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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, 1999
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 10, 1999, 8,366,721 shares of common stock were outstanding.
The aggregate market value of the shares of common stock owned by non-affiliates
of the Registrant as of December 21, 1999 was approximately $41.8 million
(based upon the closing sales price of these shares as reported by the NASDAQ
Stock Market's national market). Calculation of the number of shares held by
non-affiliates is based on the assumption that the affiliates of the Company
include only directors, executive officers and stockholders filing Schedules 13D
or 13G with the Company. The information provided shall in no way be construed
as an admission that any person whose holdings are excluded from the figure is
an affiliate or that any person whose holdings are included is not an affiliate
and any such admission is hereby disclaimed. The information provided is
included solely for record keeping purposes by the Securities and Exchange
Commission.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders are incorporated by reference in Part III.
Table of Contents
Item
No. Page
PART I
1. Business................................................................................. 3
2. Properties............................................................................... 11
3. Legal Proceedings........................................................................ 11
4. Submissions of Matters to a Vote of Security Holders..................................... 11
Executive Officers of the Company........................................................ 12
PART II
5. Market for Registrant's Common Equity and Related Shareholder Matters.................... 13
6. Selected Financial Data
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................ 15
7A. Quantitative and Qualitative Disclosures about Market Risk............................... 21
8. Financial Statements and Supplementary Data.............................................. 22
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................................... 22
PART III
10. Directors and Executive Officers of the Registrant...................................... 22
11. Executive Compensation.................................................................. 22
12. Security Ownership of Certain Beneficial Owners and Management.......................... 22
13. Certain Relationships and Related Transactions.......................................... 23
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 23
Signatures............................................................................... 24
Exhibit Index............................................................................ 25
2
PART I
ITEM 1. BUSINESS
--------
General
RMH Teleservices, Inc. and its subsidiaries (collectively, "RMH" or the
"Company") provide outbound and inbound call center services predominantly to
major corporations in the insurance, financial services and telecommunications
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
eight years ago and in 1999 initiated relationships with several major
telecommunications providers. 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 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 (collectively, 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 1999 were $80.3
million and $2.3 million, respectively. This represents an increase of 53.2%
and 602.8% respectively, compared to fiscal 1998.
Overview of the Call Center Services Industry
The call center services industry provides a variety of teleservices including
outbound and inbound telephone marketing, as well as customer support and
service programs and other value-added services. Call center services 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. An increasing
percentage of call center services business is currently being outsourced to
independent providers, and the Company believes that both the total market and
the percentage of this market that is outsourced will increase as businesses
continue to recognize the benefits of such services.
Historically, the call center services industry has been extremely fragmented
and continues to include a large number of small, independent organizations.
However, over the past several years, the industry has further segmented itself
by the public or secondary offerings of common stock by ten companies.
Consequently, the sector has further defined itself by those companies that have
been able to raise monies in the public marketplace.
Many large companies have begun to outsource their telemarketing and customer
support services in order to access the industry expertise, breadth of services
and specialized capabilities of large-scale,
3
technologically-sophisticated call center services 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 call center services companies
will accelerate the outsourcing trend in the industry. In addition, the Company
believes that the deregulation of the telecommunications industry and the growth
of electronic commerce over the Internet will significantly increase the demand
for inbound and outbound call center services.
The Company believes that businesses considering outsourcing their call center
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 call center services 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 and business-to-business teleservices. In this market, the Company has
sought and established relationships with large corporate clients, many of whom
are Fortune 500 Companies. 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.
Some common applications of Outbound Teleservices are:
. Sales: Acquisition, Winback, Retention
. New Product Launch: Lead Generation, Appointment Setting
. Satisfaction Surveys
. Repair Follow-ups
. Verifications
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 automated 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.
In October 1998, the Company opened an outbound call center facility in
Largo, Florida. The Company also opened outbound facilities in Oromocto and
Saint John in the Canadian province of New Brunswick in March 1999 and August
1999, respectively. During fiscal 1999, the Company expanded its existing call
center facilities in Ewing Township, New Jersey and Reading, Pennsylvania. For
fiscal 1999 and the fourth quarter of 1999, 89.9% and 72.0%, respectively, of
the Company's telemarketing operations were outbound services.
4
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 third-party verification, 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.
Some common applications of Inbound Teleservices are:
. Sales: Acquisition, Upsale, Ancillary
. Order Processing
. Product Inquiry
. Third Party Verification
. Customer Service
. Pre- and Post Sales Support
. Technical Support: Level 1 & 2 Software Support
. Interactive Voice Response
In July 1999, the Company opened an inbound call center facility in Brantford,
Ontario, Canada. The Company currently operates inbound customer service centers
in its Brantford, Ontario, Lansdowne and York, Pennsylvania, Delran, New Jersey,
Largo, Florida, Sergeant Bluff, Iowa and Austin, Texas call center facilities.
During fiscal 1999, the Company grew its inbound business in both the
telecommunications and financial services industries. For fiscal 1999 and the
fourth quarter of 1999, 10.1% and 27.0%, respectively, of the Company's
telemarketing operations were inbound services.
The Company's Divisions
Financial information relating to RMH's business segments and operations,
both domestically and internationally, is provided in Note 10 of Notes to the
Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K.
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.
As of September 30, 1999, the Company employed 210 insurance agents licensed
to sell insurance in a total of 47 states. The Company's significant
relationships in this industry include those with MMIG, AT&T, and JCPenney,
which were responsible for 22.9%, 5.8%, and 11.7%, respectively, of the
Company's revenues for fiscal 1999. The Company originated its relationship
with MMIG over eleven years ago and originated its relationships with JCPenney
and AT&T over eight years ago. In fiscal 1999, 1998 and 1997, 40.3%, 66.1% and
74.0%, respectively, of the Company's revenues were generated from services
related to insurance products.
5
Financial Services
- ------------------
The Company provides teleservices to several of the largest credit card
issuers, banks and other financial and membership service institutions in the
United States. The Company's services include customer account acquisition and
retention programs, programs to sell credit card enhancement features such as
higher credit limits, lower interest rates and lower fees and discounts on
selected goods and services purchased through a variety of interest group clubs.
The Company also cross-sells additional services such as home equity loans and
related banking services. In fiscal 1999, 1998 and 1997, 46.9%, 31.6% and
12.7%, respectively, of the Company's revenues were generated from services
related to financial services products.
Telecommunications
- ------------------
The Company provides a variety of teleservices for the nation's leading local,
long-distance and wireless telecommunications companies. The Company continues
to expect the demand for teleservices within the telecommunications industry to
increase as the industry continues its deregulation 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.
In fiscal 1999, 1998 and 1997, 12.8%, 2.3% and 13.3%, respectively, of the
Company's revenues were generated from services related to telecommunications
services.
During fiscal 1999, the Company entered into an agreement with MCI Worldcom
("MCI") to provide third-party verification of its sales orders. Under the
agreement, the Company provides third-party verification services to MCI at call
centers in Iowa, Texas, and in Brantford, Ontario, Canada.
In the second quarter of fiscal 1999, the Company entered into a three-way
agreement with a long distance telecommunications provider and an independent
teleservices company, which specializes in Asian language outbound teleservices.
Under the agreement, the Company managed a call center on behalf of the
independent teleservices company and managed an outbound telemarketing program
outsourced by the long distance provider to the independent teleservices
company. The Company was paid a fixed monthly fee to manage the call center,
and was paid based on sales and residuals to manage the outbound telemarketing
program. Subsequently, the original agreement was modified to a two-way
agreement between the Company and the independent teleservices company under
which the Company managed a call center on behalf of the independent
teleservices company and was compensated on a monthly fixed fee basis.
Canadian Expansion
On December 10, 1998, RMH Teleservices International Inc. ("RMHTI"), a
wholly owned subsidiary, was incorporated in the Province of New Brunswick,
Canada for the purpose of conducting the Company's business operations in
Canada. In the second quarter of fiscal 1999, RMHTI entered into leases for
premises in Oromocto, New Brunswick and Brantford, Ontario for new call centers.
In the fourth quarter of fiscal 1999 RMHTI entered into a lease for premises in
Saint John, New Brunswick. The call center in Oromocto, New Brunswick commenced
operations in March 1999 with 200 seats, and by July 31, 1999 was expanded to
313 seats. The call center in Brantford, Ontario began initial operations in
July 1999 with 250 seats. The call center in Saint John, New Brunswick
commenced operations in August 1999 with 144 seats. RMHTI has received
financial incentives from the Canadian provincial governments of Ontario and New
Brunswick totaling $2.2 million and expects to receive an additional $2.2
million over the next three years. These incentives offset various start-up,
payroll and operating costs associated with the new Canadian call centers. In
the second, third and fourth quarters of fiscal 1999, the Company incurred
start-up and payroll costs associated with these three new call centers totaling
$550,000, $522,000 and $855,000 respectively, which were offset against the
financial incentives received from the Canadian provincial governments of
Ontario and New Brunswick. The remaining amounts are primarily being amortized
against payroll costs over the next three years.
6
The Company's Internet Joint Venture
The Company has entered into a joint venture with Advanta Partners to
create a new entity called 365biz.com LP. RMH owns a 49.5% interest in the
venture. 365biz.com will provide Web design, hosting and membership services to
small and medium sized businesses. Additionally, 365biz.com will provide a
variety of online options and features including Internet access, e-mail
accounts, search engine posting and e-commerce related services. The venture
was launched in response to the growing demand for flexible and inexpensive Web
solutions. The Company is committed to provide the joint venture capital
funding of $922,000, of which $466,000 has been provided as of September 30,
1999. The remaining commitment is expected to be paid in the year ending
September 30, 2000. In addition, the Company will extend up to $1,000,000 of
normal trade credit for services the Company is expected to provide to the joint
venture.
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, which
expired on May 31, 1999. In February 1999, the Company hired Mr. Noah S. Asher
as Executive Vice President and Chief Financial Officer, and Mr. Paul Burkitt as
Senior Vice President of Sales and Marketing. In May 1999, the Company hired Mr.
Paul Little as Senior Vice President of Human Resources.
Sales, Marketing and Account Management
- ---------------------------------------
During fiscal 1999, 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 call center services in its
targeted industries. This initiative was reinforced by the addition of a Senior
Vice President of Sales and Marketing in fiscal 1999 with extensive experience
in the call center services industry. In support of 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
inbound and outbound telephone service representatives ("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 call center services projects and integrity.
Newly-hired TSRs receive an intensive three-day classroom training course
that emphasizes modeling and role-playing as well as instruction on effective
sales techniques, customer service and product knowledge. New TSRs are closely
monitored for an initial two-week period and thereafter receive on-going
7
coaching and training. As of September 30, 1999, the Company employed 210
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 call center services industry for TSRs to be part-
time employees, approximately 59% of the Company's TSRs are full-time employees
(working at least 33 hours per week). The Company believes that its relatively
high proportion of full-time employees provides a more stable workforce and
reduces the Company's recruiting and training expenditures. As of September 30,
1999, the Company and RMHTI employed 5,489 persons, of whom more than 5,000 were
TSRs. None of the Company's employees are represented by a labor union. The
Company believes that it has good relationships with its employees.
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. Quality assurance
personnel monitor all TSRs on a frequent basis and provide coaching to TSRs
based on such reviews in order to continually improve TSR performance and assure
compliance with the Company's quality standards. Clients also participate in
the monitoring process. Sales confirmations are digitally recorded with the
customer's consent to ensure accuracy and to provide a record of each sale.
Company personnel review all audio files for compliance with client
specifications. In addition, audio files are selectively reviewed in order to
provide additional coaching feedback 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,
1999, the Company's management information systems department consisted of 60
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 outbound
call center, which are linked via a wide-area network to network servers at the
Company's corporate headquarters. The Company's call centers and network systems
both use a flexible database architecture permitting the easy
8
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. The Company's inbound call centers
utilize contemporary call processing systems which take advantage of the current
"state-of-the-art" technology in this industry sector for automated call
distribution, staff scheduling and call routing. These platforms are the
foundation of the Company's growth into the multiple channel, customer service
outsourcing environment.
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.
Certain Customer Relationships
The Company is dependent on several large customers for a significant
portion of its revenues. BrandDirect Marketing Inc., Mass Marketing Insurance
Group and JCPenney Insurance Company Ltd. accounted for 33.7%, 22.9% and 11.7%,
respectively, of the Company's revenues for the year ended September 30, 1999.
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.
9
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.
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. Some
examples include laws regulating electronic monitoring of telephone calls and
laws prohibiting any interference by telemarketers with caller I.D. devices.
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.
10
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, 1999, the Company operated the following
call centers.
Date of
Date of Initial Most Recent Current
Location Opening/Acquisition Workstations Expansion Workstations
- -------- ------------------- ------------ ------------- ------------
Ardmore, 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 July 1999 107
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 May 1999 220
Largo, FL (5)......................... October 1998 96 N/A 96
Oromocto, New Brunswick............... March 1999 200 June 1999 313
Brantford, Ontario.................... July 1999 250 October 1999 380
Sergeant Bluff, IA.................... August 1999 120 N/A 120
Austin, TX............................ August 1999 96 N/A 96
Colorado Springs, CO (6).............. August 1999 126 N/A -
St. John, New Brunswick............... August 1999 144 N/A 144
-----
TOTAL 2,766
=====
(1) Facilities transferred from Wynnewood, PA (the original headquarters) to
Bryn Mawr in September 1995 and to Ardmore in August 1999.
(2) Includes a 24-seat inbound capability.
(3) Includes a 70-seat inbound capability.
(4) Includes a 40-seat inbound capability.
(5) Includes a 24-seat inbound capability.
(6) Facility closed and capacity shifted to Brantford, Ontario in October 1999.
The Company believes that suitable additional or alternative space will be
available as needed on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
-----------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not Applicable.
11
Executive Officers and other Key Management of the Company
The executive officers and other key management of the Company are as
follows:
Name Age Position
- ---- --- --------
John A. Fellows............................ 35 Director and Chief Executive Officer
Noah S. Ashera............................. 37 Chief Financial Officer & Executive Vice President
Robert M. Berwanger ....................... 43 Chief Operating Officer & Executive Vice President
Michael J. Scharff......................... 53 Executive Vice President
Paul J. Burkitt............................ 38 Senior Vice President of Sales and Marketing
Paul W. Little............................. 37 Senior Vice President of Human Resources
John A. Fellows joined the Company as Chief Executive Officer in September 1998
and was elected to the Board of Directors in December 1998. Prior to joining
the Company, Mr. Fellows was President of Telequest Teleservices ("Telequest"),
an Arlington, Texas based teleservices company, from April 1997 to August 1998.
While President of Telequest, Mr. Fellows had responsibility for a business with
ten call centers and was involved in the refocusing of Telequest's historical
product offerings, including the inbound portfolio of its teleservices business.
From April 1993 to April 1997, Mr. Fellows was employed by Paging Network, Inc.
("PageNet"). During his four-year tenure with PageNet, Mr. Fellows served as
Vice President and General Manager. Before joining PageNet, Mr. Fellows held
various management positions at Pepsico, Inc. Under his leadership, RMH has
significantly increased its client base in the telecommunications and financial
services sectors and enhanced its service offerings in the insurance sector. As
a result, inbound revenues have increased dramatically during the past year and
represent over 25% of RMH's total revenues for the 4th quarter of fiscal 1999.
Mr. Fellows earned his Bachelor of Science from Texas A&M University and
received his Masters in Business Administration from Loyola College.
Noah S. Asher joined RMH in February 1999 as Executive Vice President and Chief
Financial Officer. Mr. Asher was employed with Bell Atlantic's International
Wireless Division from March 1995 to February 1999, where he served in several
capacities in the United States and Mexico, including Chief Financial Officer
from 1995 to 1996 and Vice President of Latin American Operations from 1996 to
1999. From 1989 to 1995, Mr. Asher served in various financial positions with
Scott Paper Company in Mexico, Europe and the United States. Mr. Asher served
as an auditor with Coopers & Lybrand from 1984 to 1987. Mr. Asher earned his
Bachelor of Science in Economics and his Masters of Business Administration from
The Wharton School of Business and holds a Masters of Arts degree in
International Relations from the University of Pennsylvania's Lauder Institute.
Robert M. Berwanger joined the Company in 1997, bringing 14 years experience in
the industry from AT&T Solutions Customer Care. His experience with AT&T
included building and managing large call center operations, establishing and
maintaining customer relationships with Fortune 500 companies, deploying leading
edge technology, developing new business and managing profitability. As
Director of New Business Development of AT&T Solutions Customer Care he lead a
large inbound and outbound telemarketing business unit and also developed a
broad background including experience in mutual fund processing, stock transfer
services, employee benefits delivery services and direct mail. Mr. Berwanger
earned his Bachelor of Science in Finance from The Ohio State University and his
Masters in Business Administration from the University of North Florida. Mr.
Berwanger oversees all aspects of the companies operations including recruiting,
training, account management, call center operations, data processing and
quality assurance.
Michael J. Scharff joined the Company in 1988 as the Company's Controller. He
continued to expand his role and became Vice President of Finance and Treasurer
in 1994. Mr. Scharff was named Senior Vice President of Finance and Chief
Financial Officer in 1995 and was heavily involved in the Company's Initial
Public Offering in 1996. Over the years, Mr. Scharff has headed the IT group,
human resource function, facilities and purchasing. In 1996, Mr. Scharff became
Executive Vice President of the Company and
12
currently is responsible for site selection and call center expansion as well as
facilities and purchasing. Prior to joining RMH, Mr. Scharff served as the
President of Audobon Automotive Supply, an automotive parts distributor. Mr.
Scharff was also a divisional controller of Safeguard Business Systems from 1979
to 1984.
Paul J. Burkitt joined RMH in 1999 as Senior Vice President of Sales and
Marketing. Mr. Burkitt's career includes more than 16 years of management
experience in sales and marketing, as well as extensive experience in the
teleservices industry at the executive level. His experience includes strategic
planning, development of marketing strategies, process improvement and new
business development. From April 1997 to February 1999, Mr. Burkitt served as
Vice President, Business Development for Tokai Financial, a $1.8 billion
financial leasing company. In this capacity, he had full responsibility for the
company's sales and marketing efforts. From August 1994 to March 1997 Mr.
Burkitt worked for Telespectrum World Wide as Executive Vice President of Sales
and Marketing. Mr. Burkitt earned his Bachelor of Science in Finance and
Economics in 1983 from Western Maryland College. Mr. Burkitt is responsible for
RMH's overall sales and marketing efforts.
Mr. Paul Little joined RMH Teleservices in May, 1999 as the Senior Vice
President of Human Resources. Mr. Little brings to RMH over 14 years of
corporate human resources experience in high growth service organizations. From
June 1990 to May 1999, Mr. Little served as Director of Human Resources of
Paging Network, Inc., a $1.0 billion wireless messaging company. His experience
includes an extensive background in corporate human resources, senior level
recruiting and retention as well as international experience. Mr. Little earned
his Bachelor of Business Administration from the University of North Texas and
will receive his MBA from Southern Methodist University in May, 2000. Mr. Little
is responsible for RMH's overall human resource direction.
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, 1998 and 1999.
HIGH LOW
------ ------
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
First Fiscal Quarter of 1999 .................................................... 2.50 1.38
Second Fiscal Quarter of 1999 ................................................... 2.31 1.94
Third Fiscal Quarter of 1999 .................................................... 4.25 1.88
Fourth Fiscal Quarter of 1999 ................................................... 5.97 3.75
As of December 10, 1999, there were approximately 46 shareholders of record
of the Common Stock, which excludes shareholders whose shares are held in
nominee or "street" name by brokers. 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
13
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 that the Board of Directors consider appropriate. On
September 2, 1999, warrants to purchase 142,105 shares of common stock at $0.01
each were exercised at the market price of $5.50 each, resulting in the Company
issuing an additional 141,846 shares of common stock.
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 this Report.
For The Year Ended September 30
--------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- -------- --------
(in thousands, except per share data)
Statement of Operations Data:
Revenues.......................................................... $80,318 $52,434 $45,937 $32,316 $25,545
------- ------- ------- ------- -------
Operating expenses
Cost of services............................................... 60,637 39,646 31,749 22,212 18,210
Selling, general and administrative (1)........................ 17,383 12,461 9,469 6,669 5,312
Special bonuses (2)............................................ --- --- --- 6,087 ---
------- ------- ------- ------- -------
Total operating expenses.................................... 78,020 52,107 41,218 34,968 23,522
------- ------- ------- ------- -------
Operating income (loss)..................................... 2,298 327 4,719 (2,652) 2,023
Equity in losses of joint venture................................. 88 --- --- --- ---
Interest income (expense), net (3)................................ 285 541 473 (1,893) (261)
------- ------- ------- ------- -------
Income (loss) before income taxes (benefit) and
extraordinary item......................................... 2,495 868 5,192 (4,545) 1,762
Income taxes (benefit) (4)........................................ 936 364 1,825 (1,222) 21
------- ------- ------- ------- -------
Income (loss) before extraordinary item..................... 1,559 504 3,367 (3,323) 1,741
------- ------- ------- ------- -------
Extraordinary item, net of tax benefit (5)........................ --- --- --- 582 ---
------- ------- ------- ------- -------
Net income (loss)................................................. 1,559 504 3,367 (3,905) 1,741
Preferred stock dividends......................................... --- --- --- 308 ---
------- ------- ------- ------- -------
Net income (loss) available to Common
shareholders (4)............................................... $ 1559 $ 504 $ 3,367 $(4,213) $ 1,741
======= ======= ======= ======= =======
Basic Income (Loss) Per Common Share:
Income (loss) before extraordinary item........................ $ .19 $ .06 $ .41 $ (.47) $ .17
Extraordinary item............................................. --- --- --- (.08) ---
======= ------- ======= ======= =======
Basic Income (loss) per Common share............................. $ .19 $ .06 $ .41 $ (.55) $ .17
======= ======= ======= ======= =======
Diluted Income (Loss) Per Common Share:
Income (loss) before extraordinary item........................ $ .19 $ .06 $ .41 $ (.47) $ .17
Extraordinary item................................................ --- --- --- $ (.08) ---
------- ------- ------- ------- -------
Diluted income (loss) per Common share......................... $ .19 $ .06 $ .41 $ (.55) $ .17
======= ======= ======= ======= =======
September 30
---------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(in thousands)
Balance Sheet Data:
Working capital $16,531 $18,162 $17,384 $12,899 $ 1,061
Total assets 39,395 27,335 25,286 22,555 8,757
Long-term debt, less current maturities --- --- --- --- 592
Capitalized lease obligations, less current maturities --- --- --- 2 436
Loans payable to shareholders --- --- --- --- 133
Shareholders' equity 23,788 22,187 21,683 18,315 3,668
(1) Selling, general and administrative expenses include Founders' compensation
of $141,000, $415,000, $400,000, $598,000 and $766,000 for fiscal 1999,
1998, 1997, 1996 and 1995, 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
14
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 replaced the aforementioned employment
contracts. The agreements commenced on September 9, 1998 and expired on May
31, 1999. The agreements required annual base payments of $104,000 to 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.
(4) Prior to fiscal 1996, the Company operated as an S Corporation for income
tax purposes. In connection with the Recapitalization, the S Corporation
status was terminated.
(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; (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; and (xii) expected revenues and expenses of RMH's joint venture,
365biz.com.LP.
15
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
----------------------------------
1999 1998 1997
---------- ---------- ----------
Revenues 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Cost of services 75.5 75.6 69.1
Selling, general and administrative (1) 21.6 23.8 20.6
----- ----- -----
Total operating expenses 97.1 99.4 89.7
----- ----- -----
Operating income (loss) 2.9 0.6 10.3
Equity in losses of joint venture 0.1 --- ---
Interest income, net 0.3 1.1 1.0
----- ----- -----
Income before income taxes 3.1 1.7 11.3
Income taxes 1.2 0.7 4.0
----- -----
Net income 1.9% 1.0% 7.3%
===== ===== =====
(1) Compensation to Founders represents approximately 0.2%, 0.8%, and 0.9% of
revenues for fiscal 1999, fiscal 1998 and fiscal 1997, respectively.
Fiscal Year Ended September 30, 1999 Compared to Fiscal Year Ended September 30,
1998
Revenues. Revenues increased to $80.3 million in fiscal 1999 from $52.4
million in fiscal 1998, an increase of $27.9 million or 53.2%. Of such increase
in revenues, approximately $16.5 million was attributable to net increased
calling volumes from existing clients, $10.0 million to new clients in the
telecommunications industry and $1.4 million to new clients in the financial
services industry.
Cost of Services. Cost of services includes costs incurred at the Company's
call centers including direct labor, benefits, telecommunication costs, rents
and depreciation of plant and equipment. Cost of services increased to $60.6
million in fiscal 1999 from $39.6 million in fiscal 1998. As a percentage of
revenues, cost of services decreased to 75.5% in fiscal 1999 from 75.6% in
fiscal 1998. The decrease during fiscal 1999 was the result of relocating a
portion of the Company's business to lower labor cost regions offset by pricing
pressures incurred together with opening several new call centers and increasing
capacity in two other call centers which operated at less than full capacity
during fiscal 1999. 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 $17.4 million in fiscal 1999 from $12.5 million in fiscal
1998. As a percentage of revenues, selling, general and administrative expenses
decreased to 21.6% in fiscal 1999 from 23.8% in fiscal 1998. 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.
Equity in Losses of Joint Venture. This reflects the Company's portion of
the losses of its startup internet joint venture, 365biz.com LP under the equity
method of accounting. The company anticipates the joint venture to continue to
experience operating losses for the foreseeable future.
16
Interest Income, net. Interest income net of interest expense was $285,000
and $541,000 for fiscal 1999 and 1998, 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 $936,000 and $364,000 for
fiscal 1999 and 1998, 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.
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, $4.2 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 342
workstations during fiscal 1998, at one new call center in Ewing Township, New
Jersey, and expanded capacity in two existing call centers by 308 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.
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, net. Interest income net of interest expense 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.
Liquidity and Capital Resources
Historically, the Company's primary sources of liquidity have been cash
flow from operations and borrowings under its credit and operating lease
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 special bonuses. The
remaining $9.5 million has been used for working capital and general corporate
purposes.
On March 21, 1997, the Company entered into a $4.0 million line of credit
facility (the "Credit Facility") with PNC Bank (the "Bank"). The Credit
Facility replaced the Company's former term loan and credit facility originated
in conjunction with the Recapitalization. The Credit Facility originally
expired on April 1, 1998, but was subsequently extended by the Bank.
17
On September 28, 1999, the term of the Credit Facility was extended to
September 30, 2000, subject to renewal, and the amount available under the
Credit Facility was increased to $10.0 million. On November 24, 1999, the amount
available under the Credit Facility was increased to $15.0 million. 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
Facility contains financial covenants and certain restrictions which among
others, restrict the Company's ability to incur additional debt or dispose of
its assets. As of September 30, 1999, the Company had $3.7 million outstanding
on the Credit Facility.
Under a separate agreement dated February 22, 1997, with PNC Leasing
Corporation, the Company had up to $6.0 million available for 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.
Under this agreement, the Company entered into operating leases for equipment
with an aggregate total cost of $4.1 million.
Under a separate agreement dated March 10, 1998, with PNC Leasing
Corporation, the Company established an additional lease facility of $6.0
million available for purposes of leasing call center equipment. The $6.0
million commitment expired on April 1, 1999, and required that such leases meet
the accounting definition of an operating lease with rent to be paid over a
period not to exceed sixty months. Under this agreement, the Company entered
into operating leases for equipment with an aggregate total cost of $5.5
million.
Under a separate agreement dated May 28, 1999, with PNC Leasing
Corporation, the Company established an additional lease facility of $8.0
million available for purposes of leasing call center equipment. This
commitment was subsequently reduced to $5.0 million simultaneously with the
September 1999 increase in the Credit Facility from $4.0 million to $10.0
million. The $5.0 million commitment expires on September 30, 2000 and requires
that such leases meet the accounting definition of an operating lease with rent
to be paid over a period not to exceed sixty months. Under this agreement, as
of September 30, 1999, the Company has entered into operating leases for
equipment with an aggregate total cost of $1.7 million.
In June 1999, RMHTI entered into an agreement with GATX Technology Finance
Inc. for a $5.0 million CDN lease facility. Under the terms of this lease
facility, leases must meet the accounting definition of an operating lease with
rent to be paid over a period not to exceed sixty months. Under this agreement,
as of September 30, 1999, the Company has entered into operating leases for
equipment with an aggregate total cost of $3.7 million CDN.
Cash used in operating activities was approximately $11.7 million in fiscal
1999 and cash provided by operations was $144,000 for fiscal 1998. The
reduction in cash provided by operations was the result of an increase in
accounts receivable offset by an increase in net income and accrued expenses.
The Company's teleservices operations will continue to require significant
capital expenditures. Capital expenditures, were $2.2 million in fiscal 1999,
$1.2 million in fiscal 1998 and $1.1 million in fiscal 1997. The Company
expects to spend approximately $7.0 million on capital expenditures in fiscal
2000, 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. In addition, the Company expects to invest an additional $1.5
million in the Company's internet joint venture and, as required under a certain
customer contract.
The Company believes that funds generated from operations, together with
the available credit under the Credit Facility and the lease lines of credit
will be sufficient to finance its current operations and planned capital
expenditures at least through fiscal 2000.
18
Quarterly Results of Operations
The following table sets forth statement of operations data for each of the
four quarters of fiscal 1998 and 1999, 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
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- --------- --------- -------- -------- --------- ---------
(amounts in thousands)
Revenues $12,247 $12,337 $13,212 $14,638 $15,837 $17,290 $20,627 $26,564
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Cost of services 8,983 9,313 10,155 11,195 11,950 13,144 15,585 19,958
Selling, general and admin 2,564 3,612 3,052 3,233 3,583 3,663 4,411 5,726
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 11,547 12,925 13,207 14,428 15,533 16,807 19,996 25,684
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss) 700 (588) 5 210 304 483 631 880
Equity in losses of joint venture --- --- --- --- --- --- --- 88
Interest income, net 148 121 145 127 107 69 72 37
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes (benefit) 848 (467) 150 337 411 552 703 829
Income taxes (benefit) 305 (168) 54 173 154 207 264 311
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 543 $ (299) $ 96 $ 164 $ 257 $ 345 $ 439 $ 518
======= ======= ======= ======= ======= ======= ======= =======
Quarter Ended
---------------------------------------------------------------------------------
Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30
1997 1998 1998 1998 1998 1999 1999 1999
------- ------- ------- ------- ------- ------- ------- -------
Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Cost of services 73.3 75.5 76.9 76.5 75.5 76.0 75.5 75.1
Selling, general and admin 21.0 29.3 23.1 22.1 22.6 21.2 21.4 21.6
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 94.3 104.8 100.0 98.6 98.1 97.2 96.9 96.7
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss) 5.7 (4.8) 0.0 1.4 1.9 2.8 3.1 3.3
Equity in losses of joint venture --- --- --- --- --- --- --- 0.3
Interest income, net 1.2 1.0 1.1 0.9 0.7 0.4 0.3 0.1
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes (benefit) 6.9 (3.8) 1.1 2.3 2.6 3.2 3.4 3.1
Income taxes (benefit) 2.5 ( 1.4) 0.4 1.2 1.0 1.2 1.3 1.1
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) 4.4% (2.4)% 0.7% 1.1% 1.6% 2.0% 2.1% 2.0%
======= ======= ======= ======= ======= ======= ======= =======
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.
19
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137,
"Accounting for Derivative Investments and Hedging Activities". Deferral of
the effective Date of FASB Statement No. 133 - an amendment of FASB Statement
No. 133," which must be adopted by the Company in the year ending September 30,
2001, provides a comprehensive and consistent standard for the recognition and
measurement of. As the Company does not currently hold derivative instruments
or engage in hedging activities, the adoption of this pronouncement is expected
to have no impact on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accounts issued
Statement of Position 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 and organization
costs to be charged to expense as incurred. SOP 98-5 is required to be adopted
for the Company's fiscal year ending September 30, 2000. The adoption of this
pronouncement is not expected to have a 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 digits 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 and upgrading
the remaining software systems to be Year 2000 compliant. Year 2000 compliant
upgrades to the Company's predictive dialing equipment have been installed in
all call centers. These processes 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 non-information systems
was completed at the end of November 1999. The Company has replaced all non-
compliant personal computer workstations.
The Company is also in the process of evaluating its security systems, copiers
and other non-information 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 the 1999 calendar year.
Readiness of Third Parties. The Company has been advised by its third-party
vendors and clients of their Year 2000 readiness and 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 has completed its efforts to gather vendor
compliance documentation. The Company's software has been modified to accept
two-digit year or four-digit century inputs, and will be capable of creating
output in either format as required by the client. Accordingly, the Company is
prepared for either occurrence and does not believe that it will be adversely
affected by its customers' readiness.
20
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. The
Company currently expects that the total costs to become Year 2000 compliant
will not exceed $600,000. Hardware costs to date have been approximately
$300,000, software costs are projected to be approximately $250,000, and
consulting and testing costs are projected to be approximately $50,000. New
capital equipment, which the Company required, was either purchased or financed
under the Company's new 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, and the costs of achieving 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 corrected by the end of December 1999 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 some interruptions related to specific campaigns and
applications may result. The Company has developed contingency plans to minimize
any potential risk of year 2000 issues, including alternative power sources and
redundancy in operational capabilities.
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.
21
As of September 30, 1999 the Company held no cash equivalents or marketable
securities. 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 unaccreted interest to be received at maturity.
The Company has additional exposure to the risk of changes in interest
rates as they relate to the Company's variable-rate line of credit. As of
September 30, 1999, the Company had $3,700,000 outstanding under this line of
credit. There were no borrowings outstanding as of September 30, 1998.
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-
25 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 (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 and other Key
Management 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.
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.
22
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 Years
Ended September 30, 1999
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, 1999 $37,000 $113,000 $ - $150,000
September 30, 1998 $37,000 $114,000 $114,000 $ 37,000
September 30, 1997 $10,000 $ 27,000 $ - $ 37,000
(1) Represents accounts written off against the allowance.
(3) Exhibits
See attached
(b) Reports on Form 8-K
None
23
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 27, 1999 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 and Director December 27, 1999
- --------------------------
John A. Fellows (Principal Executive Officer)
/s/ Noah S. Asher Executive Vive President and
- --------------------------
Noah S. Asher Chief Financial Officer December 27, 1999
(Principal Financial and Accounting Officer)
/s/ Herbert Kurtz Chairman of the Board of Directors December 27, 1999
- --------------------------
Herbert Kurtz
/s/ Derek Lubner Director December 27, 1999
- --------------------------
Derek Lubner
/s/ Gary Neems Director December 27, 1999
- --------------------------
Gary Neems
/s/ Mitchell Hollin Director December 27, 1999
- --------------------------
Mitchell Hollin
/s/ David P. Madigan Director December 27, 1999
- --------------------------
David P. Madigan
24
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 Letter Agreement with PNC Bank, N.A., dated March 21, 1997 (incorporated by reference to the Company's Form 10-Q
filed for the period ended March 31, 1997).
*10.4 Third Amendment to Credit Agreement with PNC Bank, N.A., dated November 24, 1999.
10.5 Agreement: Loan of CAN $2MM from the Province of New Brunswick, Canada, dated March 31, 1999 (incorporated by
reference to the Company's Form 10-Q filed for the period ended March 31, 1999).
10.6 Agreement: Loan forgiveness from the Province of New Brunswick, Canada, dated March 31, 1999 (incorporated by
reference to the Company's Form 10-Q filed for the period ended March 31, 1999).
10.7 Agreement: Grant of CAN $1MM from the Province of Ontario, Canada, dated March 17, 1999 (incorporated by reference
to the Company's Form 10-Q filed for the period ended March 31, 1999).
10.8 $8.0 million Operating Lease Facility Agreement between RMH Teleservices, Inc. and PNC Leasing Corp. dated May 11,
1999 (incorporated by reference to the Company's Form 10-Q filed for the period ended June 30, 1999).
10.9 Addendum to Master Lease Agreement between RMH Teleservices, Inc. and PNC Leasing Corp dated May 28, 1999
(incorporated by reference to the Company's Form 10-Q filed for the period ended June 30, 1999).
10.10 First Amendment to Credit Agreement between RMH Teleservices, Inc., RMH Teleservices International Inc. and PNC
Bank, N.A. dated May 28, 1999 (incorporated by reference to the Company's Form 10-Q filed for the period ended
June 30, 1999).
10.11 Master Lease Agreement between RMH Teleservices International Inc. and GATX Technology Finance Inc. dated June 1,
1999 (incorporated by reference to the Company's Form 10-Q filed for the period ended June 30, 1999).
10.12 Employment Agreement by and between the Company and John Fellows, dated August 14, 1998 (incorporated by reference
to the Company's Form 10-K filed for the period ended September 30, 1998).
10.13 Employment Agreement by and between the Company and Robert Berwanger, dated March 18, 1998 (incorporated by
reference to the Company's Form 10-K filed for the period ended September 30, 1998).
10.14 Employment Agreement by and between the Company and Michael Scharff, dated August 27, 1998 (incorporated by
reference to the Company's Form 10-K filed for the period ended September 30, 1998).
25
*10.15 Employment Agreement by and between the Company and Noah S. Asher, dated January 27, 1999.
*10.16 Employment Agreement by and between the Company and Paul Burkitt, dated January 26, 1999.
10.17 Consulting Agreement by and between the Company and Raymond J. Hansell, dated August 14, 1998 (incorporated by
reference to the Company's Form 10-K filed for the period ended September 30, 1999).
10.18 Consulting Agreement by and between the Company and MarySue Lucci, dated August 14, 1998 (incorporated by reference
to the Company's Form 10-K filed for the period ended September 30, 1999).
10.19 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).
10.20 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).
10.21 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).
*10.22 Limited Partnership Agreement of 365biz.com LP dated November 19, 1999.
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
*23.1 Consent of Arthur Andersen LLP
*27.1 Financial Data Schedule for year ended September 30, 1999.
* Filed herewith
26
RMH TELESERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets - September 30, 1999 and 1998 F-2
Consolidated Statements of Operations - For the Years
Ended September 30, 1999, 1998 and 1997 F-3
Consolidated Statements of Shareholders' Equity - For the Years
Ended September 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows - For the Years
Ended September 30, 1999, 1998 and 1997 F-5
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, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999 in conformity with generally accepted accounting principles.
Our audits were 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 regulations and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits 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 24, 1999
F-1
RMH TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30
----------------------------------------
ASSETS 1999 1998
------ ----------------- --------------------
CURRENT ASSETS:
Cash and cash equivalents $ 696,000 $ 4,179,000
Marketable securities -- 6,779,000
Accounts receivable, net of allowance for doubtful accounts of
$150,000 and $37,000, respectively 28,194,000 10,739,000
Prepaid expenses and other current assets 3,248,000 1,463,000
----------------- -----------------
Total current assets 32,138,000 23,160,000
INVESTMENT IN JOINT VENTURE 378,000 --
----------------- -----------------
PROPERTY AND EQUIPMENT:
Communications and computer equipment 7,859,000 7,571,000
Computer software 609,000 198,000
Furniture and fixtures 1,845,000 1,606,000
Leasehold improvements 1,988,000 1,155,000
----------------- -----------------
12,301,000 10,530,000
Less- Accumulated depreciation and amortization (8,123,000) (6,483,000)
----------------- -----------------
Net property and equipment 4,178,000 4,047,000
----------------- -----------------
DEFERRED INCOME TAXES 44,000 --
----------------- -----------------
OTHER ASSETS 2,657,000 128,000
----------------- -----------------
$ 39,395,000 $ 27,335,000
September 30
-----------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------------------------------ ----------------- ---------------------
CURRENT LIABILITIES:
Line of credit $ 3,700,000 $ --
Accounts payable 2,326,000 1,423,000
Income taxes payable 614,000 --
Accrued expenses 8,106,000 3,021,000
Deferred income taxes 861,000 554,000
----------------- -----------------
Total current liabilities 15,607,000 4,998,000
----------------- -----------------
DEFERRED INCOME TAXES -- 150,000
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 11)
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, --
8,361,846 and 8,120,000 shares issued and outstanding 49,288,000 48,638,000
Common stock warrant outstanding -- 450,000
Deferred compensation (158,000) --
Accumulated deficit (25,342,000) (26,901,000)
----------------- -----------------
Total shareholders' equity 23,788,000 22,187,000
----------------- -----------------
$ 39,395,000 $ 27,335,000
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
----------------------------------------------------
1999 1998 1997
REVENUES $ 80,318,000 $ 52,434,000 $ 45,937,000
--------------- --------------- ---------------
OPERATING EXPENSES:
Cost of services 60,637,000 39,646,000 31,749,000
Selling, general and administrative 17,383,000 12,461,000 9,469,000
--------------- --------------- ---------------
Total operating expenses 78,020,000 52,107,000 41,218,000
--------------- --------------- ---------------
Operating income 2,298,000 327,000 4,719,000
EQUITY IN LOSSES OF JOINT VENTURE 88,000 -- --
INTEREST INCOME, net 285,000 541,000 473,000
--------------- --------------- ---------------
Income before income taxes 2,495,000 868,000 5,192,000
INCOME TAXES 936,000 364,000 1,825,000
--------------- --------------- ---------------
NET INCOME $ 1,559,000 $ 504,000 $ 3,367,000
--------------- --------------- ---------------
BASIC INCOME PER COMMON SHARE $ .19 $ .06 $ .41
=============== =============== ===============
SHARES USED IN COMPUTING BASIC INCOME PER COMMON SHARE 8,133,000 8,120,000 8,120,000
=============== =============== ===============
DILUTED INCOME PER COMMON SHARE $ .19 $ .06 $ .41
=============== =============== ===============
SHARES USED IN COMPUTING DILUTED INCOME PER COMMON
SHARE 8,393,000 8,314,000 8,262,000
=============== =============== ===============
The accompanying notes are an integral part of these statements.
F-3
RMH TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common
Common Stock Stock Total
------------------------------- Warrant Deferred Accumulated Shareholders'
Shares Amount Outstanding Compensation Deficit Equity
------------- -------------- ----------- ------------ ------------- -------------
BALANCE, SEPTEMBER 30, 1996 $ 8,120,000 $ 48,638,000 $ 450,000 $ -- $ (30,772,000) $ 18,316,000
Net income -- -- -- -- 3,367,000 3,367,000
-------------- ------------- ------------ ------------ ------------- -------------
BALANCE, SEPTEMBER 30, 1997 8,120,000 48,638,000 450,000 -- (27,405,000) 21,683,000
Net income -- -- -- -- 504,000 504,000
-------------- ------------- ------------ ------------ ------------- -------------
BALANCE, SEPTEMBER 30, 1998 8,120,000 48,638,000 450,000 -- (26,901,000) 22,187,000
Conversion of warrant to Common
stock 141,846 450,000 (450,000) -- -- --
Deferred compensation related to
restricted stock issued to
officer 100,000 200,000 -- (200,000) -- --
Amortization of deferred
compensation -- -- -- 42,000 -- 42,000
Net income -- -- -- -- 1,559,000 1,559,000
------------- ------------- ------------ ------------ ------------- -------------
BALANCE, SEPTEMBER 30, 1999 8,361,846 $ 49,288,000 $ -- $ (158,000) $ (25,342,000) $ 23,788,000
============= ============= ============ ============ ============== =============
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
-----------------------------------------------
1999 1998 1997
OPERATING ACTIVITIES:
Net income $ 1,559,000 $ 504,000 $ 3,367,000
Adjustments to reconcile net income to net cash provided by (used
in) operating activities-
Amortization of deferred compensation 42,000 -- --
Depreciation and amortization 1,640,000 1,624,000 1,439,000
Deferred income taxes 113,000 71,000 1,645,000
Equity in losses of joint venture 88,000 -- --
Changes in operating assets and liabilities--
Accounts receivable (17,455,000) (2,813,000) (2,377,000)
Prepaid expenses and other current assets (1,785,000) (708,000) (427,000)
Other assets (2,529,000) (16,000) (48,000)
Accounts payable 903,000 840,000 (1,099,000)
Income taxes payable 614,000 -- --
Accrued expenses 5,085,000 642,000 (30,000)
------------- ------------- -------------
Net cash provided by (used in) operating activities (11,725,000) 144,000 2,470,000
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchases and development of property and equipment (1,771,000) (1,195,000) (1,118,000)
Purchases of marketable securities (7,745,000) (13,700,000) (6,135,000)
Maturities of marketable securities 14,524,000 12,056,000 1,000,000
Investment in joint venture (466,000) -- --
------------- ------------- -------------
Net cash provided by (used in) investing activities 4,542,000 (2,839,000) (6,253,000)
------------- ------------- -------------
FINANCING ACTIVITIES:
Net proceeds from line of credit 3,700,000 -- --
Repayments on capitalized lease obligations -- (8,000) (40,000)
Proceeds from refinanced equipment -- -- 658,000
------------- ------------- -------------
Net cash provided by (used in) financing activities 3,700,000 (8,000) 618,000
------------- ------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,483,000) (2,703,000) (3,165,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,179,000 6,882,000 10,047,000
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 696,000 $ 4,179,000 $ 6,882,000
============= ============= =============
The accompanying notes are an integral part of these statements.
F-5
RMH TELESERVICES, INC. AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. BACKGROUND:
----------
RMH Teleservices, Inc. and its subsidiaries (the "Company") provide outbound and
inbound teleservices predominantly to major corporations in the insurance,
financial services and telecommunications industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Teleservices Management Company, Teleservices
Technology Company and RMH Teleservices International Inc. ("RMHTI"). All
intercompany transactions have been eliminated.
Foreign Currency Translation
- ----------------------------
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation," the assets and liabilities of the Company's
foreign operations (RMHTI) are translated into U.S. dollars at current exchange
rates as of the balance sheet date, and revenues and expenses are translated at
average exchange rates for the period. Resulting translation adjustments are
reflected as a separate component of shareholders' equity. The translation
adjustment for the year ended September 30, 1999, the first year the Company had
foreign operations, was not material, nor were the foreign currency translation
gains and losses included in consolidated net income.
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.
Supplemental Cash Flow Information
- ----------------------------------
For the years ended September 30, 1999 and 1997, the Company paid interest of
$4,000 and $3,000, respectively. The Company did not pay interest expense during
the year ended
F-6
September 30, 1998. For the years ended September 30, 1999, 1998 and 1997, the
Company paid income taxes of $220,000, $180,000 and $103,000, respectively.
Fair Value of Financial Instruments
- -----------------------------------
Management believes that the carrying amounts of the Company's financial
instruments, including cash equivalents, accounts receivable, accounts payable,
accrued liabilities and the line of credit approximate fair value due to the
short-term nature of those instruments. Management also believes that the
carrying amount of marketable securities approximated fair value at September
30, 1998.
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. There were no cash
equivalents at September 30, 1999. Cash equivalents at September 30, 1998
consisted of $2,141,000 invested in domestic money market accounts.
The Company maintains cash accounts which at times may exceed federally insured
limits. The Company has not experienced any losses from maintaining cash
accounts in excess of such limits. Management believes that it is not exposed to
any significant credit risks on its cash accounts.
Marketable Securities
- ---------------------
Investments in marketable securities are categorized as either trading,
available-for-sale or held-to-maturity. There were no investments in marketable
securities at September 30, 1999. At September 30, 1998, marketable securities
consisted of corporate commercial paper with contractual maturities of less than
one year, which were being held to maturity. The debt securities were stated at
amortized cost.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. Under the provisions of Statement
of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," the Company capitalizes the costs
associated with software developed or obtained for internal use when both the
preliminary project stage is completed and management has authorized funding for
the project, which it deems probable will be completed and used to perform the
function intended. Capitalized costs include only i) external direct costs of
materials and services consumed in developing or obtaining internal-use
software, ii) payroll and payroll-related costs for employees who are directly
associated with and who devote time to the internal-use software project, and
iii) interest costs incurred, when material, while developing internal-use
software. Capitalization of such costs ceases no later than the point at which
the project is substantially complete and ready for its intended purpose.
Approximately $552,000 and $108,000 of payroll and payroll related costs
associated with software developed for internal use were capitalized in the
years ended September 30, 1999 and 1998, respectively. There were no payroll and
payroll
F-7
related costs associated with software developed for internal use capitalized in
the year ended September 30, 1997.
Depreciation and amortization are provided over the estimated useful lives of
the applicable assets using the straight-line method. The lives used are as
follows:
Communications equipment 5-7 years
Computer equipment 5 years
Computer software 2-3 years
Furniture and fixtures 7 years
Leasehold improvements Lesser of lease term or
useful life
Repairs and maintenance are charged to expense as incurred, while additions and
betterments are capitalized. Gains or losses on the disposition of property and
equipment are charged to operations.
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, 1999, deposits of $426,000 primarily on telecommunications
and computer equipment were included in other current assets in the accompanying
balance sheet. The Company plans to finance this equipment under its lease lines
of credit (see Note 11) during the year ending September 30, 2000. As of
September 30, 1998, the Company had deposits of $501,000 included in other
current assets that were financed under its lease lines of credit during the
year ended September 30, 1999.
Long-Lived Assets
- -----------------
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," the Company records
impairment losses on long-lived assets used in operations whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment is recognized to the extent that the sum of
undiscounted estimated future cash flows expected to result from use of the
assets is less than the carrying value. As of September 30, 1999, 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.
F-8
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 33.7%, 22.9% and 11.7% of revenues
for the year ended September 30, 1999. At September 30, 1999, these same three
customers represented approximately $10,838,000, $3,663,000 and $2,095,000 of
the Company's total accounts receivable balance. Advanta Partners LP ("Advanta
Partners"), a shareholder that has board representation on the Board of
Directors of the Company, is also a shareholder and has board representation on
the customer that represented 33.7% of revenues for the year ended September 30,
1999. 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. The loss of one or more of these
customers could have a materially adverse effect on the Company's business.
The Company is affiliated with one of its customers based upon the customer's
partial ownership of Advanta Partners. This customer represented 1.0%, 6.2% and
7.1% of revenues for the years ended September 30, 1999, 1998 and 1997,
respectively. At September 30, 1999 and 1998, $205,000 and $978,000,
respectively, were due from this customer, and included in accounts receivable
in the accompanying consolidated balance sheets.
For the years ended September 30, 1999, 1998 and 1997, revenues from customers
within the insurance industry accounted for 40.3%, 66.1% and 74.0% of revenues,
respectively, customers within the financial services industry accounted for
46.9% 31.6% and 12.7% of revenues, respectively, and customers within the
telecommunications industry accounted for 12.8%, 2.3% and 13.3% of revenues,
respectively.
Concentration of credit risk is limited to accounts receivable and is subject to
the financial conditions of the Company's customers. Three of the Company's
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, 1999, the accounts
receivable from the customers that represent a single credit risk were
$7,334,000.
Advertising and Promotion
- -------------------------
Costs associated with advertising and promotion are generally charged to expense
when incurred. Advertising and promotion expense was $251,000, $131,000 and
$182,000 for the years ended September 30, 1999, 1998 and 1997, respectively.
Income Taxes
- ------------
The Company applies SFAS No. 109, "Accounting for Income Taxes," which requires
the liability method of accounting for income taxes. Under the liability method,
deferred tax assets and liabilities are recognized for 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 the respective tax bases and operating loss and tax credit
carryforwards, for years which taxes are expected to be paid or recovered.
F-9
Income per Common Share
- -----------------------
The Company provides basic and diluted income per share data pursuant to SFAS
No. 128, "Earnings per Share." SFAS No. 128 requires dual presentation of basic
and diluted income per share. According to SFAS No. 128, basic income per share
is calculated by dividing net income by the weighted average number of Common
shares outstanding for the period. Diluted income per share reflects the
potential dilution from the exercise or conversion of securities into Common
stock, such as stock options and warrants.
The following is a reconciliation of the numerators and denominators of the
basic and diluted income per Common share computations.
For the Year Ended September 30, 1999
-----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------- ---------------- -------------
Basic income per Common share -
Net income $ 1,559,000 8,133,000 $ .19
=============
Effect of dilutive securities -
Stock warrants -- 130,000
Stock options -- 108,000
Restricted stock -- 22,000
---------------- ---------------
Diluted income per Common share -
Net income and assumed conversions $ 1,559,000 8,393,000 $ .19
================ =============== =============
For the Year Ended September 30, 1998
------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------- ---------------- -------------
Basic income per Common share -
Net income $ 504,000 8,120,000 $ .06
=============
Effect of dilutive securities -
Stock warrants -- 142,000
Stock options -- 52,000
---------------- ----------------
Diluted income per Common share -
Net income and assumed conversions $ 504,000 8,314,000 $ .06
================ ================ =============
F-10
For the Year Ended September 30, 1997
-----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic income per Common share -
Net income $ 3,367,000 8,120,000 $ .41
=============
Effect of dilutive securities -
Stock warrants -- 142,000
Stock options -- --
---------------- ----------------
Diluted income per Common share -
Net income and assumed conversions $ 3,367,000 8,262,000 $ .41
================ ================ =============
Options to purchase 444,000 shares of Common stock with an average exercise
price per share of $3.47 were outstanding during the year ended September 30,
1999, but were not included in the computation of diluted income per Common
share because the exercise prices of the options were greater than the average
market price of the Common shares during the period. The options, which expire
at various times through September 2009, were still outstanding as of
September 30, 1999.
Options to purchase 4,700 and 245,210 shares of Common stock with an average
exercise price of $12.50 and $12.28 were outstanding during the years ended
September 30, 1998 and 1997, respectively, but were not included in the
computation of diluted income per Common share because the exercise prices of
the options were greater than the average market price of the Common shares
during the periods. In addition, during the year ended September 30, 1998, 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.
New Accounting Pronouncements
- -----------------------------
Effective with the year ended September 30, 1999, the Company was subject to the
provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive income in a
full set of general-purpose financial statements. Comprehensive income is
defined as the total of net income and all other non-owner changes in equity.
For the years ended September 30, 1999, 1998 and 1997, the Company's
comprehensive income consists only of net income; therefore, there have been no
changes in the display of the Company's consolidated financial statements.
Effective with the year ended September 30, 1999, the Company was subject to the
provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position but did affect the Company's
disclosure of segment information (see Note 10).
F-11
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- an
amendment of FASB Statement No. 133," which must be adopted by the Company in
the year ending September 30, 2001, provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. As the Company does not currently hold derivative instruments or
engage in hedging activities, the adoption of this pronouncement is expected to
have no impact on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants ("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 and organization costs to be
charged to expense as incurred. SOP 98-5 is required to be adopted for the
Company's fiscal year ending September 30, 2000. The adoption of this
pronouncement is not expected to have a material impact on the Company's
financial position or results of operations.
3. CUSTOMER CONTRACT:
-----------------
In August 1999, the Company entered into a contract with a new customer to
provide in-bound teleservices over a four-year period. In connection with the
execution of this contract, the Company made a $2,000,000 upfront payment to the
customer and is committed to making an additional $1,000,000 payment in the
quarter ending December 31, 1999. The payment is refundable on a pro-rata basis
over the contract term if the agreement is terminated. The payment is included
in other noncurrent assets in the accompanying consolidated balance sheet as of
September 30, 1999, and is being amortized to cost of services over the contract
term. In addition, the Company is obligated to spend $800,000 for the
development of a voice response unit application to be used in providing certain
services to the customer. These development costs will be recorded in the year
ending September 30, 2000 and the Company can recover such costs through
billings to the customer based on usage of the system.
4. CREDIT FACILITY:
---------------
On March 21, 1997, the Company entered into a credit facility with a bank (the
"Credit Facility"), consisting of a line of credit. The Credit Facility was a
$4,000,000 revolving line of credit that originally expired on April 1, 1998,
but was subsequently extended. On September 28, 1999, and November 24, 1999, the
Company entered into a second and third amendment, respectively, to the Credit
Facility. The Credit Facility, as amended, provides for a $15,000,000 revolving
line of credit. The amended Credit Facility expires September 30, 2000, subject
to renewal. As of September 30, 1999, the Company had borrowings of $3,700,000
outstanding under the Credit Facility. During the year ended September 30, 1999,
the maximum amount outstanding under the line of credit was $3,700,000 at a
weighted average interest rate of 7.8%. There were no borrowings on the line of
credit during the years ended September 30, 1998 and 1997. Borrowings bear
interest at either a
F-12
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 Credit Facility is unsecured and provides for
certain covenants. Such covenants, among other things, restrict the Company's
ability to incur debt, pay dividends, or make capital expenditures and
acquisitions. The Company is also subject to restrictive financial covenants,
which include levels of tangible net worth and a ratio related to lease expense
coverage.
The Company incurred $8,000 in interest expense under the Credit Facility for
the year ended September 30, 1999. The Company did not incur interest expense
under the Credit Facility for the years ended September 30, 1998 and 1997.
5. ACCRUED EXPENSES:
----------------
September 30
------------------------------
1999 1998
Payroll and related benefits $ 5,329,000 $ 2,000,000
Unearned grant reimbursements 1,122,000 --
Telecommunications expense 1,089,000 461,000
Other 566,000 560,000
------------- -------------
$ 8,106,000 $ 3,021,000
6. SHAREHOLDERS' EQUITY:
--------------------
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 determines the price and
other terms upon which awards are made. The exercise price of incentive stock
options may not be less than the fair market value of Common stock on the date
of grant. As of September 30, 1999, 32,100 options are available for future
grants.
F-13
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, 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
Granted 381,250 1.41-5.56 2.35 897,000
Exercised -- -- -- --
Terminated (57,650) 2.00-12.50 3.42 (197,000)
---------- ------------ ------------ -------------
Balance as of September 30, 1999 917,900 $ 1.41-$12.50 $ 3.06 $ 2,809,000
========== ============= ============ =============
Options exercisable as of September 30, 1999 129,273 $ 3.61
========== ============
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 were not vested and will vest over
four years and have a contractual term of ten years. The weighted average
remaining contractual term of all options outstanding at September 30, 1999 is
8.9 years.
F-14
The following table summarizes information relating to the Plan at September 30,
1999 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) 1999 (Years) (Per Share) 1999 (Per Share)
- -------------- --------------- ----------- ------------ --------------- ------------
$1.41 - $2.06 266,000 9.3 $ 1.95 -- $ --
$2.44 - $2.94 147,000 9.2 $ 2.60 20,000 $ 2.44
$3.69 - $5.56 502,200 8.5 $ 3.74 107,613 $ 3.69
$12.50 2,700 7.0 $ 12.50 1,660 $ 12.50
The Company accounts for its option plan under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized. In 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123 established a fair value based method of accounting for stock-based
compensation plans. This statement also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from non-
employees. SFAS No. 123 requires that an employer's financial statements include
certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for the Plan. Had the Company
recognized compensation cost for 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, 1999, 1998 and 1997
would have been as follows:
For the Year Ended
September 30
-------------------------------------------------
1999 1998 1997
------------- ------------- --------------
Net income:
As reported $ 1,559,000 $ 504,000 $ 3,367,000
============= ============= =============
Pro forma $ 1,128,000 $ 80,000 $ 2,907,000
============= ============= =============
Basic net income per Common share:
As reported $ .19 $ .06 $ .41
============= ============= =============
Pro forma $ .14 $ .01 $ .36
============= ============= =============
Diluted net income per Common share:
As reported $ .19 $ .06 $ .41
============= ============= =============
Pro forma $ .13 $ .01 $ .35
============= ============= =============
F-15
The weighted average fair value of the stock options granted during the years
ended September 30, 1999, 1998 and 1997 was $2.00, $2.75 and $3.89,
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
----------------------------------------------
1999 1998 1997
Risk-free interest rate 5.4% 5.7% 7.0%
Volatility 85.0% 85.0% 60.0%
Expected dividend yield 0.0% 0.0% 0.0%
Expected life 7.0 years 7.0 years 7.5 years
Warrant
- -------
In connection with a former credit agreement with a bank, the Company issued the
bank a warrant to purchase 236,842 shares of Common stock for $.01 per share.
The warrant was to expire on May 31, 2006, and was fully exercisable. The number
of shares to be purchased upon exercise of the warrant was subject to reduction
based on the timing of the Company's initial public offering, which occurred in
September 1996, and was reduced to 142,105. For financial reporting purposes,
the warrant was valued at $450,000 and was recorded as original issue discount
on the related term loan.
In September 1999, the warrant was exercised through a cashless exercise by the
bank as permitted by the original warrant agreement. Based upon the market price
of the Common stock on the date of exercise, 141,846 shares of Common stock were
issued to the bank.
Restricted Stock
- ----------------
In April 1999, the Company issued 100,000 shares of restricted Common stock that
it had previously agreed to award to its Chief Executive Officer. The primary
restriction is the officer's continued employment over the five-year period
commencing on his original hire date, with the restriction lapsing on 20,000
shares per year on each anniversary of his hire date. The $200,000 value of the
stock was established by the market price on the date of grant with deferred
compensation recorded at that time. The deferred compensation is presented as a
reduction of shareholders' equity in the accompanying consolidated balance
sheet, and is being amortized over the restriction period.
7. 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 years ended September 30, 1999, 1998 and
1997 were $63,000, $51,000 and $36,000, respectively. Employees are fully vested
in their contributions, while vesting in the Company's contributions occurs
ratably over seven years beginning in year three.
F-16
8. JOINT VENTURE:
-------------
The Company has formed a joint venture, 365biz.com LP, with Advanta Partners to
provide web design, hosting and membership services to small and medium sized
businesses. Additionally, the joint venture will provide a variety of online
options and features including Internet access, e-mail accounts, search engine
posting and e-commerce related services. Advanta Partners is a related party
given its stock interest held in the Company. Based on the terms of the limited
partnership agreement, in order to obtain a 49.5% minority ownership interest in
the joint venture, the Company is committed to provide the joint venture capital
funding of $922,000, of which $466,000 has been provided as of September 30,
1999. The remaining commitment is expected to be paid in the year ending
September 30, 2000. In addition, the Company will extend up to $1,000,000 of
normal trade credit for services the Company is expected to provide to the joint
venture.
The limited partnership agreement provides that the Company will be allocated
33.3% of the joint venture's initial losses and subsequent profits, if any,
until such time as the Company and Advanta Partners' equity accounts equal their
original funding commitments. At that time, profits and losses will be allocated
based upon ownership percentages.
During the year ended September 30, 1999, the Company has accounted for the
joint venture under the equity method of accounting thereby recognizing its
share of the joint venture's losses to date per the limited partnership
agreement.
The following is summarized financial information for 365biz.com LP:
For the Period from
Inception to
September 30, 1999
-------------------
Sales $ --
Loss from operations 264,000
Net loss 264,000
September 30, 1999
-------------------
Current assets $ --
Noncurrent assets 307,000
Current liabilities 106,000
Noncurrent liabilities --
F-17
9. INCOME TAXES:
------------
Net income tax expense is as follows:
For the Year Ended September 30
----------------------------------------------------
1999 1998 1997
Current:
Federal $ 785,000 $ 200,000 $ 89,000
State 38,000 93,000 91,000
------------- ------------- -------------
823,000 293,000 180,000
------------- ------------- -------------
Deferred:
Federal 185,000 99,000 1,571,000
State (72,000) (28,000) 74,000
------------- ------------- -------------
113,000 71,000 1,645,000
------------- ------------- -------------
$ 936,000 $ 364,000 $ 1,825,000
============= ============= =============
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
--------------------------------------------------
1999 1998 1997
Federal statutory rate 34.0% 34.0% 34.0%
State taxes (1.4) 7.5 3.2
Other 4.9 0.4 (2.0)
------------ ---------- ----------
37.5% 41.9% 35.2%
============ ========== ==========
F-18
Deferred income tax assets and liabilities are classified as current and
noncurrent based on the financial reporting classification of the related assets
and liabilities, which give rise to the temporary difference. Significant
components of the deferred income tax assets and liabilities are as follows:
September 30
---------------------------------
1999 1998
------------- -------------
Current deferred income tax asset (liability):
Other nondeductible expenses $ (930,000) $ (729,000)
Net operating loss carryforwards 69,000 38,000
Other tax credit carryforwards -- 103,000
Cash basis of accounting -- 34,000
------------- ------------
(861,000) (554,000)
------------- ------------
Noncurrent deferred income tax asset (liability):
Depreciation and amortization of property and equipment 44,000 (101,000)
Other nondeductible expenses -- (49,000)
------------- ------------
44,000 (150,000)
------------- ------------
Net deferred income tax liability $ (817,000) $ (704,000)
============= ============
10. BUSINESS SEGMENTS:
-----------------
The Company operates in three business segments as follows:
Insurance
The Insurance segment works with large consumer insurance companies and their
agents throughout the United States to market such products as accidental death
and dismemberment policies, graded benefit life insurance and other niche
insurance products primarily to credit card customers. The Company has also
assisted clients in marketing supplemental dental and vision coverage to credit
card holders.
Financial Services
The Financial Services segment provides teleservices to several of the largest
credit card issuers, banks and other financial and membership service
institutions in the United States. The Company's services include customer
account acquisition and retention programs, programs to sell credit card
enhancement features such as higher credit limits, lower interest rates and
lower fees and discounts on selected goods and services purchased through a
variety of interest group clubs. The Company also cross-sells additional
services such as home equity loans and related banking services.
F-19
Telecommunications
The Telecommunications segment provides a variety of teleservices for the
nation's leading local, long-distance and wireless telecommunications companies.
The reportable segments have been identified as they have separate management
teams and serve separate classes of customers. The accounting policies of the
reportable segments are the same as those described in Note 2. The Company
evaluates the performance of its operating segments based on operating income
(loss) and corporate assets and costs are allocated to the segments based upon
segment revenue. Intersegment sales and transfers are not significant.
F-20
Financial information for each business segment as of September 30, 1999, 1998
and 1997 and for the years then ended is as follows:
1999 1998 1997
--------------- --------------- ---------------
Revenues:
Insurance $ 32,389,000 $ 34,697,000 $ 33,980,000
Financial services 37,621,000 16,557,000 5,857,000
Telecommunications 10,308,000 1,180,000 6,100,000
--------------- --------------- ---------------
$ 80,318,000 $ 52,434,000 $ 45,937,000
=============== =============== ===============
Operating income (loss):
Insurance $ 1,355,000 $ 1,119,000 $ 1,598,000
Financial services 330,000 (694,000) 1,529,000
Telecommunications 613,000 (98,000) 1,592,000
--------------- --------------- ---------------
$ 2,298,000 $ 327,000 $ 4,719,000
=============== =============== ===============
Total assets:
Insurance $ 10,229,000 $ 18,124,000 $ 15,913,000
Financial services 17,816,000 7,486,000 7,367,000
Telecommunications 11,350,000 1,725,000 2,006,000
--------------- --------------- ---------------
$ 39,395,000 $ 27,335,000 $ 25,286,000
=============== =============== ===============
Depreciation and amortization:
Insurance $ 1,009,000 $ 1,186,000 $ 1,073,000
Financial services 552,000 402,000 190,000
Telecommunications 79,000 36,000 176,000
--------------- --------------- ---------------
$ 1,640,000 $ 1,624,000 $ 1,439,000
=============== =============== ===============
Capital expenditures:
Insurance $ 473,000 $ 804,000 $ 833,000
Financial services 815,000 363,000 148,000
Telecommunications 483,000 28,000 137,000
--------------- --------------- ---------------
$ 1,771,000 $ 1,195,000 $ 1,118,000
=============== =============== ===============
Geographic information:
Property and equipment:
United States $ 3,636,000 $ 4,047,000 $ 4,476,000
Canada 542,000 -- --
--------------- --------------- ---------------
$ 4,178,000 $ 4,047,000 $ 4,476,000
=============== =============== ===============
F-21
The Company's revenues during the years ended September 30, 1999, 1998 and 1997
were generated entirely from customers within the United States.
11. COMMITMENTS AND CONTINGENCIES:
-----------------------------
Leases
- ------
The Company leases its offices and communications and computer equipment under
noncancellable operating leases which expire through 2009. The rental payments
for the years ended September 30, 1999, 1998 and 1997, were approximately
$5,594,000, $2,828,000 and $1,681,000, respectively.
Aggregate minimum rental payments under the noncancellable operating leases at
September 30, 1999, are as follows:
2000 $ 7,583,000
2001 7,350,000
2002 5,810,000
2003 4,598,000
2004 2,472,000
Thereafter 3,677,000
---------------
$ 31,490,000
===============
The Company had various capitalized lease obligations payable to several finance
companies. The obligations were repaid during the year ended September 30, 1998.
On May 28, 1999, the Company entered into an agreement with the same bank that
provides the Credit Facility under which it had up to $8,000,000 available for
leasing call center equipment. The balance available for leasing call center
equipment was subsequently reduced to $5,000,000 in conjunction with an
amendment to increase the Company's Credit Facility. The agreement, which
expires on September 30, 2000, requires that the leases be operating in nature
and not exceed 60 months. Under this agreement, as of September 30, 1999, the
Company has entered into operating leases for equipment with an aggregate total
cost of $1,700,000.
Previously, under separate agreements with the same bank dated February 22,
1997, and March 10, 1998, which expired on April 1, 1998 and April 1, 1999,
respectively, the Company entered into operating leases for equipment with an
aggregate total cost of $4,100,000 and $5,500,000, respectively, of equipment
under similar terms.
In addition, on June 1, 1999, RMHTI entered into an agreement with a finance
company under which it has up to 5,000,000 Canadian dollars available for
leasing call center equipment. Under the terms of the agreement, the leases must
meet the accounting definition of an operating lease with rent to be paid over a
period not to exceed 60 months. Under this agreement, as of September 30, 1999,
the Company has entered into operating leases for equipment with an aggregate
total cost of $3,746,000 Canadian dollars.
F-22
RMH Teleservices, Inc. is a guarantor of all liabilities arising from
obligations incurred by RMHTI under the agreement.
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 $7,632,000.
Employment Agreements
- ---------------------
The Company has employment agreements with five executive officers that expire
at various times through the year ending September 30, 2002, subject to renewal.
The agreements provide for aggregate base compensation of $1,029,000, $975,000
and $160,000 in the years ending September 30, 2000, 2001 and 2002,
respectively, plus incentive compensation based on performance of the Company.
The agreements also provide for certain other fringe benefits and payments upon
termination of the agreements or a change in control of the Company.
Management Fees
- ---------------
The Company has a consulting agreement with Advanta Partners under which Advanta
Partners provides consulting services to the Company and receives an annual fee
of $50,000. The consulting agreement expires on May 24, 2001.
Litigation
- ----------
From time to time, the Company is involved in certain legal actions arising in
the ordinary course of business. In management's opinion, the outcome of such
actions will not have a material adverse effect on the Company's financial
position, results of operations or liquidity.
12. GRANT REIMBURSEMENTS:
--------------------
RMHTI, which was created during the year ended September 30, 1999, to conduct
the Company's business operations in Canada, has received financial incentives
from the Canadian provincial governments of Ontario and New Brunswick totaling
3,270,000 Canadian dollars (approximately $2,229,000 using the exchange rate at
September 30, 1999) as of September 30, 1999 and expects to receive an
additional 3,250,000 Canadian dollars (approximately $2,215,000 using the
exchange rate at September 30, 1999) over the next three years. The incentives
offset various start-up, payroll and operating costs associated with creating
new call centers in Canada. The Company records a grant receivable for qualified
expenditures made but not yet reimbursed, and a liability for grant
reimbursements received for which the Company has not fulfilled its obligations
under the applicable grant. During the year ended September 30, 1999, the
Company recorded $1,927,000 as expense reductions related to the grants. At
September 30, 1999, the Company
F-23
had a grant receivable of $820,000 included in other current assets in the
accompanying consolidated balance sheet and a liability of $1,122,000 included
in accrued expenses in the accompanying balance sheet. This liability is
expected to be amortized against qualified payroll costs over the next three
fiscal years as the grant incentives are earned and the Company's performance
obligations are satisfied. As certain grants require the Company to maintain
achieved employment levels over a defined period, the Company's failure to
maintain these levels could require the Company to repay a portion of the grants
for the portion of the employment targets not maintained.
F-24
13. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED):
------------------------------------------------
Summarized quarterly financial data for the years ended September 30, 1999 and
1998 is as follows:
Quarter Ended
------------------------------------------------------------------------
December 31, March 31, June 30, September 30,
1998 1999 1999 1999
--------------- --------------- --------------- ---------------
Revenues $ 15,837,000 $ 17,290,000 $ 20,627,000 $ 26,564,000
--------------- --------------- --------------- ---------------
Operating Expenses:
Cost of services 11,950,000 13,144,000 15,585,000 19,958,000
Selling, general and administrative 3,583,000 3,663,000 4,411,000 5,726,000
--------------- --------------- --------------- ---------------
Total operating expenses 15,533,000 16,807,000 19,996,000 25,684,000
--------------- --------------- --------------- ---------------
Operating income 304,000 483,000 631,000 880,000
Equity in Losses of Joint Venture -- -- -- 88,000
Interest Income, net 107,000 69,000 72,000 37,000
--------------- --------------- --------------- ---------------
Income before income taxes 411,000 552,000 703,000 829,000
Income Taxes 154,000 207,000 264,000 311,000
--------------- --------------- --------------- ---------------
Net Income $ 257,000 $ 345,000 $ 439,000 $ 518,000
--------------- --------------- --------------- ---------------
Basic and Diluted Income Per Common Share $ .03 $ .04 $ .05 $ .06
=============== ============== =============== ===============
Quarter Ended
-----------------------------------------------------------------------
December 31, March 31, June 30, September 30,
1997 1998 1998 1998
--------------- --------------- --------------- ---------------
Revenues $ 12,247,000 $ 12,337,000 $ 13,212,000 $ 14,638,000
--------------- --------------- --------------- ---------------
Operating Expenses:
Cost of services 8,983,000 9,313,000 10,155,000 11,195,000
Selling, general and administrative 2,564,000 3,612,000 3,052,000 3,233,000
--------------- --------------- --------------- ---------------
Total operating expenses 11,547,000 12,925,000 13,207,000 14,428,000
--------------- --------------- --------------- ---------------
Operating income (loss) 700,000 (588,000) 5,000 210,000
Interest Income, net 148,000 121,000 145,000 127,000
--------------- --------------- --------------- ---------------
Income before income taxes
(benefit) 848,000 (467,000) 150,000 337,000
Income Taxes (Benefit) 305,000 (168,000) 54,000 173,000
--------------- --------------- --------------- ---------------
Net Income (Loss) $ 543,000 $ (299,000) $ 96,000 $ 164,000
=============== =============== =============== ===============
Basic and Diluted Income (Loss) Per Common
Share $ .07 $ (.04) $ .01 $ .02
=============== =============== =============== ===============
F-25