-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JYhzSFGYg6hUDvN4lq0isY+UcoJWleuXPyqI6lLgqnuV1i21AD2ZZ1qkxXP3Pp2z KlHycToKI2ymQdtom12d4g== 0000893220-96-002076.txt : 19961224 0000893220-96-002076.hdr.sgml : 19961224 ACCESSION NUMBER: 0000893220-96-002076 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961223 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RMH TELESERVICES INC CENTRAL INDEX KEY: 0001017958 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 232250564 STATE OF INCORPORATION: PA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-21333 FILM NUMBER: 96684730 BUSINESS ADDRESS: STREET 1: 40 MORRIS AVE CITY: BRYN MAWR STATE: PA ZIP: 19010 BUSINESS PHONE: 6105205300 MAIL ADDRESS: STREET 1: 40 MORRIS AVENUE CITY: BRYN MAWR STATE: PA ZIP: 19010 10-K405 1 FORM 10-K RMH TELESERVICES, INC 1 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 [Fee Required] For the fiscal year ended September 30, 1996 or [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 [No Fee Required] 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) 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. [x] As of December 16, 1996, 8,120,000 shares of common stock were outstanding. The aggregate market value of the shares of common stock owned by non-affiliates of the Registrant as of December 16, 1996 was approximately $60.9 million (based upon the closing sale price of these shares as reported by the Nasdaq's 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 Annual Meeting of Shareholders to be held on February 25, 1997 (the "1997 Proxy Statement") are incorporated by reference in Part III. 2 TABLE OF CONTENTS
Item No. Page PART I 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4. Submissions of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . 7 Executive Officers of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 PART II 5. Market for Registrant's Common Equity and Related Shareholder Matters . . . . . . . . . . . . . . . . 10 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 11 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . 17 PART III 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . 18 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . 18 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 18
3 PART I ITEM 1. BUSINESS GENERAL RMH Teleservices, Inc. (the "Company") provides outbound teleservices predominantly to major corporations in the insurance and financial services industries. The Company distinguishes itself through its high quality service and disciplined management approach which has led to long-term client relationships and sustained profitable growth. The Company originated relationships with Mass Marketing Insurance Group ("MMIG"), J.C. Penney Life Insurance Company ("J.C.Penney"), AT&T/Universal Card Services ("AT&T") and Advanta Corp. ("Advanta") over five years ago and, since fiscal 1991, the Company's aggregate volume with these clients has grown each year. The Company believes its innovative approach to producing quality service distinguishes it from its competitors and has led to the Company's rapid growth rate and its retention of key clients. RMH's net revenue has increased 88.9 % over the last two years. The Company was founded in 1983 by Raymond J. Hansell, Vice Chairman and Chief Executive Officer, and MarySue Lucci, Director, President and Chief Operating Officer (the "Founders"). In May 1996, the Company completed a leveraged recapitalization (the "Recapitalization") pursuant to which Advanta Partners LP ("Advanta Partners"), a venture capital affiliate of Advanta, 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. In connection with the Recapitalization (I) the Company redeemed 8,500,000 shares of Common Stock held by the Founders, (ii) Advanta Partners purchased 1,594,112 shares of Class A Common Stock, 1,279,573 shares of Class B Common Stock and 6,226,316 shares of the Company's Series B Preferred Stock (the "Series B Preferred Stock"), (iii) Glengar International Investments Limited ("Glengar") purchased 126,315 shares of Class A Common Stock and 273,684 shares of Series B Preferred Stock and (iv) the Company borrowed $11.2 million under a credit facility entered into with a bank. See "Certain Transactions - Recapitalization." 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 its 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, exclusive of the special compensation expense for fiscal 1996, were $32.3 million and $3.4, respectively. This represents increases of 26.5% and 69.7% respectively, compared to fiscal 1995. OVERVIEW OF THE TELESERVICES INDUSTRY The teleservices industry includes outbound and inbound telephone marketing, as well as customer support and service programs and other value-added services. Teleservices provide customized service with higher response rates and higher customer acquisition and retention rates at a lower cost per transaction than other marketing media. As a result, call centers have become robust channels for the marketing and sale of a wide variety of products and services as sophisticated telemarketers are able to market effectively and collect valuable customer data. According to Direct Marketing Magazine, telemarketing expenditures in the United States grew from approximately $34 billion in 1984 to approximately $77 billion in 1994. The call center services industry is extremely fragmented and includes a large number of small, independent organizations. A small percentage of teleservices business is currently being outsourced to independent 1 4 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. Many large companies have begun to outsource their telemarketing and customer support services in order to access the industry expertise, breadth of services and specialized capabilities of large-scale, technologically-sophisticated teleservices providers such as the Company. Using such providers enables these companies to concentrate on their core businesses and improve the quality and cost-effectiveness of their customer contact functions. As a result, the Company believes that the enhanced quality and economic advantages provided by independent teleservices companies will accelerate the outsourcing trend in the industry. In addition, the Company believes that the deregulation of the telecommunications industry and the expected deregulation of the public utilities industry will significantly increase the demand for telemarketing services. The Company believes that businesses considering outsourcing their telemarketing activities increasingly are seeking to partner with a teleservices company that possesses industry expertise and the resources to serve their long-term needs efficiently. Additionally, because teleservices involve direct interaction with a client's customers, the teleservices provider's reputation for quality is critical to winning new clients. As a recognized provider of high quality teleservices, the Company has positioned itself as an attractive partner to large users of call center services. THE COMPANY'S SERVICES Outbound Teleservices Historically, the Company has concentrated on providing outbound business-to-consumer teleservices. In this market, the Company has sought and established relationships with large corporate clients, many of which have been clients of the Company for over five years. Outbound teleservices refers to the service the Company performs when its telephone service representatives (TSRs), place calls to parties targeted by the client to offer products or services or to obtain information. At the beginning of a typical outbound program, the Company receives customer data files that the client has selected to match the demographic profile of the targeted customer for the product or service being offered. These files contain each targeted customer's name, address, phone number and other relevant data. The Company's data management system sorts the records, removes information regarding customers whom the Company is prohibited from contacting and assigns each file electronically to one of its outbound call centers. Actual telephone calling at the centers is controlled by computerized call management systems that utilize predictive dialers to automatically dial the telephone numbers in the files. The call management system then forwards all connected calls, along with the customer's name and other information, electronically to the workstation of a TSR who has been trained for the client's program. The TSR then uses a prepared script to solicit an order for the product or service or to request information that will be added to the client's database. Information regarding sales and other aspects of the program is captured by the Company's proprietary software systems and made available to clients in customized report formats. Insurance. The Company is a major telemarketer of insurance products throughout the United States. Management believes this sector to be the most attractive area in business-to-consumer telemarketing from the perspective of the teleservices provider due to its large size, relative predictability and relative lack of seasonality. The Company works with large consumer insurance companies and their agents to market such products as accidental death and dismemberment policies, graded benefit life insurance and other niche insurance products primarily to credit card customers. The Company has also assisted clients in marketing supplemental dental and vision coverage to credit card holders. 2 5 As of September 30, 1996, the Company employed 169 insurance agents licensed to sell insurance in a total of 44 states. The Company's significant relationships in this industry include those with MMIG, AT&T, J.C. Penney and Advanta, which were responsible for 44.9%, 17.6%, 12.2% and 11.2%, respectively, of the Company's revenues for fiscal 1996 (including services to Advanta related to financial services products). The Company originated its relationship with MMIG over eight years ago and originated its relationship with J.C. Penney, AT&T and Advanta over five years ago. The Company's aggregate revenues from these key clients have grown respectively, each year since fiscal 1991. In fiscal 1996, 74.8% of the Company's revenues were generated from services related to insurance products. Financial Services. The Company provides teleservices to several of the largest credit card issuers, banks and other financial institutions in the United States. The Company's services include customer account acquisition, customer retention programs, and programs to sell credit card enhancement features such as higher credit limits, lower interest rates and lower fees. The Company also cross-sells additional services such as home equity loans and related banking services. In fiscal 1996, 19.7% of the Company's revenues were generated from services related to financial services products. Telecommunications. The Company expects the demand for teleservices within the telecommunications industry to increase as the industry continues to be deregulated and as the number of products (e.g., long distance, cellular, paging and "800" services) and call features (e.g., call waiting, caller identification and voice mail) increases. The Company recently completed several programs for a major telecommunications client and is in discussions with this client and a number of prospective clients in the industry to provide outbound business-to-consumer and business-to-business services. Other Industries. The Company is currently marketing travel club and dining club programs to credit card holders on behalf of one of its clients. Inbound Teleservices Inbound teleservices involves the processing of incoming calls, often placed by customers using toll-free numbers, to a customer service representative for service, order fulfillment or product information. Inbound teleservices include activities such as customer care services, credit card and loan application processing and catalog sales. More sophisticated inbound programs assist clients in responding to customer inquiries, offering technical and product support services and assessing overall customer satisfaction. The Company currently operates a 24-seat dedicated inbound customer service center in its Lansdowne, Pennsylvania call center facility and intends to install additional inbound facilities as the Company's inbound business expands. The Company has developed an inbound customer service program for Blue Cross/Blue Shield Florida (BC/BS-FL) pursuant to which the Company's TSRs respond to customer inquiries and complaints following important changes in certain of BC/BS-FL's group medical plans. Business-to-Business Teleservices The Company believes that the dynamics of the business-to-business teleservices marketplace have now changed so as to permit the development of the type of long-term client relationships and large-scale campaigns that have formed the core of the Company's business-to-consumer services. The Company expects that the demand for business-to-business applications will grow rapidly, especially among telecommunications companies, as many large companies recognize that telemarketing is a more efficient method of reaching business customers than a field sales force. Growth in the business-to-business teleservices market will enable the Company to leverage its existing workstation capacity because such services are provided primarily during the day while business-to-consumer services are provided primarily during the evening. The Company believes that its prior experience in business-to-business teleservices and current expertise in business-to-consumer teleservices position it to take advantage of the growth in this market. 3 6 THE COMPANY'S OPERATIONS Sales, Marketing and Account Management During fiscal 1996, the Company initiated a national account sales program to focus its direct sales efforts on developing relationships with the leading users of teleservices in its targeted industries. As part of this initiative, the Company hired a new Vice President of Sales and Marketing with extensive experience in directing a national account sales program and expanded its sales and marketing staff. Supporting this initiative, the Company will continue to market its services by attending trade shows, advertising in industry publications, responding to requests for proposals, pursuing client referrals and cross-selling to existing clients. A critical element of the Company's effort to build long-term client relationships is its account management program. To improve the effectiveness of the client's program, account managers offer proactive advice and consulting services. The account managers initially provide advice on all aspects of program implementation, including scripting, performance specifications and reporting, and then manage the process on behalf of the client through interaction with each of the Company's internal departments. Periodic internal audits are performed by the account manager to determine compliance with the applicable program specifications. The Company believes that this detailed attention to account management has contributed significantly to retaining clients, expanding business from existing clients and attracting new clients. Personnel and Training The Company emphasizes the recruitment, training and development of its TSRs, which management believes enables the Company to increase productivity, reduce employee turnover and enhance the quality of its services. TSRs are selected through a three-step process that includes an initial telephone screening interview, followed by an in-person interview and extensive testing to gauge competence, suitability for telemarketing projects and integrity. Newly-hired TSRs receive an intensive three-day training course that emphasizes modeling and role-playing as well as instruction on effective sales techniques and product knowledge. New TSRs are closely monitored for an initial 30-day period and thereafter receive ongoing coaching and training. As of September 30, 1996, the Company employed 169 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 ongoing 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 targets base TSR compensation at higher levels than is paid by other businesses competing for the same labor pool. In addition, the Company recently implemented a benefits package, including health insurance, for qualifying full-time TSRs. For performance recognition, the Company pays cash bonuses to TSRs who achieve sales targets and quality benchmarks and also offers non-cash incentives and creative programs to improve performance and maintain morale. Although it is typical in the teleservices industry for TSRs to be part-time employees, over 70% 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. 4 7 As of September 30, 1996, the Company employed 1,518 persons, of whom more than 1,300 were TSRs. None of the Company's employees are represented by a labor union. The Company considers its relations with its employees to be good. Quality Assurance The Company believes that its reputation for quality services is critical to acquiring and retaining clients. The Company is committed to the principles of total quality management in order to continuously improve its operational processes. The Company establishes both internal and external benchmarks as a means to measure continuous improvement. The Company measures the quality of its services on the basis of sales per hour, level of customer inquiries, call abandonment rates and other quality performance criteria. In order to provide ongoing improvement to the TSRs' performance and to assure compliance with the Company's quality standards, quality assurance personnel monitor each TSR on a frequent basis and provide coaching to the TSR based on this review. Clients also participate in the monitoring process. Sales confirmations are recorded with the customer's consent to ensure accuracy and to provide a record of the sale. Company personnel review all sales confirmation tapes for compliance with client specifications. In addition, these tapes are selectively reviewed in order to provide additional coaching to TSRs. The Company's information systems enable it to provide its clients with customized reports on the status of an ongoing 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 ongoing 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, 1996, the Company's management information systems department consisted of 32 technical professionals who maintain, upgrade and expand the Company's systems. The Company's call management and database systems have been designed to ensure quality service to its clients and to provide effective tools for the management of the Company's business. The Company uses UNIX-based predictive dialing systems at each call center, which are linked via a wide-area network to network servers at the Company's corporate headquarters. The Company's call center and network systems both use a flexible database architecture permitting the easy sharing of data among users of the system. As a result, the Company's scaleable systems can be configured to work cost-effectively at low and high volumes and permit the efficient addition of capacity. 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 the Customer Information System, which includes a dedicated server and an optical disk storage system. 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. 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 5 8 Group, Inc., SITEL Corporation, ITI Marketing Services, Inc. and Ed Blank Associates, Inc. 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 TCPA, enforced by the FCC, imposes restrictions on unsolicited automated telephone calls to residential telephone subscribers. Under the TCPA and the regulations promulgated thereunder, it is unlawful to initiate telephone solicitations to residential telephone subscribers before 8:00 a.m. or after 9:00 p.m., local time at the subscriber's location, or to use automated telephone dialing systems or artificial or prerecorded voices to call certain subscribers. Additionally, the TCPA regulations require telemarketing firms to develop a written policy implementing a "do not call" list and to train its telemarketing personnel to comply with these restrictions. The TCPA creates a right of action for both consumers and state attorneys general. A court may award damages or impose penalties of $500 per violation, which may be trebled for willful or knowing violations. Currently, the Company trains its service representatives to comply with the regulations of the TCPA and programs its call management system to avoid initiating telephone calls during restricted hours or to individuals maintained on the Company's "do not call" list. The FTC regulates both general sales practices and telemarketing specifically. Under the Federal Trade Commission Act (the "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 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. Most of these statutes allow a private right of action for the recovery of damages or provide for enforcement by state agencies permitting the 6 9 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 to participate in regular continuing education programs, which currently are paid for by the Company. The Company believes that it is in compliance with all applicable regulations. ITEM 2. PROPERTIES The Company's corporate headquarters facility is located in Bryn Mawr, Pennsylvania in an approximately 45,000 square-foot building leased to the Company through December 1998. 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, 1996, the Company operated the following call centers.
DATE OF DATE OF INITIAL MOST RECENT CURRENT LOCATION OPENING WORKSTATIONS EXPANSION WORKSTATIONS - -------- ------- ------------ --------- ------------ Bryn Mawr, PA(1) . . . . . March 1985 15 November 1996 112 Lansdowne, PA(2) . . . . . October 1990 80 November 1996 120 Pleasantville, NJ . . . . . November 1992 64 February 1996 96 Scranton, PA . . . . . . . July 1993 64 May 1996 96 Wilkes-Barre, PA . . . . . April 1994 64 March 1996 96 Reading, PA . . . . . . . . February 1995 64 October 1996 96 Ocean Township, NJ . . . . November 1995 80 November 1996 96 Allentown, PA . . . . . . . April 1996 80 October 1996 96 Harrisburg, PA . . . . . . October 1996 80 October 1996 80 --- Total: 888 ===
(1) Facilities transferred from Wynnewood, PA (the original headquarters) to Bryn Mawr in September 1995. (2) Includes a 24-seat inbound capability. The Company believes that suitable additional or alternative space will be available as needed on commercially reasonable terms. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is involved in litigation incidental to its business. In the view of management, no litigation to which the Company is currently a party is likely to have a material adverse effect on the Company, if decided adversely to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company has not submitted any matters to a vote of its shareholders since the Company completed its initial public offering. 7 10 EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are as follows:
NAME AGE POSITION - ---- --- -------- Raymond J. Hansell . . . . . . 47 Vice Chairman of the Board and Chief Executive Officer MarySue Lucci . . . . . . . 48 Director, President and Chief Operating Officer Michael J. Scharff . . . . . . 50 Executive Vice President Richard C. Altus . . . . . . . 38 Vice President and Chief Financial Officer Richard P. Keenan . . . . . . . 50 Vice President of Sales and Marketing William D. Mulvihill . . . . . 55 Vice President of Account Management David Clautice . . . . . . . 55 Vice President of Management Information Systems
Mr. Hansell currently serves as Vice Chairman and Chief Executive Officer of the Company. From November 1994 until the Recapitalization in May 1996, Mr. Hansell served as the Chairman of the Board of Directors of the Company and from the Company's founding in 1983 until November 1994, he served as the Company's President. Mr. Hansell has been an active industry leader and served on the operating committee of the Direct Marketing Association's Telephone Marketing Council from 1993 to 1995. Mr. Hansell was named a Top Ten Telepro by Teleprofessional Magazine in October 1995 for his contributions to the industry. Prior to co-founding the Company, Mr. Hansell served in various managerial sales and marketing positions at Shared Medical Systems, NCR and Automatic Data Processing. Ms. Lucci has served as the Company's President since November 1994 and Chief Operating Officer since December 1995, prior to which she had served as an Executive Vice President for more than five years and as the Company's Treasurer from the Company's founding in 1983 until November 1994. Ms. Lucci also has acted as a director and the Secretary of the Company since its founding in 1983. Ms. Lucci was recently a recipient of the 1996 Distinguished Women in Telemarketing Award by Telemarketing Magazine. From 1981 to 1983, Ms. Lucci was Vice President of New Product Publications Development for Clement Communications, a national business marketing publisher. From 1969 to 1981, Ms. Lucci was employed by Colonial Penn Insurance Company, a leading direct marketer of insurance products, where she managed marketing, training and customer service functions, most recently as a Vice President. Mr. Hansell and Ms. Lucci are husband and wife. Mr. Scharff is the Company's Executive Vice President and, since November 1994, has been Treasurer of the Company. Mr. Scharff was Senior Vice President of Finance of the Company from November 1995 to September 1996 and Vice President of Finance of the Company from November 1994 to November 1995. From January 1994 to November 1994, Mr. Scharff was an Assistant Vice President of the Company and, from the time he joined the Company in October 1988 until January 1994, Mr. Scharff served as the Company's Controller. From 1984 until joining the Company, Mr. Scharff was the President of Audobon Automotive Supply Co., an automotive parts distributor. Mr. Scharff was a divisional controller of Safeguard Business Systems from 1979 to 1984. Mr. Altus joined the Company as Vice President and Chief Financial Officer in September 1996. From April 1996 until he joined the Company, Mr. Altus served as Executive Vice President and Chief Financial Officer of Nobel Education Dynamics, Inc., a provider of child care and elementary education services. From 1988 to March 1996, Mr. Altus served as Vice President of Finance and Chief Financial Officer of GBC Technologies, Inc., a wholesale distributor of computer products. Prior to 1988, he was employed by KPMG Peat Marwick for seven years in various accounting and consulting positions. Mr. Keenan is the Company's Vice President of Sales and Marketing. For 18 years prior to joining the Company in March 1996, Mr. Keenan was employed by Tektronix, Inc., a computer software and 8 11 graphics company serving most recently as Tektronix's Regional Sales Manager for the Eastern United States in charge of a national account sales program for that region. For seven years prior thereto, Mr. Keenan served in various sales and management capacities at NCR. Mr. Mulvihill is the Company's Vice President of Account Management. From August 1994 until he joined the Company in June 1996, Mr. Mulvihill was an independent consultant. From October 1993 until August 1994, Mr. Mulvihill served as a Team Leader in the telemarketing group at Towers Perrin, a national management and benefits consulting firm. From 1982 until joining Towers Perrin, Mr. Mulvihill served as Vice President of Customer Service for Users, Inc., an information systems company. Mr. Clautice serves as the Company's Vice President of Management Information Systems. From June 1995 to December 1995, Mr. Clautice served as the Company's Director of Methods and Procedures. Prior to joining the Company in June 1995, Mr. Clautice was President of Clautice Associates, Inc., an information systems consulting firm he founded in 1974. From 1974 to 1985, Mr. Clautice was President of Electronic Processing Center, a data processing service organization. 9 12 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 shares have been quoted on the Nasdaq National Market under the symbol "RMHT." Prior to the Initial Public Offering, the Common Shares were 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 Shares as reported on the Nasdaq National Market during the twelve day period ended September 30, 1996.
HIGH LOW --------- --------- Fourth Quarter of 1996 (from September 18, 1996) . . . $17.25 $14.00
As of December 10, 1996, there were 38 holders of record of the Common Shares. The Company currently intends to retain future earnings to finance its growth and development and therefore does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's credit facilities restrict the payment of cash dividends by the Company. Payment of any future dividends will depend upon the future earnings and capital requirements of the Company and other factors which the Board of Directors consider appropriate. For certain information regarding distributions made by the Company prior to the Initial Public Offering, see Item 13 "Certain Relationships and Related Transactions" (as incorporated by reference to the registrant's 1997 Proxy Statement). ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Financial Statements of the Company and notes thereto included elsewhere in the Report.
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 6,988 $10,292 $17,105 $25,545 $32,316 ------- ------- ------- ------- ------- Operating expenses: Cost of services . . . . . . . . . . . . . . . . . . . . 5,189 7,642 13,286 18,210 22,212 Selling, general and administrative (1) . . . . . . . . 1,428 2,076 3,007 5,312 6,669 Special bonuses (2) . . . . . . . . . . . . . . . . . . - - - - - - - - 6,087 -------- ------- ------- ------- -------- Total operating expenses . . . . . . . . . . . 6,617 9,718 16,293 23,522 34,968 -------- ------- ------- ------- -------- Operating income (loss) . . . . . . . . . . . . . . . . . 371 574 812 2,023 (2,652) Interest expense (3) . . . . . . . . . . . . . . . . . . 125 137 170 261 1,893 -------- ------- ------- ------- -------- Income (loss) before income taxes and extraordinary item . . . . . . . . . . . . . . . . . . . . . . . 246 437 642 1,762 (4,545) Income taxes (benefit) (4) . . . . . . . . . . . . . . . - - - - 40 21 (1,222) -------- ------- ------- ------- ------- Income (loss) before extraordinary item . . . . . . . . . 246 437 602 1,741 (3,323) Extraordinary item, net of taxes (5) . . . . . . . . . . - - - - - - - - 582 -------- ------- ------- ------- --------- Net income (loss) . . . . . . . . . . . . . . . 246 437 602 1,741 (3,905) Preferred stock dividends . . . . . . . . . . . . . . . . - - - - - - - - 308 Net income (loss) available to Common . . . . . . . . . . ------- ------- ------- ------- -------- shareholders (4) . . . . . . . . . . . . . . . . . . . $ 246 $ 437 $ 602 $ 1,048 $(4,213) ======= ======= ======= ======= ======== Pro forma loss per common share: (i) - -------------------------------- Pro forma loss before extraordinary item. . . . . . . . . $ ( .68) Extraordinary item, net of taxes . . . . . . . . . . . . ( .12) ------- Pro forma loss . . . . . . . . . . . . . . . . . . . . . $ (.80)
(i) The pro forma net loss per common share includes the pro forma income tax benefit for fiscal 1996 which would have been recorded on the historical loss before income taxes if the Company had not been an S corporation during such period at an effective rate of 36%. The pro forma net loss per 10 13 common share is computed by dividing the pro forma loss by the weighted average number of shares outstanding during the period.
SEPTEMBER 30, -------------------------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- BALANCE SHEET DATA: Working capital $ 21 $ 282 $ 829 $1,061 $12,718 Total assets 2,364 3,743 5,576 8,757 22,555 Long-term debt, less current maturities 51 20 355 592 -- Capitalized lease obligations, less current maturities 287 525 623 436 2 Loans payable to shareholders 125 125 125 133 -- Shareholders' equity 887 1,325 1,927 3,668 18,315
- -------------------------- (1) Selling, general and administrative expenses include Founders' compensation of $308,000, $386,000, $660,000, $766,000 and $597,684 for fiscal 1992 through fiscal 1996, 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 is fixed at a combined base amount of $400,000 per year for three years (subject to annual adjustment based on the inflation rate), plus a discretionary bonus which at the present time is not expected to exceed 20% of base compensation. (3) In fiscal 1996 interest expense includes a one-time charge of $1,177,000 relating to interest expense on a Founders' note. (4) The Company operated as an S Corporation for income tax purposes since April 1, 1990 and terminated such status in connection with the Recapitalization. See Item 13 "Certain Relationships and Related Transactions" (as incorporated by reference to the Registrant's proxy statement for the 1997 Annual Meeting) and Note 8 of Notes to Financial Statements, for information concerning computation and realizability of the net operating loss carry forward generated in fiscal 1996. (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 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. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS From time-to-time, the Company may publish statements which are not historical facts but are forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provided a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of 11 14 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) reliance on independent long-distance companies; (viii) changes in government regulations affecting the teleservices and telecommunications industries; (ix) competition from other outside providers of teleservices and in-house telemarketing operations of existing and potential clients; and (x) competition from providers of other marketing formats, such as existing formats such as direct mail and emerging strategies such as interactive shopping and marketing over the Internet. OVERVIEW The Company is a leading provider of outbound teleservices to major corporations in the insurance and financial services industries. Founded in 1983 by Raymond J. Hansell and MarySue Lucci to provide direct marketing and sales consulting, the Company opened its first call center focusing on business-to-business teleservices in 1985 to support the marketing efforts of its consulting customers. By the late 1980s, outbound business-to-consumer teleservices had become the predominant business of the Company. On May 24, 1996, the Company completed a Recapitalization of the Company which included the purchase of a significant equity interest in the Company by Advanta Partners. On September 24, 1996 the Company completed the Initial Public Offering from which it realized proceeds, after the deduction of underwriting discounts and commissions of $37,448,600. Concurrently with the Initial Public Offering, the Company issued an aggregate of 400,000 shares of the Company Common Stock in exchange for all of the outstanding Series A Preferred Stock and a 6% Subordinated Promissory Note held by the Founders' ("the Founders Note") and redeemed an aggregate of 6,500,000 shares of Series B Preferred Stock held by Advanta Partners and Glengar. See Item 13 "Certain Relationships and Related Transactions"(as incorporated by reference to the Registrant's 1997 Proxy Statement). The Company's business has grown rapidly, resulting in increases in revenues and operating income during each of the last three fiscal years. The increase in revenues from $17.1 million in fiscal 1994 to $ 32.3 million in fiscal 1996, has largely been driven by increases in call volumes from existing clients, primarily in the insurance industry, coupled with the development of new clients primarily in the financial services industry. There is no assurance that the Company will be able to maintain its historical profit margins, which may be adversely affected by, among other factors, the pricing of such business and additional technological and other costs involved in servicing such business. Operating income, exclusive of special compensation expenses, increased from $812,000 or 4.7% of revenues in fiscal 1994 to $3,435,000, or 10.6 % of revenues in fiscal 1996. The increase in operating income over the three-year period resulted from both the growth in revenues and the reduction in cost of services as a percentage of revenues. Cost of services, which primarily consists of labor, telephone and other call center-related operating and support expenses, declined from 77.7% of revenues in fiscal 1994 to 68.7 % of revenues in fiscal 1996. These costs have decreased as a percentage of revenues as the Company has expanded its call center locations to lower cost geographic areas, improved its operating efficiencies and negotiated more favorable long distance rates. Selling, general and administrative expenses are comprised principally of corporate expenses, including management, sales and marketing activities, account management services, accounting and finance, human resources, information services and other administrative costs. Corporate expenses include, among other items, compensation to Founders which amounted to $660,000, $766,000 and $597,684 for fiscal 1994, 12 15 fiscal 1995 and fiscal 1996, respectively. See Item 13 "Certain Relationships and Related Transactions" (as incorporated by reference to the Registrant's 1997 Proxy Statement). The Company was subject to taxation under Subchapter S of the Internal Revenue Code of 1986, as amended, from April 1, 1990 to May 24, 1996. As a result, the net income of the Company, for federal and certain state tax purposes, was taxed directly to the Company's Founders rather than the Company. Upon completion of the Recapitalization, the Company terminated its Subchapter S status. In fiscal 1996, certain charges were incurred in connection with the Recapitalization of the Company and the Initial Public Offering. As a result of these charges the Company incurred a net operating loss for fiscal 1996. In accordance with the provisions of SFAS 109, a calculation as to the realizability of the net operating loss carry forward was made for the purposes of taking into account the Company's ability to generate sufficient taxable income and thereby realize the benefit of the net operating loss prior to its expiration. As a result of this analysis, the Company recorded a deferred tax asset of $1,111,840 in fiscal 1996. In future periods the Company will be subject to, and accrue, both federal and state income taxes. 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:
YEAR ENDED SEPTEMBER 30, ------------------------------------- 1994 1995 1996 ---- ---- ---- Revenues 100.0% 100.0% 100.0% ------ ------ ----- Operating expenses: Cost of services 77.7 71.3 68.8 Selling, general and administrative (1) 17.6 20.8 20.6 Special Bonuses (2) -- -- 18.8 ------ ------ ------ Total operating expense 95.3 92.1 108.2 ------ ------ ----- Operating income (loss) 4.7 7.9 (8.2) Interest expense (3) 1.0 1.0 5.9 ------ ------ ----- Income (loss) before income taxes (benefit) and extraordinary item 3.7 6.9 (14.1) Income taxes (benefit) .2 .1 (3.8) Extraordinary item, net of taxes (4) -- -- 1.8 Net income (loss) 3.5% 6.8% (12.1)% ====== ====== ======
(1) Compensation to Founders represents 3.9%, 3.0% and 2% of revenues for fiscal 1994, fiscal 1995 and fiscal 1996, respectively. (2) Special Bonuses in fiscal 1996 include cash bonuses and related payroll taxes in the amount of $6,087,000 paid to the Founders. (3) During 1996, 3.6% of revenues represents interest expense incurred as the result of the exchange of a the Founders' Note for common stock. (4) During 1996, the Company incurred an extraordinary loss of $582,000, net of taxes, on the early extinguishment of bank indebtedness. 13 16 FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1995 Revenues. Revenues increased to $32.3 million in fiscal 1996 from $25.5 million in fiscal 1995, an increase of $6.8 million or 26.7%. Of such increase in revenues, approximately $4 million was attributable to increased calling volumes from existing clients, $1.2 million to new clients in the financial services industry and $1.6 million to new clients in the telecommunications industry. To meet the demands of increased call volumes, the Company added a new 80-workstation call center in November 1995 and another 80-workstation call center in April 1996 and expanded capacity in four existing call centers by an aggregate of 64 workstations during February, March and May 1996, respectively. Additionally, in October 1996, the Company added a new 80-workstation call center in Harrisburg, PA. Cost of Services. Cost of services increased to $22.2 million in fiscal 1996 from $18.2 million in fiscal 1995. As a percentage of revenues, cost of services decreased to 68.8% in fiscal 1996 from 71.3% in fiscal 1995. This decrease was the result of the spreading of fixed costs over a larger revenue base coupled with greater utilization of the call centers on a year to year comparative basis. Selling, General and Administrative. Selling, general and administrative expenses increased to $6.7 million in fiscal 1996 from $5.3 million in fiscal 1995. As a percentage of revenues, selling, general and administrative expenses decreased to 20.6% in 1996 from 20.8% in 1995. The dollar increase was primarily the result of increased staffing and expanding facility costs required to support the growth in the Company's revenues. Special Bonuses. Special Bonuses are bonuses and related payroll taxes in the amount of $6,087,000 paid to the Founders. Under their employment contracts, the Founders' compensation is fixed at a combined base amount of $400,000 per year for three years (subject to annual adjustment based on the inflation rate), plus a discretionary bonus which at the present time is not expected to exceed 20% of base compensation. Interest Expense. Interest expense rose to $1,893,000 for fiscal 1996 from $262,000 in fiscal 1995. Of such increase, $1,177,000 relates to interest expense on the Founders' Note, $448,000 reflects interest on debt incurred in connection with the Recapitalization, and $7,000 reflects the financing of equipment purchases related primarily to the opening of two additional call centers and the expansion of four other call centers. Income Tax Benefit. During fiscal 1996 the Company generated a net operating loss carry-forward. In accordance with SFAS 109, a calculation as to the realizability of the net operating loss carry forward was made for purposes of taking into account the Company's ability to generate sufficient taxable income and thereby realize the benefit of the net operating loss prior to its expiration. As a result of this analysis, the Company recorded a tax benefit of $1,549,586 in fiscal 1996. Extraordinary Item. On September 30, 1996 the Company incurred an extraordinary loss of $582,000, net of taxes, on the early extinguishment of bank indebtedness. In fiscal 1995 the Company was an S Corporation for Federal and Pennsylvania income tax purposes and, accordingly, income was passed through to the shareholders and taxed at the individual level. The Company was not an S Corporation in New Jersey, and therefore charged against income $21,000 for such taxes. FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1994 Revenues. Revenues increased to $25.5 million for fiscal 1995 from $17.1 million for fiscal 1994, an increase of $8.4 million or 49.3%. Of such increase in revenues, $2.7 million was attributable primarily to increased calling volumes from existing insurance clients and $5.7 million was attributable to the 14 17 addition of new clients in the financial services industry. To meet the demands of increased call volumes, the Company added two new 64-workstation call centers in April 1994 and February 1995, respectively. Cost of Services. Cost of services increased to $18.2 million for fiscal 1995 from $13.3 million for fiscal 1994. As a percentage of revenues, cost of services decreased to 71.3% in fiscal 1995 from 77.7% in fiscal 1994. This decrease was primarily the result of realizing substantial operating efficiencies, the most significant of which, resulting in a $1.4 million decrease in such costs, was a reduction in long distance telephone rates. Selling, General and Administrative. Selling, general and administrative expenses increased to $5.3 million for fiscal 1995 from $3.0 million for fiscal 1994. As a percentage of revenues, selling, general and administrative expenses increased to 20.8% for fiscal 1995 from 17.6% for fiscal 1994. Of such increase, $427,000 was due to the addition of 31 administrative personnel, $1.7 million was due to corporate expenses associated with the Company's growth and $223,000 was due to an increase in Founders' compensation. Interest Expense. Interest expense rose to $262,000 for fiscal 1995 from $170,000 for fiscal 1994. The increase reflects the financing of equipment purchases related to the opening of two additional call centers and related to the relocation of the Company's corporate headquarters. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's primary sources of liquidity have been cash flow from operations and borrowings under its credit facilities. These funds, combined with borrowings under capitalized lease obligations, have provided the liquidity to finance the growth of the Company. On May 24, 1996, the Company completed the Recapitalization, which included the purchase of a significant equity interest in the Company by Advanta Partners. See Item 13 (Certain Relationships and Related Transactions" as incorporated by reference to the Registrant's 1997 Proxy Statement). In conjunction with the Recapitalization, the Company distributed to the Founders $4.6 million of accounts receivable. As part of the Recapitalization, the Company also distributed $16.0 million in cash, $1.0 million in Series A Preferred Stock, and a Founders' Note in the initial principal amount of $3.0 million, (which was subsequently increased by $1.0 million) all for the redemption of an aggregate of 8,500,000 shares of Common Stock owned by the Founders. In addition, Advanta Partners and Glengar invested $9.5 million in Series B Preferred Stock and Class A and Class B Common Stock. On September 24, 1996 the Company completed an 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 its Series B Preferred Stock and pay the Special Bonuses. The remaining $9.5 will be used for working capital and general corporate purposes. Upon completion of the Company's initial public offering, the Founders exchanged the Series A Preferred Stock and the Founders' Note for 400,000 shares of Common Stock. In conjunction with the Recapitalization, the Company entered into a Credit Facility with Chemical Bank, which provides for the $14.0 million Term Loan and the $6.0 million Revolver. The Term Loan and Revolver are secured by all of the assets of the Company. In addition, the loan agreement contains financial covenants and certain restrictions on the Company's ability to pay dividends on the Common Stock, incur debt and make capital expenditures and acquisitions. Borrowings on the Revolver are limited to 85% of eligible accounts receivable. The Term Loan and Revolver bear interest at the bank's base rate plus 1.5% or LIBOR plus 3.0%. The Revolver expires on May 24, 2001. As of September 30, 1996, the Company had retired the full $14.0 million amount of the Term Loan and had no draws outstanding on the Revolver. 15 18 Cash used by operating activities was approximately $1.7 million for the fiscal year ended 1996 compared to cash provided by operations of $1.7 million for the same period in 1995. The change in the utilization of cash within operating activities was due to the Company's net loss for the year, which was primarily caused by the Special Bonuses of $6.1 million paid to the Founders. The Company's teleservices operations will continue to require significant capital expenditures. Capital expenditures, including capitalized leases, were $1.1 million in fiscal 1994, $2.4 million in fiscal 1995 and $2.9 million in fiscal 1996. The Company expects to spend approximately $5.0 million on capital expenditures in fiscal 1997, primarily for the addition of two call centers, capacity expansion and where available, enhancement of technology used throughout its call center operations. However, in conjunction with such expenditures, the Company is evaluating certain lease versus buy decisions and may decide to lease such assets under five year operating leases. The Company believes that funds generated from operations, together with the remaining proceeds of its initial public offering and available credit under the Revolver, will be sufficient to finance its current operations and planned capital expenditures at least through the end of fiscal 1997. QUARTERLY RESULTS OF OPERATIONS The following table sets forth statement of operations data for each of the four quarters of fiscal 1995 and 1996, 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, 1994 1995 1995 1995 1995 1996 1996 1996 ---- ---- ---- ---- ---- ---- ---- ---- Revenues $5,632 $5,683 $7,132 $7,098 $7,278 $7,506 $8,778 $8,754 ------ ------ ------ ------ ------ ------ ------ ------ Operating expenses: Cost of services 3,941 4,240 4,921 5,107 5,127 5,309 5,889 5,887 Selling, general and administrative 1,064 1,208 1,348 1,693 1,575 1,545 1,688 1,861 Special Bonuses -- -- -- -- -- -- -- 6,087 ------ ------ ------ ------ ------ ------ ------- ------- Total operating expenses 5,005 5,448 6,269 6,800 6,702 6,854 7,577 13,835 ------ ------ ------ ------ ------ ------ ------- ------- Operating income (loss) 627 235 863 298 576 652 1,201 (5,081) Interest expense 54 57 71 80 75 71 227 1,520 ------ ------ ------ ------ ------ ------ ------- ------- Income (loss) before income taxes (benefit) $ 573 $ 178 $ 792 $ 218 $ 501 $ 581 $ 974 $(6,601) ====== ====== ====== ====== ====== ======= ====== ========
16 19
QUARTER ENDED --------------------------------------------------------------------------------------------- DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1994 1995 1995 1995 1995 1996 1996 1996 ---- ---- ---- ---- ---- ---- ---- ---- Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- ----- ----- ----- Operating expenses: Cost of services 70.0 74.6 69.0 72.0 70.5 70.7 67.1 67.2 Selling, general and administrative 18.9 21.3 18.9 23.8 21.6 20.6 19.2 21.3 Special bonuses -- -- -- -- -- -- -- 69.5 ----- ---- ---- ----- ----- ----- ----- ---- Total operating expenses 88.9 95.9 87.9 95.8 92.1 91.3 86.3 158.0 ----- ---- ---- ----- ----- ----- ----- ----- Operating income (loss) 11.1 4.1 12.1 4.2 7.9 8.7 13.7 (58.0) Interest expense 1.0 1.0 1.0 1.1 1.0 1.0 2.6 17.4 ----- ----- ---- ------ ----- ----- ----- ---- Income (loss) before income taxes (benefit) 10.1% 3.1% 11.1% 3.1% 6.9% 7.7% 11.1% (75.4)% ===== ===== ===== ===== ===== ===== ===== ======
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. The variations in quarterly results during fiscal 1995 are primarily due to the opening of the Reading, Pennsylvania call center in February 1995, an increase in management compensation and the write-off of leasehold improvements associated with the relocation of the Company's headquarters in September 1995. In connection with the Initial Public Offering, the Company incurred certain pre-tax charges of approximately $8.2 million in the quarter ended September 30, 1996. These charges consist of the Special Bonuses and related payroll taxes of $6,087,000 paid to the Founders pursuant to their employment agreements, interest expense on the Founders' Note of approximately $1,177,000 and an extraordinary charge of approximately $909,507 resulting from the early extinguishment of the Term Loan. These charges caused the Company to incur a net loss for the quarter and for fiscal 1996. See Item 13 "Certain Relationships and Related Transactions" (as incorporated by reference to the Registrant' 1997 Proxy Statement and Notes 3 and 4 of Notes to Financial Statements). 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-17 below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In June 1996, the Company engaged Arthur Andersen LLP as independent public accountants to audit the Company's financial statements for fiscal 1995, replacing the firm of Asher & Company, Ltd., which had previously served as the Company's independent public accountants and had completed its audit of the Company's financial statements for fiscal 1993 and fiscal 1994. The Company's decision to change accountants was ratified by the Board of Directors of the Company. In connection with the audit of the Company's financial statements for fiscal 1993 and fiscal 1994, there were no disagreements with Asher & Company, Ltd. during such two years or during the period through the date of such firm's replacement on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which if not resolved to its satisfaction would have caused Asher & Company, Ltd. to make reference thereto in connection with its report. Asher & Company, Ltd.'s reports on the Company's financial statements for fiscal 1993 and fiscal 1994 contained no adverse 17 20 opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. 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 is incorporated herein by reference to the information set forth in the Registrant's 1997 Proxy Statement. The information required by the Item with respect to executive officers of the Company is furnished in a separate item captioned "Executive Officers of the Company" and included in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS A PART OF THIS REPORT: (1) Financial Statements. Page ---- Reports of Independent Accountants-----------------F-1 Consolidated Balance Sheets------------------------F-3 Consolidated Statements of Operations--------------F-4 Consolidated Statements of Shareholders' Equity----F-5 Consolidated Statements of Cash Flows--------------F-6 Notes to Consolidated Financial Statements---------F-7 (2) Exhibits See attached 18 21 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. 10.2 - Shareholders' Agreement by and among the Company, the Founders, Advanta Partners and Glengar, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.3 - Employment Agreement by and between the Company and Raymond J. Hansell, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.4 - Employment Agreement by and between the Company and MarySue Lucci Hansell, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.5 - Warrant for the Purchase of Class B Non-Voting Common Stock of the Company in favor of Chemical Bank (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.6 - Management Fee Agreement by and between Advanta Partners and the Company, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.7 - Credit Agreement among the Company and Chemical Bank, as agent, and as lender, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.8 - Revolving Credit Note made by the Company in favor of Chemical Bank, as agent, and as lender, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.9 - Term Note made by the Company in favor of Chemical Bank, as agent, and as lender, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501).
19 22
Exhibit No. 10.10 - Security Agreement between the Company and Chemical Bank, as agent (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.11 - 6% Subordinated Note made by the Company, in favor of the Founders, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.12 - Exchange and Conversion Agreement among the Company, the Founders, Advanta Partners and Glengar dated as of July 2, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). *10.13 - Consulting Agreement between the Company and Advanta Partners dated August 20, 1996. 10.14 - Letter Agreement between the Company and Chemical Bank, dated as of June 28, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). *10.15 - Agreement on Post-Closing Adjustments, among the Company, Advanta Partners, the Founders and Glengar dated August 20, 1996. 11 - Statement re Computation of Per Share Earnings. 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. *27.1 - Financial Data Schedule for year ended September 30, 1996.
- ----------------- * Filed herewith 20 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 12, 1996 By: /s/ Raymond J. Hansell ----------------------------------------- Raymond J. Hansell Vice-Chairman and Chief Executive Officer Pursuant to the requirements of the Securities 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/ MarySue Lucci President December 12, 1996 - -------------------------- MarySue Lucci /s/ Richard C. Altus Chief Financial Officer December 12, 1996 - -------------------------- (principal Financial and Richard C. Altus Accounting Officer) /s/ Anthony P. Brenner Chairman December 12, 1996 - -------------------------- Anthony P. Brenner /s/ Mitchell L. Hollin Director December 12, 1996 - -------------------------- Mitchell L. Hollin /s/ Herbert Kurtz Director December 12, 1996 - -------------------------- Herbert Kurtz /s/ David P. Madigan Director December 12, 1996 - -------------------------- David P. Madigan 21 24 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To RMH Teleservices, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of RMH Teleservices, Inc. (a Pennsylvania corporation) and Subsidiaries as of September 30, 1995 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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 consolidated financial position of RMH Teleservices, Inc. and subsidiaries as of September 30, 1995 and 1996, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Philadelphia, Pa., November 6, 1996 F-1 25 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To RMH Teleservices, Inc.: We have audited the accompanying balance sheet of RMH Teleservices, Inc. (a Pennsylvania corporation) as of September 30, 1994, and the related statements of operations, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides 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. as of September 30, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ ASHER & COMPANY, Ltd. ------------------------- ASHER & COMPANY, Ltd. Philadelphia, Pennsylvania June 27, 1996 F-2 26 RMH TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30 -------------------------------- ASSETS 1995 1996 ------ ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 322,024 $ 10,046,647 Accounts receivable, net of allowance for doubtful accounts of $47,000 and $2,500 in 1995 and 1996 4,449,351 5,549,234 Prepaid expenses 182,518 327,531 Receivables from Founders 34,500 -- Deferred income taxes -- 1,111,840 ------------ ------------ Total current assets 4,988,393 17,035,252 ------------ ------------ PROPERTY AND EQUIPMENT: Communications and computer equipment 4,959,500 7,272,564 Furniture and fixtures 732,135 1,112,208 Leasehold improvements 322,106 509,269 ------------ ------------ 6,013,741 8,894,041 Less- Accumulated depreciation and amortization (2,349,792) (3,438,700) ------------ ------------ Net property and equipment 3,663,949 5,455,341 ------------ ------------ OTHER ASSETS 104,841 64,168 ------------ ------------ $ 8,757,183 $ 22,554,761 ============ ============
September 30 LIABILITIES AND SHAREHOLDERS' ------------------------------- ----------------------------- EQUITY 1995 1996 ------ ------------ ------------ CURRENT LIABILITIES: Borrowings on lines of credit $ 975,000 $ -- Current portion of long-term debt 205,006 -- Current portion of capitalized lease obligations 353,716 45,632 Accounts payable 1,126,768 1,682,249 Accrued expenses 1,206,226 2,409,257 Deferred income taxes 61,000 -- ------------ ------------ Total current liabilities 3,927,716 4,137,138 ------------ ------------ LONG-TERM DEBT 592,105 -- ------------ ------------ CAPITALIZED LEASE OBLIGATIONS 436,338 2,118 ------------ ------------ LOANS PAYABLE TO FOUNDERS 132,975 -- ------------ ------------ DEFERRED INCOME TAXES -- 100,085 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 9) SHAREHOLDERS' EQUITY: Common Stock 80,200 48,637,756 Common Stock warrant outstanding -- 450,000 Retained earnings (deficit) 3,587,849 (30,772,336) ------------ ------------ Total shareholders' equity 3,668,049 18,315,420 ------------ ------------ $ 8,757,183 $ 22,554,761 ============ ============
The accompanying notes are an integral part of these statements. F-3 27 RMH TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended September 30 --------------------------------------------------- 1994 1995 1996 ------------ ------------ ------------ REVENUES $ 17,105,333 $ 25,544,790 $ 32,316,039 ------------ ------------ ------------ OPERATING EXPENSES: Cost of services 13,285,998 18,209,525 22,212,117 Selling, general and administrative 3,007,363 5,311,905 6,669,016 Special bonuses -- -- 6,087,000 ------------ ------------ ------------ Total operating expenses 16,293,361 23,521,430 34,968,133 ------------ ------------ ------------ Operating income (loss) 811,972 2,023,360 (2,652,094) INTEREST EXPENSE 169,641 261,546 1,892,996 ------------ ------------ ------------ Income (loss) before income taxes and extraordinary item 642,331 1,761,814 (4,545,090) INCOME TAXES (BENEFIT) 40,000 21,000 (1,222,163) ------------ ------------ ------------ Income (loss) before extraordinary item 602,331 1,740,814 (3,322,927) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, net of $327,423 tax benefit -- -- 582,084 ------------ ------------ ------------ NET INCOME (LOSS) 602,331 1,740,814 (3,905,011) PREFERRED STOCK DIVIDENDS -- -- 308,361 ------------ ------------ ------------ NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 602,331 $ 1,740,814 $ (4,213,372) ============ ============ ============ PRO FORMA DATA (UNAUDITED) (Note 2): Historical loss before income taxes and extraordinary item $ (4,545,090) Pro forma income tax benefit (1,636,232) Extraordinary item, net of tax 582,084 Preferred Stock dividends 308,361 ------------- Pro forma net loss available to Common shareholders $ (3,799,303) ------------ Pro forma loss per Common share- Pro forma loss before extraordinary item $ (.68) Extraordinary item (.12) ------------ Pro forma net loss $ (.80) ============ Shares used in computing pro forma net loss per Common share 4,749,247 ------------
The accompanying notes are an integral part of these financial statements. F-4 28 RMH TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Class A Voting Class B Non-Voting Common Stock Common Stock ---------------------------- ------------------------------ Shares Amount Shares Amount ------------- ------------- ------------ ------------- BALANCE, SEPTEMBER 30, 1993 10,000,000 $ 80,200 -- $ -- Net income -- -- -- -- ---------- ------------ ------------ ------------ BALANCE, SEPTEMBER 30, 1994 10,000,000 80,200 -- -- Net income -- -- -- -- ---------- ------------ ------------ ------------ BALANCE, SEPTEMBER 30, 1995 10,000,000 80,200 -- -- Distribution of accounts receivable -- -- -- -- Sale of Class A and Class B Common Stock 1,720,427 3,278,666 1,279,573 2,438,275 Redemption of Class A Common Stock (8,500,000) (68,170) -- -- Reclassification of Redeemable Class A Common Stock outside of shareholders' equity (1,500,000) (12,030) -- -- Cancellation of redemption features of warrant -- -- -- -- Conversion of Redeemable Class A Common Stock to Class A Common Stock 1,500,000 2,865,000 -- -- Conversion of Class B to Class A Common Stock 1,279,573 2,438,275 (1,279,573) (2,438,275) Conversion of Series A Preferred Stock to Common Stock 80,000 539,082 -- -- Conversion of Founders' Note to Common Stock 320,000 3,200,000 -- -- Initial public offering of Common Stock, net of expenses 3,220,000 36,316,733 -- -- Redemption of Series B Preferred Stock -- -- -- -- Net loss -- -- -- -- Dividends on Series A and Series B Preferred Stock -- -- -- -- ---------- ------------ ------------ ------------ BALANCE, SEPTEMBER 30, 1996 8,120,000 $ 48,637,756 -- $ -- ========== ============ ============ ============
Common Retained Total Stock Earnings Shareholders' Warrants (Deficit) Equity --------------- ---------------- ----------- BALANCE, SEPTEMBER 30, 1993 $ -- $ 1,244,704 $ 1,324,904 Net income -- 602,331 602,331 ------------ ------------ ------------ BALANCE, SEPTEMBER 30, 1994 -- 1,847,035 1,927,235 Net income -- 1,740,814 1,740,814 ------------ ------------ ------------ BALANCE, SEPTEMBER 30, 1995 -- 3,587,849 3,668,049 Distribution of accounts receivable -- (4,600,000) (4,600,000) Sale of Class A and Class B Common Stock -- -- 5,716,941 Redemption of Class A Common Stock -- (20,068,351) (20,136,521) Reclassification of Redeemable Class A Common Stock outside of shareholders' equity -- (2,852,970) (2,865,000) Cancellation of redemption features of warrant 450,000 -- 450,000 Conversion of Redeemable Class A Common Stock to Class A Common Stock -- -- 2,865,000 Conversion of Class B to Class A Common Stock -- -- -- Conversion of Series A Preferred Stock to Common Stock -- -- 539,082 Conversion of Founders' Note to Common Stock -- -- 3,200,000 Initial public offering of Common Stock, net of expenses -- -- 36,316,733 Redemption of Series B Preferred Stock -- (2,625,492) (2,625,492) Net loss -- (3,905,011) (3,905,011) Dividends on Series A and Series B Preferred Stock -- (308,361) (308,361) ------------ ------------ ------------ BALANCE, SEPTEMBER 30, 1996 $ 450,000 $(30,772,336) $ 18,315,420 ============ ============ ============
The accompanying notes are an integral part of these financial statements. F-5 29 RMH TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended September 30 ---------------------------------------------- 1994 1995 1996 ------------- ------------- ------------- OPERATING ACTIVITIES Net income (loss) $ 602,331 $ 1,740,814 $ (4,213,372) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Extraordinary loss on early extinguishment of debt, net -- -- 582,084 Depreciation and amortization 638,734 786,065 1,088,908 Loss on disposal of equipment -- 73,230 -- Deferred income taxes 40,000 21,000 (1,020,993) Imputed interest and dividends -- -- 185,919 Amortization of deferred financing costs -- -- 10,522 Imputed interest on Founders' Note -- -- 1,135,634 Changes in operating assets and liabilities- Accounts receivable (965,764) (1,783,749) (1,099,883) Prepaid expenses (69,726) (18,056) (145,013) Other assets (23,549) (21,601) 40,673 Accounts payable 486,062 332,355 555,481 Accrued expenses (48,699) 592,423 1,203,031 ------------- ------------- ------------- Net cash provided by (used in) operating activities 659,389 1,722,481 (1,677,009) ------------- ------------- ------------- INVESTING ACTIVITIES: Purchases of property and equipment (338,564) (2,197,482) (2,774,865) ------------- ------------- ------------- FINANCING ACTIVITIES: Net borrowings (repayments) on lines of credit 300,000 275,000 (975,000) Proceeds from long-term debt 513,847 500,000 15,100,000 Repayments on long-term debt (85,322) (182,901) (15,897,111) Repayments on capitalized lease obligations (740,700) (311,766) (847,739) Deferred financing costs -- -- (505,630) Borrowings from Founders -- -- 1,006,251 Repayments to Founders (32,000) 5,027 (1,104,726) Proceeds from sale of Preferred and Common Stock -- -- 9,500,000 Redemption of Common Stock -- -- (17,112,601) Distribution to Founders -- -- (4,600,000) Redemption of Preferred Stock -- -- (6,500,000) Net proceeds from initial public offering -- -- 36,316,733 Dividends paid -- -- (203,680) ------------- ------------- ------------- Net cash provided by (used in) financing activities (44,175) 285,360 14,176,497 ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 276,650 (189,641) 9,724,623 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 235,015 511,665 322,024 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 511,665 $ 322,024 $ 10,046,647 ============= ============= =============
The accompanying notes are an integral part of these financial statements. F-6 30 RMH TELESERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 1. BACKGROUND: RMH Teleservices, Inc. (the Company) provides outbound teleservices to major corporations in the insurance and financial services industries. The Company was founded in 1983 by two individuals (the Founders). On May 24, 1996, the Company completed a leveraged recapitalization (the Recapitalization) pursuant to which a portion of the Common Stock owned by the Founders was redeemed and two investors (the Investors) purchased Preferred and Common Stock (see Note 3). These transactions were accounted for as a sale of newly issued stock by the Company and a redemption of previously outstanding shares. Accordingly, the historical bases of the Company's assets and liabilities have been retained. On September 18, 1996, the Company completed an initial public offering of 3.22 million shares of Common Stock, raising net proceeds of approximately $36.3 million. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Teleservices Management Company and Teleservices Technology Company. All intercompany transactions have been eliminated. 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. Revenue Recognition The Company recognizes revenues on programs as services are performed, generally based on hours incurred. F-7 31 Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are provided over the estimated useful lives of the applicable assets using the straight-line method. The lives used are as follows:
Computer equipment 5 years Communications equipment 5-7 years Furniture and fixtures 7 years Leasehold improvements Lesser of lease term or useful life
Repairs and maintenance are charged to expense as incurred, while additions and betterments are capitalized. Gains or losses on the disposition of property and equipment are charged to operations. Equipment under capital leases included in property and equipment is $2,425,250 and $2,530,685, with accumulated depreciation of $1,265,307 and $1,653,539 as of September 30, 1995 and 1996, respectively. Income Taxes Prior to May 24, 1996, the Company was an S Corporation for federal and Pennsylvania income tax purposes and, accordingly, income was passed through to the shareholders and taxed at the individual level. The Company was not an S Corporation in New Jersey and, therefore, the Company paid income taxes on its taxable income in that state. The S Corporation status was terminated on May 24, 1996 (see Note 8). On October 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." SFAS No. 109 requires a change from the deferred method of accounting for income taxes to the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences, measured by enacted tax rates, attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards, for years which taxes are expected to be paid or recovered. The impact of adopting SFAS No. 109 was not material to the statement of operations for the year ended September 30, 1994. Supplemental Cash Flow Information For the years ended September 30, 1994, 1995 and 1996, the Company paid interest of $165,207, $252,828 and $1,992,512, respectively. Capitalized lease obligations of $765,689, $220,782 and $105,435 were incurred on equipment leases entered into in fiscal 1994, 1995 and 1996, respectively. F-8 32 Major Customers and Concentration of Credit Risk The Company is dependent on several large customers for a significant portion of its revenues. Four customers accounted for 23.7%, 19.2%, 18.8% and 16.2% of revenues for the year ended September 30, 1994, and four customers accounted for 29.2%, 18.8%, 14.6% and 12.7% of revenues for the year ended September 30, 1995. Three customers accounted for 45.0%, 17.6% and 12.2% of revenues for the year ended September 30, 1996. The loss of one or more of these customers could have a materially adverse effect on the Company's business. As a result of the issuance of the Preferred and Common Stock to one of the Investors (see Note 3), the Company is now affiliated with one of its customers. This customer represented 3.6%, 8.3% and 11.2% of revenues for the year ended September 30, 1994, 1995 and 1996, respectively. In fiscal 1994, 1995 and 1996, revenues from customers within the insurance industry accounted for 63.3%, 59.3% and 74.8% of revenues, respectively, and customers within the financial services industry accounted for 36.4%, 39.7% and 19.7% 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 largest customers are engaged in transactions with each other and represent a single credit risk to the Company. The Company does not require collateral or other securities to support customer receivables. At September 30, 1996, the accounts receivable from the customers that represent a single credit risk were $4,675,031 and the accounts receivable from the customer affiliated with one of the Investors were $690,280. Cash and Cash Equivalents 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 federally insured limits. Management believes that it is not exposed to any significant credit risks on its cash accounts. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents at September 30, 1996 consist of $9,452,897 invested in domestic money market accounts. Fair Value of Financial Instruments Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the financial statements at fair value due to the short-term nature of those instruments. The carrying amount of the long-term debt and capitalized lease obligations approximates fair value at September 30, 1995 and 1996, respectively. F-9 33 New Accounting Pronouncements The Financial Accounting Standards Board has issued SFAS No. 123, "Accounting for Stock-Based Compensation." The Company is required to adopt this standard for the year ending September 30, 1997. The Company has elected to adopt the disclosure requirement of this pronouncement. Accordingly, this pronouncement will have no impact on the Company's reported financial position or results of operations. The Financial Accounting Standards Board has issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The Company is required to adopt this standard at the beginning of the fiscal year ending September 30, 1997. Management believes that the adoption of this standard will have no impact on the Company's reported financial position or results of operations. Pro Forma Net Loss Per Share Prior to May 24, 1996, the Company was an S Corporation for federal and Pennsylvania income tax purposes. The pro forma income tax benefit for fiscal 1996 reflects taxes which would have been recorded on the historical loss before income taxes if the Company had not been an S Corporation during such period at an effective rate of 36%. The pro forma net loss per share is computed by dividing the pro forma loss by the weighted average number of shares outstanding during the period. 3. RECAPITALIZATION: On May 24, 1996, the Company authorized (i) 20,000,000 shares of Common Stock, no par value, consisting of 10,000,000 shares of Class A Voting Common Stock (the Class A Common) and 10,000,000 shares of Class B Non-Voting Common Stock (the Class B Common), and (ii) 10,000,000 shares of Preferred Stock, of which 1,000,000 shares were designated as Series A Preferred Stock (the Series A Preferred) and 6,500,000 shares were designated as Series B Preferred Stock (the Series B Preferred). The previously outstanding Common Stock was converted into 10,000,000 shares of Class A Common. All references in the accompanying financial statements to the number of Common shares have been retroactively restated to reflect the recapitalization. F-10 34 Common Stock Redemption On May 24, 1996, the Company redeemed 8,500,000 shares of Class A Common for $20,136,521, as follows:
Cash payment $16,001,646 Final redemption price adjustment (paid in August 1996) 436,980 Issuance of 6%, $3,000,000 subordinated note payable to Founders (the "Founders' Note") 2,022,639 Issuance of 1,000,000 shares of 6%, Series A Preferred 524,450 Deferred tax liability for difference in basis of Founders' Note 476,831 Transaction costs 673,975 ----------- $20,136,521 ===========
The face amounts of the Founders' Note and Series A Preferred have been discounted at estimated market rates of 14% and 15% for interest and dividends, respectively, on similar-type instruments. The original issue discounts are being amortized over the terms of the Founders' Note and the Series A Preferred. On May 23, 1996, the Company distributed $4,600,000 of accounts receivable to the Founders as a Subchapter S distribution of previously taxed income. The Company is collecting these receivables on behalf of the Founders. The Founders' Note initially had a face amount of $3,000,000 and was subordinated to all other liabilities. The face amount of the Founders' Note was increased to $4,000,000 due to the achievement of certain financial goals as defined in the note, with the $1,135,634 difference in the estimated fair market value of the new note versus the carrying value of the original note being charged to interest expense. The Founders' Note bore interest at an annual rate of 6%, payable quarterly, and was due in two equal installments on May 24, 2003 and 2004, subject to acceleration upon the occurrence of certain defined events. Upon the completion of the initial public offering, the Founders' Note was satisfied through the issuance of 320,000 shares of Common Stock at the offering price. The Series A Preferred had 1,000,000 shares outstanding, a face amount of $1,000,000 and required a dividend of 6% per year, payable quarterly. The Series A Preferred had no voting rights, was senior to the Series B Preferred upon liquidation and contained certain put features. Upon completion of the initial public offering, the Series A Preferred was converted into 80,000 shares of Common Stock at the offering price and accrued dividends of $21,324 were paid. F-11 35 Sale of Preferred and Common Stock On May 24, 1996, the Company issued Preferred and Common Stock for $9,500,000 to the Investors, as follows:
Series B Preferred Stock $3,783,059 Class A Voting Common Stock 3,278,666 Class B Non-Voting Common Stock 2,438,275 ---------- $9,500,000 ==========
The Company issued 6,500,000 shares of Series B Preferred for an aggregate of $6,500,000 or $1.00 per share. The Series B Preferred required a dividend of 8% per year, payable quarterly. The face amount of the Series B Preferred was discounted at the estimated market dividend rate of 15% and the discount of $2,716,941 was amortized over the expected term. Due to the discount applied to the face amount of the Series B Preferred, its value for accounting purposes was $.58 per share. The Series B Preferred had no voting rights, was senior to the Common Stock upon liquidation and had a liquidation value of $6,500,000 plus unpaid dividends. The holders of the Series B Preferred could have required the Company to redeem their shares on May 24, 2004, subject to acceleration upon the occurrence of certain defined events, including an initial public offering. Upon completion of the initial public offering, the Series B Preferred was redeemed for $6,500,000 plus accrued dividends of $182,356. The Company issued 1,720,427 shares of Class A Common and 1,279,573 shares of Class B Common for an aggregate of $3,000,000 or $1.00 per share. The Common Stock was valued at $1.91 per share based on the relative estimated fair values of the Series B Preferred and Class A and B Common Stock issued to the Investors. The Class B Common shares were converted into an equal number of Class A Common shares upon the completion of the initial public offering and the division of Common Stock between two classes was eliminated. 4. BANK DEBT: The Company had available lines of credit with a bank of $2,600,000 as of September 30, 1995, with interest ranging from the prime rate plus 1/2% to 1%. The average interest rate on outstanding borrowings was 8.17% and 9.60% for the years ended September 30, 1994 and 1995, respectively, and was 9.08% through May 24, 1996. The highest outstanding borrowings during fiscal 1995 were $1,575,000 and through May 24, 1996 were $1,475,000. All amounts outstanding under the lines of credit were repaid on May 24, 1996, with the proceeds from a credit facility with a new bank. On May 24, 1996, the Company and its shareholders entered into an agreement with a bank (the Credit Agreement), which provides the Company with a $14,000,000 term loan (the Term Loan) and $6,000,000 in revolving credit loans (the Revolver). On May 24, 1996, the Company borrowed $11,200,000 on the Term Loan and incurred $505,630 in financing costs, which were deferred and to be amortized over the term of the Credit Agreement. In June 1996, the Company borrowed the final $2,800,000 on the Term Loan. The borrowings on F-12 36 the Term Loan were used to fund a portion of the Common Stock redemption, to repay a bank line of credit and to buy out certain leases. The Credit Agreement required an annual administrative fee of $15,000 and an annual commitment fee of one-half of 1% on the average unused portion of the Revolver. All borrowings under the Credit Agreement are collateralized by the assets of the Company and the pledge by the shareholders of their Preferred and Common Stock in the Company. The interest rate varies based on whether the borrowing is designated as a Eurodollar loan, the level of market interest rates such as the prime or LIBO rates, and the ratio of the Company's debt to earnings, as defined. Borrowings on the Revolver are limited to the lesser of $6,000,000 or 85% of eligible accounts receivable, as defined, less outstanding letters of credit which cannot exceed $1,000,000. In certain circumstances, amounts outstanding under the Revolver can be converted to term loans. The Revolver expires on May 24, 2001. The Company is subject to certain covenants described in the Credit Agreement. 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 a number of restrictive financial covenants, which include ratios related to debt service, total debt to earnings and interest coverage, as defined. In connection with the Credit Agreement, the bank received a warrant to purchase 236,842 shares of Class B Common for $.01 per share. The warrant expires on May 31, 2006, and is exercisable upon the earlier of an initial public offering or a change in control of the Company, as defined. The number of shares which can be purchased upon exercise of the warrant is 142,105. For financial reporting purposes, the warrant has been valued at $450,000 based on the estimated fair value of the Class B Common, and was recorded as original issue discount on the Term Loan. Upon completion of the Company's initial public offering, a portion of the net proceeds were used to repay the outstanding Term Loan. In connection with this repayment, the Company recorded an extraordinary loss, net of income tax benefit, in the statement of operations. The extraordinary loss consists of the write-off of the unamortized deferred financing costs and the unamortized discount on the Term Loan. F-13 37 The Company's long-term debt is comprised of the following:
September 30 -------------------------- 1995 1996 ------------- --------- Note payable to a bank, interest at 7.5%, collateralized by the assets of the Company and the personal guarantees of the Founders (repaid on May 24, 1996) $ 350,000 $ -- Note payable to a bank, interest at 9.5%, collateralized by all assets of the Company (repaid on May 24, 1996) 441,667 -- Other 5,444 -- ------------- --------- 797,111 -- Less- Current portion (205,006) -- ------------- --------- $ 592,105 $ -- ============= =========
5. ACCRUED EXPENSES:
September 30 ------------------------------ 1995 1996 ------------- ------------- Payroll and related benefits $ 751,315 $ 663,555 Telecommunications expense 393,480 435,300 Other 61,431 1,310,402 ------------- ------------- $ 1,206,226 $ 2,409,257 ============= =============
6. CAPITALIZED LEASE OBLIGATIONS: The Company has various capitalized lease obligations payable to several finance companies. The obligations mature between 1997 and 1998, and are collateralized by computer and other equipment with an aggregate cost of $186,121 as of September 30, 1996. F-14 38 Minimum future lease payments and imputed interest on the obligations under the capital leases, together with the present value of the net minimum lease payments as of September 30, 1996, are as follows: Years Ending September 30, 1997 $ 48,045 1998 1,808 -------- Total minimum lease payments 49,853 Less- Imputed interest (2,103) -------- Present value of net minimum lease payments 47,750 Less- Current portion (45,632) -------- $ 2,118 ========
7. LOANS PAYABLE TO FOUNDERS: The Founders made long-term unsecured loans to the Company. There were no repayment terms established on these loans, which were subordinated to bank debt and bore interest at a variable rate. These loans were repaid in connection with the payment of the final redemption price adjustment in August 1996 (see Note 3). 8. INCOME TAXES: As a result of the sale of Preferred and Common Stock, the Company's S Corporation status was terminated on May 24, 1996, and a net deferred income tax liability of $241,500 was recorded as additional income tax expense on that date. The net income tax benefit for the year ended September 30, 1996, consists of a deferred federal benefit of $1,262,376 and deferred state benefit of $287,210. The income tax benefit reflects a deferred tax asset recorded based upon the realizability of the net operating loss carryforward. The deferred tax asset takes into account the Company's ability to generate taxable income sufficient to realize the net operating loss before its expiration. For state income tax purposes, the loss carryforward is limited to three years and $1,000,000 per year. F-15 39 The net deferred income tax assets represent the tax effect of the cumulative differences between the financial reporting and income tax bases of certain assets and liabilities, as follows:
September 30 ------------------------------ 1995 1996 ------------- ------------- Current deferred income tax asset (liability): Other nondeductible expenses $ -- $ 23,027 Net operating loss carryforward -- 1,059,403 Cash basis of accounting (61,000) 29,410 ------------- ------------- (61,000) 1,111,840 ------------- ------------- Noncurrent deferred income tax asset (liability): Cash basis of accounting -- 58,820 Depreciation of property and equipment -- (284,082) Other nondeductible expenses (54,823) Net operating loss -- 180,000 ------------- ------------- -- (100,085) ------------- ------------- Net deferred income tax asset (liability) $ (61,000) $ 1,011,755 ============= =============
9. COMMITMENTS AND CONTINGENCIES: The Company leases its offices and communications and computer equipment under noncancellable operating leases which expire through 2001. The rental payments for fiscal 1994, 1995 and 1996 were approximately $753,000, $911,000 and $808,000, respectively. Aggregate minimum rental payments under the noncancellable operating leases at September 30, 1996, are as follows:
1997 $1,113,321 1998 765,431 1999 406,394 2000 245,714 2001 194,714 ---------- $2,725,574 ==========
The Company 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 $1,377,000. The Founders have entered into employment contracts which expire on May 31, 1999. The contracts require an annual base compensation of $200,000 per employee subject to an annual inflation adjustment, plus a discretionary annual bonus not expected to exceed 20% F-16 40 of base compensation. In addition, in 1996 the Founders each received a one-time $3,000,000 bonus based upon the successful completion of the Company's initial public offering. Payroll taxes of approximately $87,000 were recorded in connection with the bonus payments. The Company entered into an agreement with one of the Investors which required the payment of an annual management fee of $100,000, payable quarterly. The management agreement was terminated upon completion of the initial public offering. Beginning at that time, the Investors will provide consulting services to the Company pursuant to a consulting agreement and will receive annual fees of $50,000. The consulting agreement expires on May 24, 2001. 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. 10. PROFIT SHARING PLAN: In fiscal 1995, the Company adopted 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 in 1995 and 1996 were $8,317 and $32,852, respectively. Employees are fully vested in their contributions, while vesting for the Company's contributions occurs ratably over seven years beginning in year three. 11. STOCK OPTION PLAN: In 1996 the Company established the 1996 Stock Incentive Plan (the "Plan"), which reserves 950,000 shares of Common Stock for issuance in connection with a variety of awards including stock options, stock appreciation rights and restricted and unrestricted stock grants. The Plan is administered by a committee, which is comprised of two or more non-employee directors as designated by the Board of Directors. The committee will determine the price and other terms upon which awards shall be made. The exercise price of incentive stock options may not be less than the fair market value of Common Stock on the date of grant. In September 1996, options to purchase 278,200 shares of Common Stock were granted under the Plan to employees and directors at an exercise price of $12.50 per share. No options were exercisable at September 30, 1996. F-17 EX-10.1 2 RMH TELESERVICES, INC. '96 STOCK INCENTIVE PLAN 1 Exhibit 10.1 RMH TELESERVICES, INC. 1996 STOCK INCENTIVE PLAN 1. Purpose. RMH Teleservices, Inc., a Pennsylvania corporation (the "Company"), hereby adopts the RMH Teleservices, Inc. 1996 Stock Incentive Plan (the "Plan"). The Plan is intended to recognize the contributions made to the Company by employees (including employees who are members of the Board of Directors) of the Company or any Affiliate, to provide such persons with additional incentive to devote themselves to the future success of the Company or an Affiliate, and to improve the ability of the Company or an Affiliate to attract, retain, and motivate individuals upon whom the Company's sustained growth and financial success depend, by providing such persons with an opportunity to acquire or increase their proprietary interest in the Company through receipt of rights to acquire the Company's Common Stock, no par value (the "Common Stock"), and through the transfer or issuance of Common Stock. In addition, the Plan is intended as an additional incentive to directors of the Company who are not employees of the Company or an Affiliate to serve on the Board of Directors and to devote themselves to the future success of the Company by providing them with an opportunity to acquire or increase their proprietary interest in the Company through the receipt of rights to acquire Common Stock. Furthermore, the Plan may be used to encourage consultants and advisors of the Company to further the success of the Company. 2. Definitions. Unless the context clearly indicates otherwise, the following terms shall have the following meanings: (a) "Act" means the Securities Act of 1933. (b) "Affiliate" means a corporation which is a parent corporation or a subsidiary corporation with respect to the Company within the meaning of Section 424(e) or (f) of the Code. (c) "Award" shall mean a transfer of Common Stock made pursuant to the terms of the Plan. (d) "Award Agreement" shall mean the agreement between the Company and a Grantee with respect to an Award made pursuant to the Plan. (e) "Board of Directors" means the Board of Directors of the Company. (f) "Change of Control" shall have the meaning as set forth in Section 9 of the Plan. (g) "Code" means the Internal Revenue Code of 1986, as amended. (h) "Committee" shall have the meaning set forth in Section 3 of the Plan. (i) "Common Stock" shall have the meaning set forth in Section 1 of the Plan. (j) "Company" means RMH Teleservices, Inc., a Pennsylvania corporation. 2 (k) "Disability" shall have the meaning set forth in Section 22(e)(3) of the Code. (l) "Employee" means an employee of the Company or an Affiliate. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (n) "Fair Market Value" shall have the meaning set forth in Subsection 8(b) of the Plan. (o) "Grantee" shall mean a person to whom an Award has been granted pursuant to the Plan. (p) "ISO" means an Option granted under the Plan which is intended to qualify as an "incentive stock option" within the meaning of Section 422(b) of the Code. (q) "Non-Employee Director" shall mean a member of the Board of Directors of the Company who is a "non-employee" of the Company within the meaning of Rule 16b-3. (r) "Non-qualified Stock Option" means an Option granted under the Plan which is not intended to qualify, or otherwise does not qualify, as an "incentive stock option" within the meaning of Section 422(b) of the Code. (s) "Option" means either an ISO or a Non-qualified Stock Option granted under the Plan. (t) "Optionee" means a person to whom an Option has been granted under the Plan, which Option has not been exercised and has not expired or terminated. (u) "Option Document" means the document described in Section 8 of the Plan, as applicable, which sets forth the terms and conditions of each grant of Options. (v) "Option Price" means the price at which Shares may be purchased upon exercise of an Option, as calculated pursuant to Subsection 8(b) of the Plan. (w) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act. (x) "SAR" shall have the meaning set forth in Section 11 of the Plan. (y) "Section 16 Officers" means any person who is an "officer" within the meaning of Rule 16a-1(f) promulgated under the Exchange Act or any successor rule. (z) "Shares" means the shares of Common Stock of the Company which are the subject of Options or granted as Awards under the Plan. 3. Administration of the Plan. The Board of Directors may designate a committee or committees composed of two or more of directors, each of whom is a Non-Employee Director, to operate and administer the Plan with respect to all or a designated portion of the participants. Any such committee designated by the Board of Directors, and the Board of Directors itself in its -2- 3 administrative capacity with respect to the Plan, is referred to as the "Committee." The provisions set forth herein, as it pertains to members of the Committee, may be administered by the Board of Directors. (a) Meetings. The Committee shall hold meetings at such times and places as it may determine, shall keep minutes of its meetings, and shall adopt, amend and revoke such rules or procedures as it may deem proper; provided, however, that it may take action only upon the agreement of a majority of the whole Committee. Any action which the Committee shall take through a written instrument signed by a majority of its members shall be as effective as though it had been taken at a meeting duly called and held. (b) Exculpation. No member of the Board of Directors shall be personally liable for monetary damages for any action taken or any failure to take any action in connection with the administration of the Plan or the granting of Options under the Plan, provided that this Subsection 3(b) shall not apply to (i) any breach of such member's duty of loyalty to the Company, an Affiliate, or the Company's shareholders, (ii) acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law, (iii) acts or omissions that would result in liability under applicable law, and (iv) any transaction from which the member derived an improper personal benefit. (c) Indemnification. Service on the Committee shall constitute service as a member of the Board of Directors of the Company. Each member of the Committee shall be entitled, without further act on his or her part, to indemnity from the Company and limitation of liability to the fullest extent provided by applicable law and by the Company's Articles of Incorporation and/or By-laws in connection with or arising out of any action, suit or proceeding with respect to the administration of the Plan or the granting of Options thereunder in which he or she may be involved by reason of his or her being or having been a member of the Committee, whether or not he or she continues to be such member of the Committee at the time of the action, suit or proceeding. (d) Interpretation. The Committee shall have the power and authority to interpret the Plan and to adopt rules and regulations for its administration that are not inconsistent with the express terms of the Plan. Any such actions by the Committee shall be final, binding and conclusive on all parties in interest. 4. Grants under the Plan. Grants under the Plan may be in the form of a Non-qualified Stock Option, an ISO or a combination thereof, at the discretion of the Committee. 5. Eligibility. All Employees, members of the Board of Directors and consultants and advisors to the Company shall be eligible to receive Options and Awards hereunder. Consultants and advisors shall be eligible only if they render bona fide services to the Company unrelated to the offer or sale of securities; provided, however, that the limitation contained in this sentence shall not apply to the extent that the inapplicability of such limitation will not disqualify the Common Stock from being eligible for registration on Form S-8 (or any successor form) under the Act. The Committee, in its sole discretion, shall determine whether an individual qualifies as an employee. 6. Shares Subject to Plan. The aggregate maximum number of Shares for which Awards or Options may be granted pursuant to the Plan is nine hundred fifty thousand (950,000). The number of Shares which may be issued under the Plan shall be further subject to adjustment in accordance with Section 10. The Shares shall be issued from authorized and unissued Common Stock or Common Stock held in or hereafter acquired for the treasury of the Company. If an Option terminates or expires without having been fully exercised for any reason or if Shares subject to an Award have been conveyed back to the Company pursuant to the terms of an Award Agreement, the Shares for -3- 4 which the Option was not exercised or the Shares that were conveyed back to the Company may again be the subject of one or more Options or Awards granted pursuant to the Plan. 7. Term of the Plan. The Plan is effective as of August 20, 1996, the date on which it was adopted by the Board of Directors, subject to the approval of the Plan within one year after such date by the shareholders in the manner required by state law. If the Plan is not so approved by the shareholders, all ISO's granted under the Plan shall be null and void. No ISO may be granted under the Plan after August 19, 2006. 8. Option Documents and Terms. Each Option granted under the Plan shall be a Non-qualified Stock Option unless the Option shall be specifically designated at the time of grant to be an ISO for Federal income tax purposes. If any Option designated an ISO is determined for any reason not to qualify as an incentive stock option within the meaning of Section 422 of the Code, such Option shall be treated as a Non-qualified Stock Option for all purposes under the provisions of the Plan. Options granted pursuant to the Plan shall be evidenced by the Option Documents in such form as the Committee shall from time to time approve, which Option Documents shall comply with and be subject to the following terms and conditions and such other terms and conditions as the Committee shall from time to time require which are not inconsistent with the terms of the Plan. (a) Number of Option Shares. Each Option Document shall state the number of Shares to which it pertains. An Optionee may receive more than one Option, which may include Options which are intended to be ISO's and Options which are not intended to be ISO's, but only on the terms and subject to the conditions and restrictions of the Plan. Notwithstanding anything herein to the contrary, no Optionee shall be granted Options during one fiscal year of the Company for more than one hundred thousand (100,000) Shares (such number to be subject to adjustment in accordance with Section 10). (b) Option Price. Each Option Document shall state the Option Price which, for a Non-qualified Stock Option, may be less than, equal to, or greater than the Fair Market Value of the Shares on the date the Option is granted and, for an ISO, shall be at least 100% of the Fair Market Value of the Shares on the date the Option is granted as determined by the Committee in accordance with this Subsection 8(b); provided, however, that if an ISO is granted to an Optionee who then owns, directly or by attribution under Section 424(d) of the Code, shares possessing more than ten percent of the total combined voting power of all classes of stock of the Company or an Affiliate, then the Option Price shall be at least 110% of the Fair Market Value of the Shares on the date the Option is granted. If the Common Stock is traded in a public market, then the Fair Market Value per share shall be, if the Common Stock is listed on a national securities exchange or included in the NASDAQ System, the last reported sale price thereof on the relevant date, or, if the Common Stock is not so listed or included, the mean between the last reported "bid" and "asked" prices thereof on the relevant date, as reported on NASDAQ or, if not so reported, as reported by the National Daily Quotation Bureau, Inc. or as reported in a customary financial reporting service, as applicable and as the Committee determines. If the Common Stock is not traded in a public market, Fair Market Value shall be determined in good faith by the Committee. (c) Exercise. No Option shall be deemed to have been exercised prior to the receipt by the Company of written notice of such exercise and (unless arrangements satisfactory to the Company have been made for payment through a broker in accordance with procedures permitted by Regulation P of the Federal Reserve Board) of payment in full of the Option Price for the Shares to be purchased. Each such notice shall specify the number of Shares to be purchased and shall (unless the Shares are covered by a then current registration statement or a Notification under Regulation A under the Act), contain the Optionee's acknowledgment in form and substance satisfactory to the Company that (a) such Shares are being purchased for investment and not for distribution or resale (other than -4- 5 a distribution or resale which, in the opinion of counsel satisfactory to the Company, may be made without violating the registration provisions of the Act), (b) the Optionee has been advised and understands that (i) the Shares have not been registered under the Act and are "restricted securities" within the meaning of Rule 144 under the Act and are subject to restrictions on transfer and (ii) the Company is under no obligation to register the Shares under the Act or to take any action which would make available to the Optionee any exemption from such registration, (c) such Shares may not be transferred without compliance with all applicable federal and state securities laws, and (d) an appropriate legend referring to the foregoing restrictions on transfer and any other restrictions imposed under the Option Documents may be endorsed on the certificates. Notwithstanding the foregoing, if the Company determines that issuance of Shares should be delayed pending (A) registration under federal or state securities laws, (B) the receipt of an opinion of counsel satisfactory to the Company that an appropriate exemption from such registration is available, (C) the listing or inclusion of the Shares on any securities exchange or an automated quotation system or (D) the consent or approval of any governmental regulatory body whose consent or approval is necessary in connection with the issuance of such Shares, the Company may defer exercise of any Option granted hereunder until any of the events described in this sentence has occurred. (d) Medium of Payment. Subject to the terms of the applicable Option Document, an Optionee shall pay for Shares (i) in cash, (ii) by certified or cashier's check payable to the order of the Company, or (iii) by such other mode of payment as the Committee may approve, including payment through a broker in accordance with procedures permitted by Regulation P of the Federal Reserve Board. The Optionee may also exercise the Option in any manner contemplated by Section 11. Furthermore, the Committee may provide in an Option Document that payment may be made in whole or in part in shares of the Company's Common Stock held by the Optionee. If payment is made in whole or in part in shares of the Company's Common Stock, then the Optionee shall deliver to the Company certificates registered in the name of such Optionee representing the shares owned by such Optionee, free of all liens, claims and encumbrances of every kind and having an aggregate Fair Market Value on the date of delivery that is at least as great as the Option Price of the Shares (or relevant portion thereof) with respect to which such Option is to be exercised by the payment in shares of Common Stock, endorsed in blank or accompanied by stock powers duly endorsed in blank by the Optionee. In the event that certificates for shares of the Company's Common Stock delivered to the Company represent a number of shares in excess of the number of shares required to make payment for the Option Price of the Shares (or relevant portion thereof) with respect to which such Option is to be exercised by payment in shares of Common Stock, the stock certificate or certificates issued to the Optionee shall represent (i) the Shares in respect of which payment is made, and (ii) such excess number of shares. Notwithstanding the foregoing, the Committee may impose from time to time such limitations and prohibitions on the use of shares of the Common Stock to exercise an Option as it deems appropriate. (e) Termination of Options. (i) No Option shall be exercisable after the first to occur of the following: (A) Expiration of the Option term specified in the Option Document, which, in the case of an ISO, shall not occur after (1) ten years from the date of grant, or (2) five years from the date of grant if the Optionee on the date of grant owns, directly or by attribution under Section 424(d) of the Code, shares possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of an Affiliate; -5- 6 (B) Except to the extent otherwise provided in an Optionee's Option Document, a finding by the Committee, after full consideration of the facts presented on behalf of both the Company and the Optionee, that the Optionee has been engaged in disloyalty to the Company or an Affiliate, including, without limitation, fraud, embezzlement, theft, commission of a felony or proven dishonesty in the course of the Optionee's employment or service, or has disclosed trade secrets or confidential information of the Company or an Affiliate. In such event, in addition to immediate termination of the Option, the Optionee shall automatically forfeit all Shares for which the Company has not yet delivered the share certificates upon refund by the Company of the Option Price. Notwithstanding anything herein to the contrary, the Company may withhold delivery of share certificates pending the resolution of any inquiry that could lead to a finding resulting in a forfeiture; (C) The date, if any, set by the Board of Directors as an accelerated expiration date in the event of the liquidation or dissolution of the Company; (D) The occurrence of such other event or events as may be set forth in the Option Document as causing an accelerated expiration of the Option; or (E) Except as otherwise set forth in the Option Document and subject to the foregoing provisions of this Subsection 8(e), three months after the Optionee's employment or service with the Company or its Affiliates terminates for any reason other than Disability or death or one year after such termination due to Optionee's Disability or death. With respect to this Subsection 8(e)(i)(E), the only Options that may be exercised during the three-month or one-year period, as the case may be, are Options which were exercisable on the last date of such employment or service and not Options which, if the Optionee were still employed or rendering service during such three-month or one-year period, would become exercisable, unless the Option Document specifically provides to the contrary. The terms of an executive severance agreement or other agreement between the Company and an Optionee, approved by the Committee, whether entered into prior or subsequent to the grant of an Option, which provide for Option exercise dates later than those set forth in Subsection 8(e)(i) shall be deemed to be Option terms approved by the Committee and consented to by the Optionee. (ii) Notwithstanding the foregoing, the Committee may extend the period during which all or any portion of an Option may be exercised to a date no later than the Option term specified in the Option Document pursuant to Subsection 8(e)(i)(A), provided that any change pursuant to this Subsection 8(e)(ii) which would cause an ISO to become a Non-qualified Stock Option may be made only with the consent of the Optionee. (iii) Notwithstanding anything to the contrary contained in the Plan or an Option Document, an ISO shall be treated as a Non-qualified Stock Option to the extent such ISO is exercised at any time after the expiration of the time period permitted under the Code for the exercise of an ISO. (f) Transfers. No Option granted under the Plan may be transferred, except by will or by the laws of descent and distribution except as otherwise set forth in the Option Document or to the extent that the Committee otherwise determines. (g) Limitation on ISO Grants. To the extent that the aggregate fair market value of the shares of Common Stock (determined at the time the ISO is granted) with respect to which ISO's under all incentive stock option plans of the Company or its Affiliates are exercisable for the first -6- 7 time by the Optionee during any calendar year exceeds $100,000, such ISO's shall, to the extent of such excess, be treated as Non-qualified Stock Options. (h) Other Provisions. Subject to the provisions of the Plan, the Option Documents shall contain such other provisions including, without limitation, provisions authorizing the Committee to accelerate the exercisability of all or any portion of an Option granted pursuant to the Plan, additional restrictions upon the exercise of the Option or additional limitations upon the term of the Option, as the Committee shall deem advisable. (i) Amendment. Subject to the provisions of the Plan, the Committee shall have the right to amend any Option Document or Award Agreement issued to an Optionee or Award holder, subject to the Optionee's or Award holder's consent if such amendment is not favorable to the Optionee or Award holder, or if such amendment has the effect of changing an ISO to a Non-Qualified Stock Option, except that the consent of the Optionee or Award holder shall not be required for any amendment made pursuant to Subsection 8(e)(i)(C) or Section 9 of the Plan, as applicable. 9. Change of Control. In the event of a Change of Control, the Committee may take whatever actions it deems necessary or desirable with respect to any of the Options outstanding which need not be treated identically, including, without limitation, accelerating (a) the expiration or termination date in the respective Option Documents to a date no earlier than thirty (30) days after notice of such acceleration is given to the Optionees, or (b) the exercisability of the Option. Notwithstanding the foregoing, in the event of a Change of Control, Options granted pursuant to the Plan will become automatically exercisable in full but only with respect to those Optionees who, in the good faith determination of the Board of Directors, are likely to have their relationship with the Company or any Affiliate of the Company terminated (including constructive termination through a significant decrease in authority, responsibility or overall total compensation) as a result of such Change of Control. A "Change of Control" shall be deemed to have occurred upon the earliest to occur of the following events: (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any subsidiary of the Company, any "person" (as hereinabove defined) acting on behalf of the Company as underwriter pursuant to an offering who is temporarily holding securities in connection with such offering, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any "person" (as hereinabove defined) who, on the date the Plan is effective, shall have been the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of or have voting control over shares of capital stock of the Company possessing more than thirty percent (30%) of the combined voting power of the Company's then outstanding securities) is or becomes the "beneficial owner" (as hereinabove defined), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of not more than two consecutive years (not including any period prior to the date the Plan is effective), individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a "person" (as hereinabove defined) who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this Section 9) whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose -7- 8 election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation or other legal entity, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) (other than a "person" who, on the date the Plan is effective, shall have been the "beneficial owner" (as hereinabove defined) of or have voting control over shares of capital stock of the Company possessing more than thirty percent (30%) of the combined voting power of the Company's then outstanding securities) acquires more than thirty percent (30%) of the combined voting power of the Company's then outstanding securities; (iv) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect); or (v) a "change of control" as hereinafter defined by the Board of Directors for the express purposes of this Plan has occurred. 10. Adjustments on Changes in Capitalization. (a) In the event that the outstanding Shares are changed by reason of a reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination or exchange of shares and the like (not including the issuance of Common Stock on the conversion of other securities of the Company which are outstanding on the date of grant and which are convertible into Common Stock) or dividends payable in Shares, an equitable adjustment shall be made by the Committee in the aggregate number of shares available under the Plan and in the number of Shares and price per Share subject to outstanding Options. Unless the Committee makes other provisions for the equitable settlement of outstanding Options, if the Company shall be reorganized, consolidated, or merged with another corporation or other legal entity, or if all or substantially all of the assets of the Company shall be sold or exchanged, an Optionee shall at the time of issuance of the stock under such corporate event be entitled to receive upon the exercise of his or her Option the same number and kind of shares of stock or the same amount of property, cash or securities as he or she would have been entitled to receive upon the occurrence of any such corporate event as if he or she had been, immediately prior to such event, the holder of the number of Shares covered by his or her Option. (b) Any adjustment under this Section 10 in the number of Shares subject to Options shall apply proportionately to only the unexercised portion of any Option granted hereunder. If fractions of a Share would result from any such adjustment, the adjustment shall be revised to the next lower whole number of Shares. (c) The Committee shall have authority to determine the adjustments to be made under this Section, and any such determination by the Committee shall be final, binding and conclusive. -8- 9 11. Stock Appreciation Rights (SARs). (a) In General. Subject to the terms and conditions of the Plan, the Committee may, in its sole and absolute discretion, grant to an Optionee the right to surrender an Option to the Company, in whole or in part, and to receive in exchange therefor payment by the Company of an amount equal to the excess of the Fair Market Value of the shares of Common Stock subject to such Option, or portion thereof, so surrendered (determined in the manner described in section 8(b) as of the date the SARs are exercised) over the exercise price to acquire such shares (which right shall be referred to as an "SAR"). Except as may otherwise be provided in an Option Document, such payment may be made, as determined by the Committee in accordance with subsection 11(c) below and set forth in the Option Document, either in shares of Common Stock or in cash or in any combination thereof. (b) Grant. Each SAR shall relate to a specific Option granted under the Plan and shall be granted to the Optionee concurrently with the grant of such Option by inclusion of appropriate provisions in the Option Document pertaining thereto. The number of SARs granted to an Optionee shall not exceed the number of shares of Common Stock which such Optionee is entitled to purchase pursuant to the related Option. The number of SARs held by an Optionee shall be reduced by (i) the number of SARs exercised under the provisions of the Option Document pertaining to the related Option, and (ii) the number of shares of Common Stock purchased pursuant to the exercise of the related Option. (c) Payment. The Committee shall have sole discretion to determine whether payment in respect of SARs granted to any Optionee shall be made in shares of Common Stock, or in cash, or in a combination thereof. If payment is made in Common Stock, the number of shares of Common Stock which shall be issued pursuant to the exercise of SARs shall be determined by dividing (i) the total number of SARs being exercised, multiplied by the amount by which the Fair Market Value (as determined under section 8(b)) of a share of Common Stock on the exercise date exceeds the exercise price for shares covered by the related Option, by (ii) the Fair Market Value of a share of Common Stock on the exercise date of the SARs. No fractional share of Common Stock shall be issued on exercise of an SAR; cash may be paid by the Company to the individual exercising an SAR in lieu of any such fractional share. If payment on exercise of an SAR is to be made in cash, the individual exercising the SAR shall receive in respect of each share to which such exercise relates an amount of money equal to the difference between the Fair Market Value of a share of Common Stock on the exercise date and the exercise price for shares covered by the related Option. (d) Limitations. SARs shall be exercisable at such times and under such terms and conditions as the Committee, in its sole and absolute discretion, shall determine; provided, however, that an SAR may be exercised only at such times and by such individuals as the related Option under the Plan and the Option Agreement may be exercised. 12. Terms and Conditions of Awards. Awards granted pursuant to the Plan shall be evidenced by written Award Agreements in such form as the Committee shall from time to time approve, which Award Agreements shall comply with and be subject to the following terms and conditions and such other terms and conditions which the Committee may from time to time require which are not inconsistent with the terms of the Plan. (a) Number of Shares. Each Award Agreement shall state the number of shares of Common Stock to which it pertains. -9- 10 (b) Purchase Price. Each Award Agreement shall specify the purchase price, if any, which applies to the Award. If the Board specifies a purchase price, the Grantee shall be required to make payment on or before the date specified in the Award Agreement. A Grantee shall pay for Shares (i) in cash, (ii) by certified check payable to the order of the Company, or (iii) by such other mode of payment as the Committee may approve. (c) Grant. In the case of an Award which provides for a grant of Shares without any payment by the Grantee, the grant shall take place on the date specified in the Award Agreement. In the case of an Award which provides for a payment, the grant shall take place on the date the initial payment is delivered to the Company, unless the Committee or the Award Agreement otherwise specifies. Stock certificates evidencing Shares granted pursuant to an Award shall be issued in the sole name of the Grantee. Notwithstanding the foregoing, as a precondition to a grant, the Company may require an acknowledgment by the Grantee as required with respect to Options under Section 8. (d) Conditions. The Committee may specify in an Award Agreement any conditions under which the Grantee of that Award shall be required to convey to the Company the Shares covered by the Award. Upon the occurrence of any such specified condition, the Grantee shall forthwith surrender and deliver to the Company the certificates evidencing such Shares as well as completely executed instruments of conveyance. The Committee, in its discretion, may provide that certificates for Shares transferred pursuant to an Award be held in escrow by the Company or an officer of the Company until such time as each and every condition has lapsed and that the Grantee be required, as a condition of the Award, to deliver to such escrow agent or Company officer stock powers covering the Award Shares duly endorsed by the Grantee. Unless otherwise provided in the Award Agreement, distributions made on Shares held in escrow will be deposited in escrow, to be distributed to the party becoming entitled to the Shares on which the distribution was made. Stock certificates evidencing Shares subject to conditions shall bear a legend to the effect that the Common Stock evidenced thereby is subject to repurchase or conveyance to the Company in accordance with an Award made under the Plan and that the Shares may not be sold or otherwise transferred. (e) Lapse of Conditions. Upon termination or lapse of each and every forfeiture condition, if any, the Company shall cause certificates without the legend referring to the Company's repurchase right (but with any other legends that may be appropriate) evidencing the Shares covered by the Award to be issued to the Grantee upon the Grantee's surrender of the legended certificates held by him or her to the Company. (f) Rights as Shareholder. Upon payment of the purchase price, if any, for Shares covered by an Award and compliance with the acknowledgment requirement of subsection 12(c), the Grantee shall have all of the rights of a shareholder with respect to the Shares covered thereby, including the right to vote the Shares and receive all dividends and other distributions paid or made with respect thereto, except to the extent otherwise provided by the Committee or in the Award Agreement. 13. Amendment of the Plan. The Board of Directors of the Company may amend the Plan from time to time in such manner as it may deem advisable. Nevertheless, the Board of Directors of the Company may not change the class of individuals eligible to receive an ISO or increase the maximum number of Shares as to which Options may be granted without obtaining approval, within twelve months before or after such action, by the shareholders in the manner required by state law. Notwithstanding anything herein to the contrary, the Committee may, at its sole discretion, amend the Plan and any outstanding Option or Award to (i) eliminate any provision it determines is no longer -10- 11 required to comply with Rule 16b-3 as a result of revisions to Rule 16b-3 which are generally effective after the date the Plan is effective or (ii) provide the holder of the Option or Award an exemption from potential liability under Section 16(b) of the Exchange Act and the rules and regulations thereunder. 14. No Commitment to Retain. The grant of an Option or Award pursuant to the Plan shall not be construed to imply or to constitute evidence of any agreement, express or implied, on the part of the Company or any Affiliate to retain the Optionee or Grantee as an employee, consultant or advisor of the Company or any Affiliate, as a member of the Board of Directors or in any other capacity. 15. Withholding of Taxes. In connection with any event relating to an Option or Award, the Company shall have the right to (a) require the recipient to remit or otherwise make available to the Company an amount sufficient to satisfy any federal, state and/or local withholding tax requirements prior to the delivery or transfer of any certificate or certificates for such Shares or (b) take whatever other action it deems necessary to protect its interests with respect to tax liabilities. The Company's obligations under the Plan shall be conditioned on the Optionee's or Grantee's compliance, to the Company's satisfaction, with any withholding requirement. 16. Interpretation. The Plan is intended to enable transactions under the Plan with respect to directors to satisfy the conditions of Rule 16b-3; to the extent that any provision of the Plan would cause a conflict with such conditions or would cause the administration of the Plan as provided in Section 3 to fail to satisfy the conditions of Rule 16b-3, such provision shall be deemed null and void to the extent permitted by applicable law. This section shall not be applicable if no class of the Company's equity securities is then registered pursuant to Section 12 of the Exchange Act. -11- EX-10.13 3 CONSULTING AGREEMENT BETWEEN THE CO & ADVANTA 1 Exhibit 10.13 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT (this "Agreement"), effective as of this 20th day of August, 1996, is entered into by and between ADVANTA PARTNERS LP, a Pennsylvania limited partnership ("Advanta Partners"), and RMH TELESERVICES, INC., a Pennsylvania corporation ("the Company"). WHEREAS, Advanta Partners purchased a substantial portion of the capital stock of the Company on May 24, 1996, in connection with a recapitalization of the Company (the "Recapitalization"); WHEREAS, in connection with the Company's Recapitalization, the Company and Advanta Partners entered into a Management Fee Agreement pursuant to which the Company agreed to pay Advanta Partners a management fee in exchange for Advanta Partners' agreement to provide certain consulting services to the Company; WHEREAS, the Company intends to complete an initial public offering of shares of its common stock, no par value, on or about September 15, 1996 (the "IPO"), pursuant to a Registration Statement, File No. 333-07501, first filed with the U.S. Securities and Exchange Commission on July 3, 1996; WHEREAS, Advanta Partners and the Company wish to terminate the Management Fee Agreement and enter an agreement to govern the providing of consulting services by Advanta Partners to the Company upon completion of the IPO. NOW, THEREFORE, in consideration of the foregoing recitals and the terms and conditions stated below, and for other good and valuable consideration, the receipt of which is hereby acknowledged, Advanta Partners and the Company, intending to be legally bound, agree as follows: SECTION 1: CONSULTING SERVICES TO BE PERFORMED. In consideration of the fee set forth in Section 2, Advanta Partners agrees to perform the following services for the Company, upon the Company's request: Provide assistance to the Company, including: (i) causing representatives of Advanta Partners to perform duties as board members and officers of the Company without separate compensation therefor; and (ii) providing guidance and advice on such subjects as strategic direction, budgeting, recruiting, financing, and establishing a management compensation system. 2 SECTION 2: FEES. The Company shall pay an annual fee of $50,000 to Advanta Partners for the services provided pursuant to this Agreement. Such fee shall be paid in quarterly installments in arrears, with the first $12,500 installment being due and payable on September 30, 1996; provided, however, that no such installment or installments shall be paid if an Event of Default, as that term is defined in that certain Credit Agreement between the Company and Chemical Bank, individually and as Agent, dated as of May 24, 1996, shall have occurred and be continuing; provided, further, that if such Event of Default is subsequently cured, all such fees that were not paid by reason of the first proviso herein may be paid on the next installment date or dates to the extent such payment would not cause an Event of Default. SECTION 3: EXTRAORDINARY SERVICES. In the event Advanta Partners is required to perform extraordinary services, including without limitation, investment banking services, or undertake an extraordinary project in carrying out those services contemplated in Section 1, Advanta Partners and the Company shall, in good faith, negotiate an additional fee that shall be paid to Advanta Partners by the Company, and in the event the parties are unable to agree upon the amount of such extra fee, Advanta Partners shall not be obligated to perform such extraordinary services. SECTION 4: OUT-OF-POCKET EXPENSES. All reasonable and necessary out-of-pocket expenses incurred by Advanta Partners in carrying out its foregoing obligations under Section 1 shall be reimbursed by the Company promptly upon demand by Advanta Partners. SECTION 5: ADVANTA PARTNERS' PERFORMANCE STANDARD. Advanta Partners shall perform all of its obligations set forth in Section 1 with all due care, in a commercially reasonable manner, and in a manner consistent with its own administrative practices and standards or the standards prevailing in the telemarketing industry, whichever standard is more stringent. SECTION 6: COMPLIANCE WITH THE LAW. Each party represents, warrants and covenants to the other party that all of its practices and acts in connection with this Agreement are, and at all times will be, in compliance with all applicable federal, state and local laws, statutes, rules and regulations. -2- 3 SECTION 7: LIABILITY. (a) Indemnification. The Company agrees to indemnify and hold Advanta Partners harmless from all claims and liabilities (including attorney's fees) incurred or assessed against it in connection with the performance of services, except such as may arise from Advanta Partner's own negligent action, negligent failure to act, willful misconduct or willful violation of applicable law. (b) No Personal Liability. No liability shall attain in favor of one party to this Agreement against any officer, director or employee of the other party. The party attaining such liability agrees to look solely to the assets of the other party for satisfaction. SECTION 8: TERM. This Agreement shall extend for a term commencing with the IPO and ending at midnight on May 24, 2001. SECTION 9: INDEPENDENT CONTRACTOR STATUS OF Advanta Partners. The relationship of Advanta Partners to the Company is that of independent contractor. Nothing herein shall be construed as constituting a partnership, joint venture or agency between Advanta Partners and the Company. SECTION 10: CONFIDENTIALITY. It is understood between the parties hereto that during the term of this Agreement, each of the parties may be dealing with confidential information and processes that are the other party's property, used in the course of its respective business. Each of the parties agrees that it will not intentionally disclose any such confidential information to anyone, directly or indirectly, without the prior consent of the other party. SECTION 11: MISCELLANEOUS. (a) No Assignment. This Agreement may not be assigned by either party without the prior written consent of the other party, which, because of the nature of the parties' respective obligations hereunder, may be declined by such party for any reason or for no reason whatsoever. (b) Notices. Any notice or other communication required or permitted to be given under this Agreement must be in writing and will be deemed effective when -3- 4 delivered in person or sent by facsimile, cable, telegram or telex, or by overnight courier or registered or certified mail, postage prepaid, return receipt requested, to the following addresses: If to Advanta Partners: Advanta Partners LP Five Horsham Business Center 300 Welsh Road Horsham, PA 19044 Attention: Senior Managing Director Telephone: (215) 830-6450 Telecopier: (215) 830-6499 If to the Company: RMH Teleservices, Inc. 40 Morris Avenue Bryn Mawr, PA 19010 Attention: Chief Executive Officer Telephone: (610) 520-5300 Telecopier: (610) 520-5354 (c) Amendment. This Agreement may be amended, and the observance of any term hereof may be waived (either prospectively or retroactively and either generally or in a particular instance) only by written amendment signed by authorized representatives of the parties hereto. (d) Choice of Law. This Agreement will be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without regard to doctrines of conflicts of laws. Any and all legal actions brought by one party against the other shall be brought in the state or federal courts of the Commonwealth of Pennsylvania. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes any and all prior oral or written understandings and agreements between the parties regarding the subject matter addressed in this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered, effective as of the date specified at the beginning hereof. ADVANTA PARTNERS LP RMH TELESERVICES, INC. By AP Capital, Inc., general partner By:/s/ Mitchell L. Hollin By: /s/ MarySue Lucci Hansell ------------------------------- ------------------------------- Name: Mitchell L. Hollin Name: MarySue Lucci Hansell Title: Vice President Title: President -4- EX-10.15 4 AGREEMENT ON POST-CLOSING ADJUSTMENTS 10/20/96 1 Exhibit 10.15 AGREEMENT ON POST-CLOSING ADJUSTMENTS This AGREEMENT is entered into as of the 20th day of August, 1996, among RMH TELESERVICES, INC., a Pennsylvania corporation formerly known as RMH Sales and Marketing Consulting, Inc. ("the Company"), Raymond J. Hansell ("Hansell"), MarySue Lucci Hansell ("Lucci"), ADVANTA PARTNERS LP, a Pennsylvania limited partnership and GLENGAR INTERNATIONAL INVESTMENTS LIMITED, a limited liability company organized in the British Virgin Islands. Hansell and Lucci are sometimes referred to herein as the "Principals." BACKGROUND WHEREAS, on May 24, 1996, the parties to this Agreement entered into a Recapitalization and Stock Purchase Agreement (the "Recapitalization Agreement") (Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Recapitalization Agreement. All capitalized section headings referred to herein shall refer to the appropriate sections of the Recapitalization Agreement). WHEREAS, on the Closing Date, the Company paid the Principals $15,436,975 in cash, reflecting the Cash Redemption Price, as adjusted in accordance with Section 2.2(c) less $500,000 in funds deposited in escrow pursuant to Section 10.5, as determined based upon the Preliminary Closing Balance Sheet as required under Section 2.2(c). WHEREAS, in accordance with the procedures set forth in Section 2.2(c), the parties hereto have agreed that the balance sheet prepared after Closing by Asher & Company, Ltd. as of and for the period ending on the Closing Date shall constitute the Closing Balance Sheet and now wish that the closing adjustments to the Cash Redemption Price be finally reconciled. WHEREAS, pursuant to the Closing Balance Sheet and the workpapers relevant to the calculation of adjustments, all attached hereto as Exhibit A, the actual Cash Redemption Price is $436,980 greater than the estimated amount paid to the Principals at the Closing Date. The parties hereto now wish that the Company pay such difference to the Principals as required by the terms of the Recapitalization Agreement. WHEREAS, the Recapitalization Agreement contemplated that the Company would repay any and all amounts of outstanding shareholder loans, including loans by the Principals to the Company (the "Principal Loans"), and that the Principals would repay any indebtedness of the Principals to the Company (the "Company Loans") at or prior to the Closing Date; however, neither the Principal Loans nor the Company Loans were satisfied at or prior to the Closing Date. WHEREAS, the Closing Balance Sheet reveals that as of the Closing Date the amount of the outstanding indebtedness of the Company under the Principal Loans exceeded the 2 amount of indebtedness of the Principals under the Company Loans by $56,117 (the "Net Loan Amount"). WHEREAS, the parties hereto wish to resolve any remaining issues with respect certain covenants regarding tax matters set forth in Section 9.3. NOW THEREFORE, in consideration of the premises and the mutual covenants contained in this Agreement, the parties to this Agreement, intending to be legally bound, hereby agree as follows: 1. Agreement on Facts. The recitals to this Agreement are hereby agreed to and incorporated herein by reference. 2. Payment of Balance of Cash Redemption Price. Subject to the terms of this Agreement, the Company shall pay to the Principals the aggregate of Four Hundred Thirty-six Thousand Nine Hundred Eighty Dollars ($436,980) by check or wire transfer of funds to an account or accounts designated by the Principals. All of the parties hereto agree and acknowledge that such payment is in full satisfaction of the Company's obligation to pay the Cash Redemption Price under the Recapitalization Agreement. 3. Repayment of Shareholder Loans. Subject to the terms of this Agreement, the Company shall pay to the Principals the aggregate of Fifty-six Thousand One Hundred Seventeen Dollars ($56,117) representing the Net Loan Amount, by check or wire transfer of funds to an account or account designated by the Principals. All of the parties hereto agree and acknowledge that such payment by the Company of the Net Loan Amount is in full satisfaction of the Company's obligation to repay any and all outstanding principal and interest with respect to the Principal Loans and the Principal's obligation to repay any and all outstanding principal and interest with respect to the Company Loans. 4. Agreement With Respect to Tax Distributions. Each of the parties hereto agrees and acknowledges that the Company has fully satisfied its obligations with respect the Tax Distribution under the terms of Section 9.3(b) and has no further obligation to distribute, as a dividend or otherwise, any amount to the Principals in connection therewith. Each of the parties hereto further agrees and acknowledges that the Principals remain liable to the Company for the Transition Tax in accordance with the terms of Section 9.3(c). 5. Effective Time. This Agreement shall be effective upon execution by all of the parties hereto (the "Effective Date"). All amounts to be paid hereunder shall be paid in the manner contemplated herein as soon as practicable but not later than the close of business on the third day following the Effective Date. 2 3 6. Miscellaneous. (a) Entire Agreement. This Agreement contains the entire understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. (b) Binding Nature of Agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. (c) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. (d) Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. (e) Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. (f) Paragraph Headings. The paragraph headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation. (g) Exhibits. All exhibits attached hereto are incorporated by reference into and made a part of this Agreement. (h) Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or holiday on which federal banks are or may elect to be closed, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or such holiday. 3 4 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. /s/ Raymond J. Hansell GLENGAR INTERNATIONAL - -------------------------- INVESTMENTS LIMITED Raymond J. Hansell By: /s/ Ian C. Crosby -------------------------- Ian C. Crosby Director: Montblanc (Directors) Limited Sole corporate director: Glengar /s/ Mary Sue Lucci Hansell International Investments Limited - -------------------------- MarySue Lucci Hansell RMH TELESERVICES, INC ADVANTA PARTNERS LP By: AP CAPITAL, INC., managing general partner By: /s/ Anthony P. Brenner -------------------------- By: /s/ Mitchell L. Hollin Anthony P. Brenner, ---------------------------------- Chairman Mitchell L. Hollin, Vice President
4 EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Teleservices Management Company, a Delaware corporation Teleservices Technology Company, a Delaware corporation EX-27.1 6 FINANCIAL DATA SCHEDULE
5 YEAR SEP-30-1996 OCT-01-1995 SEP-30-1996 10,046,647 0 5,551,734 2,500 0 17,035,252 8,894,041 3,438,700 22,554,761 4,137,138 0 0 0 48,637,756 (30,322,336) 22,554,761 0 32,316,039 0 34,968,133 0 0 1,892,996 (4,545,090) (1,222,163) (3,322,927) 0 582,084 0 (3,905,011) (.80) (.80)
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