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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended September 30, 1998
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 23, 1998, 8,120,000 shares of common stock were outstanding.
The aggregate market value of the shares of common stock owned by non-affiliates
of the Registrant as of December 23, 1998 was approximately $11.7 million (based
upon the closing sales price of these shares as reported by the Nasdaqs 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 to be held on February 23, 1999 are incorporated by reference in
Part III.
Table of Contents
Item
No. Page
PART I
1. Business...................................................................1
2. Properties.................................................................7
3. Legal Proceedings..........................................................8
4. Submissions of Matters to a Vote of Security Holders.......................8
Executive Officers of the Company..........................................8
PART II
5. Market for Registrant's Common Equity and Related Shareholder Matters.....10
6. Selected Financial Data...................................................11
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations...........................................................12
7.A. Quantitative and Qualitative Disclosures about Market Risk..............20
8. Financial Statements and Supplementary Data...............................20
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................20
PART III
10. Directors and Executive Officers of the Registrant.......................20
11. Executive Compensation...................................................20
12. Security Ownership of Certain Beneficial Owners and Management...........21
13. Certain Relationships and Related Transactions...........................21
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........21
Signatures...............................................................22
PART I
ITEM 1. BUSINESS
--------
General
RMH Teleservices, Inc. (the "Company") provides outbound and inbound
teleservices predominantly to major corporations in the insurance, financial
services, telecommunications and membership services industries. The Company
distinguishes itself through its high quality service and disciplined management
approach which has led to long-term client relationships and sustained
profitable growth. The Company originated relationships with Mass Marketing
Insurance Group ("MMIG"), JCPenney Life Insurance Company ("JCPenney") and
AT&T/Universal Card Services ("AT&T") over seven years ago and, since fiscal
1991, the Company's aggregate volume with these clients has grown each year. The
Company believes its innovative approach to producing quality service
distinguishes it from its competitors and has led to the Company's sustained
growth and its retention of key clients despite severe recruiting and retention
challenges brought about by a tight labor market. The Company's net revenue has
increased 14.1% over the last year.
The Company was founded in 1983 by Raymond J. Hansell, former Vice Chairman
and Chief Executive Officer, and MarySue Lucci, former Director, President and
Chief Operating Officer (the "Founders"). In May 1996, the Company completed a
leveraged recapitalization (the "Recapitalization") pursuant to which Advanta
Partners LP ("Advanta Partners"), a venture capital affiliate of Advanta Corp.,
became the largest equity holder of the Company. The Company completed the
Recapitalization to permit Advanta Partners to invest substantial financial and
other resources in the Company and to permit the Founders to realize a portion
of the economic value of their initial investment in the Company. The Company is
a Pennsylvania corporation and its principal business office is located at 40
Morris Avenue, Bryn Mawr, Pennsylvania 19010. Its telephone number is (610)
520-5300.
In September 1996, the Company completed an Initial Public Offering of
3,220,000 shares of Common Stock ("Common Stock") from which it realized
aggregate proceeds, after deduction of underwriting discounts and commissions of
$37,448,000 (the "Initial Public Offering"). On September 18, 1996 the Company's
Common Stock was included on the Nasdaq Stock Market's National Market under the
symbol "RMHT".
The Company's revenue and income from operations for fiscal 1998 were $52.4
million and $327,000, respectively. This represents an increase of 14.1% and a
decrease of 93.1% respectively, compared to fiscal 1997.
Overview of the Teleservices Industry
The teleservices industry includes outbound and inbound telephone
marketing, as well as customer support and service programs and other
value-added services. Teleservices provide customized service with higher
response rates and higher customer acquisition and retention rates at a lower
cost per transaction than other marketing media. As a result, call centers have
become robust channels for the marketing and sale of a wide variety of products
and services as sophisticated telemarketers are able to market effectively and
collect valuable customer data. According to Direct Marketing Magazine,
telemarketing expenditures in the United States grew from approximately $34
billion in 1984 to approximately $77 billion in 1994. An increasing percentage
of teleservices business is currently being outsourced to independent providers,
and the Company believes that both the total market and the percentage of this
market that is outsourced will increase as businesses continue to recognize the
benefits of such services.
Historically, the call center services industry has been extremely
fragmented and continues to include a large number of small, independent
organizations. However, over the past several years, the industry has further
segmented itself by the public or secondary offerings of common stock by ten
companies. Consequently, the sector has further defined itself by those
companies that have been able to raise monies in the public marketplace.
1
Many large companies have begun to outsource their telemarketing and
customer support services in order to access the industry expertise, breadth of
services and specialized capabilities of large-scale, technologically-
sophisticated teleservices providers such as the Company. Using such providers
enables these companies to concentrate on their core businesses and improve the
quality and cost-effectiveness of their customer contact functions. As a result,
the Company believes that the enhanced quality and economic advantages provided
by independent teleservices companies will accelerate the outsourcing trend in
the industry. In addition, the Company believes that the deregulation of the
telecommunications industry will significantly increase the demand for
telemarketing services.
The Company believes that businesses considering outsourcing their
telemarketing activities increasingly are seeking to partner with a teleservices
company that possesses industry expertise and the resources to serve their
long-term needs efficiently. Additionally, because teleservices involve direct
interaction with a client's customers, the teleservices provider's reputation
for quality is critical to winning new clients. As a recognized provider of high
quality teleservices, the Company has positioned itself as an attractive partner
to large users of call center services.
The Company's Services
Outbound Teleservices
---------------------
Historically, the Company has concentrated on providing outbound
business-to-consumer teleservices. In this market, the Company has sought and
established relationships with large corporate clients, many of which have been
clients of the Company for over seven years.
Outbound teleservices refers to the service the Company performs when its
telephone service representatives ("TSRs"), place calls to parties targeted by
the client to offer products or services or to obtain information. At the
beginning of a typical outbound program, the Company receives customer data
files that the client has selected to match the demographic profile of the
targeted customer for the product or service being offered. These files contain
each targeted customer's name, address, phone number and other relevant data.
The Company's data management system sorts the records, removes information
regarding customers whom the Company is prohibited from contacting and assigns
each file electronically to one of its outbound call centers. Actual telephone
calling at the centers is controlled by computerized call management systems
that utilize predictive dialers to automatically dial the telephone numbers in
the files. The call management system then forwards all connected calls, along
with the customer's name and other information, electronically to the
workstation of a TSR who has been trained for the client's program. The TSR then
uses a prepared script to solicit an order for the product or service or to
request information that will be added to the client's database. Information
regarding sales and other aspects of the program is captured by the Company's
proprietary software systems and made available to clients in customized report
formats.
During fiscal 1998, the Company opened a new outbound call center facility
in Ewing Township, NJ and commenced construction of another facility in Largo,
Florida which opened in October 1998.
Insurance. The Company is a major telemarketer of insurance products
throughout the United States. Management believes this sector to be an extremely
attractive area in business-to-consumer telemarketing from the perspective of
the teleservices provider due to its large size, relative predictability and
relative lack of seasonality. The Company works with large consumer insurance
companies and their agents to market such products as accidental death and
dismemberment policies, graded benefit life insurance and other niche insurance
products primarily to credit card customers. The Company has also assisted
clients in marketing supplemental dental and vision coverage to credit card
holders.
2
As of September 30, 1998, the Company employed 162 insurance agents
licensed to sell insurance in a total of 46 states. The Company's significant
relationships in this industry include those with MMIG, AT&T, and JCPenney,
which were responsible for 43.7%, 6.5%, and 15.9%, respectively, of the
Company's revenues for fiscal 1998. The Company originated its relationship with
MMIG over ten years ago and originated its relationships with JCPenney and AT&T
over seven years ago. The Company's aggregate revenues from this group of
clients have grown respectively, each year since fiscal 1991. In fiscal 1998,
66.2% of the Company's revenues were generated from services related to
insurance products.
Financial Services. The Company provides teleservices to several of the
largest credit card issuers, banks and other financial institutions in the
United States. The Company's services include customer account acquisition,
customer retention programs, and programs to sell credit card enhancement
features such as higher credit limits, lower interest rates and lower fees. The
Company also cross-sells additional services such as home equity loans and
related banking services. In fiscal 1998, 23.2% of the Company's revenues were
generated from services related to financial services products.
Telecommunications. The Company expects the demand for teleservices within
the telecommunications industry to increase as the industry continues to be
deregulated and as the number of products (e.g., long distance, cellular, paging
and "800" services) and call features (e.g., call waiting, caller identification
and voice mail) increases. On behalf of several telecommunication companies, the
Company completed several of these outbound campaigns during the current fiscal
year.
Membership Services. The Company provides services on behalf of a company
that provides membership services to a variety of interest groups. These
memberships generally entitle the members to a discount on selected goods and
services purchased. In fiscal 1998, 7.0% of the Company's revenues were
generated from services related to membership services products.
Inbound Teleservices
- --------------------
Inbound teleservices involves the processing of incoming calls, often
placed by customers using toll-free numbers, to a customer service
representative for service, order fulfillment or product information. Inbound
teleservices include activities such as customer care services, credit card and
loan application processing and catalog sales. More sophisticated inbound
programs assist clients in responding to customer inquiries, offering technical
and product support services and assessing overall customer satisfaction.
The Company currently operates inbound customer service centers in its
Lansdowne, PA and Delran, NJ call center facilities. During 1998, the Company
grew its inbound business in the financial services and membership services
industries which were offset by the loss of a client in the telecommunications
industry.
Business-to-Business Teleservices
- ---------------------------------
The Company believes that the dynamics of the business-to-business
teleservices marketplace have now changed so as to permit the development of the
type of long-term client relationships and large-scale campaigns that have
formed the core of the Company's business-to-consumer services. The Company
expects that the demand for business-to-business applications will grow,
especially among telecommunications and membership services companies, as many
large companies recognize that telemarketing is a more efficient method of
reaching business customers than a field sales force. Growth in the
business-to-business teleservices market has the potential for the Company to
leverage its existing workstation capacity because such services are provided
primarily during the day while business-to-consumer services are provided
primarily during the evening. The Company believes that its prior experience in
business-to-business teleservices and current expertise in business-to-consumer
teleservices position it to take advantage of the growth in this market. Though
this business has not grown dramatically during 1998, the Company believes that
the business-to-business marketplace is embracing teleservices and opportunities
may present themselves in future periods.
3
The Company's Operations
Management
- ----------
At the beginning of fiscal 1998 an executive search was undertaken for a
Chief Executive Officer in anticipation of the expiration of the Founders'
employment agreements in fiscal 1999. On August 13, 1998 the Board of Directors
approved the employment of Mr. John A. Fellows as Chief Executive Officer.
Concurrently the Board of Directors approved consulting agreements for the
Founders expiring on May 31, 1999.
Sales, Marketing and Account Management
- ---------------------------------------
During fiscal 1998 the Company continued the national account sales program
that was initiated in 1996. This program focuses its direct sales efforts on
developing relationships with the leading users of teleservices in its targeted
industries. This initiative was re-inforced by the addition of a Vice President
of Sales and a Vice President of Business Development in fiscal 1998, both with
extensive experience in the communications and telemarketing industries.
Supporting this initiative, the Company will continue to market its services by
attending trade shows, advertising in industry publications, responding to
requests for proposals, pursuing client referrals and cross-selling to existing
clients.
A critical element of the Company's effort to build long-term client
relationships is its account management program. To improve the effectiveness of
the client's program, account managers offer proactive advice and consulting
services. The account managers initially provide advice on all aspects of
program implementation, including scripting, performance specifications and
reporting, and then manage the process on behalf of the client through
interaction with each of the Company's internal departments. Periodic internal
audits are performed by the account manager to determine compliance with the
applicable program specifications. The Company believes that this detailed
attention to account management has contributed significantly to retaining
clients, expanding business from existing clients and attracting new clients.
Personnel and Training
- ----------------------
The Company emphasizes the recruitment, training and development of its
TSRs, which management believes enables the Company to increase productivity,
reduce employee turnover and enhance the quality of its services. TSRs are
selected through a three-step process that includes an initial telephone
screening interview, followed by an in-person interview and extensive testing to
gauge competence, suitability for telemarketing projects and integrity.
Newly-hired TSRs receive an intensive three-day training course that
emphasizes modeling and role-playing as well as instruction on effective sales
techniques and product knowledge. New TSRs are closely monitored for an initial
30-day period and thereafter receive ongoing coaching and training. As of
September 30, 1998, the Company employed 162 licensed insurance agents
specializing in the marketing of insurance-related products. These licensed
agents receive continuing insurance-related education to comply with applicable
state licensing requirements. To further assure the continuity and consistency
of management practices, each call center has dedicated recruiting and training
personnel who report directly to corporate management. The Company also provides
significant on-going training to its supervisory and management personnel on
coaching, counseling and total quality management techniques.
The Company has developed an innovative compensation and performance
recognition plan in order to motivate employees and reduce turnover. The Company
generally attempts to target base TSR compensation at higher levels than is paid
by other businesses competing for the same labor pool. In addition, the Company
offers a benefits package, including health insurance, for qualifying full-time
TSRs. For performance recognition, the Company pays cash bonuses to TSRs who
achieve sales targets and quality benchmarks and also offers non-cash incentives
and creative programs to improve performance and maintain morale. Although it is
typical in the teleservices industry for TSRs to be part-time employees, over
61.2% of the Company's TSRs are full-time employees (working at least 33 hours
per week). The Company believes that its relatively high proportion of full-time
employees provides a more stable
4
workforce and reduces the Company's recruiting and training expenditures. As of
September 30, 1998, the Company employed 2,566 persons, of whom more than 2,260
were TSRs. None of the Company's employees are represented by a labor union. The
Company considers its relations with its employees to be good.
Quality Assurance
-----------------
The Company believes that its reputation for quality services is critical
to acquiring and retaining clients. The Company is committed to the principles
of total quality management in order to continuously improve its operational
processes. The Company establishes both internal and external benchmarks as a
means to measure continuous improvement. The Company measures the quality of its
services on the basis of sales per hour, level of customer inquiries, call
abandonment rates and other quality performance criteria. In order to provide
continuing improvement to the TSRs' performance and to assure compliance with
the Company's quality standards, quality assurance personnel monitor each TSR on
a frequent basis and provide coaching to the TSR based on this review. Clients
also participate in the monitoring process. Sales confirmations are recorded
with the customer's consent to ensure accuracy and to provide a record of the
sale. Company personnel review all sales confirmation tapes for compliance with
client specifications. In addition, these tapes are selectively reviewed in
order to provide additional coaching to TSRs. The Company's information systems
enable it to provide its clients with customized reports on the status of an
on-going telemarketing campaign and can transmit information electronically to
clients if desired. Access to this data enables the Company's clients to modify
or enhance an on-going campaign in order to improve its effectiveness. Each
Company call center has dedicated quality assurance personnel who provide
on-going employee training and coaching to the center's TSRs.
Technology
----------
The Company was an early user of predictive dialing technology and was an
early adopter of centralized management systems. The Company continues to invest
strategically in proven systems and software technologies in order to enhance
operational efficiency and maintain high quality services. These technologies
reduce the cost per call and improve sales and customer service by providing the
Company's TSRs and account management personnel with enhanced real-time access
to customer and production information. As of September 30, 1998, the Company's
management information systems department consisted of 56 technical
professionals who maintain, upgrade and expand the Company's systems. The
Company's call management and database systems have been designed to ensure
quality service to its clients and to provide effective tools for the management
of the Company's business.
The Company uses UNIX-based predictive dialing systems at each call center,
which are linked via a wide-area network to network servers at the Company's
corporate headquarters. The Company's call center and network systems both use a
flexible database architecture permitting the easy sharing of data among users
of the system. As a result, the Company's scaleable systems can be configured to
work cost-effectively at low and high volumes and permit the efficient addition
of capacity. During fiscal 1998, the Company continued to expand its focus and
invest its capital in the outbound and inbound teleservices marketplace by
adding a total of 326 workstations in its new and two existing facilities.
To effectively manage and control calling campaigns, the Company has
developed its own proprietary software. The Company uses its Track System to
monitor the status and performance of each client program throughout its life
cycle. Information relating to each customer file (including a complete record
of each sale transaction) is archived to ARCHIVE 2000, an internally generated
suite of programs that retains call history for a client specified period of
time, normally 2 years. This system is designed to respond to a client request
to review details of a particular sales call in minutes and is able to identify
the program, the date and time of the call and the TSR who recorded the sale.
The Company has implemented procedures to protect the integrity of data against
power loss, fire and other casualty.
5
Certain Customer Relationships
The Company is dependent on several large customers for a significant
portion of its revenues. Mass Marketing Insurance Group accounted for 43.7%,
JCPenney Insurance Company Ltd accounted for 15.9% and Citicorp Credit Services,
Inc. accounted for 10.8% of revenues for the year ended September 30, 1998. The
loss of or diminution in business from one or more of these customers without a
corresponding increase in business from other customers could have a material
adverse effect on the Company's business.
Competition
The teleservices industry is intensely competitive and the Company's
principal competition in its primary markets comes from large teleservices
organizations, including APAC TeleServices, Inc., ICT Group, Inc., and SITEL
Corporation, to name a few. In addition, the Company competes with the in-house
telemarketing operations of many of its clients or potential clients. The
Company also competes with direct mail, television, radio and other advertising
media, as well as emerging direct marketing channels, such as interactive
shopping and data collection through the television, the Internet and other
media.
Competition with other teleservices organizations is based primarily upon
performance (measures include sales per hour, contact rate, conversion ratio and
cost per sale), technological and reporting capabilities, industry experience,
quality of client services and staff and price. The Company believes that it
generally compares favorably with its competitors with respect to each of these
factors.
Government Regulation
Telemarketing sales practices are regulated at both the federal and state
level. The Telephone Consumer Protection Act ("TCPA") enforced by the Federal
Communications Commission ("FCC"), imposes restrictions on unsolicited automated
telephone calls to residential telephone subscribers. Under the TCPA and the
regulations promulgated thereunder, it is unlawful to initiate telephone
solicitations to residential telephone subscribers before 8:00 a.m. or after
9:00 p.m., local time at the subscriber's location, or to use automated
telephone dialing systems or artificial or prerecorded voices to call certain
subscribers. Additionally, the TCPA regulations require telemarketing firms to
develop a written policy implementing a "do not call" list and to train its
telemarketing personnel to comply with these restrictions. The TCPA creates a
right of action for both consumers and state attorneys general. A court may
award damages or impose penalties of $500 per violation, which may be trebled
for willful or knowing violations. Currently, the Company trains its service
representatives to comply with the regulations of the TCPA and programs its call
management system to avoid initiating telephone calls during restricted hours or
to individuals maintained on the Company's "do not call" list.
The FTC regulates both general sales practices and telemarketing
specifically. Under the Federal Trade Commission ("FTC") Act, the FTC has broad
authority to prohibit a variety of advertising or marketing practices that may
constitute "unfair or deceptive acts and practices." Pursuant to its general
enforcement powers, the FTC can obtain a variety of types of equitable relief,
including injunctions, refunds, disgorgement, the posting of bonds and bars from
continuing to do business for a violation of the acts and regulations it
enforces.
The FTC also administers the Telemarketing and Consumer Fraud and Abuse
Prevention Act of 1990 ("TCFAPA") under which the FTC has issued regulations
prohibiting a variety of deceptive, unfair or abusive practices in telemarketing
sales. Generally, these rules prohibit misrepresentations of the cost, quantity,
terms, restrictions, performance or characteristics of products or services
offered by telephone solicitation or of refund, cancellation or exchange
policies. The regulations also regulate the use of prize promotions in
telemarketing to prevent deception and require that a telemarketer identify
promptly and clearly the seller on whose behalf the telemarketer is calling, the
purpose of the call, the nature of the goods or services offered and, if
applicable, that no purchase or payment is necessary to win a prize. The
regulations also require that a telemarketer maintain records on various aspects
of its business.
6
Most states have enacted statutes similar to the FTC Act prohibiting unfair
or deceptive acts and practices. For example, telephone sales in certain states
are not final until a written contract is delivered to and signed by the buyer,
and such a contract often may be canceled within three business days. At least
one state also prohibits telemarketers from requiring credit card payment, and
several other states require certain telemarketers to obtain licenses, post
bonds or submit sales scripts to the state's attorney general. Under these
general enabling statutes, depending on the willfulness and severity of the
violation, penalties can include imprisonment, fines and a range of equitable
remedies such as consumer redress or the posting of bonds before continuing in
business. Additionally, some states have enacted laws and others are considering
enacting laws targeted directly at telemarketing practices. Most of these
statutes allow a private right of action for the recovery of damages or provide
for enforcement by state agencies permitting the recovery of significant civil
or criminal penalties, costs and attorneys' fees. There can be no assurance that
any such laws, if enacted, will not adversely affect or limit the Company's
current or future operations.
The industries served by the Company are also subject to government
regulation, and, from time to time, bills are introduced in Congress which, if
enacted, would affect the Company's operations. The Company and its employees
who sell insurance products are required to be licensed by various state
insurance commissions for the particular type of insurance product to be sold
and are required to participate in regular continuing education programs, which
are currently paid for by the Company.
The Company believes that it is in compliance with all applicable
regulations.
ITEM 2. PROPERTIES
----------
The Company's corporate headquarters facility is located in Bryn Mawr,
Pennsylvania in an approximately 45,000 square-foot building leased to the
Company through December 2001.
The Company also leases all of the facilities used in its call center
operations. The Company believes that its existing facilities are suitable and
adequate for its current operations, but additional facilities will be required
to support growth. As of November 30, 1998, the Company operated the following
call centers.
Date of
Date of Initial Most Recent Current
Location Opening Workstations Expansion Workstations
- -------- ------- ------------ --------- ------------
Bryn Mawr, PA(1)........ March 1985 15 November 1996 112
Lansdowne, PA(2)........ October 1990 80 November 1996 120
Pleasantville, NJ....... November 1992 64 February 1996 96
Scranton, PA............ July 1993 64 May 1996 88
Wilkes-Barre, PA........ April 1994 64 March 1996 88
Reading, PA............. February 1995 64 October 1996 96
Ocean Township, NJ...... November 1995 80 November 1996 96
Allentown, PA........... April 1996 80 June 1997 106
Harrisburg, PA.......... October 1996 80 March 1997 96
Delran, NJ(3)........... March 1997 100 June 1998 304
York, PA(4)............. June 1997 80 May 1998 184
Ewing Township, NJ...... July 1998 64 November 1998 124
Largo, FL............... October 1998 96 October 1998 96
----
TOTAL 1,606
=====
(1) Facilities transferred from Wynnewood, PA (the original headquarters) to
Bryn Mawr in September 1995.
(2) Includes a 24-seat inbound capability.
(3) Includes a 70-seat inbound capability.
(4) Includes a 40-seat inbound capability.
The Company believes that suitable additional or alternative space will be
available as needed on commercially reasonable terms.
7
ITEM 3. LEGAL PROCEEDINGS
-----------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not Applicable.
Executive Officers of the Company
The executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
John A. Fellows........... 34 Director and Chief Executive Officer
Robert M. Berwanger....... 42 Chief Operating Officer
Michael J. Scharff........ 52 Executive Vice President and acting
Chief Financial Officer
Diane Bowser.............. 45 Senior Vice President of Operations
David Clautice............ 56 Vice President of Management Information Systems
Christina Johnson......... 55 Vice President of Corporate Training and
Process Development
Darrell Jones............. 37 Vice President of Business Development
Eric Kligman.............. 35 Vice President of Outbound Operations
Dean McCarney............. 33 Vice President of Account Management -
Financial Services
Ellen Ritson.............. 45 Vice President of Operations Recruiting, Training
& Quality
Suzanne Snyder............ 35 Vice President of Account Management - Insurance
James Wallace............. 46 Vice President of MIS Systems and Programming
Michael Weston............ 38 Vice President of Sales
Mr. Fellows joined the Company as Chief Executive Officer in September 1998
and was elected to the Board of Directors in December 1998 to fill the unexpired
term of Raymond J. Hansell who resigned from the Board of Directors in December
1998. Prior to joining the Company, Mr. Fellows held various management
positions at Pepsico, Inc. and then served in senior positions at Paging
Network, Inc. before becoming President of Telequest Teleservices, an Arlington,
Texas based teleservices company. While President of Telequest Teleservices, Mr.
Fellows had responsibility for a business with ten call centers and was very
successful in helping refocus Telequest's historical product offerings,
including retooling and enhancing the inbound portfolio of their teleservices
business.
Mr. Berwanger joined the Company as Senior Vice President of Operations in
March 1997 and was named an Executive Vice President in December 1997. In March
1998, Mr. Berwanger was named Chief Operating Officer. For 14 years prior to
joining the Company, Mr. Berwanger was employed by American Transtech, a
wholly-owned teleservices subsidiary of AT&T where he most recently served as
Director, New Business Development. Mr. Berwanger's tenure at AT&T included
oversight of American Transtech's outbound telemarketing operation, start-up and
oversight of a large-scale call center in Canada, and management of the AT&T
multi-lingual call centers in San Jose, California.
8
Mr. Scharff is the Company's Executive Vice President and acting Chief
Financial Officer and since November 1994 has been Treasurer of the Company. Mr.
Scharff was Senior Vice President of Finance of the Company from November 1995
to September 1996 and Vice President of Finance of the Company from November
1994 to November 1995. From January 1994 to November 1994, Mr. Scharff was an
Assistant Vice President of the Company and, from the time he joined the Company
in October 1988 until January 1994, Mr. Scharff served as the Company's
Controller. From 1984 until joining the Company, Mr. Scharff was the President
of Audobon Automotive Supply Co., an automotive parts distributor. Mr. Scharff
was a divisional controller of Safeguard Business Systems from 1979 to 1984.
Ms. Bowser recently joined RMH as Senior Vice President of Operations
responsible for the Financial and General Business Partners. Ms Bowser comes
from Fleet Financial/ Advanta Corporation where she served in various
operational functions from 1981. Ms Bowser managed a customer base of over 6
million and 900 employees in three operational sites. Ms Bowser was also
responsible for employee training, vendor management and quality assurance.
Mr. Clautice serves as the Company's Vice President of Management
Information Systems. From June 1995 to December 1995, Mr. Clautice served as the
Company's Director of Methods and Procedures. Prior to joining the Company in
June 1995, Mr. Clautice was President of Clautice Associates, Inc., an
information systems consulting firm he founded in 1974. From 1974 to 1985, Mr.
Clautice was President of Electronic Processing Center, a data processing
service organization.
Ms. Johnson currently serves as Vice President of Corporate Training and
Process Development. Ms Johnson joined the Company in 1994, after nearly
seventeen years with Safeguard Business Systems. While at Safeguard, Ms. Johnson
served as Director of Quality Initiative (TQM) and was responsible for corporate
training and human resources. Prior to that, Ms. Johnson served as Marketing
Director for the core product line.
Mr. Jones recently joined the Company as Vice President of Business
Development. Prior to joining the Company, Mr. Jones was Director of Business
Development for Telequest Teleservices and National Sales Manager for Century
Telecommunications. From 1991 to 1997 Mr. Jones was Territory Manager for NMI
Corporation. Mr. Jones served as Senior Account Executive for AT&T Wireless
Services from 1989 to 1991.
Mr. Kligman serves as Vice President of Outbound Operations, managing all
insurance product call centers. Mr. Kligman joined the company in 1990 as a
supervisor in one of the call centers and, prior to assuming his current
position, served as General Manager of one site.
Mr. McCarney is Vice President of Account Management for Financial Services
and General business partners. Since joining the Company in 1990, Mr. McCarney
has managed various areas of the Company including technical training, sales to
national accounts and client services.
Ms. Ritson is the Company's Vice President of Operations Recruiting,
Training & Quality. Ms. Ritson joined the Company in 1993 and comes to the
Company with over 15 years of experience in retail operations management.
Ms. Snyder serves as Vice President of Account Management for the Insurance
Division. Ms. Snyder joined the Company in 1990 after nearly five years in the
retail management arena. Ms. Snyder manages the activity of the Company's
insurance customers and oversees the licensing department, the Company
compliance function and overall recruitment of licensed agents.
9
Mr. Wallace is Vice President of MIS Systems and Programming and is
responsible for the coordinating, testing, and implementing of all Company and
customer programming needs. Prior to joining the Company, Mr. Wallace was an
independent systems consultant servicing a broad range of clients with both
programming and project management needs.
Mr. Weston is currently Vice President of Sales. Prior to joining the
Company, Mr. Weston served as National Sales Director of Telequest Teleservices
from May 1996 to September 1998. From October 1994 to May 1996 Mr. Weston was an
Account Executive at Somar. Mr. Weston also served in various sales capacities
with two major insurance companies.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
---------------------------------------------------------------------
The Company completed the Initial Public Offering on September 18, 1996
selling 3,220,000 shares of its Common Stock at a price of $12.50 per share.
Since the Initial Public Offering, the Company's Common Stock has been quoted on
the Nasdaq National Market under the symbol "RMHT." Prior to the Initial Public
Offering, the Common Stock was not listed or quoted on any organized market
system. The following table sets forth for the periods indicated the high and
low closing sale prices of the Common Stock as reported on the Nasdaq National
Market during the fiscal years ended September 30, 1997 and 1998.
HIGH LOW
---- ---
First Fiscal Quarter of 1997................. $17.00 $ 6.13
Second Fiscal Quarter of 1997................ 8.25 5.00
Third Fiscal Quarter of 1997................. 8.50 4.88
Fourth Fiscal Quarter of 1997................ 9.13 6.25
First Fiscal Quarter of 1998................. 8.88 4.75
Second Fiscal Quarter of 1998................ 6.25 3.44
Third Fiscal Quarter of 1998................. 4.38 3.25
Fourth Fiscal Quarter of 1998................ 3.38 1.63
As of December 21, 1998 there were 36 shareholders of record of the Common
Stock. The Company has not declared dividends on the Common Stock during the
past two fiscal years. The Company currently intends to retain future earnings
to finance its growth and development and therefore does not anticipate paying
any cash dividends in the foreseeable future. In addition, the Company's credit
facilities restrict the payment of cash dividends by the Company. Payment of any
future dividends will depend upon the future earnings and capital requirements
of the Company and other factors which the Board of Directors consider
appropriate. The Company sold no securities during fiscal 1998.
10
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Financial Statements of the Company and notes thereto
included elsewhere in the Report.
For The Year Ended September 30
-------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations Data:
Revenues ....................................................... $ 52,434 $ 45,937 $ 32,316 $ 25,545 $ 17,105
-------- -------- -------- -------- --------
Operating expenses
Cost of services ............................................ 39,646 31,749 22,212 18,210 13,286
Selling, general and administrative (1) ..................... 12,461 9,469 6,669 5,312 3,007
Special bonuses (2) ......................................... -- -- 6,087 -- --
-------- -------- -------- -------- --------
Total operating expenses ................................. 52,107 41,218 34,968 23,522 16,293
-------- -------- -------- -------- --------
Operating income (loss) .................................. 327 4,719 (2,652) 2,023 812
Interest income (expense) (3) .................................. 541 473 (1,893) (261) (170)
-------- -------- -------- -------- --------
Income (loss) before income taxes (benefit) and
extraordinary item ................................... 868 5,192 (4,545) 1,762 642
Income taxes (benefit) (4) ..................................... 364 1,825 (1,222) 21 40
-------- -------- -------- -------- --------
Income (loss) before extraordinary item .................. 504 3,367 (3,323) 1,741 602
Extraordinary item, net of tax benefit (5) ..................... -- -- 582 -- --
-------- -------- -------- -------- --------
Net income (loss) .............................................. 504 3,367 (3,905) 1,741 602
Preferred stock dividends ...................................... -- -- 308 -- --
-------- -------- -------- -------- --------
Net income (loss) available to Common
shareholders (4) ............................................ $ 504 $ 3,367 $ (4,213) $ 1,741 $ 602
======== ======== ======== ======== ========
Basic Income (Loss) Per Common Share
Income (loss) before extraordinary item ..................... $ .06 $ .41 $ (.47) $ .17 $ .06
Extraordinary item .......................................... -- -- (.08) -- --
-------- -------- -------- -------- --------
Basic net income (loss) per Common share .................... $ .06 $ .41 $ (.55) $ .17 $ .06
======== ======== ======== ======== ========
Diluted Income (Loss) Per Common Share
Income (loss) before extraordinary item ..................... $ .06 $ .41 $ (.47) $ .17 $ .06
Extraordinary item .......................................... -- -- (.08) -- --
-------- -------- -------- -------- --------
Diluted net income (loss) per Common share .................. $ .06 $ .41 $ (.55) $ .17 $ .06
======== ======== ======== ======== ========
September 30
--------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Working capital ................................................ $ 18,162 $ 17,384 $ 12,899 $ 1,061 $ 829
Total assets ................................................... 27,335 25,286 22,555 8,757 5,576
Long-term debt, less current maturities ........................ -- -- -- 592 355
Capitalized lease obligations, less current maturities ......... -- -- 2 436 623
Loans payable to shareholders .................................. -- -- -- 133 125
Shareholders' equity ........................................... 22,187 21,683 18,315 3,668 1,927
- ----------------
1) Selling, general and administrative expenses include Founders' compensation
of $415,000, $400,000, $598,000, $766,000 and $660,000 for fiscal 1998,
1997, 1996, 1995 and 1994, respectively.
2) Special bonuses in fiscal 1996 are bonuses and related payroll taxes in the
amount of $6,087,000 paid to the Founders. Pursuant to employment contracts
entered into and effective in May 1996, the Founders' compensation was
fixed at a combined base amount of $400,000 per year for three years
(subject to annual adjustment based on the inflation rate), plus a
discretionary bonus which was not expected to exceed 20% of base
compensation. On August 14, 1998, the Founders entered into consulting
agreements with the Company which replace the aforementioned employment
contracts. The agreements commenced on September 9, 1998 and expire on May
31, 1999. The agreements require annual basis payments of $104,000 for each
of the Founders.
3) In fiscal 1996 interest expense includes a one-time charge of $1,177,000
relating to interest expense on a Founders' note.
11
4) The Company operated as an S Corporation for income tax purposes since
April 1, 1990 and terminated such status in connection with the
Recapitalization.
5) The $582,000 extraordinary expense, net of an income tax benefit,
represents the write-off of certain deferred financing costs associated
with the early extinguishment of bank indebtedness.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
Safe Harbor For Forward Looking Statements
The following discussion of the Company's historical results of operations
and its liquidity and capital resources should be read in conjunction with
"Selected Financial Information" and the Financial Statements of the Company and
Notes thereto appearing elsewhere in this document.
From time-to-time, the Company may publish statements which are not
historical facts but are forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provided a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include, but are not limited to: (i) reliance on principal client relationships
in the insurance and financial services industry; (ii) fluctuations in quarterly
results of operations due to the timing of clients' telemarketing campaigns, the
timing of opening of new call centers and expansion of existing call centers and
changes in competitive conditions affecting the telemarketing industry; (iii)
difficulties of managing growth profitably; (iv) dependence on the services of
the Company's executive officers and other key operations and technical
personnel; (v) changes in the availability of qualified employees (vi)
performance of its automated call-processing systems and other technological
factors; (vii) the impact of Year 2000 issues on the Company; (viii) reliance on
independent long-distance companies; (ix) changes in government regulations
affecting the teleservices and telecommunications industries; (x) competition
from other outside providers of teleservices and in-house telemarketing
operations of existing and potential clients; and (xi) competition from
providers of other marketing formats, such as existing formats such as direct
mail and emerging strategies such as interactive shopping and marketing over the
Internet.
Overview
The Company is a leading provider of outbound and inbound teleservices to
major corporations in the insurance, financial services, telecommunications, and
membership services industries. Founded in 1983 by Raymond J. Hansell and
MarySue Lucci to provide direct marketing and sales consulting, the Company
opened its first call center focusing on business-to-business teleservices in
1985 to support the marketing efforts of its consulting customers. By the late
1980s, outbound business-to-consumer teleservices had become the predominant
business of the Company. On May 24, 1996, the Company completed the
Recapitalization which included the purchase of a significant equity interest in
the Company by Advanta Partners. On September 24, 1996 the Company completed the
Initial Public Offering from which it realized proceeds, after the deduction of
underwriting discounts and commissions of $37.4 million. In connection with the
Initial Public Offering, the Company redeemed all outstanding preferred stock.
Specifically, the Company: (i) issued an aggregate of 400,000 shares of the
Common Stock to the Founders in exchange for Series A Preferred Stock and a 6%
subordinate promissory note for $4.0 million (the "Founders' Note") held by the
Founders; and (ii) redeemed an aggregate of 6,500,000 shares of Series B
Preferred Stock held by Advanta Partners and Glengar International Investments
Limited. The Company also combined existing classes of common stock by
converting shares of Class B Common Stock into an equal number of shares of
Class A Common Stock, thereby leaving the Common Stock as the sole equity
security of the Company.
12
The Company's business has grown rapidly, resulting in increases in
revenues during each of the last three fiscal years. The increase in revenues
from $32.3 million in fiscal 1996 to $52.4 million in fiscal 1998, has largely
been driven by increases in call volumes from existing clients, primarily in the
insurance industry, coupled with the development of new clients primarily in the
financial services, membership services and telecommunications industry. There
is no assurance that the Company will be able to maintain its historical profit
margins, which may be adversely affected by, among other factors, the pricing of
such business and additional technological, labor and other costs involved in
servicing such business. Operating income (exclusive of any special compensation
expenses and one-time charges) decreased from $3.4 million or 10.6% of revenues
in fiscal 1996 to $327,000 or 0.6% of revenues in fiscal 1998.
Operating income decreased in 1998 when compared to 1997 as a result of the
increase in cost of services as a percentage of revenues, partially offset by
growth in revenue. Cost of services, which primarily consists of labor,
telephone and other call center-related operating and support expenses,
increased from 69.1% of revenues in fiscal 1997 to 75.6% of revenues in fiscal
1998. These costs have increased as a percentage of revenues as the Company has
encountered a tight labor market, resulting in higher average hourly pay rates
coupled with difficulties in staffing its existing call centers. In 1997, cost
of services increased slightly as a percentage of revenues from 68.7% in 1996 to
69.1% in 1997 as certain factors that caused cost of services to decline were
offset by pricing pressures and the costs of opening new call centers that were
under utilized in 1997. These factors included expansion of call centers into
lower cost geographic areas, improved operating efficiencies, negotiation of
more favorable long distance rates and the maintenance of hourly wage rates.
Selling, general and administrative expenses are comprised principally of
corporate expenses, including management, sales and marketing activities,
account management services, accounting and finance, human resources,
information services and other administrative costs.
The Company was subject to taxation under Subchapter S of the Internal
Revenue Code of 1986, as amended, from April 1, 1990 to May 24, 1996. As a
result, the net income of the Company, for federal and certain state tax
purposes, was taxed directly to the Company's Founders rather than the Company.
Upon completion of the Recapitalization, the Company terminated its Subchapter S
status. In fiscal 1996, certain charges were incurred in connection with the
Recapitalization of the Company and the Initial Public Offering. As a result of
these charges the Company incurred a net operating loss for fiscal 1996. In
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, a calculation as to the realizability of the net operating
loss carry forward was made taking into account the Company's ability to
generate sufficient taxable income and thereby realize the benefit of the net
operating loss prior to its expiration. As a result of this analysis, the
Company recorded a deferred tax asset of $1.1 million in fiscal 1996.
Results of Operations
The following table sets forth statements of operations and other data as a
percentage of revenues from services provided by the Company for the periods
indicated:
For The Year Ended September 30
-------------------------------
1998 1997 1996
------ ------ ------
Revenues 100.0% 100.0% 100.0%
------ ------ ------
Operating expenses:
Cost of services 75.6 69.1 68.8
Selling, general and administrative(1) 23.8 20.6 20.6
Special bonuses(2) -- -- 18.8
------ ------ ------
Total operating expenses 99.4 89.7 108.2
------ ------ ------
Operating income (loss) 0.6 10.3 (8.2)
Interest income (expense)(3) 1.1 1.0 (5.9)
------ ------ ------
Income (loss) before income taxes
(benefit) and extraordinary item 1.7 11.3 (14.1)
Income taxes (benefit) 0.7 4.0 (3.8)
Extraordinary item, net of tax benefit(4) -- -- 1.8
------ ------ ------
Net income (loss) 1.0% 7.3% (12.1)%
====== ====== ======
13
(1) Compensation to Founders represents approximately 0.8%, 0.9% and 1.9% of
revenues for fiscal 1998, fiscal 1997 and fiscal 1996, respectively.
(2) Special Bonuses in fiscal 1996 include cash bonuses and related payroll
taxes in the amount of $6,087,000 paid to the Founders.
(3) During 1996, 3.6% of revenues represents interest expense incurred as the
result of the exchange of the Founders' Note for Common Stock.
(4) During 1996, the Company incurred an extraordinary loss of $582,000, net of
taxes, on the early extinguishment of bank indebtedness.
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September 30,
1997
Revenues. Revenues increased to $52.4 million in fiscal 1998 from $45.9
million in fiscal 1997, an increase of $6.5 million or 14.1%. Of such increase
in revenues, approximately $9.8 million was attributable to increased calling
volumes from existing clients, $3.6 million to new clients in the membership
services industry, $0.6 million to new clients in the financial services
industry and $0.6 million to new clients in other industries, which together
offset any decreases in revenues from other existing clients. To meet the
demands of increased call volumes, the Company added a total of 326 workstations
during the year, 64 at one new call center in Ewing Township, New Jersey, and
expanded capacity in two existing call centers by 262 workstations.
Cost of Services. Cost of services increased to $39.6 million in fiscal
1998 from $31.7 million in fiscal 1997. As a percentage of revenues, cost of
services increased to 75.6% in fiscal 1998 from 69.1% in fiscal 1997. The
increase during fiscal 1998 was the result of labor cost pressure and pricing
pressures incurred together with costs associated with opening one new call
center and increasing capacity in two others which were less than fully utilized
over the twelve-month period. The Company anticipates that cost of services, as
a percentage of revenues, may increase during the next year to the degree that
large volume opportunities warrant the Company offering appropriate pricing
discounts, to the extent that the Company requires a longer period of time to
generate acceptable levels of utilization at its new call centers, and/or the
Company experiences upward pressures on hourly wages as a result of tighter or
more competitive labor markets.
Selling, General, and Administrative. Selling, general and administrative
expenses increased to $12.5 million in fiscal 1998 from $9.5 million in fiscal
1997. As a percentage of revenues, selling, general and administrative expenses
increased to 23.8% in fiscal 1998 from 20.6% in fiscal 1997. The dollar increase
was primarily the result of increasing staffing and operating costs required to
support both the growth in the Company's revenues and the on-going requirements
of its customers with respect to technology and programming requirements.
Interest Income. Interest income was $541,000 and $473,000 for fiscal 1998
and 1997 respectively and was earned by investing the remaining proceeds of the
Company's Initial Public Offering in short term investments.
Income Tax Expense. Income tax expense was $364,000 and $1.8 million for
fiscal 1998 and 1997 respectively and represents income taxes based upon the
Company's effective tax rate. This tax rate is reflective of both the federal
tax rate in effect and those state tax rates in effect where the Company does
business coupled with certain tax planning strategies implemented in fiscal
1996.
14
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30,
1996
Revenues. Revenues increased to $45.9 million in fiscal 1997 from $32.3 in
fiscal 1996, an increase of $13.6 million or 42.1%. Of such increase in
revenues, approximately $9.0 million was attributable to increased calling
volumes from existing clients, $4.5 million to new clients in the
telecommunications industry, $1.7 million to new clients in the financial
services industry and $800,000 to new clients in other industries, which
together offset any decreases in revenues from other existing clients. To meet
the demands of increased call volumes, the Company added a total of 364
workstations during the year, spread across three new call centers in
Harrisburg, PA, Delran, NJ, and York, PA, and expanded capacity in three
existing call centers by 58 workstations.
Cost of Services. Cost of services increased to $31.7 million in fiscal
1997 from $22.2 million in fiscal 1996. As a percentage of revenues, cost of
services increased to 69.1% in fiscal 1997 from 68.8% in fiscal 1996. This
increase was the result of specific pricing pressures incurred in its insurance
business coupled with the costs of opening three new call centers, during the
year, which were less than fully utilized over the twelve-month period.
Selling, General, and Administrative. Selling, general and administrative
expenses increased to $9.5 million in fiscal 1997 from $6.7 million in fiscal
1996. As a percentage of revenues, selling, general and administrative expenses
remained fixed at 20.6% during fiscal years 1997 and 1996. The dollar increase
was primarily the result of increasing staffing and operating costs required to
support both the growth in the Company's revenues and the on-going requirements
of its customers with respect to technology and programming requirements.
Interest Income (Expense). Interest income was $473,000 for fiscal 1997 and
was earned by investing the remaining proceeds of the Company's Initial Public
Offering in short term investments. Interest expense was $1.9 million for fiscal
1996 of which $1.6 million relates to certain interest incurred as a result of
the Company's Recapitalization and interest paid on the Founders' Note.
Income Tax Expense (Benefit). Income tax expense was $1.8 million for
fiscal 1997 and represents income taxes based upon the Company's effective tax
rate. This tax rate is reflective of both the federal tax rate in effect and
those state tax rates in effect where the Company does business coupled with
certain tax planning strategies implemented in fiscal 1996. During 1996, the
Company generated a net operating loss carry forward. In accordance with SFAS
No. 109, a calculation as to the realizability of the net operating loss carry
forward was made taking into account the Company's ability to generate
sufficient taxable income and thereby realize the benefit of the net operating
loss prior to its expiration. As a result of this analysis, the Company recorded
a tax benefit of $1.6 million in fiscal 1996.
Liquidity and Capital Resources
Historically, the Company's primary sources of liquidity have been cash
flow from operations and borrowings under its credit facilities. These funds,
combined with borrowings under capitalized lease obligations, have provided the
liquidity to finance the growth of the Company.
On September 24, 1996 the Company completed the Initial Public Offering and
raised net proceeds of approximately $37.4 million. The Company used
approximately $27.9 million of these proceeds to repay all bank indebtedness,
redeem outstanding Series B Preferred Stock and pay the Special Bonuses. The
remaining $9.5 million has been and will continue to be used for working capital
and general corporate purposes. Upon completion of the Company's Initial Public
Offering, the Company issued 400,000 shares of the Common Stock to the Founders
in exchange for Series A Preferred Stock and the Founders' Note.
15
On March 21, 1997, the Company entered into a new $4.0 million line of
credit facility (the "Credit Line") with PNC Bank (the "Bank"). The Credit Line
replaces the Company's former Term Loan and Credit Facility originated in
conjunction with the Recapitalization. The Credit Line expired on April 1, 1998,
but was extended by the Bank to April 1, 1999. Outstanding balances bear
interest at the Company's option at either the LIBOR rate plus 95 basis points
or at the Bank's prime rate minus fifty basis points. The Credit Line is secured
by all of the assets of the Company and contains financial covenants and certain
restrictions on the Company" ability to incur additional debt or dispose of its
assets. As of September 30, 1998, the Company had no draws outstanding on the
Credit Line.
This Credit Line compares favorably with a former term loan and credit
facility which bore interest at either the LIBOR rate plus 250 to 300 basis
points or the prime rate plus 100 to 150 basis points and required an annual fee
of $15,000 and an annual commitment fee of one-half of 1% on the average unused
portion of such term loan and credit facility. Although total borrowing
capability is $4.0 million under the Company's Credit Line versus $6.0 million
under its former term loan and credit facility, the Company believes that the
existing line will be sufficient to finance its current operations at least
through the end of fiscal 1999.
Under a separate agreement dated February 22, 1997, with PNC Leasing
Corporation, the Company has up to $6.0 million available for purposes 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.
As of September 30, 1998, the Company had financed $4.1 million of equipment
purchases under this facility.
Under a separate agreement dated March 10, 1998, with PNC Leasing
Corporation, the Company has established an additional lease facility of $6.0
million available for purposes of leasing call center equipment. The $6.0
million commitment expires on April 1, 1999, and requires that such leases meet
the accounting definition of an operating lease with rent to be paid over a
period not to exceed sixty months. As of September 30, 1998, the Company has
financed $2.3 million of equipment purchases under this facility.
Cash provided by operating activities was approximately $144,000 and $2.5
million for the fiscal years ended September 30, 1998 and 1997 respectively. The
reduction in cash provided by operations was the result of the decrease in the
Company's net income in 1998 and a reduction in non-cash income taxes offset by
an increase in accounts payable and accrued expenses.
The Company's teleservices operations will continue to require significant
capital expenditures. Capital expenditures, including capitalized leases, in
applicable periods, were $2.9 million in fiscal 1996, $1.1 million in fiscal
1997 and $1.2 million in fiscal 1998. The Company expects to spend approximately
$9.4 million on capital expenditures in fiscal 1999, primarily for the
enhancement of technology used throughout its call center operations and
additional call center expansion. However, in conjunction with such
expenditures, the Company is evaluating whether to lease or buy such assets and
may decide to enter into operating leases for their acquisition.
The Company believes that funds generated from operations, together with
the remaining proceeds of its Initial Public Offering and available credit under
the Credit Line and the lease line of credit will be sufficient to finance its
current operations and planned capital expenditures at least through fiscal
1999.
16
Quarterly Results of Operations
The following table sets forth statement of operations data for each of the
four quarters of fiscal 1997 and 1998, as well as such data expressed as a
percentage of revenues. This quarterly information is unaudited, but has been
prepared on a basis consistent with the audited Financial Statements of the
Company presented elsewhere and, in the Company's opinion, includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the information for the quarters presented. The results for
any quarter are not necessarily indicative of results for any future period.
Quarter Ended
--------------------------------------------------------------------------------------
Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30
1996 1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
(amounts in thousands)
Revenues $ 9,749 $ 11,322 $ 12,698 $ 12,168 $ 12,247 $ 12,337 $ 13,212 $ 14,638
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Cost of services 6,623 7,580 8,858 8,688 8,983 9,313 $ 10,155 $ 11,195
Selling, general and admin 2,032 2,437 2,553 2,447 2,564 3,612 3,052 3,233
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses 8,655 10,017 11,411 11,135 11,547 12,925 13,207 14,428
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) 1,094 1,305 1,287 1,033 700 (588) 5 210
Interest income 111 102 133 127 148 121 145 127
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes (benefit) 1,205 1,407 1,420 1,160 848 (467) 150 337
Income taxes (benefit) 434 506 477 408 305 (168) 54 173
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 771 $ 901 $ 943 $ 752 $ 543 $ (299) $ 96 $ 164
======== ======== ======== ======== ======== ======== ======== ========
Quarter Ended
--------------------------------------------------------------------------------------
Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30
1996 1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Cost of services 67.9 67.0 69.8 71.4 73.3 75.5 76.9 76.5
Selling, general and admin 20.8 21.5 20.1 20.1 21.0 29.3 23.1 22.1
Total operating expenses 88.7 88.5 89.9 91.5 94.3 104.8 100.0 98.6
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) 11.3 11.5 10.1 8.5 5.7 (4.8) 0.0 1.4
Interest income 1.1 .9 1.1 1.0 1.2 1.0 1.1 0.9
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes (benefit) 12.4 12.4 11.2 9.5 6.9 (3.8) 1.1 2.3
Income taxes (benefit) 4.5 4.5 3.8 3.3 2.5 (1.4) 0.4 1.2
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) 7.9% 7.9% 7.4% 6.2% 4.4% (2.4)% 0.7% 1.1%
======== ======== ======== ======== ======== ======== ======== ========
The Company has experienced and expects to continue to experience quarterly
variations in operating results, principally as a result of the timing of
clients' telemarketing campaigns, the commencement and expiration of contracts,
the timing and amount of new business generated by the Company, the Company's
revenue mix, the timing of the opening of call centers or expansion of existing
centers, the timing of additional selling, general and administrative expenses
and competitive conditions in the teleservices industry. While the effects of
seasonality on the Company's business have historically been obscured by its
growing revenues, the Company's business tends to be slower in the fourth
quarter of its fiscal year due to a certain segment of its workforce turning
over coupled with a slowdown in client marketing programs during the summer
months.
17
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements and requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is required to be adopted for the Company's
fiscal year ending September 30, 1999. The adoption of this pronouncement is
expected to have no material impact on the Company's financial position or
results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. The Company will adopt SFAS No. 131 for its fiscal year ending
September 30, 1999 financial statements. Management believes that SFAS No. 131
will not have a material effect on the Company's financial statements.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." This statement
requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software, and is effective for fiscal years beginning after December
15, 1998. The statement also requires that costs related to the preliminary
project stage and post implementation/operations stage in an internal-use
computer software development project be expensed as incurred. During the fiscal
year ended September 30, 1998, the Company recorded all applicable costs in
accordance with the guidance proscribed in SOP 98-1.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities," which is effective for fiscal years beginning after
December 15, 1998 and provides guidance on the financial reporting of start-up
activities and organization costs. It requires costs of start-up activities to
be expensed as incurred. SOP 98-5 is required to be adopted for the Company's
fiscal year ending September 30, 1999. The adoption of this pronouncement is
expected to have no material impact on the Company's financial position or
results of operations.
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
The year 2000 problem arises as a result of computer programs being written
using two digits rather than four to define the applicable year. In other words,
date-sensitive software, including those with embedded microprocessors, may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system and equipment failures or malfunctions causing
disruptions of operations, including among others, a temporary inability to
process calls, transactions and information, or engage in similar normal
business activities.
The Company's Internal Systems. The Company has evaluated its
infrastructure as it relates to information technology and has developed a plan
to ensure its Year 2000 compliance. This plan includes, among other things,
replacing certain systems with new internally developed Year 2000 compliant
systems, upgrading the remaining software systems to be Year 2000 compliant.
Year 2000 compliant upgrades to the Company's predictive dialing equipment are
approximately 40% complete with full completion planned by February 1999. These
processes will allow the Company to receive lead information, make and receive
calls, and produce reports on compliant and non-compliant date formats.
Modification and testing of all information and noninformation systems are
scheduled to be completed by March 1999. In addition, the Company will also be
replacing 55 non-compliant personal computer workstations by February 1999.
18
The Company is also in the process of evaluating its security systems,
copiers and other noninformation technology infrastructure in which
non-compliant software or embedded microprocessors might exist. The Company
believes that all material components in this infrastructure will be Year 2000
compliant by the end of fiscal 1999.
Readiness of Third Parties. The Company has requested information from its
third party vendors and clients on their Year 2000 readiness to determine the
extent to which their inability to be Year 2000 compliant will affect the
Company. This process has included identifying vendors and defining the
readiness of their products and services. The Company's primary focus as it
relates to vendors is on those that support the teleservices platform and
information technology platforms, followed by all others. The Company is
approximately 25% through the vendor compliance documentation process which
includes use of vendor compliance documentation published on the internet. A
similar process will be followed with clients to assess their Year 2000
readiness. The Company's software is being modified to accept two digit year or
four digit century inputs, and will output in either format. Accordingly, the
Company is prepared for either occurrence and should not be adversely affected
by year format.
Cost of Year 2000 Compliance. The Company has incurred minimal costs to
date in addressing the Year 2000 issue. The Year 2000 evaluation, modification
and testing that has been undertaken to date has not had a material effect on
the Company's ability to deliver reports and other output on a timely basis.
However, the Company anticipates that the Year 2000 project could affect
development of internal systems nearing the latter part of fiscal 1999. The
Company currently expects that the total costs to become Year 2000 compliant
will not exceed $750,000. Hardware costs are projected to be approximately
$300,000, software costs are projected to be approximately $250,000, and
consulting and testing costs are projected to be approximately $200,000. The
Company is researching the use of a third party to independently review its plan
and processes. New capital equipment which the Company will require will be
either purchased or financed under the Company's operating lease line. The
remaining costs will be financed out of operating working capital.
Risks Associated with the Year 2000. The extent of the Company's Year 2000
exposure, the costs of achieving Year 2000 compliance and the time period within
which the Company believes it will achieve its Year 2000 compliance are based on
management's knowledge to date and its best estimates. The Company is not aware,
at this time, of any internal or third party vendor Year 2000 non-compliance
that will not be fixed by the Year 2000 and that will materially affect the
Company. However, these estimates were derived using numerous assumptions, and
some risks that the Company faces include: the failure of internal information
systems, the failure of third parties to provide services, such as electricity
and telecommunication services and a slow down in clients ability to make
payments. There can be no assurance that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel, the ability to identify and correct all Year
2000 impacted areas, the ability of third party vendors and clients to be Year
2000 compliant and other similar uncertainties.
Contingency Plans. The Company believes that the most reasonably likely
worst case scenario, other than the loss of telecommunications and power, is
loss of the dialers which will prevent the Company from generating revenue. It
is reasonable to assume that there might be some interruptions related to
specific campaigns and applications. The Company is in the process of developing
contingency plans. Such plans are expected to be completed by July 1999.
19
ITEM 7A. 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 to 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 presents principal (or notional) amounts and related
weighted average interest rates for the Company's investment portfolio as of
September 30, 1998. All investments mature in one year or less.
Principal Amount Fair Value
---------------- ----------
(In Thousands)
------------
Assets
Cash equivalents:
Variable rate $ 2,141 $ 2,141
Average interest rate 5.26% 5.26%
Marketable securities:
Fixed rate 6,950 6,779
Average interest rate 5.51% 5.51%
--------- ---------
Total investments $ 9,091* $ 8,920
========= =========
* Includes $83,000 of unaccrued interest to be received at maturity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Financial statements and supplementary financial information specified by
this Item, together with the Reports of the Company's independent accountants
thereon, are included in this Annual Report on Form 10-K on pages F-1 through
F-22 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item with respect to the directors of the
Company and with respect to Item 405 of Regulation S-K is incorporated herein by
reference to the information set forth in the Registrant's Proxy Statement for
the Annual Meeting of Shareholders to be held on February 23, 1999 (the "Proxy
Statement"). The information required by this Item with respect to executive
officers of the Company is furnished in a separate item captioned "Executive
Officers of the Company" and included in Part I of this Annual Report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item is incorporated herein by reference
to the information set forth in the Proxy Statement.
20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item is incorporated herein by reference
to the information set forth in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this Item is incorporated herein by reference
to the information set forth in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) Documents filed as a part of this Report:
(1) Financial Statements. Page
----
Report of Independent Accountants--------------------------F-1
Consolidated Balance Sheets--------------------------------F-2
Consolidated Statements of Operations----------------------F-3
Consolidated Statements of Shareholders' Equity------------F-4
Consolidated Statements of Cash Flows----------------------F-5
Notes to Consolidated Financial Statements-----------------F-6
(2) Financial Statement Schedules.
Schedule II - Valuation & Qualifying Accounts for the Three Year
Ended September 30, 1998
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Additions Balance at
Beginning Charged to End of
of Period Expense Deductions(1) Period
--------- ------- ---------- ------
Allowance for
doubtful accounts:
September 30, 1998 $ 37,000 $114,000 $114,000 $ 37,000
September 30, 1997 $ 10,000 $ 27,000 $ -- $ 37,000
September 30, 1996 $ 47,000 $ 38,000 $ 75,000 $ 10,000
(1) Represents accounts written off against the allowance.
(3) Exhibits
See attached
(b) Reports on Form 8-K
None
21
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, 1998 By: /s/ John A. Fellows
-----------------------------
John A. Fellows
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signatures Title Date
---------- ----- ----
/s/ John A. Fellows Chief Executive Officer December 28, 1998
- ------------------------ (Principal Executive Officer)
John A. Fellows
/s/ Michael J. Scharff Executive Vice President December 28, 1998
- ------------------------ and acting Chief Financial Officer
Michael J. Scharff (Principal Financial,
Accounting Officer)
/s/ William A. Rosoff Chairman December 28, 1998
- ------------------------
William A. Rosoff
/s/ Derek Lubner Director December 28, 1998
- ------------------------
Derek Lubner
/s/ Gary Neems Director December 28, 1998
- ------------------------
Gary Neems
/s/ Herbert Kurtz Director December 28, 1998
- ------------------------
Herbert Kurtz
/s/ David P. Madigan Director December 28, 1998
- ------------------------
David P. Madigan
RMH TELESERVICES, INC. AND SUBSIDIARIES
---------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
CONSOLIDATED BALANCE SHEETS - September 30, 1998 and 1997 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS - For the Years F-3
Ended September 30, 1998, 1997 and 1996
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -
For the Years Ended September 30, 1998, 1997 and 1996 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years F-5
Ended September 30, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6
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, 1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended September 30, 1998. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RMH Teleservices, Inc. and
subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule II, Valuation and Qualifying Accounts, is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
November 10, 1998
F-1
RMH TELESERVICES, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
September 30
--------------------------------------
ASSETS 1998 1997
------ ---------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,179,000 $ 6,882,000
Marketable securities 6,779,000 5,135,000
Accounts receivable, net of allowance for doubtful
accounts of $37,000 10,739,000 7,926,000
Prepaid expenses and other current assets 1,463,000 755,000
----------------- -----------------
Total current assets 23,160,000 20,698,000
----------------- -----------------
PROPERTY AND EQUIPMENT:
Communications and computer equipment 7,769,000 7,198,000
Furniture and fixtures 1,606,000 1,354,000
Leasehold improvements 1,155,000 802,000
----------------- -----------------
10,530,000 9,354,000
Less- Accumulated depreciation and amortization (6,483,000) (4,878,000)
----------------- -----------------
Net property and equipment 4,047,000 4,476,000
----------------- -----------------
OTHER ASSETS 128,000 112,000
----------------- -----------------
$ 27,335,000 $ 25,286,000
================= =================
September 30
--------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
------------------------------------ ---------------- ------------------
CURRENT LIABILITIES:
Current portion of capitalized lease obligations $ -- $ 8,000
Accounts payable 1,423,000 583,000
Accrued expenses 3,021,000 2,379,000
Deferred income taxes 554,000 344,000
----------------- -----------------
Total current liabilities 4,998,000 3,314,000
----------------- -----------------
DEFERRED INCOME TAXES 150,000 289,000
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, 10,000,000 shares authorized, none
issued and outstanding -- --
Common stock, no par value, 20,000,000 shares authorized,
8,120,000 shares issued and outstanding 48,638,000 48,638,000
Common stock warrant outstanding 450,000 450,000
Accumulated deficit (26,901,000) (27,405,000)
----------------- -----------------
Total shareholders' equity 22,187,000 21,683,000
----------------- -----------------
$ 27,335,000 $ 25,286,000
================= =================
The accompanying notes are an integral part of these statements.
F-2
RMH TELESERVICES, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Year Ended
September 30
--------------------------------------------------
1998 1997 1996
--------------- ---------------- ---------------
REVENUES $ 52,434,000 $ 45,937,000 $ 32,316,000
--------------- --------------- ---------------
OPERATING EXPENSES:
Cost of services 39,646,000 31,749,000 22,212,000
Selling, general and administrative 12,461,000 9,469,000 6,669,000
Special bonuses -- -- 6,087,000
--------------- --------------- ---------------
Total operating expenses 52,107,000 41,218,000 34,968,000
--------------- --------------- ---------------
Operating income (loss) 327,000 4,719,000 (2,652,000)
INTEREST INCOME (EXPENSE) 541,000 473,000 (1,893,000)
--------------- --------------- ---------------
Income (loss) before income taxes (benefit) and
extraordinary item 868,000 5,192,000 (4,545,000)
INCOME TAXES (BENEFIT) 364,000 1,825,000 (1,222,000)
--------------- --------------- ---------------
Income (loss) before extraordinary item 504,000 3,367,000 (3,323,000)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, net of $327,000
tax benefit -- -- 582,000
--------------- --------------- ---------------
NET INCOME (LOSS) 504,000 3,367,000 (3,905,000)
PREFERRED STOCK DIVIDENDS -- -- 308,000
--------------- --------------- ---------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 504,000 $ 3,367,000 $ (4,213,000)
=============== =============== ===============
BASIC INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item $ .06 $ .41 $ (.47)
Extraordinary item -- -- (.08)
--------------- --------------- -----------------
Basic net income (loss) per Common share $ .06 $ .41 $ (.55)
=============== =============== ===============
SHARES USED IN COMPUTING BASIC INCOME (LOSS) PER COMMON SHARE 8,120,000 8,120,000 7,694,000
=============== =============== ===============
DILUTED INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item $ .06 $ .41 $ (.47)
Extraordinary item -- -- (.08)
--------------- --------------- ---------------
Diluted net income (loss) per Common share $ .06 $ .41 $ (.55)
=============== =============== ===============
SHARES USED IN COMPUTING DILUTED INCOME (LOSS) PER COMMON SHARE 8,314,000 8,262,000 7,694,000
=============== =============== ===============
The accompanying notes are an integral part of these statements.
F-3
RMH TELESERVICES, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
Class A Voting Class B Nonvoting
Common Stock Common Stock
--------------------------------------------------------------------
Shares Amount Shares Amount
------------- --------------- --------------- ----------------
BALANCE, SEPTEMBER 30, 1995 10,000,000 $ 80,000 -- $ --
Distribution of accounts receivable -- -- -- --
Sale of Class A and Class B Common stock 1,720,427 3,279,000 1,279,573 2,438,000
Redemption of Class A Common stock (8,500,000) (68,000) -- --
Reclassification of Redeemable Class A Common stock
outside of shareholders' equity (1,500,000) (12,000) -- --
Cancellation of redemption features of warrant -- -- -- --
Conversion of Redeemable Class A Common stock to Class A
Common stock 1,500,000 2,865,000 -- --
Conversion of Class B to Class A Common stock 1,279,573 2,438,000 (1,279,573) (2,438,000)
Conversion of Series A Preferred stock to Common stock 80,000 539,000 -- --
Conversion of Founders' Note to Common stock 320,000 3,200,000 -- --
Initial public offering of Common stock,
net of expenses 3,220,000 36,317,000 -- --
Redemption of Series B Preferred stock -- -- -- --
Net loss -- -- -- --
Dividends on Series A and Series B Preferred stock -- -- -- --
------------- --------------- -------------- ----------------
BALANCE, SEPTEMBER 30, 1996 8,120,000 48,638,000 -- --
Net income -- -- -- --
------------- --------------- -------------- ----------------
BALANCE, SEPTEMBER 30, 1997 8,120,000 48,638,000 -- --
Net income -- -- -- --
------------- --------------- -------------- ----------------
BALANCE, SEPTEMBER 30, 1998 8,120,000 $ 48,638,000 -- $ --
============= =============== ============= ================
Common Retained Total
Stock Earnings Shareholders'
Warrants (Deficit) Equity
---------------- ---------------- -----------------
BALANCE, SEPTEMBER 30, 1995 $ -- $ 3,588,000 $ 3,668,000
Distribution of accounts receivable -- (4,600,000) (4,600,000)
Sale of Class A and Class B Common stock -- -- 5,717,000
Redemption of Class A Common stock -- (20,068,000) (20,136,000)
Reclassification of Redeemable Class A Common stock
outside of shareholders' equity -- (2,853,000) (2,865,000)
Cancellation of redemption features of warrant 450,000 -- 450,000
Conversion of Redeemable Class A Common stock to Class A
Common stock -- -- 2,865,000
Conversion of Class B to Class A Common stock -- -- --
Conversion of Series A Preferred stock to Common stock -- -- 539,000
Conversion of Founders' Note to Common stock -- -- 3,200,000
Initial public offering of Common stock,
net of expenses -- -- 36,317,000
Redemption of Series B Preferred stock -- (2,626,000) (2,626,000)
Net loss -- (3,905,000) (3,905,000)
Dividends on Series A and Series B Preferred stock -- (308,000) (308,000)
---------------- ---------------- -----------------
BALANCE, SEPTEMBER 30, 1996 450,000 (30,772,000) 18,316,000
Net income -- 3,367,000 3,367,000
---------------- ---------------- -----------------
BALANCE, SEPTEMBER 30, 1997 450,000 (27,405,000) 21,683,000
Net income -- 504,000 504,000
---------------- ---------------- -----------------
BALANCE, SEPTEMBER 30, 1998 $ 450,000 $ (26,901,000) $ 22,187,000
================ ================ =================
The accompanying notes are an integral part of these statements.
F-4
RMH TELESERVICES, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Year Ended
September 30
-----------------------------------------------
1998 1997 1996
------------- ------------- --------------
OPERATING ACTIVITIES:
Net income (loss) $ 504,000 $ 3,367,000 $ (4,213,000)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities-
Depreciation and amortization 1,624,000 1,439,000 1,089,000
Deferred income taxes 71,000 1,645,000 (1,021,000)
Extraordinary loss on early extinguishment of debt, net -- -- 582,000
Imputed interest and dividends -- -- 186,000
Amortization of deferred financing costs -- -- 10,000
Imputed interest on Founders' Note -- -- 1,136,000
Changes in operating assets and liabilities--
Accounts receivable (2,813,000) (2,377,000) (1,100,000)
Prepaid expenses and other current assets (708,000) (427,000) (145,000)
Other assets (16,000) (48,000) 41,000
Accounts payable 840,000 (1,099,000) 555,000
Accrued expenses 642,000 (30,000) 1,203,000
------------- ------------- -------------
Net cash provided by (used in) operating activities 144,000 2,470,000 (1,677,000)
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,195,000) (1,118,000) (2,775,000)
Purchases of marketable securities (13,700,000) (6,135,000) --
Maturities of marketable securities 12,056,000 1,000,000 --
------------- ------------- ------------
Net cash used in investing activities (2,839,000) (6,253,000) (2,775,000)
------------- ------------- -------------
FINANCING ACTIVITIES:
Net repayments on lines of credit -- -- (975,000)
Proceeds from long-term debt -- -- 15,100,000
Repayments on long-term debt -- -- (15,897,000)
Repayments on capitalized lease obligations (8,000) (40,000) (848,000)
Proceeds from refinanced equipment -- 658,000 --
Deferred financing costs -- -- (505,000)
Borrowings from Founders -- -- 1,006,000
Repayments to Founders -- -- (1,105,000)
Proceeds from sale of Preferred and Common stock -- -- 9,500,000
Redemption of Common stock -- -- (17,112,000)
Distribution to Founders -- -- (4,600,000)
Redemption of Preferred stock -- -- (6,500,000)
Net proceeds from initial public offering -- -- 36,317,000
Dividends paid -- -- (204,000)
------------- ------------- -------------
Net cash provided by (used in) financing activities (8,000) 618,000 14,177,000
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,703,000) (3,165,000) 9,725,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,882,000 10,047,000 322,000
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,179,000 $ 6,882,000 $ 10,047,000
============= ============= =============
The accompanying notes are an integral part of these statements.
F-5
RMH TELESERVICES, INC. AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 1998
------------------
1. BACKGROUND:
----------
RMH Teleservices, Inc. (the "Company") provides outbound and inbound
teleservices to major corporations in the insurance, financial services,
telecommunications and membership services industries. The Company was founded
in 1983 by two individuals (the "Founders"). On May 24, 1996, the Company
completed a leveraged recapitalization (the "Recapitalization") pursuant to
which a portion of the Common stock owned by the Founders was redeemed and two
investors (the "Investors") purchased Preferred and Common stock (see Note 3).
These transactions were accounted for as a sale of newly issued stock by the
Company and a redemption of previously outstanding shares. Accordingly, the
historical bases of the Company's assets and liabilities have been retained.
On September 18, 1996, the Company completed an initial public offering of 3.2
million shares of Common stock, raising net proceeds of approximately $36.3
million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Teleservices Management Company and Teleservices
Technology Company. All intercompany transactions have been eliminated.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents at
September 30, 1998 and 1997 consist of $2,141,000 and $5,693,000, respectively,
invested in domestic money market accounts.
The Company maintains cash accounts, which at times may exceed federally insured
limits. The Company has not experienced any losses from maintaining cash
accounts in excess of such limits. Management believes that it is not exposed to
any significant credit risks on its cash accounts.
F-6
Marketable Securities
- ---------------------
Investments in marketable securities are categorized as either trading,
available-for-sale, or held-to-maturity. At September 30, 1998 and 1997,
marketable securities consist of corporate commercial paper with contractual
maturities of less than one year which are being held to maturity. The debt
securities are stated at amortized cost.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. Depreciation and amortization are
provided over the estimated useful lives of the applicable assets using the
straight-line method. The lives used are as follows:
Computer software 2-3 years
Computer equipment 5 years
Communications equipment 5-7 years
Furniture and fixtures 7 years
Leasehold improvements Lesser of lease term or useful
life
Repairs and maintenance are charged to expense as incurred, while additions and
betterments are capitalized. Gains or losses on the disposition of property and
equipment are charged to operations.
Equipment under capital leases at September 30, 1997, included in property and
equipment was $66,000, with accumulated depreciation of $33,000. There were no
capital lease obligations outstanding at September 30, 1998.
During the year ended September 30, 1997, the Company entered into a refinancing
transaction under which certain of the Company's telecommunications equipment
was sold at the net book value of $658,000. Concurrently, the Company entered
into a five-year operating lease for the equipment.
As of September 30, 1998, deposits of $501,000 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 line
of credit (see Note 8) during the year ending September 30, 1999.
Long-Lived Assets
- -----------------
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," effective October 1, 1996. SFAS No. 121 requires that
long-lived assets to be held and used or disposed of by an entity be reviewed
for impairment whenever events or circumstances indicate that the carrying
amount of an asset may not be recoverable. An
F-7
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, 1998, management has evaluated the Company's
asset base, under the guidelines established by SFAS No. 121, and believes that
no impairment has occurred.
Revenue Recognition
- -------------------
The Company recognizes revenues on programs as services are performed, generally
based on hours incurred.
Advertising and Promotion
- -------------------------
Costs associated with advertising and promotion are generally charged to expense
when incurred. Advertising and promotion expense was $131,000, $182,000 and
$174,000 for the years ended September 30, 1998, 1997 and 1996, respectively.
Income Taxes
- ------------
Prior to May 24, 1996, the Company was an S Corporation for federal and
Pennsylvania income tax purposes and, accordingly, income was passed through to
the shareholders and taxed at the individual level. The Company was not an S
Corporation in New Jersey and, therefore, the Company paid income taxes on its
taxable income in that state. The S Corporation status was terminated on May 24,
1996 (see Note 7).
The Company applies SFAS No. 109, "Accounting for Income Taxes," which requires
the liability method of accounting for income taxes. Under the liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences, measured by enacted tax rates, attributable to temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards, for years which taxes are expected to be paid or recovered.
Major Customers and Concentration of Credit Risk
- ------------------------------------------------
The Company is dependent on several large customers for a significant portion of
its revenues. Three customers accounted for 43.7%, 15.9% and 10.8% of revenues
for the year ended September 30, 1998. Two customers accounted for 51.6% and
15.5% of revenues for the year ended September 30, 1997. Three customers
accounted for 45.0%, 17.6% and 12.2% of revenues for the year ended September
30, 1996. The loss of one or more of these customers could have a materially
adverse effect on the Company's business.
As a result of the issuance of the Preferred and Common stock to one of the
Investors (see Note 3), the Company is now affiliated with one of its customers.
This customer represented 6.2%, 7.1% and 11.2% of revenues for the years ended
September 30, 1998, 1997 and 1996, respectively. At September 30, 1998 and 1997,
$978,000 and $503,000, respectively, were due from this customer and included in
accounts receivable in the accompanying consolidated balance sheets.
F-8
For the years ended September 30, 1998, 1997 and 1996, revenues from customers
within the insurance industry accounted for 66.2%, 74.0% and 74.8% of revenues,
respectively, and customers within the financial services industry accounted for
23.2%, 11.4% and 19.7% of revenues, respectively. In addition, for the year
ended September 30, 1997, customers within the telecommunications industry
accounted for 12.8% of revenues.
Concentration of credit risk is limited to accounts receivable and is subject to
the financial conditions of the Company's customers. Three of the Company's
largest customers are engaged in transactions with each other and represent a
single credit risk to the Company. The Company does not require collateral or
other securities to support customer receivables. At September 30, 1998, the
accounts receivable from the customers that represent a single credit risk were
$6,088,000.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
- -----------------------------------
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at fair value due to the short-term nature
of those instruments. The carrying amount of marketable securities and
capitalized lease obligations approximates fair value at September 30, 1998 and
1997, respectively.
Earnings (Loss) per Common Share
- --------------------------------
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share," which supersedes Accounting Principles Board ("APB")
Opinion No. 15. SFAS No. 128 requires dual presentation of basic and diluted
earnings (loss) per Common share for complex capital structures on the face of
the statements of operations. According to SFAS No. 128, basic earnings (loss)
per Common share, which replaced primary earnings (loss) per Common share, is
calculated by dividing net income (loss) available to Common shareholders by the
weighted average number of Common shares outstanding for the period. Diluted
earnings (loss) per Common share, which replaced fully diluted earnings (loss)
per Common share, reflects the potential dilution from the exercise or
conversion of securities into Common stock, such as stock options.
The Company was required to and did adopt SFAS No. 128 during the period ended
December 31, 1997, as earlier application was not permitted. As required by SFAS
No. 128, all prior-period earnings (loss) per Common share data has been
restated to conform with the provisions of this statement.
F-9
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings (loss) per share computations.
For the Year Ended September 30, 1998
----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- ------------
Basic earnings per Common share -
Net income $ 504,000 8,120,000 $ 0.06
===========
Effect of dilutive securities -
Stock warrants -- 142,000
Stock options -- 52,000
------------- --------------
Diluted earnings per Common share -
Net income and assumed conversions $ 504,000 8,314,000 $ 0.06
============= ============= ===========
For the Year Ended September 30, 1997
----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- --------------- ------------
Basic earnings per Common share -
Net income $ 3,367,000 8,120,000 $ 0.41
===========
Effect of dilutive securities -
Stock warrants -- 142,000
Stock options -- --
------------- ---------------
Diluted earnings per Common share -
Net income and assumed conversions $ 3,367,000 8,262,000 $ 0.41
============= =============== ===========
For the Year Ended September 30, 1996
----------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
-------------- --------------- ------------
Basic loss per Common share -
Net loss $ (4,213,000) 7,694,000 $ (0.55)
===========
Effect of dilutive securities -
Stock warrants -- --
Stock options -- --
------------- ---------------
Diluted loss per Common share -
Net loss and assumed conversions $ (4,213,000) 7,694,000 $ (0.55)
============= =============== ===========
Options to purchase 4,700 shares of Common stock with an exercise price per
share of $12.50 were outstanding during the year ended September 30, 1998, but
were not included in the computation of diluted earnings per Common share
because the options' exercise
F-10
prices were greater than the average market price of the Common shares during
the period. The options, which expire in September 2006, were still outstanding
as of September 30, 1998. In addition, the 100,000 shares of restricted stock to
be 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. Options to purchase 245,120 shares of Common stock with an
average exercise price per share of $12.28 were outstanding during the year
ended September 30, 1997, but were not included in the computation of diluted
earnings per Common share because the options' exercise prices were greater than
the average market price of the Common shares during the period. Warrants to
purchase 142,105 shares of Common stock with an exercise price of $.01 per share
and options to purchase 272,200 shares of Common stock with an exercise price
per share of $12.50 were outstanding during the year ended September 30, 1996,
but were not included in the computation of diluted loss per Common share
because the Company had a net loss for the year and all outstanding warrants and
options would have been anti-dilutive.
Supplemental Cash Flow Information
- ----------------------------------
The Company did not pay interest expense during the year ended September 30,
1998. For the years ended September 30, 1997 and 1996, the Company paid interest
of $3,000 and $1,993,000, respectively. For the years ended September 30, 1998,
1997 and 1996, the Company paid income taxes of $180,000, $103,000 and $82,000,
respectively. There were no new capital leases entered into during the years
ended September 30, 1998 or 1997. Capitalized lease obligations of $105,000 were
incurred on equipment leases entered into during the year ended September 30,
1996.
New Accounting Pronouncements
- -----------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements and requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is required to be adopted for the Company's
year ending September 30, 1999. The adoption of this pronouncement is not
expected to have any impact on the Company's financial position or results of
operations.
F-11
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. The Company will adopt SFAS No. 131 in the year ending September 30,
1999. Management believes that SFAS No. 131 will not have a material effect on
the Company's financial statements.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement requires that
certain costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software, and is
effective for fiscal years beginning after December 15, 1998. The statement also
requires that costs related to the preliminary project stage and post
implementation/operations stage in an internal-use computer software development
project be charged to expense as incurred. During the year ended September 30,
1998, the Company recorded all applicable costs in accordance with the guidance
proscribed in SOP 98-1.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up
Activities," which is effective for fiscal years beginning after December 15,
1998 and provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start-up activities and organization
costs to be charged to expense as incurred. SOP 98-5 is required to be adopted
for the Company's year ending September 30, 1999. The adoption of this
pronouncement is not expected to have a material impact on the Company's
financial position or results of operations.
3. RECAPITALIZATION:
----------------
On May 24, 1996, the Company authorized (i) 20,000,000 shares of Common stock,
no par value, consisting of 10,000,000 shares of Class A Voting Common stock
(the "Class A Common") and 10,000,000 shares of Class B Nonvoting Common stock
(the "Class B Common"), and (ii) 10,000,000 shares of Preferred stock, of which
1,000,000 shares were designated as Series A Preferred stock (the "Series A
Preferred") and 6,500,000 shares were designated as Series B Preferred stock
(the "Series B Preferred"). The previously outstanding Common stock was
converted into 10,000,000 shares of Class A Common. All references in the
accompanying financial statements to the number of Common shares have been
retroactively restated to reflect the recapitalization.
F-12
Common Stock Redemption
- -----------------------
On May 24, 1996, the Company redeemed 8,500,000 shares of Class A Common for
$20,136,000, as follows:
Cash payment $ 16,002,000
Final redemption price adjustment (paid in
August 1996)
437,000
Issuance of 6%, $3,000,000 subordinated note
payable to Founders (the "Founders' Note") 2,023,000
Issuance of 1,000,000 shares of 6%, Series A
Preferred
524,000
Deferred tax liability for difference in basis
of Founders' Note 477,000
Transaction costs 673,000
--------------
$ 20,136,000
==============
The face amounts of the Founders' Note and Series A Preferred were discounted at
estimated market rates of 14% and 15% for interest and dividends, respectively,
on similar-type instruments. The original issue discounts were amortized over
the terms of the Founders' Note and the Series A Preferred.
On May 23, 1996, the Company distributed $4,600,000 of accounts receivable to
the Founders as a Subchapter S distribution of previously taxed income. The
Company collected these receivables on behalf of the Founders.
The Founders' Note initially had a face amount of $3,000,000 and was
subordinated to all other liabilities. The face amount of the Founders' Note was
increased to $4,000,000 due to the achievement of certain financial goals as
defined in the note, with the $1,136,000 difference in the estimated fair market
value of the new note versus the carrying value of the original note being
charged to interest expense. The Founders' Note bore interest at an annual rate
of 6%, payable quarterly, and was due in two equal installments on May 24, 2003
and 2004, subject to acceleration upon the occurrence of certain defined events.
Upon the completion of the initial public offering, the Founders' Note was
satisfied through the issuance of 320,000 shares of Common stock at the offering
price.
The Series A Preferred had 1,000,000 shares outstanding, a face amount of
$1,000,000 and required a dividend of 6% per year, payable quarterly. The Series
A Preferred had no voting rights, was senior to the Series B Preferred upon
liquidation and contained certain put features. Upon completion of the initial
public offering, the Series A Preferred was converted into 80,000 shares of
Common stock at the offering price and accrued dividends of $22,000 were paid.
F-13
Sale of Preferred and Common Stock
- ----------------------------------
On May 24, 1996, the Company issued Preferred and Common stock for $9,500,000 to
the Investors, as follows:
Series B Preferred stock $ 3,783,000
Class A Voting Common stock 3,279,000
Class B Non-Voting Common stock 2,438,000
-------------
$ 9,500,000
=============
The Company issued 6,500,000 shares of Series B Preferred for an aggregate of
$6,500,000 or $1.00 per share. The Series B Preferred required a dividend of 8%
per year, payable quarterly. The face amount of the Series B Preferred was
discounted at the estimated market dividend rate of 15% and the discount of
$2,717,000 was amortized over the expected term. Due to the discount applied to
the face amount of the Series B Preferred, its value for accounting purposes was
$0.58 per share. The Series B Preferred had no voting rights, was senior to the
Common stock upon liquidation and had a liquidation value of $6,500,000 plus
unpaid dividends. The holders of the Series B Preferred could have required the
Company to redeem their shares on May 24, 2004, subject to acceleration upon the
occurrence of certain defined events, including an initial public offering. Upon
completion of the initial public offering, the Series B Preferred was redeemed
for $6,500,000 plus accrued dividends of $182,000.
The Company issued 1,720,427 shares of Class A Common and 1,279,573 shares of
Class B Common for an aggregate of $3,000,000 or $1.00 per share. The Common
stock was valued at $1.91 per share based on the relative estimated fair values
of the Series B Preferred and Class A and B Common stock issued to the
Investors. The Class B Common shares were converted into an equal number of
Class A Common shares upon the completion of the initial public offering and the
division of Common stock between two classes was eliminated.
4. BANK DEBT:
---------
On May 24, 1996, the Company and its shareholders entered into an agreement with
a bank (the "Credit Agreement"), which provided the Company with a $14,000,000
term loan (the "Term Loan") and $6,000,000 in revolving credit loans (the
"Revolver"). The Company incurred $505,000 in financing costs, which were
deferred and were to be amortized over the term of the Credit Agreement. The
borrowings on the Term Loan were used to fund a portion of the Common stock
redemption, to repay a bank line of credit and to buy out certain leases.
F-14
In connection with the Credit Agreement, the bank received a warrant to purchase
236,842 shares of Class B Common for $0.01 per share. The warrant expires on May
31, 2006, and is fully exercisable. The number of shares to be purchased upon
exercise of the warrant was subject to reduction based on the timing of the
initial public offering and is 142,105. For financial reporting purposes, the
warrant has been valued at $450,000 based on the estimated fair value of the
Class B Common, and was recorded as original issue discount on the Term Loan.
Upon completion of the Company's initial public offering, a portion of the net
proceeds were used to repay the outstanding Term Loan. In connection with this
repayment, the Company recorded an extraordinary loss, net of income tax
benefit, in the statement of operations. The extraordinary loss consists of the
write-off of the unamortized deferred financing costs and the unamortized
discount on the Term Loan.
On March 21, 1997, the Company entered into a new credit facility with a bank
(the "Credit Facility"), consisting of a line of credit, which replaces the
previous Credit Agreement and related Revolver. The Credit Facility is a
$4,000,000 revolving line of credit that originally expired on April 1, 1998,
but was extended to April 1, 1999. There were no borrowings on the line of
credit during the years ended September 30, 1998 and 1997. Borrowings bear
interest at either a base rate, or euro-rate option, as selected by the Company
and is payable either monthly under the base rate option or on the last day of
the related euro-rate interest period. The bank has a security interest in
essentially all assets of the Company and the Credit Facility provides for
certain covenants. Such covenants, among other things, restrict the Company's
ability to incur debt, pay dividends, or make capital expenditures and
acquisitions. The Company is also subject to restrictive financial covenants,
which include levels of tangible net worth and a ratio related to debt service.
The Company did not incur interest expense under the Credit Agreement or Credit
Facility for the years ended September 30, 1998 and 1997. Interest expense under
the Credit Agreement for the year ended September 30, 1996 was $470,000.
5. ACCRUED EXPENSES:
----------------
September 30
------------------------------
1998 1997
------------- --------------
Payroll and related benefits $ 2,000,000 $ 1,738,000
Telecommunications expense 461,000 308,000
Other 560,000 333,000
------------- -------------
$ 3,021,000 $ 2,379,000
============= =============
F-15
6. CAPITALIZED LEASE OBLIGATIONS:
The Company had various capitalized lease obligations payable to several finance
companies. The obligations were repaid during the year ended September 30, 1998.
7. INCOME TAXES:
As a result of the sale of Preferred and Common stock, the Company's S
Corporation status was terminated on May 24, 1996, and a net deferred income tax
liability of $242,000 was recorded as additional income tax expense on that
date.
Net income tax expense (benefit) is as follows:
For the Year Ended September 30
-------------------------------------------------
1998 1997 1996
------------- ------------- ------------
Current:
Federal $ 200,000 $ 89,000 $ --
State 93,000 91,000 --
------------- ------------- ------------
293,000 180,000 --
------------- ------------- ------------
Deferred:
Federal 99,000 1,571,000 (1,262,000)
State (28,000) 74,000 (287,000)
------------- ------------- -------------
71,000 1,645,000 (1,549,000)
------------- ------------- -------------
$ 364,000 $ 1,825,000 $ (1,549,000)
============= ============= =============
A reconciliation of the U.S. Federal Income Tax rate to the effective income tax
rate is as follows:
For the Year Ended September 30
--------------------------------------------
1998 1997 1996
----------- ----------- -------------
Federal statutory rate 34.0% 34.0% 34.0%
Income not subject to corporate taxes
due to S Corporation status -- -- 3.7
Reinstatement of deferred taxes upon
conversion to C Corporation status -- -- (11.3)
State taxes 7.5 3.2 5.3
Other 0.4 (2.0) (3.3)
--------- --------- ---------
41.9% 35.2% 28.4%
========= ========= =========
F-16
Deferred income tax assets and liabilities are classified as current and
noncurrent based on the financial reporting classification of the related assets
and liabilities which gave rise to the temporary difference. Significant
components of the deferred income tax assets and liabilities are as follows:
September 30
-------------------------------
1998 1997
------------- --------------
Current deferred income tax asset (liability):
Other nondeductible expenses $ (729,000) $ (683,000)
Net operating loss carryforward 38,000 106,000
Other tax credit carryforwards 103,000 166,000
Cash basis of accounting 34,000 67,000
------------- -------------
(554,000) (344,000)
------------- -------------
Noncurrent deferred income tax asset (liability):
Depreciation of property and equipment (101,000) (379,000)
Other nondeductible expenses (49,000) --
Net operating loss carryforward -- 90,000
------------- -------------
(150,000) (289,000)
------------- -------------
Net deferred income tax liability $ (704,000) $ (633,000)
============= =============
F-17
8. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases its offices and communications and computer equipment under
noncancelable operating leases which expire through 2003. The rental payments
for the years ended September 30, 1998, 1997 and 1996, were approximately
$2,828,000, $1,681,000 and $808,000, respectively.
Aggregate minimum rental payments under the noncancelable operating leases at
September 30, 1998, are as follows:
1999 $ 3,868,000
2000 3,459,000
2001 2,795,000
2002 1,915,000
2003 796,000
---------------
$ 12,833,000
===============
The Company had an agreement with the same bank that provides the Credit
Facility under which it had up to $6,000,000 available for leasing call center
equipment. The original $6,000,000 commitment expired on December 31, 1997, was
extended through April 1, 1998, and was subsequently renewed with a maturity
date of April 1, 1999, to coincide with the expiration of the Company's Credit
Facility. As of September 30, 1998, the lease line of credit requires that the
leases be operating in nature. The Company financed $4,100,000 of equipment
under the original agreement and $2,334,000 under the $6,000,000 renewed lease
line.
Purchase Commitments
The Company has entered into agreements with its telephone long distance
carriers which currently range from one to three years, which provide for, among
other things, annual minimum purchases and termination penalties. The annual
minimum purchases under such agreements total approximately $2,580,000.
Employment/Consulting Agreements
The Company has employment agreements with three executive officers that expire
at various times through fiscal 2002, subject to renewal. The agreements provide
for aggregate base compensation of $650,000 in fiscal 1999, $694,000 in fiscal
2000, $615,000 in fiscal 2001 and $160,000 in fiscal 2002, 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 a change in control of the Company.
The Founders had previously entered into employment contracts which were to
expire on May 31, 1999. The contracts required an annual base compensation of
$200,000 per employee subject to an annual inflation adjustment, plus a
discretionary annual bonus not expected to exceed 20% of base compensation. In
addition, during the year ended September 30, 1996, the Founders each received a
one-time $3,000,000 bonus based upon the successful completion of the Company's
initial public offering. Payroll taxes of approximately $87,000 were recorded in
connection with the bonus payments.
F-18
On August 14, 1998, the Founders entered into consulting agreements with the
Company which replace the aforementioned employment contracts. The agreements
commenced on September 9, 1998 and expire on May 31, 1999. The agreements
require payments of $104,000 for each of the Founders.
Management Fees
The Company entered into an agreement with one of the Investors which required
the payment of an annual management fee of $100,000, payable quarterly. The
management agreement was terminated upon completion of the initial public
offering. Beginning at that time, the Investors are to provide consulting
services to the Company pursuant to a consulting agreement and will receive
annual fees of $50,000. The consulting agreement expires on May 24, 2001.
Litigation
Since 1995, the Company has had a relationship with Kipany Productions, Ltd.
("Kipany"), an independent third-party entity that arranges marketing campaigns
on behalf of its clients. In April 1997, Kipany requested the Company to provide
certain telemarketing services in connection with marketing campaigns Kipany had
contracted to provide for two of its telecommunication clients. The calls for
the campaign began on June 2, 1997 and ended on July 28, 1997. For services
performed during this period, the Company billed Kipany $2,227,000, of which
$728,000 was paid and $1,499,000 remained outstanding.
On September 17, 1997, the Company filed a Demand for Arbitration along with
other legal filings, for purposes of seeking the balances due on its outstanding
invoices, attorneys' fees, arbitration costs and other consequential damages. On
October 13, 1997, attorneys representing Kipany notified the Company that they
were filing a complaint seeking injunctive relief with respect to the
arbitration claiming that the Company did not have a contract with Kipany. In
addition, Kipany filed a counterclaim against the Company on December 5, 1997
claiming damages resulting from execution of the campaign. During the year ended
September 30, 1998, the Company reached a settlement with Kipany which resulted
in the write-off of $244,000 of the $1,499,000 in outstanding receivables as of
September 30, 1997 and the Company retaining its business relationship with
Kipany. The remaining receivables have since been paid.
From time to time, the Company is involved in certain other legal actions
arising in the ordinary course of business. In management's opinion, the outcome
of such actions will not have a material adverse effect on the Company's
financial position, results of operations or liquidity.
9. PROFIT SHARING PLAN:
The Company has a defined contribution savings plan available to substantially
all employees under Section 401(k) of the Internal Revenue Code. Employee
contributions are generally limited to 15% of compensation. On an annual basis,
the Company may match a portion of the participating employee's contribution.
The Company's contributions for the
F-19
years ended September 30, 1998, 1997 and 1996 were $51,000, $36,000 and $33,000,
respectively. Employees are fully vested in their contributions, while vesting
in the Company's contributions occurs ratably over seven years beginning in year
three.
10. STOCK OPTION PLAN:
In 1996, the Company established the 1996 Stock Incentive Plan (the "Plan"),
which reserves 950,000 shares of Common stock for issuance in connection with a
variety of awards including stock options, stock appreciation rights and
restricted and unrestricted stock grants. The Plan is administered by a
committee, which is comprised of two or more non-employee directors as
designated by the Board of Directors. The committee will determine the price and
other terms upon which awards shall be made. The exercise price of incentive
stock options may not be less than the fair market value of Common stock on the
date of grant. As of September 30, 1998, 355,700 options are available for
future grants.
Information relative to the Plan is as follows:
Weighted
Average
Exercise Price Exercise Price Aggregate
Options (Per Share) (Per Share) Proceeds
--------------- -------------- -------------- ---------------
Balance as of September 30, 1995 -- $ -- $ -- $ --
Granted 278,200 12.50 12.50 3,477,000
Exercised -- -- -- --
Terminated (6,000) 12.50 12.50 (75,000)
--------------- ------------- ------------- -------------
Balance as of September 30, 1996 272,200 12.50 12.50 3,402,000
Granted 13,100 7.00-12.50 8.32 109,000
Exercised -- -- -- --
Terminated (30,180) 12.50 12.50 (377,000)
--------------- ----------------- -------------- --------------
Balance as of September 30, 1997 255,120 7.00-12.50 12.29 3,134,000
Granted 779,600 2.44-4.13 3.55 2,767,000
Exercised -- -- -- --
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
=============== ============== ============= ==============
Options exercisable as of September 30, 1998
1,940 $ 12.50
=============== =============
On March 12, 1998, the Company modified 248,820 options granted to certain
employees during the years ended September 30, 1997 and 1996. 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 are not vested and will vest over four
years and have a contractual life of 10 years.
F-20
The weighted average remaining contractual life of all options outstanding at
September 30, 1998 is 9.5 years.
The following table summarizes information relating to the Plan at September 30,
1998 based upon each exercise price:
Weighted Weighted
Weighted Average Average
Average Exercise Exercise
Range of Options Remaining Price of Options Price of
Exercise Outstanding at Contractual Outstanding Exercisable at Exercisable
Prices September 30, Life Options September 30, Options
(Per Share) 1998 (Years) (Per Share) 1998 (Per Share)
- ---------------- ------------------ --------------- ---------------- ----------------- --------------
$ 2.44 100,000 9.9 $ 2.44 -- $ --
3.69 489,600 9.4 3.69 -- --
12.50 4,700 8.0 12.50 1,940 12.50
The Company accounts for its option plan under APB Opinion No. 25, "Accounting
for Stock Issued to Employees," under which no compensation cost has been
recognized. In 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair
value based method of accounting for stock-based compensation plans. This
statement also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. SFAS No. 123
requires that an employer's financial statements include certain disclosures
about stock-based employee compensation arrangements regardless of the method
used to account for the Plan. Had the Company recognized compensation cost for
its stock option plan consistent with the provisions of SFAS No. 123, the
Company's net income and basic and diluted net income per Common share for the
years ended September 30, 1998 and 1997 would have decreased and the Company's
net loss and basic and diluted net loss per Common share for the year ended
September 30, 1996 would have increased to the following pro forma amounts:
For the Year Ended
September 30
-------------------------------------------------
1998 1997 1996
------------- ------------- --------------
Net income (loss):
As reported $ 504,000 $ 3,367,000 $ (4,213,000)
============= ============= =============
Pro forma $ 80,000 $ 2,907,000 $ (4,226,000)
============= ============= =============
Basic net income (loss) per Common share:
As reported $ .06 $ .41 $ (.55)
============= ============= =============
Pro forma $ .01 $ .36 $ (.55)
============= ============= =============
Diluted net income (loss) per Common share:
As reported $ .06 $ .41 $ (.55)
============= ============= =============
Pro forma $ .01 $ .35 $ (.55)
============= ============= =============
F-21
The weighted average fair value of the stock options granted during the years
ended September 30, 1998, 1997 and 1996 was $2.75, $3.89 and $8.62,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
For the Year Ended
September 30
---------------------------------------------
1998 1997 1996
------------- ------------- ------------
Risk-free interest rate 5.7% 7.0% 6.9%
Volatility 85.0% 60.0% 60.0%
Expected dividend yield 0.0% 0.0% 0.0%
Expected life 7.0 years 7.5 years 7.5 years
11. RESTRICTED STOCK:
In September 1998, the Company agreed to award 100,000 shares of restricted
Common stock to the new Chief Executive Officer. The primary restriction will be
the officer's continued employment over a five-year period, and the restrictions
will lapse on 20,000 shares per year on each anniversary date. The value of such
stock will be established by the market price on the date of grant and unearned
compensation will be at the date of grant and unearned compensation will be
recorded at that time. The unearned compensation will be presented as a
reduction of shareholders' equity in the consolidated balance sheet and will be
amortized ratably over the five-year restriction period.
F-22
EXHIBIT INDEX
Exhibit
No.
2 Recapitalization and Stock Purchase Agreement among the Company, Advanta
Partners, Glengar and the Founders, dated May 24, 1996 (incorporated by
reference to the Company's Registration Statement on Form S-1, File
No. 333-07501).
3.1 Articles of Incorporation of the Company, as amended (incorporated by
reference to the Company's Registration Statement on Form S-1, File
No. 333-07501).
3.2 Form of Amended and Restated Bylaws of the Company (incorporated by
reference to the Company's Registration Statement on Form S-1, File
No. 333-07501).
9 Voting Agreement among the Founders and Advanta Partners dated as of
July 2, 1996 (incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 333-07501).
10.1 1996 Stock Incentive Plan (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 333-07501).
10.2 Shareholders' Agreement by and among the Company, the Founders, Advanta
Partners and Glengar, dated May 24, 1996 (incorporated by reference to
the Company's Registration Statement on Form S-1, File No. 333-07501).
10.3 Employment Agreement by and between the Company and Raymond J. Hansell,
dated May 24, 1996 (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 333-07501).
10.4 Employment Agreement by and between the Company and MarySue Lucci
Hansell, dated May 24, 1996 (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 333-07501).
10.5 Warrant for the Purchase of Class B Non-Voting Common Stock of the
Company in favor of Chemical Bank (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 333-07501).
10.6 Letter Agreement with PNC Bank, N.A., dated March 21, 1997 (incorporated
by reference to the Company's Form 10-Q filed for the period ended March
31, 1997).
*10.7 Employment Agreement by and between the Company and John Fellows, dated
August 14, 1998.
*10.8 Employment Agreement by and between the Company and Robert Berwanger,
dated March 18, 1998.
*10.9 Employment Agreement by and between the Company and Michael Scharff,
dated August 27, 1998.
*10.10 Consulting Agreement by and between the Company and Raymond J. Hansell,
dated August 14, 1998.
*10.11 Consulting Agreement by and between the Company and MarySue Lucci, dated
August 14, 1998.
10.12 Exchange and Conversion Agreement among the Company, the Founders,
Advanta Partners and Glengar dated as of July 2, 1996 (incorporated by
reference to the Company's Registration Statement on Form S-1, File No.
333-07501).
10.13 Consulting Agreement between the Company and Advanta Partners dated
August 20, 1996 (incorporated by reference to the Company's Registration
Statement on Form S-1, No. 333-07501).
10.14 Agreement on Post-Closing Adjustments, among the Company, Advanta
Partners, the Founders and Glengar dated August 20, 1996 (incorporated by
reference to the Company's Registration Statement on Form S-1, No. 333-
07501).
16 Letter regarding change in certifying accountant, dated July 2, 1996
(incorporated by reference to the Company's Registration Statement on Form
S-1, File No. 333-07501).
21 Subsidiaries of the Registrant (incorporated by reference to the Company's
Form 10-K filed for the year ended September 30, 1996).
*23.1 Consent of Arthur Andersen LLP
*27.1 Financial Data Schedule for year ended September 30, 1998.
* Filed herewith