and 1995, were approximately $1,681,000, $808,000 and
$911,000, respectively.
Aggregate minimum rental payments under the noncancellable operating leases at
September 30, 1997, are as follows:
<TABLE>
<S> <C>
1998 $ 2,369,000
1999 1,857,000
2000 1,720,000
2001 1,676,000
2002 920,000
---------------
$ 8,542,000
===============
</TABLE>
The Company has an agreement with a bank which provides up to $6 million for
leasing call center equipment. The commitment expires on December 31, 1997 and
the leases must be operating in nature. As of September 30, 1997, the Company
has financed $3.2 million of equipment under this agreement.
<PAGE> 39
Purchase Commitments
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 $2,400,000.
Employment Agreements
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% 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.
Management Fees
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 are to 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.
Litigation
Since 1995 the Company has had a relationship with Kipany Productions, Ltd.
(Kipany), an independent third party entity that arranges marketing campaigns on
behalf of its clients. In April 1997, Kipany requested the Company to provide
certain telemarketing services in connection with marketing campaigns Kipany had
contracted to provide for two of its telecommunication clients. The calls for
the campaign began on June 2, 1997 and ended on July 28, 1997. For services
performed during this period, the Company billed Kipany $2,227,000, of which
$728,000 was paid and $1,499,000 remains outstanding.
On September 17, 1997, the Company filed a Demand for Arbitration along with
other legal filings, for purposes of seeking the balances due on its outstanding
invoices, attorneys' fees, arbitration costs and other consequential damages. On
October 13, 1997, attorneys representing Kipany notified the Company that they
were filing a complaint seeking injunctive relief with respect to the
arbitration claiming that the Company did not have a contract with Kipany. In
addition, Kipany filed a counterclaim against the Company on December 5, 1997
claiming damages resulting from execution of the campaign.
Management and legal counsel are confident that the evidence suggests that a
legally enforceable contract existed and, therefore, any disputes arising from
this work should be settled in arbitration. Based upon the facts that are
available at this time, management and legal counsel are confident that the
outstanding amount of $1,499,000 is properly due and
<PAGE> 40
payable in full. Management does not currently expect the ultimate resolution of
these actions to have a material adverse effect on the Company's financial
position.
From time to time, the Company is involved in certain other 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.
9. PROFIT SHARING PLAN:
The Company has 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 fiscal 1997, 1996 and 1995 were $36,000, $33,000
and $8,000, respectively. Employees are fully vested in their contributions,
while vesting in the Company's contributions occurs ratably over seven years
beginning in year three.
10. 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.
Information relative to the Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Price Exercise Price Aggregate
Options (Per Share) (Per Share) Proceeds
------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Balance as of September 30, 1995 -- $ -- $ -- $ --
Granted 278,200 $ 12.50 $ 12.50 3,477,000
Exercised -- $ -- $ -- --
Terminated (6,000) $ 12.50 $ 12.50 (75,000)
--------------- ----------------- ------------- -------------
Balance as of September 30, 1996 272,200 $ 12.50 $ 12.50 3,402,000
Granted 13,100 $ 7.00-$12.50 $ 8.30 109,000
Exercised -- $ -- $ -- --
Terminated (30,180) $ 12.50 $ 12.50 (377,000)
--------------- ----------------- ------------- --------------
Balance as of September 30, 1997 255,120 $ 7.00-$12.50 $ 12.28 $ 3,134,000
=============== =============== ============= ==============
Options exercisable as of $ 12.50
=============
September 30, 1997 85,300
===============
</TABLE>
<PAGE> 41
The weighted average remaining contractual life of all options outstanding at
September 30, 1997 is 9.0 years.
The following table summarizes information relating to the Plan at September 30,
1997 based upon each exercise price:
<TABLE>
<CAPTION>
Weighted Weighted
Weighted Average Average
Average Exercise Exercise
Range of Options Remaining Price of Options Price of
Exercise Outstanding at Contractual Outstanding Exercisable at Exercisable
Prices September 30, Life Options September 30, Options
(Per Share) 1997 (Years) (Per Share) 1997 (Per Share)
- ---------------- ------------------ --------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$7.00 -$ 7.75 13,100 9.5 $ 7.18 -- $ --
$ 12.50 242,020 9.0 $ 12.50 85,300 $ 12.50
</TABLE>
The Company accounts for its option plan under APB Opinion No. 25, "Accounting
for Stock Issued to Employees," under which no compensation cost has been
recognized. In 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair
value based method of accounting for stock-based compensation plans. This
statement also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. SFAS No. 123
requires that an employer's financial statements include certain disclosures
about stock-based employee compensation arrangements regardless of the method
used to account for the plan. Had the Company recognized compensation cost for
its stock option plan consistent with the provisions of SFAS No. 123, the
Company's net income and net income per share in 1997 would have decreased and
the Company's net loss and pro forma net loss per Common share in 1996 would
have increased to the following pro forma amounts:
Year Ended
September 30
------------------------------
1997 1996
------------- -------------
Net Income (Loss):
As reported $ 3,367,000 $ (4,213,000)
============= =============
Pro forma $ 2,907,000 $ (4,226,000)
============= =============
Pro Forma Net Income (Loss) per
Common share:
As reported $ .41 $ (.80)
============= =============
Pro forma $ .35 $ (.89)
============= =============
Since the SFAS No. 123 method of accounting has not been applied to options
granted prior to October 1, 1995, the pro forma compensation cost disclosed
above may not be representative of that to be expected in future years.
<PAGE> 42
The weighted average fair value of the stock options granted during 1997 and
1996 was $3.89 and $8.62, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:
1997 1996
------------- ----------
Risk-free interest rate 7.0% 6.9%
Volatility 60.0% 60.0%
Expected dividend yield 0.0% 0.0%
Expected life 7.5 years 7.5 years
<PAGE> 43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RMH Teleservices, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements for RMH Teleservices, Inc. and have issued our
report thereon dated December 5, 1997. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule of valuation and qualifying accounts is presented for the purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Philadelphia Pennsylvania
December 5, 1997
<PAGE> 44
RMH TELESERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged Balance at
Beginning to End of
of Period Expense Deductions (1) Period
---------- -------- ----------- --------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
September 30, 1997 $ 10,000 $ 27,000 $ - $ 37,000
============= ============ ============= ============
September 30, 1996 $ 47,000 $ 38,000 $ 75,000 $ 10,000
============= ============ ============= ============
September 30, 1995 $ 3,000 $ 44,000 $ - $ 47,000
============= ============ ============= ============
</TABLE>
(1) Represents accounts written off against the allowance.
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
Exhibit
No.
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 (incorporated by reference to the
Company's Registration Statement on Form S-1, File No.
333-07501).
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 Letter Agreement with PNC Bank, N.A., dated March 21, 1997
(incorporated by reference to the Company's Form 10-Q filed
for the period ended March 31, 1997).
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 (incorporated by reference to the
Company's Registration Statement on Form S-1, No. 333-07501).
10.15 Agreement on Post-Closing Adjustments, among the Company,
Advanta Partners, the Founders and Glengar dated August 20,
1996 (incorporated by reference to the Company's Registration
Statement on Form S-1, No. 333-07501).
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 (incorporated by reference to
the Company's Form 10-K filed for the year ended September 30,
1996).
* 27.1 Financial Data Schedule for year ended September 30, 1997.
</TABLE>
* Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 6,882,000
<SECURITIES> 5,135,000
<RECEIVABLES> 7,963,000
<ALLOWANCES> 37,000
<INVENTORY> 0
<CURRENT-ASSETS> 20,698,000
<PP&E> 9,354,000
<DEPRECIATION> 4,878,000
<TOTAL-ASSETS> 25,286,000
<CURRENT-LIABILITIES> 3,314,000
<BONDS> 0
0
0
<COMMON> 48,638,000
<OTHER-SE> (27,405,000)
<TOTAL-LIABILITY-AND-EQUITY> 25,286,000
<SALES> 0
<TOTAL-REVENUES> 45,937,000
<CGS> 0
<TOTAL-COSTS> 41,218,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,192,000
<INCOME-TAX> 1,825,000
<INCOME-CONTINUING> 3,367,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,367,000
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
</TABLE>
