<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2000
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)
(610) 520-5300
(Registrant's telephone number, including area code)
Indicate by check 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 the number of shares outstanding of each of the Registrant's classes of
Common stock, as of the latest practicable date: 8,341,521 shares of Common
stock outstanding as of August 14, 2000.
<PAGE>
RMH TELESERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets at
June 30, 2000 and September 30, 1999 ......................... 3
Consolidated Statements of Operations for the
Three Months Ended June 30, 2000 and 1999 ..................... 4
Consolidated Statements of Operations for the
Nine Months Ended June 30, 2000 and 1999 ...................... 5
Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 2000 and 1999 ...................... 6
Notes to Consolidated Financial Statements .................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 19
SIGNATURES.............................................................. 20
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
RMH TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
ASSETS June 30, September 30,
------
2000 1999
---------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $2,546,000 $ 696,000
Accounts receivable, net of allowance
for doubtful accounts of $153,000
and $150,000, respectively 23,062,000 28,194,000
Prepaid expenses and other current
assets 4,931,000 3,248,000
----------- -----------
Total current assets 30,539,000 32,138,000
----------- -----------
INVESTMENT IN JOINT
VENTURE 448,000 378,000
----------- -----------
PROPERTY AND EQUIPMENT 14,763,000 12,301,000)
Less - Accumulated depreciation and
amortization (9,527,000) (8,123,000)
----------- -----------
Net property and equipment 5,236,000 4,178,000
----------- -----------
DEFERRED INCOME TAXES 44,000 44,000
----------- -----------
OTHER ASSETS 2,329,000 2,657,000
----------- -----------
$38,596,000 $39,395,000
=========== ===========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY June 30, September 30,
--------------------
2000 1999
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ - $ 3,700,000
Accounts payable 5,835,000 2,326,000
Income taxes payable 223,000 614,000
Accrued expenses 5,359,000 8,106,000
Deferred income taxes 861,000 861,000
------------ ------------
Total current liabilities 12,278,000 15,607,000
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock 49,462,000 49,288,000
Deferred compensation (128,000) (158,000)
Accumulated deficit (23,217,000) (25,342,000)
Cumulative foreign currency translation
adjustment 201,000 -
------------ ------------
Total shareholder's equity 26,318,000 23,788,000
------------ ------------
$ 38,596,000 $ 39,395,000
============ ============
</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
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RMH TELESERVICES, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30
------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUES $34,799,000 $20,627,000
----------- -----------
OPERATING EXPENSES:
Cost of services 26,476,000 15,585,000
Selling, general and administrative 6,567,000 4,411,000
----------- -----------
Total operating expenses 33,043,000 19,996,000
----------- -----------
Operating income 1,756,000 631,000
EQUITY IN LOSSES OF JOINT VENTURE 335,000 -
INTEREST INCOME, net 14,000 72,000
----------- -----------
Income before income taxes 1,435,000 703,000
INCOME TAXES 546,000 264,000
----------- -----------
NET INCOME $ 889,000 $ 439,000
=========== ===========
BASIC INCOME PER COMMON SHARE $ .11 $ .05
=========== ===========
DILUTED INCOME PER COMMON SHARE $ .10 $ .05
=========== ===========
SHARES USED IN COMPUTING BASIC
INCOME PER COMMON SHARE 8,313,000 8,120,000
=========== ===========
SHARES USED IN COMPUTING DILUTED
INCOME PER COMMON SHARE 8,945,000 8,416,000
=========== ===========
</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
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RMH TELESERVICES, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
June 30
--------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUES $94,892,000 $53,754,000
----------- -----------
OPERATING EXPENSES:
Cost of services 72,849,000 40,679,000
Selling, general and administrative 18,094,000 11,657,000
----------- -----------
Total operating expenses 90,943,000 52,336,000
----------- -----------
Operating income 3,949,000 1,418,000
EQUITY IN LOSSES OF JOINT VENTURE 486,000 -
INTEREST INCOME (EXPENSE), net (50,000) 248,000
----------- -----------
Income before income taxes 3,413,000 1,666,000
INCOME TAXES 1,288,000 625,000
----------- -----------
NET INCOME $ 2,125,000 $ 1,041,000
=========== ===========
BASIC INCOME PER COMMON SHARE $ .26 $ .13
=========== ===========
DILUTED INCOME PER COMMON SHARE $ .24 $ .13
=========== ===========
SHARES USED IN COMPUTING BASIC
INCOME PER COMMON SHARE 8,296,000 8,120,000
=========== ===========
SHARES USED IN COMPUTING DILUTED
INCOME PER COMMON SHARE 8,824,000 8,316,000
=========== ===========
</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.
5
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RMH TELESERVICES, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
June 30
---------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,125,000 $ 1,041,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Amortization of deferred compensation 30,000 32,000
Depreciation and amortization 1,404,000 1,178,000
Equity in losses of joint venture 486,000 -
Issuance of Common stock options for
services rendered - 12,000
Changes in operating assets and liabilities -
Accounts receivable 5,132,000 (4,013,000)
Prepaid expenses and other current assets (1,683,000) (1,277,000)
Other assets 328,000 (4,000)
Accounts payable and accrued expenses 371,000 2,865,000
----------- -----------
Net cash provided by (used in) operating
activities 8,193,000 (166,000)
----------- -----------
INVESTING ACTIVITIES:
Purchases and development of property and equipment (2,462,000) (1,136,000)
Investment in joint venture (556,000) -
Purchases of marketable securities - (7,007,000)
Maturities of marketable securities - 10,447,000
----------- -----------
Net cash provided by (used in) investing
activities (3,018,000) 2,304,000
----------- -----------
FINANCING ACTIVITIES:
Net repayments on line of credit (3,700,000) -
Common stock options exercised 174,000 -
----------- -----------
Net cash used in financing activities (3,526,000) -
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES 201,000 -
----------- -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 1,850,000 2,138,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 696,000 4,179,000
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 2,546,000 $ 6,317,000
=========== ===========
</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.
6
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RMH TELESERVICES, INC. AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION:
----------------------------------------------
RMH Teleservices, Inc. and subsidiaries ("RMH" or the "Company") is a leading
provider of inbound and outbound telemarketing, inbound customer service and e-
commerce customer contact programs for major corporations on both a business-to-
business and business-to-consumer basis. Founded in 1983, the Company is
headquartered in Bryn Mawr, Pennsylvania and has 21 facilities, comprising 19
call centers and 2 quality centers throughout the United States and Canada.
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position, results of operations and cash flows of
the Company. Operating results for the three and nine month periods ended June
30, 2000 and 1999 are not necessarily indicative of the results that may be
expected for the full 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 Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1999.
NOTE 2 - EARNINGS PER SHARE
---------------------------
The Company has provided basic and diluted income per share pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." SFAS No. 128 requires dual presentation of basic and diluted earnings
per share. According to SFAS No. 128, basic 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 reflects the potential dilution from
the exercise or conversion of securities into Common stock, such as stock
options and warrants.
7
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The following is a reconciliation of the numerators and denominators of the
basic and diluted income per share computations:
<TABLE>
<CAPTION>
For the Three Months Ended June 30
---------------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------- ----------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic income per
Common share:
Net income $889,000 8,313,000 $.11 $439,000 8,120,000 $.05
==== ====
Effect of dilutive
securities:
Stock warrants --- --- --- 142,000
Stock options --- 566,000 --- 112,000
Restricted stock --- 66,000 --- 42,000
-------- --------- -------- ---------
Diluted income per
Common share:
Net income and
assumed conversion
of dilutive
securities $889,000 8,945,000 $.10 $439,000 8,416,000 $.05
======== ========= ==== ======== ========= ====
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended June 30
---------------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------- ----------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic income per
Common share:
Net income $2,125,000 8,296,000 $.26 $1,041,000 8,120,000 $.13
==== ====
Effect of dilutive
securities:
Stock warrants --- --- --- 142,000
Stock options --- 469,000 --- 40,000
Restricted stock --- 59,000 --- 14,000
---------- --------- ---------- ---------
Diluted income per
Common share:
Net income and
assumed conversion
of dilutive
securities $2,125,000 8,824,000 $.24 $1,041,000 8,316,000 $.13
========== ========= ==== ========== ========= ====
</TABLE>
Options to purchase approximately 2,000 and 498,000 shares of Common stock with
an average exercise price of $12.50 and $3.72 were outstanding during the three
months ended June 30, 2000 and 1999, respectively, and options to purchase
approximately 12,000 and 589,000 shares of Common stock with an
8
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average exercise price of $7.02 and $3.45 were outstanding during the nine
months ended June 30, 2000 and 1999, respectively, but were not included in the
computation of diluted income per Common share because the exercise prices of
the options were greater than the average market price of the Common shares
during the respective periods. The options, which are to expire at various times
through April 2010, were still outstanding as of June 30, 2000.
NOTE 3 - MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK:
---------------------------------------------------------
The Company is dependent on several large customers for a significant portion of
its revenues. Three customers accounted for 61.8% and 62.2% of revenues for the
three and nine months ended June 30, 2000, respectively, and 81.3% and 81.5% of
revenues for the three and nine months ended June 30, 1999, respectively. The
loss of one or more of these customers could have a materially adverse effect on
the Company"s business.
Concentration of credit risk is limited to accounts receivable and is subject to
the financial conditions of the Company"s customers. The Company does not
require collateral or other securities to support customer receivables. The
Company's customers with the two largest outstanding balances had amounts owing
of approximately $5.5 million and $4.5 million, respectively, at June 30, 2000.
The third, fourth and fifth largest of the Company's customers are engaged in
transactions with each other and represent a single credit risk to the Company.
At June 30, 2000, the accounts receivable from the customers that represent a
single credit risk were approximately $4.0 million.
NOTE 4 - COMPREHENSIVE INCOME:
------------------------------
The Company's comprehensive income includes net income and gains and losses from
foreign currency translation adjustments.
The Company's total comprehensive income, net of tax, is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
June 30 June 30
---------------------------------- ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 889,000 $ 439,000 $ 2,125,000 $ 1,041,000
Foreign currency
translation adjustment 133,000 -- 201,000 --
------------- ------------ ------------- -------------
Comprehensive income $ 1,022,000 $ 439,000 $ 2,326,000 $ 1,041,000
============= ============ ============= =============
</TABLE>
NOTE 5 - CUSTOMER CONTRACT:
---------------------------
In August 1999, the Company entered into a contract with a new customer to
provide in-bound teleservices over a four-year period. In connection with the
execution of this contract, the Company mad a $2,000,000 payment to the customer
during the three months ended September 30, 1999, and an additional $1,000,000
payment in the three months ended December 31, 1999. The payments are refundable
on a pro-rata basis over the contract term if the agreement is terminated. The
payments are included in other non-current assets in the accompanying
consolidated balance sheets, 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 customer. As of June 30, 2000, the Company has incurred
$391,000 related to
9
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this application, of which $216,000 was incurred in the three months ended June
30, 2000. The balance of the development costs ($409,000) is anticipated to be
incurred by March 31, 2001 and the Company can recover such costs through
billings to the customer based on usage of the system.
NOTE 6: JOINT VENTURE
The Company has a joint venture, 365biz.com LP, with Advanta Partners LP to
provide web design, hosting and membership services to the nation's small and
medium sized businesses that do not currently have a web presence. Per the
limited partnership agreement, to obtain a 49% minority ownership interest in
the joint venture the Company was committed to provide the joint venture with
capital funding of $922,000, of which $466,000 was provided as of September 30,
1999 and the remainder of which was paid during the three months ended June 30,
1999. In addition, the Company is to extend up to $1,000,000 of normal trade
credit for services the Company provides to the joint venture.
Per the limited partnership agreement, the Company was allocated 33.3% of the
joint venture's initial losses and was to be allocated subsequent profits, if
any, until such time as the Company's and Advanta's equity accounts equaled
their original funding commitments. At that time, profits and losses would 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 three months ended June 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 provided to the venture. Therefore, starting
in the three months ended June 30, 2000, the Company has recorded its share of
the joint venture's losses under the equity method of accounting at its new
allocation percentage of 49%.
10
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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 provides 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, financial services and
telecommunications industries; (ii) fluctuations in quarterly results of
operations due to the timing of clients" telemarketing campaigns, the
commencement and expiration of contracts, the timing of opening new call centers
and expansion of existing call centers, the amount of new business generated by
the Company, changes in the Company's revenue mix among its various customers,
bonus arrangements continuing to be negotiated with clients, and if negotiated,
any amount being earned, the timing of additional selling, general and
administrative expenses to acquire and support such new business, and changes in
competitive conditions affecting the telemarketing industry; (iii) difficulties
of managing growth profitably; (iv) dependence on the services of the Company"s
executive officers and other key operations and technical personnel; (v) changes
in the availability of qualified employees; (vi) fluctuations in US dollar and
Canadian dollar exchange rates; (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; (xi) competition from providers of other
marketing formats, such as direct mail and emerging strategies such as
interactive shopping and marketing over the Internet; and (xii) realization of
revenues, unexpected expenses, and viability of RMH's joint venture 365biz.com
LP.
Overview
--------
The Company is a leading outsourcing provider of outbound and inbound customer
relationship management programs predominantly to major corporations 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 is the predominant business of the Company.
In December 1998, RMH Teleservices International Inc. ("RMHTI"), a wholly owned
subsidiary, was incorporated in the Province of New Brunswick, Canada for the
purpose of conducting the Company"s business operations in Canada. During fiscal
1999, RMHTI entered into leases for premises in Oromocto, New Brunswick,
Brantford, Ontario and Saint John, New Brunswick for new call centers. The call
center in Oromocto, New Brunswick commenced operations in March 1999 with 200
workstations, and in June 1999 was expanded to 313 workstations. The call center
in Brantford, Ontario began initial operations in July 1999 with 250
workstations and in October 1999
11
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was expanded to 380 workstations. The call center in Saint John, New Brunswick
commenced operations in August 1999 with 144 workstations and was expanded to
344 workstations in February 2000. A new call and quality center in Sarnia,
Ontario, with 300 workstations, and a new call center in Sault Ste. Marie,
Ontario, with 230 workstations, commenced operations in June 2000. RMHTI has
received financial incentives from the Canadian provincial governments of
Ontario and New Brunswick totaling $3.1 million and expects to receive an
additional $1.4 million over the next three years. These incentives offset
various start-up, payroll and operating costs associated with the new Canadian
call centers. In the three months ended June 30, 2000, the Company incurred
payroll costs associated with the Oromocto, Saint John, Sarnia and Sault Ste.
Marie call centers totaling $219,000, which were offset against the financial
incentives received from the Canadian provincial governments of Ontario and New
Brunswick. The remaining amounts are primarily being amortized against payroll
costs over the next three years.
In addition to the call centers in Canada, the Company operates 14 call centers
in the United States which had an aggregate of 1,809 workstations at June 30,
2000. The call center in Sgt. Bluff, Iowa ceased operations in June 2000.
Results of Operations
---------------------
Three and Nine Months Ended June 30, 2000 Compared to Three and Nine Months
---------------------------------------------------------------------------
Ended June 30, 1999
-------------------
Revenues - Revenues increased to $34,799,000 and $94,892,000 for the three and
nine month periods ended June 30, 2000 from $20,627,000 and $53,754,000 for the
comparable periods in 1999. This represents revenue increases of 68.7% and 76.5%
for the three and nine month periods ended June 30, 2000, respectively, as
compared to the comparable periods in 1999. Of such increase in revenues,
approximately $2,387,000 and $13,746,000 were attributable to increased calling
volumes from existing clients, for the three and nine month periods ending June
30, 2000 respectively, and $11,785,000 and $27,392,000 were attributable to new
clients for the three and nine month periods ended June 30, 2000, respectively.
Included in the revenue for the three and nine month periods ended June 30, 2000
are performance related bonuses of $1,760,000 and $2,108,000 respectively.
Cost of Services - Cost of services increased to $26,476,000 and $72,849,000 for
the three and nine month periods ended June 30, 2000 from $15,585,000 and
$40,679,000 for the comparable periods in 1999. As a percentage of revenues,
cost of services increased to 76.1% and 76.8% for the three and nine month
periods ended June 30, 2000, as compared to 75.6% and 75.7% for the comparable
periods in 1999. The increase in cost of services as a percentage of revenues
during the three and nine months is attributable to startup costs of 2 new call
centers incurred in the three months ended June 30, 2000, for which only minimal
revenue was realized during the three and nine months period ended on that date.
Selling, General and Administrative - Selling, general and administrative
expenses increased to $6,567,000 and $18,094,000 for the three and nine month
periods ended June 30, 2000 from $4,411,000 and $11,657,000 for the comparable
periods in 1999. As a percentage of revenues, selling, general and
administrative expenses decreased to 18.9% and 19.1% for the three and nine
month periods ended June 30, 2000, as compared to 21.4% and 21.7% for the
comparable periods in 1999. The decrease was primarily the result of better
utilization of infrastructure and increasing revenues being serviced by the
Company's infrastructure.
12
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Interest Income (Expense), net - Interest income during the three months ended
June 30, 2000 was $14,000. Interest expense, net of interest income for the nine
months ended June 30, 2000, was $50,000 and was incurred on borrowings on the
Company's line of credit. Interest income for the three and nine months ended
June 30, 1999, was $72,000 and $248,000, respectively, and was earned by
investing cash in marketable securities and cash equivalents.
Income Taxes - Income tax expense for the three and nine month periods ended
June 30, 2000 and 1999 was $546,000 and $1,288,000 and $264,000 and $625,000,
respectively, and represents income taxes based upon an effective tax rate of
38% in both fiscal 2000 and 1999. This tax rate is reflective of both the U.S.
and Canadian Federal tax rates and the state and provincial tax rates in effect
where the Company does business coupled with certain implemented tax planning
strategies.
Liquidity and Capital Resources
-------------------------------
Historically, the Company's primary sources of liquidity have been cash flow
from operations and borrowings under its credit facilities. These funds,
combined with the proceeds of the Company's initial public offering in September
1996, have provided the liquidity to finance the growth of the Company.
On March 21, 1997, the Company entered into a $4.0 million line of credit
facility (the "Credit Facility") with PNC Bank (the "Bank"). The Credit Facility
replaced the Company"s former term loan and credit facility. The Credit Facility
originally expired on April 1, 1998, but was subsequently extended by the Bank.
On September 28, 1999, the term of the Credit Facility was extended to September
30, 2000, subject to renewal, and the amount available under the Credit Facility
was increased to $10.0 million. On November 24, 1999, the amount available under
the Credit Facility was increased to $15.0 million. On May 23, 2000, the Credit
Facility was amended, among other things, to lower the effective interest rate
on outstanding balances to the lower of the LIBOR rate plus 95 basis points and
the Bank's prime rate minus seventy-five basis points. The Credit Facility
contains financial covenants and certain restrictions which, among others,
restrict the Company's ability to incur additional debt or dispose of its
assets. As of June 30, 2000, the Company did not have any borrowings outstanding
on the Credit Facility.
Under a separate agreement dated February 22, 1997 with PNC Leasing Corporation,
the Company had up to $6.0 million available for the purpose of leasing call
center equipment. The $6.0 million commitment expired on April 1, 1998, and
required that such leases meet the accounting definition of an operating lease
with rent to be paid over a period not to exceed sixty months. Under this
agreement, the Company entered into operating leases for equipment with an
aggregate total cost of $4.1 million.
Under a separate agreement dated March 10, 1998 with PNC Leasing Corporation,
the Company established an additional lease facility of $6.0 million available
for purposes of leasing call center equipment. The $6.0 million commitment
expired on April 1, 1999, and required that such leases meet the accounting
definition of an operating lease with rent to be paid over a period not to
exceed sixty months. Under this agreement, the Company entered into operating
leases for equipment with an aggregate total cost of $5.5 million.
Under a separate agreement dated May 28, 1999 with PNC Leasing Corporation, the
Company established an additional lease facility of $8.0 million available for
purposes of leasing call center equipment. In September 1999, this commitment
was reduced to $5.0 million at the same time that the Credit Facility was
increased from $4.0 million to $10.0 million. The $5.0 million commitment
expires on September 30, 2000 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 June 30, 2000, the Company has entered into operating
leases for equipment under this agreement with an aggregate total cost of $3.7
million.
13
<PAGE>
In June 1999, RMHTI entered into an agreement with GATX Technology Finance Inc.
("GATX") for a $5.0 million CDN lease facility which was increased in September
1999 to $10.0 million CDN. Under the terms of this lease facility, leases must
meet the accounting definition of an operating lease with rent to be paid over a
period not to exceed sixty months. As of June 30, 2000, the Company has entered
into operating leases for equipment under this agreement with an aggregate total
cost of $8.4 million CDN. On April 26, 2000, GATX assigned its rights under the
lease to Royal Bank of Canada.
Net cash provided by operating activities was approximately $8.2 million for the
nine months ended June 30, 2000 and net cash used in operating activities was
$166,000 during the nine months ended June 30, 1999. The cash provided by
operations in the fiscal 2000 period resulted from the Company's net income for
the period coupled with a decrease in the Company"s accounts receivable and
other assets and increase in accounts payable and accrued expenses offset by an
increase in prepaid expenses.
The Company"s teleservices operations will continue to require significant
capital expenditures. Capital expenditures during the nine months ended June 30,
2000 and 1999, were $2,462,000 and $1,136,000, respectively. The Company expects
to allocate approximately $1.0 million for capital equipment expenditures from
its operating lease facilities during the remainder of the fiscal year ending
September 30, 2000, primarily for call center capacity expansion and other
enhancements of technology used throughout its call center operations.
As required under a certain customer contract, the Company spent $2.0 million in
the three months ended September 30, 1999, and $1.4 million in the nine months
ended June 30, 2000. The Company expects to spend up to an additional $409,000
by March 31, 2001 under this customer contract.
The Company believes that funds generated from operations, together with the
available credit under the Credit Facility and the lease lines of credit, will
be sufficient to finance its current operations and planned capital expenditures
at least through September 30, 2001.
The Company has entered into a joint venture with Advanta Partners to create a
new entity called 365biz.com LP. RMH owns a 49% interest in the venture.
365biz.com provides Web design, hosting and membership services to small and
medium sized businesses. Additionally, 365biz.com provides a variety of online
options and features including Internet access, e-mail accounts, search engine
posting and e-commerce related services. The venture was launched in response to
the growing demand for flexible and inexpensive Web solutions. The Company was
committed to provide the joint venture additional capital funding of $0.5
million which was paid in the three months ended June 30, 2000. In addition, the
Company will extend up to $1.0 million of normal trade credit for services the
Company is expected to provide to the joint venture. During the three months
ended June 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 provided to the venture. Therefore, starting in the three months
ended June 30, 2000, the Company has recorded its share of the joint venture's
losses under the equity method of accounting at its new allocation percentage of
49%.
14
<PAGE>
Segment Information
-------------------
The Company operates the majority of its business activities in three business
segments as follows:
Insurance
The Insurance segment works with large consumer insurance companies and their
agents throughout the United States to market such products as accidental death
and dismemberment policies, graded benefit life insurance and other niche
insurance products primarily to credit card customers. The Company has also
assisted clients in marketing supplemental dental and vision coverage to credit
card holders.
Financial Services
The Financial Services segment provides teleservices 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.
Telecommunications
The Telecommunications segment provides a variety of teleservices for the
nation's leading local, long-distance and wireless telecommunications companies.
The reportable segments have been identified because they have separate
management teams and predominantly serve separate classes of customers via
specific call centers. The accounting policies of the reportable segments are
the same as those of the consolidated Company. The Company evaluates the
performance of its 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.
15
<PAGE>
Financial information for each business segment as of June 30, 2000 and 1999 and
for the three and nine months then ended is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended June For the Nine Months Ended June
---------------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Insurance $ 9,979,000 $ 8,051,000 $ 28,464,000 $ 24,378,000
Financial 12,546,000 11,746,000 32,530,000 27,492,000
Telecommunication 12,274,000 830,000 33,898,000 1,884,000
------------- ------------ ------------- ------------
$ 34,799,000 $ 20,627,000 $ 94,892,000 $ 53,754,000
============= ============ ============= ============
Operating income (loss):
Insurance $ 492,000 $ (185,000) $ 1,280,000 $ 607,000
Financial 566,000 556,000 1,253,000 793,000
Telecommunication 698,000 260,000 1,416,000 18,000
------------- ------------ ------------- ------------
$ 1,756,000 $ 631,000 $ 3,949,000 $ 1,418,000
============= ============ ============= ============
Depreciation and amortization:
Insurance $ 122,000 $ 155,000 $ 260,000 $ 568,000
Financial 288,000 267,000 737,000 585,000
Telecommunication 39,000 4,000 407,000 25,000
------------- ------------ ------------- ------------
$ 449,000 $ 426,000 $ 1,404,000 $ 1,178,000
============= ============ ============= ============
Capital expenditures:
Insurance $ 438,000 $ 259,000 $ 675,000 $ 431,000
Financial 422,000 338,000 571,000 614,000
Telecommunication 465,000 8,000 1,216,000 91,000
------------- ------------ ------------- ------------
$ 1,325,000 $ 605,000 $ 2,462,000 $ 1,136,000
============= ============ ============= ============
June 30
----------------------------------
2000 1999
------------- ------------
Total assets:
Insurance $ 9,971,000 $ 13,392,000
Financial 14,211,000 17,493,000
Telecommunication 14,414,000 400,000
------------- ------------
$ 38,596,000 $ 31,285,000
============= ============
Geographic information
----------------------
Property and equipment:
United States $ 2,869,000 $ 4,005,000
Canada 2,367,000 -
------------- ------------
$ 5,236,000 $ 4,005,000
============= ============
</TABLE>
The Company's revenues during the three and Nine months ended June 30, 2000 and
1999 were generated entirely from customers within the United States.
16
<PAGE>
Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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
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.
17
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio. The
Company does not use derivative financial instruments in its investment
portfolio. The Company places its investments with high credit quality issuers
and limits the amount of credit exposure with any one issuer. The Company is
averse to principal loss and ensures the safety and preservation of its invested
funds by limiting default risk, market risk and reinvestment risk.
The Company mitigates default risk by investing in only the safest and highest
credit quality securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer, guarantor or depository. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity.
The table below represents principal (or notional) amounts and related weighted
average interest rates for the Company's investment portfolio as of June 30,
2000 and 1999. All investments mature in one year or less.
<TABLE>
<CAPTION>
Principal Amount Fair Value
---------------- ----------
(in thousands) (in thousands)
June 30 June 30
-------------------------- ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Assets
------
Cash equivalents:
Variable rate $ 2,546 $ 634 $ 2,546 $ 634
Average interest rate --% 4.92% -- 4.92%
Marketable Securities:
Fixed rate $ -- 3,400 $ -- $ 3,339
Average interest rate --% 4.94% --% 4.94%
-------- -------- -------- --------
Total Investments $ 2,546 $ 4,034* $ 2,546 $ 3,973
======== ======== ======== ========
</TABLE>
* Includes $26,000 of unaccrued interest received at maturity
18
<PAGE>
PART II: OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
a. Exhibits:
10.1 - Fourth Amendment to Credit Agreement with PNC
Bank, N.A. dated May 23, 2000
10.2 - Agreement: Targeted Wage Subsidy - Human
Resources Development Canada, Province of Ontario
10.3 - Agreement: Youth Employment Initiatives - Human
Resources Development Canada, Province of Ontario
10.4 - Agreement: Conditional Grant, Province of New
Brunswick, Canada
27.0 - Financial Data Schedule
b. Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on April 14, 2000, announcing the
acquisition by R-T Investors, LLC, of approximately 49% of the Company's Common
stock by certain officers of the Company and the resignation of two members of
the Company's Board of Directors.
19
<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.
DATED: August 14, 2000 BY: /s/ John A. Fellows
--------------------------
John A. Fellows
Chief Executive Officer
DATED: August 14, 2000 BY: /s/ Noah S. Asher
--------------------------
Noah S. Asher
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
