<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
Amendment No. 1
For Annual and Transition Reports Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
[x] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended September 30, 2000
or
[_] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
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 and zip code)
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. [_]
As of December 21, 2000, 8,445,000 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 21, 2000 was approximately $41.4 million
(based upon the closing sales price of these shares as reported by the NASDAQ
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 the Annual Meeting of
Shareholders are incorporated by reference in Part III of the Company's original
Form 10-K for fiscal year ended September 30, 2000, filed on December 22, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item
No. Page
<S> <C>
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................... 2
Signatures........................................................................................................ 4
Exhibit Index..................................................................................................... 5
</TABLE>
This Amendment No. 1 to RMH Teleservices Inc.'s (the "Company") Annual Report on
Form 10-K is being filed solely for the purpose of filing Exhibit No. 10.18
(Addendum to Employment Agreement by and between the Company and Robert
Berwanger dated April 20, 1998) and the Company's Financial Statements which
were inadvertently omitted from the Company's Annual Report on Form 10-K, filed
on December 22, 2000.
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>
Report of Independent Public 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.
Information is included in the consolidated financial statements
(3) Exhibits
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. 333-40946).
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. 333-40946).
10.1 1996 Stock Incentive Plan (incorporated by reference to the Company's
Registration Statement on Form S-8, File No. 333-40946).
10.2 Shareholder Agreement by and between the Company and R-T Investors
dated March 28, 2000 (incorporated by reference to the Company's
Current Report on Form 8-K dated April 24, 2000)
10.3 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).
<PAGE>
10.4 First Amendment to Credit Agreement with PNC Bank, N.A. dated May 28,
1999 (incorporated by reference to the Company's Form 10-Q filed for
the period ended June 30, 1999).
10.5 Second Amendment to Credit Agreement with PNC Bank, N.A., dated
September 28, 1999.
10.6 Third Amendment to Credit Agreement with PNC Bank, N.A., dated November
24, 1999 (incorporated by reference to the Company's Form 10-K filed
for the period ended September 30, 1999).
10.7 Fourth Amendment to Credit Agreement with PNC Bank, N.A., dated May 25,
2000 (incorporated by reference to the Company's Form 10-Q filed for
the period ended June 30, 2000).
10.8 Fifth Amendment to Credit Agreement with PNC Bank, N.A., dated
September 27, 2000.
10.9 Agreement: Loan of CAN $2 million from the Province of New Brunswick,
Canada, dated March 31, 1999 (incorporated by reference to the
Company's Form 10-Q filed for the period ended March 31, 1999).
10.10 Agreement: Loan forgiveness from the Province of New Brunswick, Canada,
dated March 31, 1999 (incorporated by reference to the Company's Form
10-Q filed for the period ended March 31, 1999).
10.11 Agreement: Grant of CAN $1 million from the Province of Ontario,
Canada, dated March 17, 1999 (incorporated by reference to the
Company's Form 10-Q filed for the period ended March 31, 1999).
10.12 $8.0 million Operating Lease Facility Agreement between the Company and
PNC Leasing Corp. dated May 11, 1999 (incorporated by reference to the
Company's Form 10-Q filed for the period ended June 30, 1999).
10.13 Addendum to Master Lease Agreement between the Company and PNC Leasing
Corp. dated May 28, 1999 (incorporated by reference to the Company's
Form 10-Q filed for the period ended June 30, 1999).
10.14 Addendum to Master Lease Agreement between the Company and PNC Leasing
Corp. dated October 1, 2000.
10.15 Master Lease Agreement between RMH Teleservices International Inc. and
GATX Technology Finance Inc. dated June 1, 1999 (incorporated by
reference to the Company's Form 10-Q filed for the period ended June
30, 1999).
10.16 Employment Agreement by and between the Company and John Fellows, dated
August 14, 1998 (incorporated by reference to the Company's Form 10-K
filed for the period ended September 30, 1998).
10.17 Employment Agreement by and between the Company and Robert Berwanger,
dated March 18, 1998 (incorporated by reference to the Company's Form
10-K filed for the period ended September 30, 1998).
10.18 Addendum to Employment Agreement by and between the Company and Robert
Berwanger, dated April 20, 1998.
10.19 Employment Agreement by and between the Company and Michael Scharff,
dated August 27, 1998 (incorporated by reference to the Company's Form
10-K filed for the period ended September 30, 1998).
10.20 Employment Agreement by and between the Company and Noah S. Asher,
dated January 27, 1999. (incorporated by reference to the Company's
Form 10-K filed for the period ended September 30, 1999).
10.21 Employment Agreement by and between the Company and Paul J. Burkitt,
dated January 26, 1999. (incorporated by reference to the Company's
Form 10-K filed for the period ended September 30, 1999).
10.22 Employment Agreement by and between the Company and Paul W.Little,
dated April 14,1999.
10.23 Limited Partnership Agreement of 365biz.com LP dated November 19, 1999
(incorporated by reference to the Company's Form 10-K filed for the
year ended September 30, 1999).
<PAGE>
10.24 Amendment to the Limited Partnership Agreement of 365biz.com LP dated
September 27, 2000.
10.25 Agreement: Targeted Wage Subsidy - Human Resources Development Canada,
Province of Ontario (incorporated by reference to the Company's Form
10-Q filed for the period ended June 30, 2000).
10.26 Agreement: Youth Employment Initiatives - Human Resources Development
Canada, Province of Ontario (incorporated by reference to the Company's
Form 10-Q filed for the period ended June 30, 2000).
10.27 Agreement: Conditional Grant, Province of New Brunswick, Canada
(incorporated by reference to the Registrant's Form 10-Q filed for the
period ended June 30, 2000).
10.28 Amended and Restated Agreement for Independent Verification of
Telemarketing Sales effective as of July 8, 1999 by and between MCI
WORLDCOM Network Services, Inc. and the Company.
10.29 Side Agreement, dated July 15, 1999, by and between MCI WORLDCOM
Network Services, Inc. and the Company.
10.30 Telemarketing Agreement, dated July 1, 1998, by and between the Company
and BrandDirect Marketing, Inc.
10.31 Amendment No. 1, dated August 24, 1998, to Telemarketing Agreement,
dated July 1, 1998, by and between the Company and BrandDirect
Marketing, Inc.
10.32 Amendment No. 3, dated January 29, 1999, to Telemarketing Agreement,
dated July 1, 1998, by and between the Company and BrandDirect
Marketing, Inc.
10.33 Service Agreement dated as of June 1, 1998 by and between the Company
and Consumer Membership Services, Inc.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule for year ended September 30, 2000.
(b) Reports on Form 8-K
None
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 28, 2000 By /s/ Noah S. Asher
------------------------
Noah S. Asher
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
No.
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.
333-40946).
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.
333-40946).
++10.1 1996 Stock Incentive Plan (incorporated by reference to the Company's
Registration Statement on Form S-8, File No. 333-40946).
10.2 Shareholder Agreement by and between the Company and R-T Investors
dated March 28, 2000 (incorporated by reference to the Company's
Current Report on Form 8-K dated April 24,2000)
10.3 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).
10.4 First Amendment to Credit Agreement with PNC Bank, N.A. dated May 28,
1999 (incorporated by reference to the Company's Form 10-Q filed for
the period ended June 30, 1999).
10.5 Second Amendment to Credit Agreement with PNC Bank, N.A., dated
September 28, 1999.**
10.6 Third Amendment to Credit Agreement with PNC Bank, N.A., dated November
24, 1999 (incorporated by reference to the Company's Form 10-K filed
for the period ended September 30, 1999). **
10.7 Fourth Amendment to Credit Agreement with PNC Bank, N.A., dated May 25,
2000 (incorporated by reference to the Company's Form 10-Q filed for
the period ended June 30, 2000).
10.8 Fifth Amendment to Credit Agreement with PNC Bank, N.A., dated
September 27, 2000.**
10.9 Agreement: Loan of CAN $2 million from the Province of New Brunswick,
Canada, dated March 31, 1999 (incorporated by reference to the
Company's Form 10-Q filed for the period ended March 31, 1999).
10.10 Agreement: Loan forgiveness from the Province of New Brunswick, Canada,
dated March 31, 1999 (incorporated by reference to the Company's Form
10-Q filed for the period ended March 31, 1999).
10.11 Agreement: Grant of CAN $1 million from the Province of Ontario,
Canada, dated March 17, 1999 (incorporated by reference to the
Company's Form 10-Q filed for the period ended March 31, 1999).
10.12 $8.0 million Operating Lease Facility Agreement between the Company and
PNC Leasing Corp. dated May 11, 1999 (incorporated by reference to the
Company's Form 10-Q filed for the period ended June 30, 1999).
10.13 Addendum to Master Lease Agreement between the Company and PNC Leasing
Corp. dated May 28, 1999 (incorporated by reference to the Company's
Form 10-Q filed for the period ended June 30, 1999).
10.14 Addendum to Master Lease Agreement between the Company and PNC Leasing
Corp. dated October 1, 2000.**
Master Lease Agreement between RMH Teleservices International Inc. and
10.15 GATX Technology Finance Inc. dated June 1, 1999 (incorporated by
reference to the Company's Form 10-Q filed for the Period ended June
30, 1999).
++10.16 Employment Agreement by and between the Company and John Fellows, dated
August 14, 1998 (incorporated by reference to the Company's Form 10-K
filed for the period ended September 30, 1998).
++10.17 Employment Agreement by and between the Company and Robert Berwanger,
dated March 18, 1998 (incorporated by reference to the Company's Form
10-K filed for the period ended September 30, 1998).
<PAGE>
++*10.18 Addendum to Employment Agreement by and between the Company and Robert
Berwanger, dated April 20, 1998.
++ 10.19 Employment Agreement by and between the Company and Michael Scharff,
dated August 27, 1998 (incorporated by reference to the Company's Form
10-K filed for the period ended September 30, 1998).
++ 10.20 Employment Agreement by and between the Company and Noah S. Asher,
dated January 27, 1999. (incorporated by reference to the Company's
Form 10-K filed for the period ended September 30, 1999).
++ 10.21 Employment Agreement by and between the Company and Paul J. Burkitt,
dated January 26, 1999. (incorporated by reference to the Company's
Form 10-K filed for the period ended September 30, 1999).
++ 10.22 Employment Agreement by and between the Company and Paul W. Little,
dated April 14, 1999.**
10.23 Limited Partnership Agreement of 365biz.com LP dated November 19, 1999
(incorporated by reference to the Company's Form 10-K filed for the
year ended September 30, 1999).
10.24 Amendment to the Limited Partnership Agreement of 365biz.com LP dated
September 27, 2000.**
10.25 Agreement: Targeted Wage Subsidy - Human Resources Development Canada,
Province of Ontario (incorporated by reference to the Company's Form
10-Q filed for the period ended June 30, 2000).
10.26 Agreement: Youth Employment Initiatives - Human Resources Development
Canada, Province of Ontario (incorporated by reference to the
Company's Form 10-Q filed for the period ended June 30, 2000).
10.27 Agreement: Conditional Grant, Province of New Brunswick, Canada
(incorporated by reference to the Registrant's Form 10-Q filed for the
period ended June 30, 2000).
+10.28 Amended and Restated Agreement for Independent Verification of
Telemarketing Sales effective as of July 8, 1999 by and between MCI
WORLDCOM Network Services, Inc. and the Company.**
+10.29 Side Agreement, dated July 15, 1999, by and between MCI WORLDCOM
Network Services, Inc. and the Company.**
+10.30 Telemarketing Agreement, dated July 1, 1998, by and between the
Company and BrandDirect Marketing, Inc.**
+10.31 Amendment No. 1, dated August 24, 1998, to Telemarketing Agreement,
dated July 1, 1998, by and between the Company and BrandDirect
Marketing, Inc.**
+10.32 Amendment No. 3, dated January 29, 1999, to Telemarketing Agreement,
dated July 1, 1998, by and between the Company and BrandDirect
Marketing, Inc.**
+10.33 Service Agreement dated as of June 1, 1998 by and between the Company
and Consumer Membership Services, Inc.**
21.1 Subsidiaries of the Registrant.**
*23.1 Consent of Arthur Andersen LLP
*27.1 Financial Data Schedule for year ended September 30, 2000.
* Filed herewith
** Included with the Company's original Form 10-K for the fiscal year
ended September 30, 2000, filed on December 22, 2000
+ Portions of this exhibit have been omitted pursuant to a request
for confidential treatment.
++ This exhibit is a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report.
<PAGE>
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, 2000 and 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended September 30, 2000. 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 auditing standards generally accepted
in the United States. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RMH Teleservices,
Inc. and Subsidiaries as of September 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2000, in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen LLP
Philadelphia, Pennsylvania
November 10, 2000
F-1
<PAGE>
RMH Teleservices, Inc. and Subsidiaries
Consolidated balance sheets
As of September 30, 2000 and 1999
<TABLE>
<CAPTION>
Assets
2000 1999
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,210,000 $ 696,000
Accounts receivable, net
of allowance for doubtful accounts of
$97,000 and $150,000, respectively 23,655,000 28,194,000
Prepaid expenses and other current asset 3,665,000 3,248,000
-------------- --------------
Total current assets 32,530,000 32,138,000
-------------- --------------
Investment in joint venture 284,000 378,000
-------------- --------------
Property and equipment:
Communications and computer equipment 8,091,000 7,859,000
Computer software 1,148,000 609,000
Furniture and fixtures 1,909,000 1,845,000
Leasehold improvements 4,006,000 1,988,000
-------------- --------------
15,154,000 12,301,000
Less- Accumulated depreciation and
amortization (10,000,000) (8,123,000)
-------------- --------------
Net property and equipment 5,154,000 4,178,000
-------------- --------------
Deferred income taxes 179,000 44,000
-------------- --------------
Other assets 2,281,000 2,657,000
-------------- --------------
Total assets $ 40,428,000 $ 39,395,000
============== ==============
<CAPTION>
Liabilities and shareholders' equity
2000 1999
-------------- --------------
<S> <C> <C>
Current liabilities:
Line of credit $ -- $ 3,700,000
Accounts payable 3,625,000 2,326,000
Income taxes payable 934,000 614,000
Accrued expenses 8,188,000 8,106,000
Deferred income taxes 557,000 861,000
--------------- ---------------
Total current liabilities 13,304,000 15,607,000
--------------- ---------------
Deferred income taxes 14,000 --
--------------- ---------------
Commitments and contingencies (Note 12)
Shareholders' equity:
Preferred stock, $1 par value, 5,000,000 shares
authorized, none issued and outstanding -- --
Common stock, no par value, 20,000,000 shares
authorized, 8,437,711 and 8,361,846 shares issued and
outstanding 49,772,000 49,288,000
Deferred compensation (118,000) (158,000)
Accumulated deficit (22,332,000) (25,342,000)
Accumulated other comprehensive income-
Cumulative foreign currency translation adjustment (212,000) --
--------------- ---------------
Total shareholders' equity 27,110,000 23,788,000
--------------- ---------------
Total liabilities and shareholders' equity $ 40,428,000 $ 39,395,000
=============== ===============
</TABLE>
F-2
<PAGE>
RMH Teleservices, Inc. and Subsidiaries
Consolidated statements of operations
For the years ended September 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Net revenues $ 132,140,000 $ 80,318,000 $ 52,434,000
-------------- -------------- --------------
Operating expenses:
Cost of services 100,988,000 60,637,000 39,646,000
Selling, general and administrative 25,579,000 17,383,000 12,461,000
-------------- -------------- --------------
Total operating expenses 126,567,000 78,020,000 52,107,000
-------------- -------------- --------------
Operating income 5,573,000 2,298,000 327,000
Equity in losses of joint venture 650,000 88,000 --
Interest (expense) income, net (110,000) 285,000 541,000
-------------- -------------- --------------
Income before income taxes 4,813,000 2,495,000 868,000
Income taxes 1,803,000 936,000 364,000
-------------- -------------- --------------
Net income $ 3,010,000 $ 1,559,000 $ 504,000
============== ============== ==============
Basic income per common share $ .36 $ .19 $ .06
============== ============== ==============
Shares used in computing basic income per
common share 8,311,000 8,133,000 8,120,000
============== ============== ==============
Diluted income per common share $ .34 $ .19 $ .06
============== ============== ==============
Shares used in computing diluted income per
common share 8,902,000 8,393,000 8,314,000
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
RMH Teleservices, Inc. and Subsidiaries
Consolidated statements of shareholders' equity
For the years ended September 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Common stock
Common stock warrant Deferred
------------------------------
Shares Amount outstanding Compensation
------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance, September 30, 1997 8,120,000 $ 48,638,000 $ 450,000 $ --
Comprehensive income:
Net income -- -- -- --
------------- --------------- -------------- ---------------
Balance, September 30, 1998 8,120,000 48,638,000 450,000 --
Comprehensive income:
Net income -- -- -- --
Conversion of warrant to Common stock 141,846 450,000 (450,000) --
Deferred compensation related to restricted stock issued
to officer 100,000 200,000 -- (200,000)
Amortization of deferred compensation -- -- -- 42,000
------------- --------------- -------------- ---------------
Balance, September 30, 1999 8,361,846 49,288,000 -- (158,000)
Comprehensive income:
Net income -- -- -- --
Foreign currency translation adjustment -- -- -- --
------------- --------------- -------------- ---------------
Total comprehensive income -- -- -- --
Exercise of Common stock options 75,865 261,000 -- --
Tax benefit from exercise of stock options -- 223,000 -- --
Amortization of deferred compensation -- -- -- 40,000
------------- --------------- -------------- ---------------
Balance, September 30, 2000 8,437,711 $ 49,772,000 $ -- $ (118,000)
============= =============== =============== ===============
<CAPTION>
Cumulative
foreign
currency Total
Accumulated translation shareholders'
deficit adjustment equity
-------------- ------------ ---------------
<S> <C> <C> <C>
Balance, September 30, 1997 $ (27,405,000) $ -- $ 21,683,000
Comprehensive income:
Net income 504,000 -- 504,000
-------------- --------- --------------
Balance, September 30, 1998 (26,901,000) -- 22,187,000
Comprehensive income:
Net income 1,559,000 -- 1,559,000
Conversion of warrant to Common stock -- -- --
Deferred compensation related to restricted stock issued
to officer -- -- --
Amortization of deferred compensation -- -- 42,000
-------------- --------- --------------
Balance, September 30, 1999 (25,342,000) -- 23,788,000
Comprehensive income:
Net income 3,010,000 -- 3,010,000
Foreign currency translation adjustment -- (212,000) (212,000)
-------------- --------- --------------
Total comprehensive income 3,010,000 (212,000) 2,798,000
Exercise of Common stock options -- -- 261,000
Tax benefit from exercise of stock options -- -- 223,000
Amortization of deferred compensation -- -- 40,000
-------------- ---------- ---------------
Balance, September 30, 2000 $ (22,332,000) $ (212,000) $ 27,110,000
============== ========== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
RMH Teleservices, Inc. and Subsidiaries
Consolidated statements of cash flows
For the years ended September 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Operating activities:
Net income $ 3,010,000 $ 1,559,000 $ 504,000
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities-
Amortization of deferred compensation 40,000 42,000 --
Depreciation and amortization 1,877,000 1,640,000 1,624,000
Deferred income taxes (202,000) 113,000 71,000
Equity in losses of joint venture 650,000 88,000 --
Changes in operating assets and
liabilities
Accounts receivable 4,539,000 (17,455,000) (2,813,000)
Prepaid expenses and other current
assets (417,000) (1,785,000) (708,000)
Other assets 376,000 (2,529,000) (16,000)
Accounts payable 1,299,000 903,000 840,000
Income taxes payable 320,000 614,000 --
Accrued expenses 82,000 5,085,000 642,000
-------------- -------------- --------------
Net cash provided by (used in) operating
activities 11,574,000 (11,725,000) 144,000
-------------- -------------- --------------
Investing activities:
Purchases and development of property
and equipment (2,853,000) (1,771,000) (1,195,000)
Purchases of marketable securities -- (7,745,000) (13,700,000)
Maturities of marketable securities -- 14,524,000 12,056,000
Investment in\advances to joint venture (556,000) (466,000) --
-------------- -------------- --------------
Net cash provided by (used in) investing
activities (3,409,000) 4,542,000 (2,839,000)
-------------- -------------- --------------
Financing activities:
Net borrowings (repayments) under line
of credit (3,700,000) 3,700,000 --
Repayments on capitalized lease
obligations -- -- (8,000)
Common stock options exercised 261,000 -- --
-------------- -------------- --------------
Net cash provided by (used in) financing
activities (3,439,000) 3,700,000 (8,000)
-------------- -------------- --------------
Effect of exchange rate changes (212,000) -- --
Net increase (decrease) in cash and cash
equivalents 4,514,000 (3,483,000) (2,703,000)
Cash and cash equivalents, beginning of year 696,000 4,179,000 6,882,000
-------------- -------------- --------------
Cash and cash equivalents, end of year $ 5,210,000 $ 696,000 $ 4,179,000
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
RMH Teleservices, Inc. and Subsidiaries
Notes to consolidated financial statements
September 30, 2000 and 1999
1. Background:
RMH Teleservices, Inc. and its Subsidiaries (the Company) is a leading provider
of outsourced customer relationship management, or CRM, services. The Company
offers its clients multi-channel customer interaction solutions that most
effectively manage the relationships between the Company's clients and their
customers. Founded in 1983, the Company is headquartered in Bryn Mawr,
Pennsylvania and operates over 3,500 workstations within a network of 20 state-
of-the-art customer interaction centers and two quality assurance centers
throughout the United States and Canada.
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, Teleservices
Technology Company, RMH Interactive Technologies, LLC and RMH Teleservices
International Inc. (RMH International). All intercompany transactions have been
eliminated.
Foreign currency translation
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign
Currency Translation," the assets and liabilities of the Company's foreign
operations (RMH International) are translated into U.S. dollars at current
exchange rates as of the balance sheet date, and revenues and expenses are
translated at average exchange rates for the period. Resulting translation
adjustments are reflected as a separate component of shareholders' equity. For
the year ended September 30, 2000, the Company recognized a foreign currency
translation loss of approximately $212,000, which is included in shareholders'
equity as of September 30, 2000 and in comprehensive income for the year then
ended. Net transaction losses included in consolidated net income for the year
ended September 30, 2000 were $72,000. The translation adjustment for the year
ended September 30, 1999, the first year the Company had foreign operations, was
not material, nor were the net amounts of foreign currency transaction gains and
losses included in consolidated net income.
Use of estimates and assumptions
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
Supplemental cash flow information
For the years ended September 30, 2000 and 1999, the Company paid interest of
$198,000 and $4,000, respectively. The Company paid no interest during the year
ended
F-6
<PAGE>
September 30, 1998. For the years ended September 30, 2000, 1999 and 1998, the
Company paid income taxes of $993,000, $220,000, and $180,000, respectively.
Fair value of financial instruments
Management believes that the carrying amounts of the Company's financial
instruments, including cash equivalents, accounts receivable, accounts payable,
accrued liabilities and the line of credit, approximate fair value due to the
short-term nature of those instruments.
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, 2000, consisted of approximately $4,673,000 invested in domestic
money market accounts. There were no cash equivalents at September 30, 1999.
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.
Property and equipment
Property and equipment are recorded at cost. Under the provisions of AICPA
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," the Company capitalizes the costs
associated with software developed or obtained for internal use when both the
preliminary project stage is completed and management has authorized funding for
the project, which it deems probable to be completed and used to perform the
function intended. Capitalized costs include only i) external direct costs of
materials and services consumed in developing or obtaining internal-use
software, ii) payroll and payroll-related costs for employees who are directly
associated with and who devote time to the internal-use software project, and
iii) interest costs incurred, when material, while developing internal-use
software. Capitalization of such costs ceases no later than the point at which
the project is substantially complete and ready for its intended purpose.
Approximately $503,000 and $552,000 of payroll and payroll-related costs
associated with software developed for internal use were capitalized in the
years ended September 30, 2000 and 1999, respectively.
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:
Communications equipment 5-7 years
Computer equipment 5 years
Computer software 2-3 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.
F-7
<PAGE>
As of September 30, 2000, deposits of $471,000, primarily on telecommunications
and computer equipment, were included in other current assets in the
accompanying balance sheet. The Company plans to finance this equipment under
its lease lines of credit (see Note 12) during the year ending September 30,
2001. As of September 30, 1999, the Company had deposits of $426,000 included in
other current assets that were financed, under its lease lines of credit, during
the year ended September 30, 2000.
Long-lived assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," the Company records
impairment losses on long-lived assets used in operations 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, 2000 and 1999,
management 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. In addition, the Company receives various bonuses from
clients based on the Company's performance in executing the client's program.
The Company recognizes these bonuses as revenue at the time the bonuses are
determined by the client. For the years ended September 30, 2000 and 1999, the
Company recognized revenue related to bonuses of $6,502,000 and $292,000,
respectively.
Major clients and concentration of credit risk
The Company is dependent on several large clients for a significant portion of
revenues. The loss of one or more clients could have a materially adverse effect
on the Company's business. The following table summarizes the percent of net
revenues in the years ended September 30, 2000, 1999 and 1998 derived from each
client that represented at least 10 percent of net revenues:
2000 1999 1998
----------- -------------- -------------
Client A 29.2% 40.3% 66.1%
Client B 11.8% * 10.8%
Client C 13.8% 33.7% *
Client D 20.1% * *
Client E 10.2% * *
*Less than 10 percent for the fiscal year.
Advanta Partners, LP (Advanta Partners), an entity that was a shareholder of the
Company and had representation on the Board of Directors, is also a shareholder
and has board representation on Client C. In April 2000, Advanta Partners sold
the investment in the Company and no longer has representation on the Company's
Board of Directors.
At September 30, 2000, Clients A, B, C, D and E represented approximately
$3,786,000, $2,358,000, $6,053,000, $4,065,000 and $1,636,000 of total accounts
receivable, respectively. At September 30, 1999, Clients A and C represented
approximately $7,334,000 and $10,838,000 of total accounts receivable,
respectively.
F-8
<PAGE>
The Company was affiliated with one of its clients based upon the client's
partial ownership of Advanta Partners. The Company has not generated any revenue
from this client during the year ended September 30, 2000. This client
represented 1.0 percent and 6.2 percent of revenues for the years ended
September 30, 1999 and 1998, respectively. No receivable is due from this client
as of September 30, 2000. At September 30, 1999, $205,000 was due from this
client, and included in accounts receivable in the accompanying consolidated
balance sheets.
For the years ended September 30, 2000, 1999 and 1998, revenues from clients
within the telecommunications and technology industry accounted for 36.3
percent, 12.8 percent and 2.3 percent of revenues, respectively, clients within
the financial services industry accounted for 33.7 percent, 46.9 percent and
31.6 percent of revenues, respectively, and clients within the insurance
industry accounted for 30.0 percent, 40.3 percent, and 66.1 percent of revenues,
respectively.
Cost of services
Cost of services includes costs incurred at customer interaction centers
including labor and associated benefits and taxes, telecommunication costs,
rents, utilities, maintenance and depreciation of property and equipment.
Selling, general and administrative expenses
Selling, general and administrative expenses consist of all expenses that
support the ongoing operation of the Company. These expenses included corporate
management and infrastructure costs, sales and marketing activities, client
support services and allowances for doubtful accounts.
Costs associated with advertising and promotion are generally charged to expense
when incurred. Advertising and promotion expense was $354,000, $251,000 and
$131,000 for the years ended September 30, 2000, 1999 and 1998, respectively.
Income taxes
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 future tax consequences,
measured by enacted tax rates, attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and the
respective tax bases and operating loss and tax credit carryforwards, for years
which taxes are expected to be paid or recovered.
Income per common share
The Company provides basic and diluted income per share data pursuant to SFAS
No. 128, "Earnings per Share." SFAS No. 128 requires dual presentation of basic
and diluted income per share. According to SFAS No. 128, basic income per share
is calculated by dividing net income by the weighted average number of Common
shares outstanding for the period. Diluted income per share reflects the
potential dilution from the exercise or conversion of securities into Common
stock, such as stock options and warrants.
F-9
<PAGE>
The following is a reconciliation of the numerators and denominators of the
basic and diluted income per Common share computations.
For the year ended September 30, 2000
------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
------------ -------------- ------------
Basic income per common share -
Net income $ 3,010,000 8,311,000 $ .36
============
Effect of dilutive securities -
Stock options -- 534,000
Restricted stock -- 57,000
------------ ------------- ------------
Diluted income per common share -
Net income and assumed conversions $ 3,010,000 8,902,000 $ .34
============ ============= ============
For the year ended September 30, 1999
------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
------------ -------------- ------------
Basic income per common share -
Net income $ 1,559,000 8,133,000 $ .19
============
Effect of dilutive securities -
Stock warrants -- 130,000
Stock options -- 108,000
Restricted stock -- 22,000
------------ ------------- ------------
Diluted income per common share -
Net income and assumed conversions $ 1,559,000 8,393,000 $ .19
============ ============= ============
For the year ended September 30, 1998
------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
------------ -------------- ------------
Basic income per common share -
Net income $ 504,000 8,120,000 $ .06
============
Effect of dilutive securities -
Stock warrants -- 142,000
Stock options -- 52,000
------------ ------------- ------------
Diluted income per common share -
Net income and assumed conversions $ 504,000 8,314,000 $ .06
============ ============= ============
Options to purchase 3,860 shares of Common stock, with an average exercise price
per share of $12.50, were outstanding during the year ended September 30, 2000,
but were not included in the computation of diluted income per Common share for
that year because the exercise prices of the options were greater than the
average market price of the Common shares during the period. The options, which
expire at various times through May 2010, were still outstanding as of September
30, 2000.
Options to purchase 444,000 shares of Common stock, with an average exercise
price per share of $3.47, were outstanding during the year ended September 30,
1999, but were not included in the computation of diluted income per Common
share for that year because the
F-10
<PAGE>
exercise prices of the options were greater than the average market price of the
Common shares during the period. The options, which expire at various times
through September 2009, were still outstanding as of September 30, 1999.
Options to purchase 4,700 shares of Common stock, with an average exercise price
of $12.50, were outstanding during the year ended September 30, 1998, but were
not included in the computation of diluted income per Common share for that year
because the exercise prices of the options were greater than the average market
price of the Common shares during the period. In addition, during the year ended
September 30, 1998, the 100,000 shares of restricted stock which were awarded
subsequent to September 30, 1998, were not included in the computation of
diluted earnings per Common share as they would have been anti-dilutive.
New accounting pronouncements
Effective with the year ended September 30, 1999, the Company was subject to the
provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive income in a
full set of general-purpose financial statements. Comprehensive income is
defined as the total of net income and all other non-owner changes in equity.
For the year ended September 30, 2000, the Company's comprehensive income
consists of net income and the gains and losses from foreign currency
translation adjustment, which are presented in the accompanying consolidated
statements of shareholders' equity. For the years ended September 30, 1999 and
1998, the Company's comprehensive income consisted only of net income.
Effective with the year ended September 30, 1999, the Company was subject to the
provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position but did affect the Company's
disclosure of segment information (see Note 11).
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - an
amendment of FASB Statement No. 133," which must be adopted by the Company in
the year ending September 30, 2001, provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. As the Company does not currently hold derivative instruments or
engage in hedging activities, the adoption of this pronouncement is expected to
have no impact on the Company's financial position or results of operations.
3. Valuation accounts:
<TABLE>
<CAPTION>
For the year ended September 30
------------------------------------------
2000 1999 1998
---------- ---------- -----------
<S> <C> <C> <C>
Allowance for doubtful accounts:
Balance at beginning of period $ 150,000 $ 37,000 $ 37,000
Additions charged to expense 161,000 113,000 114,000
Accounts written off against allowance (214,000) -- (114,000)
--------- --------- ---------
Balance at end of period $ 97,000 $ 150,000 $ 37,000
========= ========= =========
</TABLE>
F-11
<PAGE>
4. Client contract:
In August 1999, the Company entered into a contract with a new client to provide
in-bound teleservices over a four-year period. In connection with the execution
of this contract, the Company made a $2,000,000 upfront payment to the client
and an additional $1,000,000 payment in the year ended September 30, 2000. The
payments are refundable on a pro-rata basis over the contract term if the
agreement is terminated. The payments are included in other current and
noncurrent assets in the accompanying consolidated balance sheets as of
September 30, 2000 and 1999, and are being amortized to cost of services over
the contract term. In addition, the Company is obligated to spend $800,000 for
the development of a voice response unit application to be used in providing
certain services to the client. As of September 30, 2000, the Company has
incurred $611,000 related to this application. The balance of the development
costs ($189,000) is anticipated to be incurred by March 31, 2001, and the
Company can recover such costs through billings to the client based on usage of
the application.
5. Credit facility:
On March 21, 1997, the Company entered into a credit facility with a bank (the
Credit Facility) consisting of a line of credit. The Credit Facility was a
$4,000,000 line of credit that originally expired on April 1, 1998, but was
subsequently extended. On September 28, 1999, November 24, 1999, May 23, 2000
and September 27, 2000, the Company entered into a second, third, fourth and
fifth amendment, respectively, to the Credit Facility. The Credit Facility, as
amended, provides for a $20,000,000 line of credit. The Company is also entitled
to use the Credit Facility for letters of credit. The amended Credit Facility
expires September 30, 2001, subject to renewal. There were no outstanding
borrowings on the line of credit at September 30, 2000 and $1,558,000
outstanding under a letter of credit used as a guarantee for rental payments
under a facility lease. As of September 30, 1999, the Company had borrowings of
$3,700,000 outstanding under the Credit Facility. During the years ended
September 30, 2000 and 1999, the maximum amount outstanding under the line of
credit was $6,750,000 and $3,700,000 at a weighted average interest rate of 8.8
percent and 7.8 percent, respectively. Borrowings bear interest at either a base
rate, or euro-rate option, as selected by the Company, and interest is payable
either monthly under the base rate option, or on the last day of the related
euro-rate interest period. The Credit Facility is unsecured and 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 lease expense
coverage.
The Company incurred $129,000 and $8,000 in interest expense under the Credit
Facility for the years ended September 30, 2000 and 1999, respectively. The
Company did not incur interest expense under the Credit Facility for the year
ended September 30, 1998.
F-12
<PAGE>
6. Accrued expenses:
September 30
-----------------------------
2000 1999
------------- -------------
Payroll and related benefits $ 3,709,000 $ 5,329,000
Unearned grant reimbursements 481,000 1,122,000
Telecommunications expense 1,625,000 1,089,000
Other 2,373,000 566,000
------------- -------------
$ 8,188,000 $ 8,106,000
============= =============
7. Shareholders' equity:
Stock option plan
In 1996, the Company established the 1996 Stock In centive Plan (the Plan),
which as amended reserves 1,450,000 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 determines the price and
other terms upon which awards are 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. As of September 30, 2000, 502,400 options are available for future
grants. Information relative to the Plan is as follows:
<TABLE>
<CAPTION>
Weighted
average
exercise
Exercise price price (per Aggregate
Options (per share) share) proceeds
------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance as of September 30,
1997 255,120 $7.00 - 12.50 $ 12.29 $ 3,134,000
Granted 779,600 2.44 - 4.13 3.55 2,767,000
Terminated (440,420) 3.69 - 12.50 8.61 (3,792,000)
------------- ---------------- ----------- ---------------
Balance as of September 30,
1998 594,300 2.44 - 12.50 3.55 2,109,000
Granted 381,250 1.41 - 5.56 2.35 897,000
Terminated (57,650) 2.00 - 12.50 3.42 (197,000)
------------- ---------------- ----------- ---------------
Balance as of September 30,
1999 917,900 $1.41 - $12.50 3.06 2,809,000
Granted 124,500 $3.69 - $12.50 6.82 849,000
Exercised (75,865) $1.45 - $12.50 3.53 (261,000)
Terminated (94,800) $2.00 - $12.50 3.64 (345,000)
------------- ---------------- ----------- ---------------
Balance as of September 30,
2000 871,735 $1.41 - $12.50 $ 3.50 $ 3,052,000
============= ================ =========== ===============
Options exercisable as of
September 30, 2000 313,263 $ 3.21
============= ===========
</TABLE>
The weighted average remaining contractual term of all options outstanding at
September 30, 2000 is 8.1 years.
F-13
<PAGE>
On March 12, 1998, the Company modified 248,820 options granted to certain
employees during the year ended September 30, 1997. The effect of this
modification was to exchange the original options, of which 85,499 were vested,
with a weighted average exercise price of $12.22 and a weighted average
remaining contractual life of 8.5 years, with 521,100 new options with an
exercise price of $3.69, which was the fair market value of Common stock on the
date of the modification. The new options were not vested and will vest over
four years and have a contractual term of ten years.
The following table summarizes information relating to the Plan at September 30,
2000 based upon each exercise price :
<TABLE>
<CAPTION>
Weighted Weighted
average average
Weighted exercise exercise
Options average price of Options price of
Range of outstanding at remaining outstanding exercisable at exercisable
exercise prices September 30, contractual options (per September 30, options
(Per Share) 2000 life (years) share) 2000 (per share)
------------- ------------ ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
$1.41 - $ 2.06 309,750 8.2 $2.00 102,437 $ 5.90
$2.94 - $ 3.69 382,625 7.6 $3.60 179,863 $ 3.64
$3.94 - $ 5.75 94,500 8.9 $4.65 23,875 $ 4.31
$6.88 - $ 7.00 74,000 9.6 $6.95 4,000 $ 6.88
$10.00 7,000 9.6 $10.00 -- $ --
$12.50 3,860 6.0 $12.50 3,088 $ 12.50
</TABLE>
The Company accounts for the option plan under Accounting Principles Board
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 established 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 the stock option plan consistent with the
provisions of SFAS No. 123, the Company's net income and basic and diluted net
income per Common share for the years ended September 30, 2000, 1999 and 1998
would have been as follows:
For the year ended September 30
---------------------------------------
2000 1999 1998
------------ ------------ -----------
Net income:
As reported $ 3,010,000 $ 1,559,000 $ 504,000
============ ============ ===========
Pro forma $ 2,275,000 $ 1,128,000 $ 80,000
============ ============ ===========
Basic net income per common share:
As reported $ .36 $ .19 $ .06
============ ============ ===========
Pro forma $ .27 $ .14 $ .01
============ ============ ===========
Diluted net income per common share:
As reported $ .34 $ .19 $ .06
============ ============ ===========
Pro forma $ .26 $ .13 $ .01
============ ============ ===========
F-14
<PAGE>
The weighted average fair value of the stock options granted during the years
ended September 30, 2000, 1999 and 1998 was $5.40, $2.00, and $2.75,
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:
For the year ended September 30
-------------------------------------
2000 1999 1998
----- ----- -----
Risk-free interest rate 6.2% 5.4% 5.7%
Volatility 85.0% 85.0% 85.0%
Expected dividend yield 0.0% 0.0% 0.0%
Expected life 7.0 years 7.0 years 7.0 years
Warrant
In connection with a former credit agreement with a bank, the Company issued the
bank a warrant to purchase 236,842 shares of Common stock for $.01 per share.
The warrant was to expire on May 31, 2006, and was fully exercisable. The number
of shares to be purchased upon exercise of the warrant was subject to reduction
based on the timing of the Company's initial public offering, which occurred in
September 1996, and was reduced to 142,105. For financial reporting purposes,
the warrant was valued at $450,000 and was recorded as original issue discount
on the related term loan.
In September 1999, the warrant was exercised through a cashless exercise by the
bank, as permitted by the original warrant agreement. Based upon the market
price of the Common stock on the date of exercise, 141,846 shares of Common
stock were issued to the bank.
Restricted stock
In April 1999, the Company issued 100,000 shares of restricted Common stock that
it had previously agreed to award to its Chief Executive Officer. The primary
restriction is the officer's continued employment over the five-year period
commencing on his original hire date, with the restriction lapsing on 20,000
shares per year on each anniversary of his hire date. The $200,000 value of the
stock was established by the market price on the date of grant with deferred
compensation recorded at that time. The deferred compensation is presented as a
reduction of shareholders' equity in the accompanying consolidated balance
sheet, and is being amortized over the restriction period.
Accumulated deficit
In fiscal 1996, the Company completed a leveraged recapitalization transaction.
The Company redeemed shares of Common stock held by the Company's founders for
$19,214,000 and made a distribution to the founders of $4,600,000. In addition,
the founders were paid a bonus of $6,000,000 upon completion of the Company's
initial public offering in September 1996. The redemption and distribution
payments totaling $23,814,000 were recorded as a reduction of retained earnings.
The leveraged recapitalization transaction, along with the impact of the bonus
payment, resulted in an accumulated deficit of $30,772,000 at September 30,
1996.
F-15
<PAGE>
8. Defined contribution 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 percent of compensation. On an annual
basis, the Company may match a portion of the participating employee's
contribution. The Company's contributions for the years ended September 30,
2000, 1999 and 1998 were $92,000, $63,000, and $51,000, respectively. Employees
are fully vested in their contributions, while vesting in the Company's
contributions occurs ratably over seven years beginning in year three.
9. Joint venture:
The Company has a joint venture, 365biz.com LP, with Advanta Partners to provide
web design, hosting and membership services to small and medium sized businesses
that do not currently have a web presence. Additionally, the joint venture will
provide a variety of online options and features including internet access, e-
mail accounts, search engine posting and e-commerce related services. Advanta
Partners was a related party given its previously held stock interest in the
Company. Based on the terms of the limited partnership agreement, in order to
obtain a 49 percent minority ownership interest in the joint venture, the
Company is committed to provide the joint venture capital funding of $1,099,000,
of which $1,023,000 has been provided as of September 30, 2000. The remaining
commitment is expected to be paid in the year ending September 30, 2001. In
addition, the Company extended $222,000 of trade credit for services the Company
provided to the joint venture.
The limited partnership agreement provides that the Company will be allocated
33.3 percent of the joint venture's initial losses and subsequent profits, if
any, until such time as the Company and Advanta Partners' equity accounts equal
their original funding commitments. At that time, profits and losses will be
allocated based upon ownership percentages.
The Company has accounted for the joint venture under the equity method of
accounting, thereby recognizing its share of the joint venture's losses to date
per the limited partnership agreement. During the year ended September 30, 2000,
the Company elected to increase its investment in the joint venture above its
original commitment and to reduce by an equal amount the trade credits available
to the venture. Upon doing so, the Company began recording its share of the
joint venture's losses at the new allocation percentage of 49 percent. The joint
venture provided $148,000 of net revenues to the Company for the year ended
September 30, 2000.
F-16
<PAGE>
The following is summarized financial information for 365biz.com LP:
For the year For the period
ended from inception
September 30, to September 30,
2000 1999
------------ ---------------
Sales $ 27,000 $ --
Loss from operations 1,228,000 264,000
Net loss 1,228,000 264,000
September 30, September 30,
2000 1999
------------ -------------
Current assets $ 50,000 $ --
Noncurrent assets 1,107,000 307,000
Current liabilities 1,119,000 106,000
Noncurrent liabilities -- --
Equity 38,000 201,000
10. Income taxes:
Income before income taxes consists of the following:
For the year ended September 30
--------------------------------------
2000 1999 1998
------------ ------------ ----------
United States $ 4,468,000 $ 2,363,000 $ 868,000
Canada 345,000 132,000 --
------------ ------------ ----------
$ 4,813,000 $ 2,495,000 $ 868,000
============ ============ ==========
Income tax expense is as follows:
For the year ended September 30
--------------------------------------
2000 1999 1998
------------ ------------ ----------
Current:
United States federal $ 2,000,000 $ 785,000 $ 200,000
United States state 5,000 38,000 93,000
------------ ------------ ----------
2,005,000 823,000 293,000
------------ ------------ ----------
Deferred:
United States federal (543,000) 185,000 99,000
United States state 68,000 (72,000) (28,000)
Canada 273,000 -- --
------------ ------------ ----------
(202,000) 113,000 71,000
------------ ------------ ----------
$ 1,803,000 $ 936,000 $ 364,000
============ ============ ==========
The tax benefit associated with nonqualified stock options increased the current
deferred tax asset and common stock by $223,000 in the year ended September 30,
2000. This benefit will reduce accrued income taxes in fiscal 2001.
F-17
<PAGE>
A reconciliation of the U.S. Federal Income Tax rate to the effective
income tax rate is as follows:
For the year ended September 30
------------------------------------------
2000 1999 1998
------------- ------------ ----------
United States federal statutory rate 34.0% 34.0% 34.0%
United States state taxes 1.5 (1.4) 7.5
Canadian tax items 3.2 -- --
Other (1.2) 4.9 0.4
------------- ------------ ----------
37.5% 37.5% 41.9%
============= ============ ==========
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 give rise to the temporary difference. Significant
components of the deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
September 30
-----------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforward $ 427,000 $ 69,000
Deferred losses in joint venture 195,000 --
Other nondeductible expenses 106,000 --
Stock option tax benefit 223,000 --
Depreciation and amortization of property and equipment -- 44,000
-------------- -------------
951,000 113,000
-------------- -------------
Deferred income tax liabilities:
Grant reimbursements (686,000) --
Depreciation and amortization of property and equipment (38,000) --
Other (619,000) (930,000)
-------------- -------------
(1,343,000) (930,000)
-------------- -------------
$ (392,000) $ (817,000)
============== =============
</TABLE>
As of September 30, 2000, the Company had approximately $950,000 of loss
carryforwards for income tax purposes available to offset future Canadian
federal and provincial income. These carryforwards are subject to examination by
the tax authorities and expire beginning in the year ending September 2006.
11. Business segments:
The Company operates in four business segments as follows:
Telecommunications
The Telecommunications segment provides a variety of CRM services for the
nation's leading local, long-distance and wireless telecommunications companies.
F-18
<PAGE>
Financial services
The Financial Services segment provides CRM services to several of the largest
credit card issuers, banks and other financial and membership service
institutions in the United States. The Company's services include customer
account acquisition and retention programs, programs to sell credit card
enhancement features such as higher credit limits, lower interest rates and
lower fees and discounts on selected goods and services purchased through a
variety of interest group clubs. The Company also cross-sells additional
services such as home equity loans and related banking services.
Insurance
The Insurance segment provides CRM services to the insurance industry in the
United States. It markets such products as accidental death and dismemberment
policies, graded benefit life insurance and other niche insurance products, such
as pet insurance.
Technology
The technology segment was formed in August 2000 and provides CRM services to
some of the nation's leading technology companies, primarily in the areas of
hardware, software and internet support.
The reportable segments have been identified as they have separate management
teams and serve separate classes of clients utilizing specific customer
interaction centers with the exception of the newest segment, technology, which
represented less than 1 percent of revenues in fiscal 2000 and was managed as
part of the telecommunications segment. The accounting policies of the
reportable segments are the same as those described in Note 2. The Company
evaluates the performance of the operating segments based on operating income
(loss) and corporate assets and costs are allocated to the segments based upon
segment revenue. Intersegment sales and transfers are not significant.
F-19
<PAGE>
Financial information for each business segment as of September 30, 2000, 1999
and 1998 and for the years then ended is as follows:
2000 1999 1998
--------------- --------------- ---------------
Revenues:
Telecommunications $ 47,719,000 $ 10,308,000 $ 1,180,000
Financial services 44,525,000 37,621,000 16,557,000
Insurance 39,672,000 32,389,000 34,697,000
Technology 224,000 -- --
--------------- --------------- ---------------
$ 132,140,000 $ 80,318,000 $ 52,434,000
=============== =============== ===============
Operating income (loss):
Telecommunications $ 2,167,000 $ 613,000 $ (98,000)
Financial services 1,323,000 330,000 (694,000)
Insurance 2,074,000 1,355,000 1,119,000
Technology 9,000 -- --
--------------- --------------- ---------------
$ 5,573,000 $ 2,298,000 $ 327,000
=============== =============== ===============
Total assets:
Telecommunications $ 12,980,000 $ 11,350,000 $ 1,725,000
Financial services 20,812,000 17,816,000 7,486,000
Insurance 6,168,000 10,229,000 18,124,000
Technology 468,000 -- --
--------------- --------------- ---------------
$ 40,428,000 $ 39,395,000 $ 27,335,000
=============== =============== ===============
Depreciation and amortization:
Telecommunications $ 709,000 $ 79,000 $ 36,000
Financial services 839,000 552,000 402,000
Insurance 327,000 1,009,000 1,186,000
Technology 2,000 -- --
--------------- --------------- ---------------
$ 1,877,000 $ 1,640,000 $ 1,624,000
=============== =============== ===============
Capital expenditures:
Telecommunications $ 1,274,000 $ 483,000 $ 28,000
Financial services 621,000 815,000 363,000
Insurance 698,000 473,000 804,000
Technology 260,000 -- --
--------------- --------------- ---------------
$ 2,853,000 $ 1,771,000 $ 1,195,000
=============== =============== ===============
Geographic information:
Property and equipment:
United States $ 2,683,000 $ 3,636,000 $ 4,047,000
Canada 2,471,000 542,000 --
--------------- --------------- ---------------
$ 5,154,000 $ 4,178,000 $ 4,047,000
=============== =============== ===============
The Company's revenues during the years ended September 30, 2000, 1999 and 1998
were generated entirely from clients within the United States.
F-20
<PAGE>
12. Commitments and contingencies:
Leases
The Company leases its offices and communications and computer equipment under
noncancellable operating leases which expire at various dates through 2009. The
rental payments for the years ended September 30, 2000, 1999 and 1998, were
approximately $9,948,000, $5,594,000, and $2,828,000, respectively.
Aggregate minimum rental payments under the noncancellable operating leases at
September 30, 2000, are as follows:
2001 $ 10,855,000
2002 9,785,000
2003 8,211,000
2004 6,486,000
2005 3,389,000
Thereafter 9,132,000
--------------
$ 47,858,000
==============
On May 28, 1999, the Company entered into an agreement with the same bank that
provides the Credit Facility which provided for up to $8,000,000 of availability
for leasing customer interaction center equipment. The balance available for
leasing customer interaction center equipment was subsequently reduced to
$5,000,000, in conjunction with an amendment to increase the Company's Credit
Facility. The agreement, which expired on September 30, 2000, required that the
leases be operating in nature and not exceed 60 months. Under this agreement,
the Company entered into leases for equipment with an aggregate total cost of
$4,825,000.
A new lease financing facility has been arranged. The facility is for $5,000,000
and expires in September 2001.
Previously, under separate agreements with the same bank, the Company entered
into operating leases for equipment with an aggregate total cost of $9,600,000
under similar terms. These lease financing agreements have expired.
In addition, on June 1, 1999, RMH Teleservices International entered into an
agreement with a finance company which provides for up to $5,000,000 Canadian
dollars of availability available for leasing customer interaction center
equipment. The facility was increased to $15,000,000 Canadian dollars during the
year ended September 30, 2000. Under the terms of the agreement, the leases must
be operating in nature and not exceed 60 months. Under this agreement, as of
September 30, 2000, the Company entered into leases for equipment with an
aggregate total cost of $8,155,000 Canadian dollars. This facility expires in
December 2000.
RMH Teleservices, Inc. is a guarantor of all liabilities arising from
obligations incurred by RMH Teleservices International under this lease
financing agreement.
Purchase commitments
The Company has entered into agreements with telephone long distance carriers
which currently range from one to three years, and which provide for, among
other things, annual
F-21
<PAGE>
minimum purchases and termination penalties. The annual minimum purchases under
these agreements total approximately $10,590,000.
Employment agreements
The Company has employment agreements with five executive officers that expire
at various times through the year ending September 30, 2003, subject to renewal.
The agreements provide for aggregate base compensation of $1,880,000, $780,000
and $780,000 in the years ending September 30, 2001, 2002 and 2003,
respectively, plus incentive compensation based on performance of the Company.
The agreements also provide for certain other fringe benefits and payments upon
termination of the agreements or upon a change in control of the Company.
Litigation
From time to time, the Company is involved in certain legal actions arising in
the ordinary course of business. In management's opinion, the outcome of such
actions will not have a material adverse effect on the Company's financial
position, results of operations or liquidity.
13. Grant reimbursements:
RMH International, which was established during the year ended September 30,
1999, to conduct the Company's business operations in Canada, has received
financial incentives from the Canadian provincial governments of Ontario and New
Brunswick totaling $5,878,000 Canadian dollars (approximately $3,910,000 using
the exchange rate at September 30, 2000) as of September 30, 2000 and expects to
receive an additional $2,247,000 Canadian dollars (approximately $1,495,000
using the exchange rate at September 30, 2000) over the next three years. The
incentives offset various start-up, payroll and operating costs associated with
operating new customer interaction centers in Canada. The Company records a
grant receivable for qualified expenditures made but not yet reimbursed, and a
liability for grant reimbursements received for which the Company has not
fulfilled its obligations under the applicable grant. During the years ended
September 30, 2000 and 1999, the Company recorded $1,345,000 and $1,927,000,
respectively, as expense reductions related to the grants. At September 30, 2000
and 1999, the Company had a grant receivable of $769,000 and $820,000,
respectively, which is included in other current assets in the accompanying
consolidated balance sheets and a liability of $481,000 and $1,122,000,
respectively, which is included in accrued expenses in the accompanying balance
sheets. This liability is expected to be amortized against qualified payroll
costs over the next three fiscal years as the grant incentives are earned and
the Company's performance obligations are satisfied. As certain grants require
the Company to maintain achieved employment levels over a defined period, the
Company's failure to maintain these levels could require the Company to repay a
portion of the grants for the portion of the employment targets not maintained.
14. Officer loan:
In December 1999, the Company loaned an officer approximately $85,000. Interest
on the loan accrues at an annual rate of 7.5 percent and is due and payable
annually, on January 1 of each year, commencing on January 1, 2000. The
principal balance of the loan and all accrued and unpaid interest thereon is due
and payable in full on the earlier of December 14, 2004 or the date of the
officer's termination.
F-22
<PAGE>
15. Shareholder agreement:
In connection with the purchase of Common stock from the Company's original
founders and Advanta Partners in March 2000, a certain shareholder entered into
a shareholder agreement with the Company. Under the shareholder agreement, the
Company agreed to cause two persons designated by the shareholder and reasonably
acceptable to the Company's board of directors to be elected to the board of
directors. The shareholder agreement further provides that the shareholder
(including its affiliates) will not directly or through affiliates consummate
any tender offer, exchange offer, merger or other business combination,
recapitalization or similar transaction involving the Company or any of its
subsidiaries unless approved by (i) a majority of members of a special committee
consisting of all of the Company's independent directors and (ii) a majority of
the shares not owned by the shareholder or its affiliates or, in the case of a
tender offer or exchange offer, the offer has a minimum condition that a
majority of the shares not owned by the shareholder or its affiliates shall have
been validly tendered and not withdrawn and the offer provides that it will be
extended for ten business days after the shareholder has publicly announced that
such minimum condition has been satisfied.
16. Supplemental quarterly financial data (unaudited):
Summarized quarterly financial data for the years ended September 30, 2000 and
1999 is as follows:
Fiscal 2000
-----------------------------------------------------
December 31, March 31, June 30, September 30,
1999 2000 2000 2000
------------ ------------ ------------ -------------
Net revenues $ 28,673,000 $ 31,420,000 $ 34,799,000 $ 37,248,000
------------ ------------ ------------ -------------
Operating expenses:
Cost of services 22,334,000 24,039,000 26,476,000 28,139,000
Selling, general and
administrative 5,502,000 6,025,000 6,567,000 7,485,000
------------ ------------ ------------ -------------
Total operating expenses 27,836,000 30,064,000 33,043,000 35,624,000
------------ ------------ ------------ -------------
Operating income 837,000 1,356,000 1,756,000 1,624,000
Equity in losses of joint
venture 56,000 95,000 335,000 164,000
Interest (expense) income,
net (64,000) -- 14,000 (60,000)
------------ ------------ ------------ -------------
Income before income taxes 717,000 1,261,000 1,435,000 1,400,000
Income taxes 269,000 473,000 546,000 515,000
------------ ------------ ------------ -------------
Net income $ 448,000 $ 788,000 $ 889,000 $ 885,000
============ ============ ============ =============
Basic income per common
share $ .05 $ .10 $ .11 $ .11
============ ============ ============ =============
Diluted income per common
share $ .05 $ .09 $ .10 $ .10
============ ============ ============ =============
F-23
<PAGE>
Fiscal 1999
-----------------------------------------------------
December 31, March 31, June 30, September 30,
1998 1999 1999 1999
------------ ------------ ------------ ------------
Net revenues $ 15,837,000 $ 17,290,000 $ 20,627,000 $ 26,564,000
------------ ------------ ------------ ------------
Operating expenses:
Cost of services 11,950,000 13,144,000 15,585,000 19,958,000
Selling, general and
administrative 3,583,000 3,663,000 4,411,000 5,726,000
------------ ------------ ------------ ------------
Total operating expenses 15,533,000 16,807,000 19,996,000 25,684,000
------------ ------------ ------------ ------------
Operating income 304,000 483,000 631,000 880,000
Equity in losses of joint
venture -- -- -- 88,000
Interest income, net 107,000 69,000 72,000 37,000
------------ ------------ ------------ ------------
Income before income taxes 411,000 552,000 703,000 829,000
Income taxes 154,000 207,000 264,000 311,000
============ ============ ============ ============
Net income $ 257,000 $ 345,000 $ 439,000 $ 518,000
============ ============ ============ ============
Basic and diluted income
per common share $ .03 $ .04 $ .05 $ .06
============ ============ ============ ============
F-24
