<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: DECEMBER 31, 1997
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)
(610) 520-5300
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all report(s) 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 ______
-----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 8,120,000 shares of Common
Stock outstanding as of February 9, 1998.
<PAGE>
INDEX TO FORM 10-Q
RMH Teleservices, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets,
December 31, 1997 and September 30, 1997 ................... 3
Consolidated Statements of Operations for the
three months ended December 31, 1997 and 1996 ............... 4
Consolidated Statements of Cash Flows for the
three months ended December 31, 1997 and 1996 ............... 5
Notes to Consolidated Financial Statements .................. 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............... 8
PART II. OTHER INFORMATION ......................................... 12
</TABLE>
2
<PAGE>
RMH TELESERVICES, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1997 1997
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,664,000 $ 6,882,000
Marketable securities 7,272,000 5,135,000
Accounts receivable, net of allowance
for doubtful accounts of $37,000 9,631,000 7,926,000
Prepaid expenses and other current 1,144,000 755,000
assets ----------- -----------
Total current assets 19,711,000 20,698,000
----------- -----------
PROPERTY AND EQUIPMENT 9,937,000 9,354,000
Less - accumulated depreciation and
amortization (5,243,000) (4,878,000)
----------- -----------
Net property and equipment 4,694,000 4,476,000
----------- -----------
OTHER ASSETS 108,000 112,000
----------- -----------
$24,513,000 $25,286,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND December 31, September 30,
SHAREHOLDERS' EQUITY 1997 1997
- ------------------------------------ ------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of capitalized lease
obligations $ 5,000 $ 8,000
Accounts payable 546,000 583,000
Accrued expenses 1,103,000 2,379,000
Deferred income taxes 344,000 344,000
------------ ------------
Total current liabilities 1,998,000 3,314,000
------------ ------------
DEFERRED INCOME TAXES 289,000 289,000
------------ ------------
SHAREHOLDERS' EQUITY:
Common Stock 48,638,000 48,638,000
Common Stock warrant outstanding 450,000 450,000
Accumulated deficit (26,862,000) (27,405,000)
------------ ------------
Total shareholders' equity 22,226,000 21,683,000
------------ ------------
$ 24,513,000 $ 25,286,000
============ ============
</TABLE>
The accompanying notes and the notes to the consolidated financial statements
included in the Registrant's Annual Report on Form 10-K are an integral part of
these consolidated financial statements.
3
<PAGE>
RMH TELESERVICES, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
December 31, December 31,
1997 1996
---- ----
<S> <C> <C>
REVENUES $12,247,000 $9,749,000
----------- ----------
OPERATING EXPENSES:
Cost of services 8,983,000 6,623,000
Selling, general & administrative 2,564,000 2,032,000
----------- ----------
Total operating expenses 11,547,000 8,655,000
----------- ----------
Operating income 700,000 1,094,000
INTEREST INCOME 148,000 111,000
----------- ----------
Income before income taxes 848,000 1,205,000
INCOME TAXES 305,000 434,000
----------- ----------
NET INCOME $ 543,000 $ 771,000
=========== ==========
BASIC EARNINGS PER SHARE $ .07 $ .09
=========== ==========
DILUTED EARNINGS PER SHARE $ .07 $ .09
=========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING USED IN BASIC
EARNINGS PER SHARE COMPUTATION 8,120,000 8,120,000
=========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING USED IN DILUTED
EARNINGS PER SHARE COMPUTATION 8,262,000 8,262,000
=========== ==========
</TABLE>
The accompanying notes and the notes to the consolidated financial statements
included in the Registrant's Annual Report on Form 10-K are an integral part of
these consolidated financial statements.
4
<PAGE>
RMH TELESERVICES, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
<TABLE>
<CAPTION>
For The Three Months Ended
December 31, December 31,
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 543,000 $ 771,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 365,000 323,000
Changes in operating assets and liabilities -
Accounts receivable (1,705,000) (252,000)
Prepaid expenses (389,000) 34,000
Other assets 4,000 1,000
Accounts payable and accrued expenses (1,313,000) (2,148,000)
----------- -----------
Net cash used in operating activities (2,495,000) (1,271,000)
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (583,000) (226,000)
Purchases of marketable securities (4,337,000) ---
Maturities of marketable securities 2,200,000 ---
----------- -----------
Net cash used in investing activities (2,720,000) (226,000)
----------- -----------
FINANCING ACTIVITIES:
Proceeds of assets refinanced --- 493,000
Repayments on capitalized lease obligations (3,000) (18,000)
----------- -----------
Net cash provided by (used in)
financing activities (3,000) 475,000
----------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (5,218,000) (1,022,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 6,882,000 10,047,000
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,664,000 $ 9,025,000
=========== ===========
</TABLE>
The accompanying notes and the notes to the consolidated financial statements
included in the Registrant's Annual Report Form 10-K are an integral part of
these consolidated financial statements.
5
<PAGE>
RMH TELESERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
NOTE 1 - BASIS OF PRESENTATION:
- ------------------------------
The consolidated financial statements have been prepared by the Registrant
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC") and, in the opinion of management, include all adjustments, consisting
of normal recurring adjustments, necessary to present fairly the financial
position and results of operations. Operating results for the three-month
periods ended December 31, 1997 and 1996, are not necessarily indicative of the
results that may be expected for the complete fiscal year. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules and regulations. These financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Registrant's Annual Report on Form 10-K for the
year ended September 30, 1997.
RMH Teleservices, Inc. (the Company) provides outbound and inbound teleservices
to major corporations, such as those in the insurance, financial services,
telecommunications and utility industries.
NOTE 2 - EARNINGS PER SHARE
- ---------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS No. 128").
SFAS No. 128 requires dual presentation of basic and diluted earnings per share.
According to SFAS No. 128, basic earnings per share, which replaces primary
earnings per share, is calculated by dividing net income 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 and warrants. The Company was required to and did adopt SFAS No. 128
during the period ended December 31, 1997, as earlier application was not
permitted. As required by SFAS No. 128, all prior-period earnings per share
data have been restated to conform with the provisions of this statement.
6
<PAGE>
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------- -------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator ) Amount
--------------- ------------------ ------------ ---------------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per
share:
Net income $543,000 8,120,000 $.07 $771,000 8,120,000 $.09
Stock warrants --- 142,000 --- 142,000
Diluted earnings
per share:
Net income and
assumed conversion
of dilutive
securities $543,000 8,262,000 $.07 $771,000 8,262,000 $.09
======== ========= ==== ======== ========= ====
</TABLE>
Options to purchase 255,120 and 272,200 shares of Common Stock at prices ranging
from $7.00 to $12.50 per share were outstanding during the three months ended
December 31, 1997 and 1996, respectively. Such options were not included in the
computations of diluted earnings per share because the option exercise prices
exceeded the average market price of the Common shares during the respective
periods.
NOTE 3 - MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK:
- ---------------------------------------------------------
The Company is dependent on several large customers within the insurance
industry for a significant portion of its revenues. These three customers
accounted for 71.6% and 81.7% of revenues for the quarters ended December 31,
1997 and 1996, respectively. The loss of one or more of these customers could
have a materially adverse effect on the Company's business.
The Company is now affiliated with one of its customers. This customer
represented 8.7% and 6.5% of revenues for the quarters ended December 31, 1997
and 1996, respectively.
Concentration of credit risk is limited to accounts receivable and is subject to
the financial conditions of the Company's customers. Three of the Company's
largest customers are engaged in transactions with each other and represent a
single credit risk to the Company. The Company does not require collateral or
other securities to support customer receivables. At December 31, 1997, the
accounts receivable from the customers that represent a single credit risk was
$5,100,000.
7
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Safe Harbor for Forward-Looking Statements
- ------------------------------------------
From time-to-time, the Company may publish statements which are not historical
facts but are forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, new
products, research and development activities and similar matters. The Private
Securities Litigation Reform Act of 1995 provided a safe harbor for forward-
looking statements. In order to comply with the terms of the safe harbor, the
Company notes that a variety of 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
industries; (ii) fluctuations in quarterly results of operations due to the
timing of clients' telemarketing campaigns, the timing of opening 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) pressure on gross margins as a result of large volume
opportunities that may warrant appropriate pricing discounts; (v) dependence on
the services of the Company's executive officers and other key operations and
technical personnel; (vi) changes in the availability of qualified employees;
(vii) performance of automated call-processing systems and other technological
factors; (viii) reliance on independent long-distance companies; (ix) changes in
government regulations affecting the teleservices and telecommunications
industries; (x) competition from other outside providers of teleservices and in-
house telemarketing operations of existing and potential clients; and (xi)
competition from providers of other marketing 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, such as those in the insurance, financial services and
telecommunications industries. Founded in 1983, the Company opened its first
call center in 1985 to support the marketing efforts of its consulting
customers. At the present time, outbound business-to-consumer teleservices has
become the predominant business of the Company.
The Company's results of operations in any single interim period should not be
viewed as an indication of future results of operations. The Company may
experience quarterly variations in net revenue and operating income as a result
of the timing of clients' telemarketing campaigns, the commencement and
expiration of contracts, the amount of new business generated by the Company,
the timing of additional selling, general and administrative expenses to acquire
and support such new business and changes in the Company's revenue mix among its
various customers.
8
<PAGE>
The Company is currently evaluating whether significant upgrades need to be
undertaken to make its existing information technology and other systems able to
handle the impact of the coming change in the century. The Company has not yet
determined the extend to which such upgrades are necessary to address this "Year
2000" problem on the Company's business. Either or both of the costs of
addressing the Year 2000 issue and/or the costs and consequences of incomplete
or untimely resolution of the Year 2000 issue, could have a material adverse
effect on the Company's future financial results and could make the Company's
reported financial information not necessarily indicative of the Company's
future operating results or future financial condition
Three Months Ended December 31, 1997 Compared to Three Months Ended December 31,
- --------------------------------------------------------------------------------
1996
- ----
Revenues - Revenues increased to $12,247,000 for the quarter ended December 31,
1997 from $9,749,000 for the quarter ended December 31, 1996, an increase of
$2,498,000 or 25.6%. Of such increase in revenues, approximately $2,208,000 was
attributable to increased calling volumes from existing clients who have been
with the Company prior to October 1, 1997, and $290,000 to new clients. During
the quarter ended December 31, 1997, the Company did not add any new
workstations and, subject to existing labor availability coupled with customer
demand, the Company plans on opening not more than three additional call centers
by September 30, 1998.
Cost of Services - Cost of services increased to $8,983,000 for the quarter
ended December 31, 1997 from $6,623,000 for the quarter ended December 31, 1996.
As a percentage of revenues, cost of services increased to 73.3% for the quarter
ended December 31, 1997 as compared to 67.9% for the quarter ended December 31,
1996. The Company believes that the increase in cost of services, as a
percentage of revenues during the quarter, is attributable to pricing pressures
coupled with the costs of supporting several new call centers that opened in
fiscal 1997 that remain less than fully utilized. The Company anticipates that
cost of services, as a percentage of revenues, may increase during the year to
the degree that large volume opportunities warrant additional pricing discounts
to be offered by the Company, 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 $2,564,000 for the quarter ended December 31, 1997 from
$2,032,000 for the quarter ended December 31, 1996. As a percentage of
revenues, selling, general and administrative expenses increased to 20.9% for
the quarter ended December 31, 1997 from 20.8% for the quarter ended December
31, 1996. The dollar increase was primarily the result of increased staffing
and expanding operating costs required to support the growth in the Company's
revenues.
Interest Income - Interest income for the quarters ended December 31, 1997 and
1996, was $148,000 and $111,000, respectively, and was earned by investing the
remaining proceeds of the Company's initial public offering, coupled with its
net cash provided by operations for all of fiscal 1997, in marketable securities
and cash equivalents.
9
<PAGE>
Income Tax Expense - Income tax expense for the quarters ended December 31, 1997
and 1996 was $305,000 and $434,000 and represents income taxes based upon an
effective tax rate of 36%. 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.
Liquidity and Capital Resources
- -------------------------------
Historically, the Company's primary sources of liquidity have been cash flow
from operations and borrowings under its credit facilities. On September 24,
1996, the Company completed an initial public offering and raised net proceeds
of approximately $36.3 million. The Company used approximately $27.9 million of
these proceeds to repay all bank indebtedness, redeem its Series B Preferred
Stock and pay certain one-time Special Bonuses to the Founders. The remaining
$9.5 million in proceeds will be used for working capital and general corporate
purposes.
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 at the Company's option of the LIBOR rate plus 95 basis points or at
the prime rate minus one-half. It is the Company's intention to renew the
existing Credit Line with terms comparable to those currently in place. The
Credit Line is secured by all of the assets of the Company and contains
financial covenants and certain restrictions on the Company's ability to incur
additional debt or dispose of its assets. As of December 31, 1997, the Company
had no borrowings outstanding on the Credit Line.
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 expiration date was extended
from December 31, 1997, to April 1, 1998, in order for this facility to mature
simultaneously with the Company's Credit Line, 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 December 31, 1997, the Company has
financed $3,200,000 of equipment purchases under this facility. At the end of
each respective lease term and at the Company's option, the Company may acquire
the specific equipment at the current fair market value. In the future, the
Company will continue to evaluate the benefits and costs of leasing such
equipment and may decide to finance future capital expenditures by utilizing
this lease line from PNC Leasing Corporation or using its available cash.
Net cash used in operating activities was $2,495,000 during the three month
period ended December 31, 1997. During the three month period ended December
31, 1996, net cash used in operating activities was $1,271,000. The cash used
in operations in the 1997 period resulted from an increase in the Company's
accounts receivable coupled with a decrease in its accounts payable and accrued
expenses partially offset by the Company's net income for the quarter.
10
<PAGE>
The Company's teleservices operations will continue to require significant
capital expenditures. Capital expenditures, during the three month period ended
December 31, 1997, were $583,000. The Company expects to allocate approximately
$4.0 million on capital expenditures during the remainder of the fiscal year
ending September 30, 1998, primarily for call center capacity expansion and
other enhancements of technology used throughout its call center operations.
The Company believes that cash generated from operations, when available,
together with its cash and marketable securities and available credit under the
credit facility and leasing agreement will be sufficient to finance its current
operations and planned capital expenditures at least until September 30, 1998.
11
<PAGE>
PART II
OTHER INFORMATION
Item 1: Legal Proceedings
- ------ -----------------
a. None.
Item 2: Changes in Securities
- ------ ---------------------
a. None.
b. None.
c. The Company has not sold any securities that were
not registered under the Securities Act
d. The Company's Registration Statement on Form S-1
(File No. 333-07501) (the "Registration
Statement") was declared effective by the
Commission on September 18, 1996. Pursuant to the
Registration Statement, the Company registered an
aggregate of 3,220,000 shares of Common Stock, par
value $0.01 per share. All of the shares
registers by the Registration Statement were sold
at $12.50 per share, realizing aggregate proceeds
of $40,250,000 and net aggregate proceeds (after
deduction of underwriters' discounts and
commissions and other offering expenses of
$2,801,420 and $900,000, respectively) of
$36,548,600. None of these expenses were paid to
directors, officers, general partners or their
associates or to 10% shareholders of the Company.
Of the net proceeds of the offering, $15,300,000
were used to repay indebtedness and $6,000,000
were used to pay a special bonus to Raymond J.
Hansell and MarySue Lucci, the Company's founders
and owners, in excess of 10% of the Common Stock.
The amount of $6,400,000 was used to fund the
redemption of Series B Preferred Stock by Advanta
Partners LP, an owner of 10% or more of the Common
Stock, and the amount of $281,000 to fund the
redemption of Series B Preferred Stock by Glengar
International Investments Limited. The remainder
of the proceeds were invested in short-term
investments pending their withdrawal for general
corporate purposes. At February 9, 1998, the
balance of these investments was approximately
$7,000,000 reflecting the use of approximately
$1,800,000 for general corporate purposes.
12
<PAGE>
Item 3: Defaults upon Senior Securities
- ------ -------------------------------
a. None.
Item 4: Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
a. None.
Item 5: Other Information
- ------ -----------------
a. None.
Item 6: Exhibits and Reports on Form 8-K
- ------ --------------------------------
a. Exhibits
27 - Financial Data Schedule
b. Reports on Form 8-K - None
13
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
DATE: February 13, 1998 BY:______________________________________________
Raymond J. Hansell
Chief Executive Officer
DATE: February 13, 1998 BY:______________________________________________
Richard C. Altus
Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,664,000
<SECURITIES> 7,272,000
<RECEIVABLES> 9,668,000
<ALLOWANCES> 37,000
<INVENTORY> 0
<CURRENT-ASSETS> 19,711,000
<PP&E> 9,937,000
<DEPRECIATION> 5,243,000
<TOTAL-ASSETS> 24,513,000
<CURRENT-LIABILITIES> 1,998,000
<BONDS> 0
0
0
<COMMON> 48,638,000
<OTHER-SE> (26,862,000)
<TOTAL-LIABILITY-AND-EQUITY> 24,513,000
<SALES> 0
<TOTAL-REVENUES> 12,247,000
<CGS> 0
<TOTAL-COSTS> 11,547,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 848,000
<INCOME-TAX> 305,000
<INCOME-CONTINUING> 543,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 543,000
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
