-----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, CitWEK3Hpnjj4HxIYZzCBThoPgcPXJkvbB8Jqzxr1TpD8moczLL3vPTbnjXTzgd2 I+b56qKRBfRL6HiC+FMiCw== 0000893220-98-000112.txt : 19980129 0000893220-98-000112.hdr.sgml : 19980129 ACCESSION NUMBER: 0000893220-98-000112 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19980128 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/A SEC ACT: SEC FILE NUMBER: 000-21333 FILM NUMBER: 98514656 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/A 1 FORM 10-K AMENDMENT 1 FOR RMH TELESERVICES, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO FORM 10-K [x] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended September 30, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Commission File Number 0-21333 RMH TELESERVICES, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2250564 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 40 MORRIS AVENUE BRYN MAWR, PA 19010 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Registrant's telephone number, including area code: (610) 520-5300 Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE PER SHARE (Title of each class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of December 8, 1997, 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 8, 1997 was approximately $40.6 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 None. 2 TABLE OF CONTENTS
Item No. Page PART I 1. Business.................................................................................................1 2. Properties...............................................................................................8 3. Legal Proceedings........................................................................................8 4. Submissions of Matters to a Vote of Security Holders.....................................................8 Executive Officers of the Company.........................................................................9 PART II 5. Market for Registrant's Common Equity and Related Shareholder Matters...................................10 6. Selected Financial Data.................................................................................11 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................12 8. Financial Statements and Supplementary Data.............................................................18 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................18 PART III 10. Directors and Executive Officers of the Registrant.....................................................18 11. Executive Compensation.................................................................................18 12. Security Ownership of Certain Beneficial Owners and Management.........................................19 13. Certain Relationships and Related Transactions.........................................................19 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................................19
3 PART I ITEM 1. BUSINESS GENERAL RMH Teleservices, Inc. (the Company) provides outbound teleservices predominantly to major corporations in the insurance, financial services, telecommunications, and utility industries. The Company distinguishes itself through its high quality service and disciplined management approach which has led to long-term client relationships and sustained profitable growth. The Company originated relationships with Mass Marketing Insurance Group ("MMIG"), JCPenney Life Insurance Company ("JCPenney") and AT&T/Universal Card Services ("AT&T") over six 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 growth rate and its retention of key clients. RMH's net revenue has increased 42.1% over the last year. 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. In connection with the Recapitalization, the Company also issued 1,000,000 shares of Series A Preferred Stock and a $4,000,000 subordinated Promissory Note (the "Founders' Note") to the Founders. 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". In connection with the Initial Public Offering, Advanta Partners and Glengar redeemed their shares of Series B Preferred Stock for an aggregate redemption payment of $6,500,000 plus accrued dividends of $182,356 and the Founders converted their Series A Preferred Stock and Founders' Note into an aggregate of 4,000,000 shares common stock. The Company's revenue and income from operations for fiscal 1997 were $45.9 million and $4.7 million, respectively. This represents increases of 42.1% and 37.4% respectively, compared to fiscal 1996, after excluding special one-time expenses in fiscal 1996. 1 4 OVERVIEW OF THE TELESERVICES INDUSTRY The teleservices industry includes outbound and inbound telephone marketing, as well as customer support and service programs and other value-added services. Teleservices provide customized service with higher response rates and higher customer acquisition and retention rates at a lower cost per transaction than other marketing media. As a result, call centers have become robust channels for the marketing and sale of a wide variety of products and services as sophisticated telemarketers are able to market effectively and collect valuable customer data. According to Direct Marketing Magazine, telemarketing expenditures in the United States grew from approximately $34 billion in 1984 to approximately $77 billion in 1994. An increasing percentage of teleservices business is currently being outsourced to independent providers, and the Company believes that both the total market and the percentage of this market that is outsourced will increase as businesses continue to recognize the benefits of such services. Historically, the call center services industry has been extremely fragmented and continues to include a large number of small, independent organizations. However, over the past several years, the industry has further segmented itself by the public or secondary offerings of common stock by ten companies. Consequently, the sector has further defined itself by those companies that have been able to raise monies in the public marketplace. 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 six 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 2 5 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. As of September 30, 1997, the Company employed 161 insurance agents licensed to sell insurance in a total of 46 states. The Company's significant relationships in this industry include those with MMIG, AT&T, and JCPenney, which were responsible for 51.6%, 6.9%, and 15.5%, respectively, of the Company's revenues for fiscal 1997. The Company originated its relationship with MMIG over nine years ago and originated its relationship with JCPenney, and AT&T over six years ago. The Company's aggregate revenues from this group of clients have grown respectively, each year since fiscal 1991. In fiscal 1997, 74.0% 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 1997, 11.4% of the Company's revenues were generated from services related to financial services products. Telecommunications. The Company expects the demand for teleservices within the telecommunications industry to increase as the industry continues to be deregulated and as the number of products (e.g., long distance, cellular, paging and "800" services) and call features (e.g., call waiting, caller identification and voice mail) increases. On behalf of several telecommunication companies, the Company completed several of these outbound campaigns during the current fiscal year. Utilities. The expected deregulation of the public utilities industry has created several opportunities for the Company in fiscal 1997, and it believes that future potential campaigns may emerge in the future. 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. 3 6 During fiscal 1997, the Company opened a new call center facility in Delran, NJ, that is capable of handling both outbound and inbound call volume and has been designed utilizing the latest telephony technology. This technology includes client server technology with fully featured PC workstations coupled with Aspect's automated call distributor. In addition, the Company currently operates an inbound customer service center in its Lansdowne, PA, call center facility. During 1997, the Company grew its inbound business by servicing Companies in the telecommunications and financial services industries, in addition to servicing its existing customer base. Business-to-Business Teleservices The Company believes that the dynamics of the business-to-business teleservices marketplace have now changed so as to permit the development of the type of long-term client relationships and large-scale campaigns that have formed the core of the Company's business-to-consumer services. The Company expects that the demand for business-to-business applications will grow, especially among telecommunications and utility companies, as many large companies recognize that telemarketing is a more efficient method of reaching business customers than a field sales force. Growth in the business-to-business teleservices market has the potential for the Company to leverage its existing workstation capacity because such services are provided primarily during the day while business-to-consumer services are provided primarily during the evening. The Company believes that its prior experience in business-to-business teleservices and current expertise in business-to-consumer teleservices position it to take advantage of the growth in this market. Though this business has not grown dramatically during 1997, the Company believes that the business-to- business marketplace is embracing teleservices and opportunities may present themselves in future periods. 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 his 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. 4 7 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, 1997, the Company employed 161 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 attempts to target base TSR compensation at higher levels than is paid by other businesses competing for the same labor pool. In addition, the Company offers a benefits package, including health insurance, for qualifying full-time TSRs. For performance recognition, the Company pays cash bonuses to TSRs who achieve sales targets and quality benchmarks and also offers non-cash incentives and creative programs to improve performance and maintain morale. Although it is typical in the teleservices industry for TSRs to be part-time employees, over 69.5% of the Company's TSRs are full-time employees (working at least 33 hours per week). The Company believes that its relatively high proportion of full-time employees provides a more stable workforce and reduces the Company's recruiting and training expenditures. As of September 30, 1997, the Company employed 1,937 persons, of whom more than 1,650 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, 1997, the Company's management information systems department consisted of 49 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. 5 8 The Company uses UNIX-based predictive dialing systems at each call center, which are linked via a wide-area network to network servers at the Company's corporate headquarters. The Company's call center and network systems both use a flexible database architecture permitting the easy sharing of data among users of the system. As a result, the Company's scaleable systems can be configured to work cost-effectively at low and high volumes and permit the efficient addition of capacity. During fiscal 1997, the Company continued to expand its focus and invest its capital in the inbound teleservices marketplace. Its tenth call center, which opened in March, 1997, includes client server technology with fully featured PC workstations coupled with Aspect's automated call distributor and Comverse's digital recording technology. 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 Group, Inc., and SITEL Corporation, to name a few. In addition, the Company competes with the in-house telemarketing operations of many of its clients or potential clients. The Company also competes with direct mail, television, radio and other advertising media, as well as emerging direct marketing channels, such as interactive shopping and data collection through the television, the Internet and other media. Competition with other teleservices organizations is based primarily upon performance (measures include sales per hour, contact rate, conversion ratio and cost per sale), technological and reporting capabilities, industry experience, quality of client services and staff and price. The Company believes that it generally compares favorably with its competitors with respect to each of these factors. GOVERNMENT REGULATION Telemarketing sales practices are regulated at both the federal and state level. The Telephone Consumer Protection Act (TCPA) enforced by the 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. 6 9 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 Telemarketing and Consumer Fraud and Abuse Prevention Act of 1990 (TCFAPA) under which the FTC has issued regulations prohibiting a variety of deceptive, unfair or abusive practices in telemarketing sales. Generally, these rules prohibit misrepresentations of the cost, quantity, terms, restrictions, performance or characteristics of products or services offered by telephone solicitation or of refund, cancellation or exchange policies. The regulations also regulate the use of prize promotions in telemarketing to prevent deception and require that a telemarketer identify promptly and clearly the seller on whose behalf the telemarketer is calling, the purpose of the call, the nature of the goods or services offered and, if applicable, that no purchase or payment is necessary to win a prize. The regulations also require that a telemarketer maintain records on various aspects of its business. Most states have enacted statutes similar to the FTC Act prohibiting unfair or deceptive acts and practices. For example, telephone sales in certain states are not final until a written contract is delivered to and signed by the buyer, and such a contract often may be canceled within three business days. At least one state also prohibits telemarketers from requiring credit card payment, and several other states require certain telemarketers to obtain licenses, post bonds or submit sales scripts to the state's attorney general. Under these general enabling statutes, depending on the willfulness and severity of the violation, penalties can include imprisonment, fines and a range of equitable remedies such as consumer redress or the posting of bonds before continuing in business. Additionally, some states have enacted laws and others are considering enacting laws targeted directly at telemarketing practices. Most of these statutes allow a private right of action for the recovery of damages or provide for enforcement by state agencies permitting the recovery of significant civil or criminal penalties, costs and attorneys' fees. There can be no assurance that any such laws, if enacted, will not adversely affect or limit the Company's current or future operations. The industries served by the Company are also subject to government regulation, and, from time to time, bills are introduced in Congress which, if enacted, would affect the Company's operations. The Company and its employees who sell insurance products are required to be licensed by various state insurance commissions for the particular type of insurance product to be sold and 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. 7 10 ITEM 2. PROPERTIES The Company's corporate headquarters facility is located in Bryn Mawr, Pennsylvania in an approximately 45,000 square-foot building leased to the Company through December 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, 1997, 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 June 1997 106 Harrisburg, PA October 1996 80 March 1997 96 Delran, NJ March 1997 100 May 1997 130 York, PA June 1997 80 June 1997 80 ----- TOTAL 1,124 =====
(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 On September 17, 1997, the Company commenced an arbitration with the American Arbitration Association in Philadelphia, Pennsylvania, against Kipany Productions Ltd. seeking damages of over $1.4 million from Kipany for its breach of contract and unjust enrichment. Kipany responded to the arbitration by filing an action in the United States District Court for the Eastern District of New York, seeking to enjoin the arbitration. That action was transferred to the United States District Court for the Eastern District of Pennsylvania. The Company commenced legal proceedings in the Court of Common Pleas of Montgomery County, Pennsylvania, against Kipany to compel arbitration. The Montgomery County proceedings were subsequently removed to the United States District Court for the Eastern District of Pennsylvania. On December 2, 1997, Kipany filed an answer and counterclaims in which it denied all of the Company's allegations and counterclaimed for its alleged damages including "not less than $3 million" for the damage allegedly suffered to its business reputation and its business relationship with two of its customers. The Company and legal counsel believe that Kipany's defenses and counterclaims are frivolous and without merit and will continue to pursue its original claims and to defend vigorously against Kipany's counterclaims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 8 11 EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are as follows:
NAME AGE POSITION - ---- --- -------- Raymond J. Hansell.............. 48 Vice Chairman of the Board and Chief Executive Officer MarySue Lucci................... 49 Director, President and Chief Operating Officer Michael J. Scharff.............. 51 Executive Vice President Richard C. Altus................ 39 Executive Vice President and Chief Financial Officer Robert Berwanger................ 41 Executive Vice President of Operations Richard P. Keenan............... 51 Vice President of Sales and Marketing William D. Mulvihill............ 56 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 and was named an Executive Vice President in February 1997. 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. 9 12 Mr. Berwanger joined the Company as Senior Vice President of Operations in March 1997 and was named an Executive Vice President in December 1997. For 14 years prior to joining the Company, Mr. Berwanger was employed by American Transtech, a wholly-owned teleservices subsidiary of AT&T where he most recently served as Director, New Business Development. Mr. Berwanger's tenure at AT&T included oversight of American Transtech's outbound telemarketing operation, start-up and oversight of a large-scale call center in Canada, and management of the AT&T multi-lingual call centers in San Jose, California. 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 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. 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 fiscal year ended September 30, 1997.
HIGH LOW ---- --- Fourth Fiscal Quarter of 1996 (from September 18, 1996)........... $17.25 $4.88 First Fiscal Quarter of 1997....................................... $17.00 $6.13 Second Fiscal Quarter of 1997...................................... $ 8.25 $5.00 Third Fiscal Quarter of 1997....................................... $ 8.50 $4.88 Fourth Fiscal Quarter of 1997...................................... $ 9.13 $6.25
As of December 12, 1997, there were 37 shareholders 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. The Company sold no securities during fiscal 1997. 10 13 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, ------------------------ 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT EARNINGS PER SHARE) STATEMENT OF OPERATIONS DATA: Revenues ................................... $ 10,292 $ 17,105 $ 25,545 $ 32,316 $45,937 -------- -------- -------- -------- ------- Operating expenses: Cost of services ........................ 7,642 13,286 18,210 22,212 31,749 Selling, general and administrative (1).. 2,076 3,007 5,312 6,669 9,469 Special bonuses (2) ..................... -- -- -- 6,087 -- -------- -------- -------- -------- ------- Total operating expenses .... 9,718 16,293 23,522 34,968 41,218 -------- -------- -------- -------- ------- Operating income (loss) .................... 574 812 2,023 (2,652) 4,719 Interest income (expense) (3) .............. (137) (170) (261) (1,893) 473 -------- -------- -------- -------- ------- Income (loss) before income taxes and extraordinary item ...................... 437 642 1,762 (4,545) 5,192 Income taxes (benefit) (4) ................. -- 40 21 (1,222) 1,825 -------- -------- -------- -------- ------- Income (loss) before extraordinary item .... 437 602 1,741 (3,323) 3,367 Extraordinary item, net of taxes (5) ....... -- -- -- 582 -- -------- -------- -------- -------- ------- Net income (loss) ........... 437 602 1,741 (3,905) 3,367 Preferred stock dividends .................. -- -- -- 308 -- -------- -------- -------- -------- ------- Net income (loss) available to Common shareholders (4) ........................ $ 437 $ 602 $ 1,741 $ (4,213) $ 3,367 ======== ======== ======== ======== ======= Earnings per share ......................... -- -- -- -- $ .41 ======= 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 common share is computed by dividing the pro forma loss by the weighted average number of shares outstanding during the period.
SEPTEMBER 30, ---------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- (AMOUNTS IN THOUSANDS) BALANCE SHEET DATA: Working capital $ 282 $ 829 $1,061 $12,899 $17,384 Total assets 3,743 5,576 8,757 22,555 25,286 Long-term debt, less current maturities 20 355 592 --- --- Capitalized lease obligations, less current maturities 525 623 436 2 --- Loans payable to shareholders 125 125 133 --- --- Shareholders' equity 1,325 1,927 3,668 18,315 21,683
(1) Selling, general and administrative expenses include Founders' compensation of $386,000, $660,000, $766,000, $598,000 and $400,000 for fiscal 1993 through fiscal 1997, 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. 11 14 (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 7 of Notes to Financial Statements, for information concerning computation and relizability 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 SAFE HARBOR FOR FORWARD LOOKING STATEMENTS The following discussion of the Company's historical results of operations and its liquidity and capital resources should be read in conjunction with "Selected Financial Information" and the Financial Statements of the Company and Notes thereto appearing elsewhere in this document. From time-to-time, the Company may publish statements which are not historical facts but are forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provided a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include, but are not limited to: (i) reliance on principal client relationships in the insurance and financial services industry; (ii) fluctuations in quarterly results of operations due to the timing of clients' telemarketing campaigns, the timing of opening of new call centers and expansion of existing call centers and changes in competitive conditions affecting the telemarketing industry; (iii) difficulties of managing growth profitably; (iv) dependence on the services of the Company's executive officers and other key operations and technical personnel; (v) changes in the availability of qualified employees (vi) performance of its automated call- processing systems and other technological factors; (vii) 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 and inbound teleservices to major corporations in the insurance, financial services, telecommunications, and utility industries. Founded in 1983 by Raymond J. Hansell and MarySue Lucci to provide direct marketing and sales consulting, the Company opened its first call center focusing on business-to-business teleservices in 1985 to support the marketing efforts of its consulting customers. By the late 1980s, outbound business-to-consumer teleservices had become the predominant business of the Company. On May 24, 1996, the Company completed the Recapitalization which included the purchase of a significant equity interest in the Company by Advanta Partners LP. 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% Founders Note and redeemed an aggregate of 6,500,000 shares of Series B Preferred Stock held by Advanta Partners and Glengar. 12 15 The Company's business has grown rapidly, resulting in increases in revenues and operating income (exclusive of any special compensation expenses and one-time charges) during each of the last three fiscal years. The increase in revenues from $25.5 million in fiscal 1995 to $45.9 million in fiscal 1997, 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 and telecommunications industry. There is no assurance that the Company will be able to maintain its historical profit margins, which may be adversely affected by, among other factors, the pricing of such business and additional technological and other costs involved in servicing such business. Operating income increased from $2,023,000 or 7.9% of revenues in fiscal 1995 to $4,719,000 or 10.3% of revenues in fiscal 1997. The increase in operating income (exclusive of any special compensation expenses and one-time charges) 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 71.3% of revenues in fiscal 1995 to 69.1% of revenues in fiscal 1997. 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, negotiated more favorable long distance rates and maintained its hourly wage rates over this time period. In 1997, Cost of Services increased as a percentage of revenues compared with 1996 as the factors causing Cost of Services to decline were offset by pricing pressures and the costs of opening new call centers that were under utilized in 1997. Selling, general and administrative expenses are comprised principally of corporate expenses, including management, sales and marketing activities, account management services, accounting and finance, human resources, information services and other administrative costs. The Company was subject to taxation under Subchapter S of the Internal Revenue Code of 1986, as amended, from April 1, 1990 to May 24, 1996. As a result, the net income of the Company, for federal and certain state tax purposes, was taxed directly to the Company's Founders rather than the Company. Upon completion of the Recapitalization, the Company terminated its Subchapter S status. In fiscal 1996, certain charges were incurred in connection with the Recapitalization of the Company and the Initial Public Offering. As a result of these charges the Company incurred a net operating loss for fiscal 1996. In accordance with the provisions of 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 $1,112,000 in fiscal 1996. RESULTS OF OPERATIONS The following table sets forth statements of operations and other data as a percentage of revenues from services provided by the Company for the periods indicated:
YEAR ENDED SEPTEMBER 30, ------------------------ 1995 1996 1997 ---- ---- ---- Revenues 100.0% 100.0% 100.0% ----- ----- ----- Operating expenses: Cost of services 71.3 68.8 69.1 Selling, general and administrative (1) 20.8 20.6 20.6 Special bonuses (2) --- 18.8 --- ------ ------ ------- Total operating expense 92.1 108.2 89.7 ------ ------ ------- Operating income (loss) 7.9 (8.2) 10.3 Interest income (expense) (3) (1.0) (5.9) 1.0 ------ ------ ------- Income (loss) before income tax (benefit) and extraordinary item 6.9 (14.1) 11.3 Income taxes (benefit) .1 (3.8) 4.0 Extraordinary item, net of tax benefit (4) --- 1.8 --- Net income (loss) 6.8% (12.1)% 7.3% ====== ====== =======
13 16 - ------------------------- (1) Compensation to Founders represents approximately 3%, 2% and 1% of revenues for fiscal 1995, fiscal 1996 and fiscal 1997, 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. FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1996 Revenues. Revenues increased to $45.9 million in fiscal 1997 from $32.3 in fiscal 1996, an increase of $13.6 million or 42.1%. Of such increase in revenues, approximately $9.0 million was attributable to increased calling volumes from existing clients, $4.5 million to new clients in the telecommunications industry, $1.7 million to new clients in the financial services industry and $800,000 to new clients in other industries, which together offset any decreases in revenues from other existing clients. To meet the demands of increased call volumes, the Company added a total of 364 workstations during the year, spread across three new call centers in Harrisburg, PA, Delran, NJ, and York, PA, and expanded capacity in three existing call centers by 58 workstations. Cost of Services. Cost of services increased to $31.7 million in fiscal 1997 from $22.2 million in fiscal 1996. As a percentage of revenues, cost of services increased to 69.1% in fiscal 1997 from 68.8% in fiscal 1996. This increase was the result of specific pricing pressures incurred in its insurance business coupled with the costs of opening three new call centers, during the year, which were less than fully utilized over the twelve-month period. The Company anticipates that cost of services, as a percentage of revenues, may increase during the next year to the degree that large volume opportunities warrant the Company offering appropriate pricing discounts, to the extent that the Company requires a longer period of time to generate acceptable levels of utilization at its new call centers, and/or the Company experiences upward pressures on hourly wages as a result of tighter or more competitive labor markets. Selling, General, and Administrative. Selling, general and administrative expenses increased to $9.5 million in fiscal 1997 from $6.7 million in fiscal 1996. As a percentage of revenues, selling, general and administrative expenses remained fixed at 20.6% during fiscal years 1997 and 1996. The dollar increase was primarily the result of increasing staffing and operating costs required to support both the growth in the Company's revenues and the on-going requirements of its customers with respect to technology and programming requirements. Interest Income (Expense). Interest income was $473,000 for fiscal 1997 and was earned by investing the remaining proceeds of the Company's initial public offering in short term investments. Interest expense was $1,893,000 for fiscal 1996 of which $1,625,000 relates to certain interest incurred as a result of the Company's Recapitalization and interest paid on the Founders' Note. Income Tax Expense (Benefit). Income tax expense was $1.8 million for fiscal 1997 and represents income taxes based upon its effective tax rate. This tax rate is reflective of both the federal tax rate in effect and those state tax rates in effect where the Company does business coupled with certain tax planning strategies implemented in fiscal 1996. During 1996, the Company generated a net operating loss carry forward. In accordance with SFAS 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 $1,549,000 in fiscal 1996. 14 17 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 26.5%. 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 $261,000 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 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 $1,549,000 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 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. 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. 15 18 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 has been and will continue to be used for working capital and general corporate purposes. Upon completion of the Company's initial public offering, the Founders exchanged the Series A Preferred Stock and the Founders' Note for 400,000 shares of Common Stock. On March 21, 1997, the Company entered into a new $4 million line of credit facility (the "Credit Line") with PNC Bank (the "Bank"). The Credit Line replaces the Company's former Term Loan and Credit Facility originated in conjunction with the Recapitalization. The Credit Line expires on April 1, 1998, or such later date, if extended by the Bank, and outstanding balances bear interest either at the Company's option at the LIBOR rate plus 95 basis points or at the Bank's prime rate minus fifty basis points. The Credit Line is secured by all of the assets of the Company and contains financial covenants and certain restrictions on the Company" ability to incur additional debt or dispose of its assets. As of September 30, 1997, the Company had no draws outstanding on the Credit Line. This Credit Line compares favorably with the former Term Loan and Credit Facility which bore interest at either the LIBOR rate plus 250 to 300 basis points or the prime rate plus 100 to 150 basis points and required an annual fee of $15,000 and an annual commitment fee of one-half of 1% on the average unused portion of the Revolver. Although total borrowing capability is $4 million under the Company's Credit Line versus $6 million under its former revolver, the Company believes that the existing line will be sufficient to finance its current operations at least through the end of fiscal 1998. Under a separate agreement dated February 22, 1997, with PNC Leasing Corporation, the Company has up to $6 million available for purposes of leasing call center equipment. The $6 million commitment expires on December 31, 1997, and requires that such leases meet the accounting definition of an operating lease with rent to be paid over a period not to exceed sixty months. As of September 30, 1997, the Company has financed $3.2 million of equipment purchases under this facility. Cash provided by operating activities was approximately $2.5 million for the fiscal year ended 1997 compared to cash used by operations of $1.7 million for the same period in 1996. The $2.5 million in cash provided by operations in 1997, as compared to the cash used of $1.7 million in 1996, was the result of the Company's net income in 1997 being further increased by certain non-cash charges which were then partially offset by the Company's growth in accounts receivable coupled with its decrease in accounts payable. The Company's teleservices operations will continue to require significant capital expenditures. Capital expenditures, including capitalized leases, in applicable periods, were $2.4 million in fiscal 1995, $2.9 million in fiscal 1996, and $1.1 million in fiscal 1997. The Company expects to spend approximately $4.0 million on capital expenditures in fiscal 1998, primarily for the enhancement of technology used throughout its call center operations and, if warranted, additional call center expansion. However, in conjunction with such expenditures, the Company is evaluating certain lease versus buy decisions and may decide to lease such assets under 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 credit line, will be sufficient to finance its current operations and planned capital expenditures at least through fiscal 1998. 16 19 QUARTERLY RESULTS OF OPERATIONS The following table sets forth statement of operations data for each of the four quarters of fiscal 1996 and 1997, 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, 1995 1996 1996 1996 1996 1997 1997 1997 -------- -------- -------- --------- -------- -------- -------- --------- (AMOUNTS IN THOUSANDS) Revenues .............................. $ 7,278 $ 7,506 $ 8,778 $ 8,754 $9,749 $11,322 $12,698 $12,168 ------- ------- ------- -------- ------ ------- ------- ------- Operating expenses: Cost of services ................. 5,127 5,309 5,889 5,887 6,623 7,580 8,858 8,688 Selling, general and admin ....... 1,575 1,545 1,688 1,861 2,032 2,437 2,553 2,447 Special bonuses .................. -- -- -- 6,087 -- -- -- -- ------- ------- ------- -------- ------ ------- ------- ------- Total operating expenses .. 6,702 6,854 7,577 13,835 8,655 10,017 11,411 11,135 ------- ------- ------- -------- ------ ------- ------- ------- Operating income (loss) .............. 576 652 1,201 (5,081) 1,094 1,305 1,287 1,033 Interest income (expense) ............. (75) (71) (227) (1,520) 111 102 133 127 ------- ------- ------- -------- ------ ------- ------- ------- Income (loss) before income taxes (benefit) .................. $ 501 $ 581 $ 974 $ (6,601) $1,205 $ 1,407 $ 1,420 $ 1,160 ======= ======= ======= ======== ====== ======= ======= =======
QUARTER ENDED ------------------------------------------------------------------------------------ DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1995 1996 1996 1996 1996 1997 1997 1997 ----- ----- ----- ----- ----- ----- ----- ----- Revenues .............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- ----- ----- ----- Operating expenses: Cost of services ................. 70.5 70.7 67.1 67.2 67.9 67.0 69.8 71.4 Selling, general and admin ....... 21.6 20.6 19.2 21.3 20.8 21.5 20.1 20.1 Special bonuses .................. -- -- -- 69.5 -- -- -- -- ----- ----- ----- ----- ----- ----- ----- ----- Total operating expenses .. 92.1 91.3 86.3 158.0 88.7 88.5 89.9 91.5 ----- ----- ----- ----- ----- ----- ----- ----- Operating income (loss) .............. 7.9 8.7 13.7 (58.0) 11.3 11.5 10.1 8.5 Interest income (expense) ............. (1.0) (1.0) (2.6) (17.4) 1.1 .9 1.1 1.0 ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before income taxes (benefit) .................. 6.9% 7.7% 11.1% (75.4)% 12.4% 12.4% 11.2% 9.5% ===== ===== ===== ===== ===== ===== ===== =====
The Company has experienced and expects to continue to experience quarterly variations in operating results, principally as a result of the timing of clients' telemarketing campaigns, the commencement and expiration of contracts, the timing and amount of new business generated by the Company, the Company's revenue mix, the timing of the opening of call centers or expansion of existing centers, the timing of additional selling, general and administrative expenses and competitive conditions in the teleservices industry. While the effects of seasonality on the Company's business have historically been obscured by its growing revenues, the Company's business tends to be slower in the fourth quarter of its fiscal year due to a certain segment of its workforce turning over coupled with a slowdown in client marketing programs during the summer months. 17 20 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 million 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 $909,000 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. 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-19 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 opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. 18 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 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 Set forth below is information required by the Item with respect to the members of the Company's Board of Directors. RAYMOND J. HANSELL, age 48, 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. HERBERT KURTZ, age 71, was elected a Director of the Company effective September 1996. Since January 1997 Mr. Kurtz has held the position of Administrator with Cynwyd Investments, a real estate management and development firm that has sold its principal assets. From July 1996 until December 1996, he was been an independent consultant. From 1984 until July 1996, Mr. Kurtz was the Chief Operating Officer of Cynwyd Investments. From 1983 until joining Cynwyd in 1984, Mr. Kurtz was a partner in Asher & Company Ltd., the Company's independent auditors prior to fiscal 1996. Mr. Kurtz no longer has any affiliation with Asher & Company Ltd. From 1981 to 1983, Mr. Kurtz was Chairman and Chief Executive Officer of Ups 'n Downs, a retail clothing firm and subsidiary of Tootal Ltd., a company listed on the London Stock Exchange. From 1961 to 1980, Mr. Kurtz served in a number of executive positions, in his final years as Chief Operating Officer and Director, with Rockower Brothers, Inc., a retail clothing firm then listed on the New York Stock Exchange. DEREK LUBNER, age 34, was elected to the Company's Board of Directors in May 1996 as the nominee of Glengar. Since June 1995, Mr. Lubner has managed the marketing operations of a leisure business and is based in England. From June 1993 to June 1995, Mr. Lubner served as a director of Two Heads Publishing, a book publisher based in England. Prior to joining Two Heads Publishing, Mr. Lubner served as marketing coordinator of Belron International, a windshield replacement company headquartered in England. 19 22 MARYSUE LUCCI, age 49, has served as the Company's President since November 1994 and Chief Operating Officer since December 1995, prior to which she 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 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. DAVID P. MADIGAN, age 58, was elected as a Director of the Company effective September 1996. Mr. Madigan is Senior Vice President and Chief Operations Officer of Personal Lines Direct Marketing Operations for CNA Insurance Companies. From 1989 until he joined CNA in October 1994, Mr. Madigan served as a Senior Vice President of Mutual Assurance Company, an underwriter of property and casualty insurance, and from March 1992 to October 1994, he also served as President and Chief Executive Officer of American Loyalty Insurance Company, a wholly-owned subsidiary of Mutual Assurance Company. GARY H. NEEMS, age 44, was elected as a Director of the Company in September 1997. Mr. Neems has been Managing Director of Financial Services of Advanta Partners, the venture capital affiliate of Advanta since May 1995. From August 1993 until he joined Advanta Partners, Mr. Neems was Managing Director of Financial Services of Clipper Capital Partners, LP, a private equity investment firm. Prior to that time Mr. Neems was a Managing Director at Equitable Capital Management Corp., a financial services firm. WILLIAM A. ROSOFF, age 54, was elected as a Director and Chairman of the Board of Directors in January 1997. Mr. Rosoff is Vice Chairman and a Director of Advanta, a diversified financial services company. Prior to joining Advanta in January 1996, Mr. Rosoff was, for more than five years, a long-time partner of the law firm of Wolf, Block, Schorr and Solis-Cohen LLP, which currently provides legal services to the Company. While at Wolf, Block, Schorr and Solis-Cohen LLP, Mr. Rosoff served as Chairman of its Executive Committee and, immediately prior to joining Advanta, as member of its Executive Committee and Chairman of its Tax Department. Mr. Rosoff is a trustee of Atlantic Realty Trust. VOTING AGREEMENT The Founders and Advanta Partners entered into a voting agreement in 1996 which became effective upon the completion of the Company's initial public offering (the "Voting Agreement"). The Voting Agreement provides that Advanta Partners, on the one hand, and Mr. Hansell and Ms. Lucci (collectively, the "Founders"), on the other, each agree to vote for 20 23 two nominees of the other to the Company's Board of Directors. Each party's rights under the Voting Agreement terminate when such party's ownership of Common Stock of the Company becomes less than 25% of such ownership. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of its Common Stock, to file with the Securities and Exchange Commission ("SEC") initial reports of ownership and reports of changes in ownership of the Company's Common Stock. Executive officers, directors and ten percent shareholders are required by SEC regulations to furnish the Company with a copy of all Section 16(a) forms ("Forms 3, 4, and 5") that they file. To the Company's knowledge, based solely on a review of copies of the Forms 3, 4 and 5 furnished to the Company and written representations as to all transactions in the Company's securities effected during the period from October 1, 1996 through September 30, 1997, all applicable Section 16(a) filing requirements were complied with, except for a Form 3 for Gary Neems which was filed late. ITEM 11. EXECUTIVE COMPENSATION SUMMARY OF EXECUTIVE COMPENSATION The following table sets forth certain information with respect to compensation paid or accrued by the Company for fiscal year 1997 to the Company's Chief Executive Officer and to each of the other executive officers of the Company whose salary and bonus for fiscal 1997 exceeded $100,000 for all services rendered in all capacities to the Company (the "Named Executive Officers"): 21 24 SUMMARY COMPENSATION TABLE
Long-Term Compensation Awards Annual Compensation ------------------- ------------------- Securities Fiscal Underlying All Other Name and Principal Position Year Salary Bonus Options(#) Compensation (2) - --------------------------- ---- ------ ----- ---------- ---------------- Raymond J. Hansell 1997 $ 200,000 $ 0 -0- $7,305 Vice Chairman 1996 364,615 3,000,000(1) -0- 7,585 and Chief Executive Officer 1995 159,895 368,727 -0- 6,070 MarySue Lucci 1997 $ 200,000 $ 0 -0- $8,972 President 1996 216,282 3,000,000(1) -0- 9,202 and Chief Operating Officer 1995 159,895 63,464 -0- 7,767 Michael J. Scharff 1997 $ 130,000 $ 12,000 -0- $6,486 Executive Vice President 1996 135,897 8,800 20,000 6,430 1995 89,343 11,453 -0- 5,617 Robert Berwanger 1997 $ 78,750 $ 58,000 10,000 $ 0 Executive Vice President Richard C. Altus 1997 $ 127,916 $ 27,000 -0- $ 0 Chief Financial Officer 1996 10,016 0 15,000 0
(1) Represents the one-time lump sum payment made in connection with the successful completion of the Company's initial offering. (2) Represents the amount in premiums paid by the Company with respect to a life insurance plan for the benefit of the referenced officer and the amount contributed by the Company to the 401(k) account of the referenced officer. 1996 Stock Incentive Plan Under the Company's 1996 Stock Incentive Plan (the "Plan"), a variety of awards, including stock options, stock appreciation rights and restricted and unrestricted stock grants may be made to the Company's employees, officers, consultants and advisors who are expected to contribute to the Company's future growth and success. There are 950,000 shares of Common Stock reserved for issuance under the Plan. The Compensation Committee administers the Plan and determines the price and other terms upon which awards shall be made to executive officers. Stock options may be granted either in the form of incentive stock options or non-statutory stock options. The option exercise price of incentive stock options may not be less than the fair market value of the Common Stock on the date of the grant. While the Company currently anticipates that most grants under this Plan will consist of stock options, the Company may grant stock appreciation rights, which represent rights to receive any excess in value of shares of Common Stock over the exercise price; restricted stock awards, which entitle recipients to acquire shares of Common Stock, subject to the right of the Company to repurchase all or a part of such shares at their purchase price in the event that the conditions specified in the award are not satisfied; or unrestricted stock awards, which represent grants of shares to participants free of any restrictions under the Plan. Options or other awards that are granted under the Plan but expire unexercised are available for future grants. At September 30, 1997 Options to purchase 255,120 shares of Common Stock granted under the Plan were outstanding. Each of the options have been granted to employees and directors at an exercise price equal to the closing price of the Company's Common Stock reported on the Nasdaq Stock Market's National Market ("Nasdaq") on the date of grant and have a vesting schedule that is dependent upon the option holders' tenure with the Company. 22 25 The following table shows the number of options granted to the Company's Named Executive Officers during fiscal 1997: OPTIONS GRANTED IN LAST FISCAL YEAR
Potentially Realizable Value At Assumed Rates of Stock Individual Grants Price Appreciation for Option Term (1) ------------------- -------------------------------------- Number of % of Total Securities Options/SARS Exercise At 5% At 10% Underlying Granted to or Base Annual Annual Options Employees Price per Expiration Growth Growth Name Granted In Fiscal Year Share Date Rate Rate - ---- -------- -------------- ------- ------ ------ ----- Robert Berwanger 10,000 (2) 67% $7.00 4/1/07 $44,023 $111,562
(1) The potential realizable values are based on an assumption that the stock price of the shares of Common Stock appreciate at the annual rate shown (compounded annually) from the date of grant until the end of the option term. These values do not take into account amounts required to be paid as income taxes under the Internal Revenue Code of 1986, as amended, and any applicable state laws, or option provisions providing for termination of an option following termination of employment, nontransferability, or vesting over periods of up to five years. These amounts are calculated based on the requirements promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future growth of the price of the Common Stock. (2) Options granted to Robert Berwanger were granted as of April 1, 1997. The options become exercisable in five equal installments of 2,000 each on the first, second, third, fourth and fifth anniversaries of the date of grant. The following table shows the number of exercised and unexercised options and the value of exercised and unexercised in-the-money options held by Named Executive Officers as of September 30, 1997: AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND FISCAL YEAR END OPTION VALUES
Number of Securities Value of Unexercised Underlying Unexercised In The Money Options at Options at September 30, 1997 September 30, 1997 (1) ----------------------------- ---------------------- Shares Acquired Value Name Upon Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- ------------- -------- ----------- ------------- ----------- ------------- Michael J. Scharff -0- $0 12,000 8,000 $0 $0 Richard C. Altus -0- $0 3,000 12,000 $0 $0 Robert Berwanger -0- $0 0 10,000 $0 $21,300
(1) The closing price of the Company's Common Stock on Nasdaq on September 30, 1997 was $9.13 per share. 23 26 Compensation of Directors The Company's directors, other than Messrs. Hansell, Neems and Rosoff and Ms. Lucci are entitled to receive a fee of $2,500 for attendance at each quarterly meeting and a fee of $750 for attendance at each special meeting of the Board of Directors. In addition, each currently serving director, other than Messrs. Hansell, Neems and Rosoff and Ms. Lucci, received options to purchase 3,000 shares of Common Stock in fiscal 1996 and are entitled to be awarded options to purchase 2,000 shares of Common Stock each fiscal year thereafter. Such options have an exercise price equal to the market value of the Common Stock on the date of grant, have a term of ten years and vest in equal amounts on the first three anniversaries of the date of grant. Employment Agreements In connection with the Recapitalization in May 1996, the Company entered into an employment agreement with Mr. Hansell providing for Mr. Hansell's employment as Chief Executive Officer of the Company. The initial term of the agreement is to expire on May 31, 1999; however, the agreement will be extended for an additional two years unless either party provides notice of termination to the other at least 180 days before the expiration of such term. At any time during the extended term, either party may terminate upon 180 days' notice. Under the terms of the employment agreement, Mr. Hansell is to be paid an annual salary of $200,000, which will be adjusted annually to reflect increases in the consumer price index. The employment agreement also entitled Mr. Hansell to a discretionary annual bonus and a one-time lump sum payment of $3.0 million subsequent to the Company's completion of its initial public offering, which amount has been paid in full. In addition, in the event Mr. Hansell's employment is terminated without cause (as defined in the agreement), the Company is obligated to continue to pay Mr. Hansell's annual salary, fringe benefits and all other compensation and benefits other than the discretionary bonus, as such amounts would have accrued through the end of the initial term of the agreement or, if such termination occurs during the extended term of the agreement, through the end of such term. The employment agreement contains provisions regarding the protection of confidential information and assignment of inventions to the Company, and a covenant not to compete from the date of the agreement until the later to occur of the seventh anniversary thereof or the second anniversary of Mr. Hansell's termination for any reason. The Company has also entered into an employment agreement with Ms. Lucci providing for her employment with the Company as President and Chief Operating Officer. The terms of Ms. Lucci's employment agreement are otherwise substantially identical to those contained in Mr. Hansell's employment agreement. In January 1997, the members of the Compensation Committee approved arrangements under which Michael J. Scharff, Executive Vice President of the Company and Richard C. Altus, Chief Financial Officer of the Company, will be entitled to receive from the Company cash bonuses of $250,000 each upon the occurrence of a merger or consolidation of the Company or a sale by the Company of all or substantially all of its assets. 24 27 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Rosoff, a member of the Company's Compensation Committee, is Vice Chairman of Advanta. The Company has provided teleservices to Advanta, of which Advanta Partners is a venture capital affiliate. These services primarily are related to the marketing of insurance and credit card products. Amounts billed by the Company to Advanta equaled $3.3 million in fiscal 1997. Mr. Neems, a member of the Company's Compensation Committee, is Managing Director of Financial Services of Advanta Partners. Since the Recapitalization, Advanta Partners has provided consulting services to the Company pursuant to a consulting agreement and will receive annual fees of $50,000 through May 24, 2001. Advanta Partners owns substantial equity interests in two other teleservices companies. REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS The Compensation Committee of the Board of Directors, consists entirely of directors who are not employees of the Company, currently Messrs. Rosoff, Neems, Kurtz and Madigan. The Committee is responsible for reviewing and approving the Company's compensation policies and the compensation paid to executive officers. The Company's compensation policies are and will continue to be structured to enable the Company to attract, retain and motivate highly qualified executive officers to contribute to the Company's goals and objectives and its overall financial success. In determining executive compensation, the Compensation Committee will review and evaluate information supplied by management and will base decisions both on the Company's performance and on the individual's contribution and performance. The compensation of executive officers includes salary and incentive compensation. SALARY Prior to the Recapitalization, salaries of executive officers were established by management with the goal of rewarding individual contributions to the Company's success and attracting and retaining highly qualified executives. Since May 1996 the salaries and bonuses paid to Mr. Hansell, the Company's Chief Executive Officer, and to Ms. Lucci, the Company's Chief Operating Officer, have been governed by the terms of their employment agreements. See "Summary of Executive Compensation -- Employment Agreements" set forth in Part III of this Report. The Compensation Committee reviews the salary of each other executive officer in relation to the previous salaries and with regard to general industry conditions or trends. The salaries will continue to be set at levels intended to reward achievement of individual and company goals and to motivate and retain highly qualified executives whom the Compensation Committee believes are important to the continued success of the Company. While the Compensation Committee's decisions are primarily subjective rather than based on formulas, the Compensation Committee considers various measures of the financial condition of the Company in absolute terms and in relation to internal performance goals. 25 28 INCENTIVE COMPENSATION The Compensation Committee believes that incorporating annual incentive compensation into the total compensation of executive officers encourages the executives to have the common goal of achieving the Company's economic and strategic objectives. As with salary considerations, the Compensation Committee bases its decisions regarding incentive compensation, which may take the form of cash bonuses or grants of stock options, on both corporate and individual performance. Grants to executive officers under the Company's 1996 Stock Incentive Plan are made by the Compensation Committee and are approved by the full Board of Directors. During fiscal 1997, the Compensation Committee has not approved any additional grants of stock options or other stock based compensation to officers who were employed by the Company at the time of its initial public offering. Accordingly, most incentive compensation paid to the executive officers during fiscal 1997 was in the form of cash bonuses. The Compensation Committee approved the grant to Robert Berwanger of options to purchase 10,000 shares of common stock at $7.00 per share shortly after Mr. Berwanger joined the Company in March 1997. The Compensation Committee believes that these grants together with outstanding grants will provide certain stock incentives to these officers in future years. The stock options granted to executive officers become exercisable in equal annual installments over a five year period and terminate shortly after termination of employment. As a result, these executives have incentive to remain in the employ of the Company for a substantial period of time and their interests are aligned with outside shareholders. Given Mr. Hansell's and Ms. Lucci's relatively substantial holdings of Common Stock, the Compensation Committee believes that the incentive compensation component for fiscal 1997 was most appropriately paid solely in the form of cash bonuses. 1997 EXECUTIVE COMPENSATION PLAN In February 1997, the Company adopted an executive compensation plan for the purpose of fairly compensating all executives of the Company. The bonus plan is based upon the Company meeting certain financial and operating performance targets. The performance targets include billable hour levels, earnings per share and net profits. Bonuses are calculated as a certain percentage of each executive's base salary and range from 0% to 50% of an executive's base salary. Seventy-five percent of each bonus award is based on meeting the performance targets and the remaining twenty-five percent of each award is discretionary. The Company paid signing bonuses of $15,000 to Mr. Altus and $50,000 to Mr. Berwanger in fiscal 1997. The annual bonus paid to each of Mr. Altus, Mr. Berwanger and Mr. Scharff for fiscal 1997 ranged from 1% to 10% of the relevant officers' base salary. No bonuses were paid to Mr. Hansell or Ms. Lucci during fiscal 1997. SUMMARY As described above, the Compensation Committee believes that its policies and actions have, and will continue to, motivate and reward the executive officers who contribute to the Company's financial performance and increase the Company's value to shareholders. 26 29 COMPENSATION COMMITTEE: William A. Rosoff Herbert Kurtz Gary H. Neems David P. Madigan January 23, 1998 STOCK PERFORMANCE GRAPH The following performance graph compares the cumulative shareholder return on the Company's Common Stock with the cumulative total return of the CRSP (Center for Research in Security Prices) Index for Nasdaq (US Companies) and an index of peer group companies consisting of teleservices companies for the period from September 19, 1996 to September 30, 1997. This peer group is one with which the management believes the Company to be most aligned. The graph assumes that $100 was invested in the Company's Common Stock and each index at September 19, 1996 and that any dividends were reinvested. COMPARISON OF CUMULATIVE TOTAL RETURN FROM 9/19/96 TO 9/30/97 AMONG RMH TELESERVICES, INC., STANDARD & POOR'S 500 INDEX AND A PEER INDEX(1) EDGAR REPRESENTATION OF DATA POINTS IN PRINTED GRAPHIC: 9/19/96 9/30/96 9/30/97 RMH Teleservices, Inc. $ 100 $ 118 $ 73 Peer Index $ 100 $ 95 $ 36 S&P 500 $ 100 $ 101 $ 141 (1) The Peer Index includes the common stock of the following companies: APAC TeleServices, Inc.; ICT Group, Inc., Precision Response Corp.; SITEL Corporation; Telespectrum Worldwide Inc.; Teletech Holdings Inc.; and West Teleservices Corp. 27 30 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows information concerning the beneficial ownership of the Common Stock as of January 20, 1998 by (i) each director and nominee, (ii) each executive officer named in the Summary Compensation Table appearing elsewhere in this proxy statement and employed by the Company as of September 30, 1997, (iii) all directors and executive officers as a group, and (iv) each person who is known to the Company to be the beneficial owner of more than 5% of the Common Stock. The number of shares beneficially owned by each person is determined under the rules of the Securities and Exchange Commission and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the person has sole or shared voting power or investment power and also any shares which the person has the right to acquire within 60 days after January 20, 1998 through the exercise of any stock option.
Number of Shares Percent of of Common Stock Common Stock Executive Officers, Directors and Beneficial Owners Beneficially Owned Beneficially Owned - --------------------------------------------------- ------------------ ------------------ Advanta Partners LP (1) 2,658,456 32.7% Gary H. Neems (1)(2) 2,658,456 32.7% William A. Rosoff (1) (3) 2,658,456 32.7% MarySue Lucci (4) 1,935,300 23.8% Raymond J. Hansell (4) 1,935,300 23.8% Michael J. Scharff (5) 13,000 * Richard C. Altus (6) 4,000 * Robert Berwanger -0- -0- Herbert Kurtz (7) 1,500 * Derek Lubner (8) 1,000 * David P. Madigan (9) 1,300 * All Executive Officers and Directors as a Group 4,620,556 56.7% (12 persons) (2) (3) (4) (5) (6) (7) (9) (10) - -------------- * Less than 1%
(1) The address of Advanta Partners LP ("Advanta Partners") is Welsh & McKean Roads, P.O. Box 844, Spring House, PA 19477-0844. (2) Includes 2,658,456 shares of Common Stock owned by Advanta Partners, of which Mr. Neems is a Managing Director. Mr. Neems disclaims beneficial ownership of these shares. (3) Includes 2,658,456 shares of Common Stock owned by Advanta Partners. Mr. Rosoff is Vice Chairman of Advanta Corp. ("Advanta"), wholly-owned subsidiaries of which are the sole general partner and a limited partner of Advanta Partners. Mr. Rosoff disclaims beneficial ownership of these shares. (4) Includes 957,900 shares of Common Stock owned directly by Mr. Hansell and 975,000 shares owned directly by Ms. Lucci and 2,400 shares owned by the children of Mr. 28 31 Hansell and Ms. Lucci. Their address is c/o RMH Teleservices, Inc., 40 Morris Avenue, Bryn Mawr, PA 19010. (5) Includes 12,000 shares purchaseable upon exercise of options granted under the Plan that are currently exercisable or will become exercisable within 60 days after January 20, 1998. (6) Includes 3,000 shares purchaseable upon exercise of options granted under the Plan that are currently exercisable or will become exercisable within 60 days after January 20, 1998. (7) Includes 1,000 shares purchaseable upon exercise of options granted under the Plan that are currently exercisable or will become exercisable within 60 days after January 20, 1998. (8) Includes 1,000 shares purchaseable upon exercise of options granted under the Plan that are currently exercisable or will become exercisable within 60 days after January 20, 1998. Mr. Lubner is the nominee of Glengar International Investments Limited ("Glengar") pursuant to a shareholder's agreement. As of January 20, 1998, Glengar was the beneficial owner of 126,315 shares of Common Stock. (9) Includes 1,000 shares purchaseable upon exercise of options granted under the Plan that are currently exercisable or will become exercisable within 60 days after January 20, 1998. (10) Includes the following shares purchaseable upon exercise of options granted under the Plan to the executive officers listed below that are currently exercisable or will become exercisable within 60 days after January 20, 1998: Richard Keenan -- 6,000; and David Clautice -- 6,000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS INDEMNIFICATION OBLIGATIONS UNDER THE RECAPITALIZATION AGREEMENT On May 24, 1996, the Company completed the Recapitalization as provided under the terms of a Recapitalization and Stock Purchase Agreement (the "Recapitalization Agreement"). In connection with the Recapitalization, the Founders, on the one hand, and Advanta Partners, Glengar and the Company, on the other hand, agreed to indemnify each other against any loss suffered by the indemnified parties related to the breach of any representation or warranty or non-fulfillment of any covenant or agreement set forth in the Recapitalization Agreement. The indemnification obligations apply only if the indemnifiable losses exceed $100,000 and are limited to an aggregate of $4.6 million (except for losses resulting from breaches by the Founders of representations, warranties and covenants with respect to tax matters). The representations and warranties expire on May 24, 1998, except for those made by the Founders regarding taxes which survive until the expiration of applicable statutes of limitations. 29 32 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-2 Consolidated Statements of Operations.........................................F-3 Consolidated Statements of Shareholders' Equity ..............................F-4 Consolidated Statements of Cash Flows.........................................F-5 Notes to Consolidated Financial Statements....................................F-6
(2) Financial Statement Schedules. Schedule II - Valuation & Qualifying Accounts for the Three Years Ended September 30, 1997
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at Additions Balance at Beginning Charged to End of of Period Expense Deductions (1) Period --------- ------- ---------- ------ Allowance for doubtful accounts: September 30, 1997 $10,000 $27,000 $ - $37,000 September 30, 1996 $47,000 $38,000 $75,000 $10,000 September 30, 1995 $ 3,000 $44,000 $ - $47,000
(1) Represents accounts written off against the allowance. (3) Exhibits See attached 30 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amended Report to be signed on its behalf by the undersigned, thereunto duly authorized. RMH TELESERVICES, INC. Dated: January 27, 1998 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 amended 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 - ---------------------------- MarySue Lucci President January 27, 1998 /s/ Richard C. Altus - ---------------------------- Richard C. Altus Chief Financial Officer January 27, 1998 (principal Financial and Accounting Officer /s/ William A. Rosoff - ---------------------------- William A. Rosoff Chairman January 27, 1998 - ---------------------------- Derek Lubner Director January 27, 1998 /s/ Gary Neems - ---------------------------- Gary Neems Director January 27, 1998 /s/ Herbert Kurtz - ---------------------------- Herbert Kurtz Director January 27, 1998 /s/ David P. Madigan - ---------------------------- David P. Madigan Director January 27, 1998
31 34 RMH TELESERVICES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Public Accountants Consolidated Balance Sheets - September 30, 1997 and 1996 Consolidated Statements of Operations - For the Years Ended September 30, 1997, 1996 and 1995 Consolidated Statements of Shareholders' Equity - For the Years Ended September 30, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - For the Years Ended September 30, 1997, 1996 and 1995 Notes to Consolidated Financial Statements 35 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To RMH Teleservices, Inc.: We have audited the accompanying consolidated balance sheets of RMH Teleservices, Inc. (a Pennsylvania corporation) and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1997. 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 financial position of RMH Teleservices, Inc. and subsidiaries as of September 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Philadelphia, Pennsylvania December 5, 1997 36 RMH TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30 ------------------------------------ ASSETS 1997 1996 ---------------- ---------------- CURRENT ASSETS: Cash and cash equivalents $ 6,882,000 $ 10,047,000 Marketable securities 5,135,000 -- Accounts receivable, net of allowance for doubtful accounts of $37,000 and $10,000 7,926,000 5,549,000 Prepaid expenses and other current assets 755,000 328,000 Deferred income taxes -- 1,112,000 ---------------- ---------------- Total current assets 20,698,000 17,036,000 ---------------- ---------------- PROPERTY AND EQUIPMENT: Communications and computer equipment 7,198,000 7,273,000 Furniture and fixtures 1,354,000 1,112,000 Leasehold improvements 802,000 509,000 ---------------- ---------------- 9,354,000 8,894,000 Less- Accumulated depreciation and amortization (4,878,000) (3,439,000) Net property and equipment 4,476,000 5,455,000 ---------------- ---------------- OTHER ASSETS 112,000 64,000 ---------------- ---------------- $ 25,286,000 $ 22,555,000 ================ ================
September 30 ------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996 ---------------- ---------------- CURRENT LIABILITIES: Current portion of capitalized lease obligations $ 8,000 $ 46,000 Accounts payable 583,000 1,682,000 Accrued expenses 2,379,000 2,409,000 Deferred income taxes 344,000 -- ---------------- ---------------- Total current liabilities 3,314,000 4,137,000 ---------------- ---------------- CAPITALIZED LEASE OBLIGATIONS -- 2,000 ---------------- ---------------- DEFERRED INCOME TAXES 289,000 100,000 ---------------- ---------------- COMMITMENTS AND CONTINGENCIES (Note 8) SHAREHOLDERS' EQUITY: Preferred stock, $1 par value, 10,000,000 shares authorized, none issued and outstanding -- -- Common stock, no par value, 20,000,000 shares authorized, 8,120,000 shares issued and outstanding 48,638,000 48,638,000 Common stock warrant outstanding 450,000 450,000 Accumulated deficit (27,405,000) (30,772,000) ---------------- ---------------- Total shareholders' equity 21,683,000 18,316,000 ---------------- ---------------- $ 25,286,000 $ 22,555,000 ================ ================
The accompanying notes are an integral part of these statements. 37 RMH TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended September 30 ---------------------------------------------------------- 1997 1996 1995 --------------- ---------------- ---------------- REVENUES $ 45,937,000 $ 32,316,000 $ 25,545,000 --------------- ---------------- ---------------- OPERATING EXPENSES: Cost of services 31,749,000 22,212,000 18,210,000 Selling, general and administrative 9,469,000 6,669,000 5,312,000 Special bonuses -- 6,087,000 -- --------------- ---------------- ---------------- Total operating expenses 41,218,000 34,968,000 23,522,000 --------------- ---------------- ---------------- Operating income (loss) 4,719,000 (2,652,000) 2,023,000 INTEREST INCOME (EXPENSE) 473,000 (1,893,000) (261,000) --------------- ---------------- ---------------- Income (loss) before income taxes (benefit) and extraordinary item 5,192,000 (4,545,000) 1,762,000 INCOME TAXES (BENEFIT) 1,825,000 (1,222,000) 21,000 --------------- ---------------- ---------------- Income (loss) before extraordinary item 3,367,000 (3,323,000) 1,741,000 EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, net of $327,000 tax benefit -- 582,000 -- --------------- ---------------- ---------------- NET INCOME (LOSS) 3,367,000 (3,905,000) 1,741,000 PREFERRED STOCK DIVIDENDS -- 308,000 -- --------------- ---------------- ---------------- NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 3,367,000 $ (4,213,000) $ 1,741,000 =============== ================ ================ NET INCOME PER SHARE $ .41 =============== WEIGHTED AVERAGE SHARES OUTSTANDING (Note 2) 8,262,000 =============== PRO FORMA DATA (Note 2): Historical loss before income tax benefit and extraordinary item $ (4,545,000) Pro forma income tax benefit (1,636,000) Extraordinary item, net of tax 582,000 Preferred stock dividends 308,000 Pro forma net loss available to Common shareholders $ (3,799,000) ================ 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 4,749,000 ================
The accompanying notes are an integral part of these statements. 38 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, 1994 10,000,000 $ 80,000 -- $ -- Net income -- -- -- -- ------------ ------------ ------------ ------------ BALANCE, SEPTEMBER 30, 1995 10,000,000 80,000 -- -- Distribution of accounts receivable -- -- -- -- Sale of Class A and Class B Common stock 1,720,427 3,279,000 1,279,573 2,438,000 Redemption of Class A Common stock (8,500,000) (68,000) -- -- Reclassification of Redeemable Class A Common stock outside of shareholders' equity (1,500,000) (12,000) -- -- Cancellation of redemption features of warrant -- -- -- -- Conversion of Redeemable Class A Common stock to Class A Common stock 1,500,000 2,865,000 -- -- Conversion of Class B to Class A Common stock 1,279,573 2,438,000 (1,279,573) (2,438,000) Conversion of Series A Preferred stock to Common stock 80,000 539,000 -- -- Conversion of Founders' Note to Common stock 320,000 3,200,000 -- -- Initial public offering of Common stock, net of expenses 3,220,000 36,317,000 -- -- Redemption of Series B Preferred stock -- -- -- -- Net loss -- -- -- -- Dividends on Series A and Series B Preferred stock -- -- -- -- ------------ ------------ ------------ ------------ BALANCE, SEPTEMBER 30, 1996 8,120,000 48,638,000 -- -- Net income -- -- -- -- ------------ ------------ ------------ ------------ BALANCE, SEPTEMBER 30, 1997 8,120,000 $ 48,638,000 -- $ -- ============ ============ ============ ============
Common Retained Total Stock Earnings Shareholders' Warrants (Deficit) Equity ------------ ------------ ------------ BALANCE, SEPTEMBER 30, 1994 $ -- $ 1,847,000 $ 1,927,000 Net income -- 1,741,000 1,741,000 ------------ ------------ ------------ BALANCE, SEPTEMBER 30, 1995 -- 3,588,000 3,668,000 Distribution of accounts receivable -- (4,600,000) (4,600,000) Sale of Class A and Class B Common stock -- -- 5,717,000 Redemption of Class A Common stock -- (20,068,000) (20,136,000) Reclassification of Redeemable Class A Common stock outside of shareholders' equity -- (2,853,000) (2,865,000) Cancellation of redemption features of warrant 450,000 -- 450,000 Conversion of Redeemable Class A Common stock to Class A Common stock -- -- 2,865,000 Conversion of Class B to Class A Common stock -- -- -- Conversion of Series A Preferred stock to Common stock -- -- 539,000 Conversion of Founders' Note to Common stock -- -- 3,200,000 Initial public offering of Common stock, net of expenses -- -- 36,317,000 Redemption of Series B Preferred stock -- (2,626,000) (2,626,000) Net loss -- (3,905,000) (3,905,000) Dividends on Series A and Series B Preferred stock -- (308,000) (308,000) ------------ ------------ ------------ BALANCE, SEPTEMBER 30, 1996 450,000 (30,772,000) 18,316,000 Net income -- 3,367,000 3,367,000 ------------ ------------ ------------ BALANCE, SEPTEMBER 30, 1997 $ 450,000 $(27,405,000) $ 21,683,000 ============ ============ ============
The accompanying notes are an integral part of these statements. 39 RMH TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended September 30 ---------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ 3,367,000 $ (4,213,000) $ 1,741,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization 1,439,000 1,089,000 786,000 Deferred income taxes 1,645,000 (1,021,000) 21,000 Extraordinary loss on early extinguishment of debt, net -- 582,000 -- Imputed interest and dividends -- 186,000 -- Amortization of deferred financing costs -- 10,000 -- Imputed interest on Founders' Note -- 1,136,000 -- Loss on disposal of equipment -- -- 73,000 Changes in operating assets and liabilities-- Accounts receivable (2,377,000) (1,100,000) (1,784,000) Prepaid expenses and other current assets (427,000) (145,000) (18,000) Other assets (48,000) 41,000 (22,000) Accounts payable (1,099,000) 555,000 332,000 Accrued expenses (30,000) 1,203,000 593,000 ------------ ------------ ------------ Net cash provided by (used in) operating activities 2,470,000 (1,677,000) 1,722,000 ------------ ------------ ------------ INVESTING ACTIVITIES: Purchases of property and equipment (1,118,000) (2,775,000) (2,197,000) Purchases of marketable securities (6,135,000) -- -- Maturities of marketable securities 1,000,000 -- -- ------------ ------------ ------------ Net cash used in investing activities (6,253,000) (2,775,000) (2,197,000) ------------ ------------ ------------ FINANCING ACTIVITIES: Net borrowings (repayments) on lines of credit -- (975,000) 275,000 Proceeds from long-term debt -- 15,100,000 500,000 Repayments on long-term debt -- (15,897,000) (183,000) Repayments on capitalized lease obligations (40,000) (848,000) (312,000) Proceeds from refinanced equipment 658,000 -- -- Deferred financing costs -- (505,000) -- Borrowings from Founders -- 1,006,000 5,000 Repayments to Founders -- (1,105,000) -- Proceeds from sale of Preferred and Common stock -- 9,500,000 -- Redemption of Common stock -- (17,112,000) -- Distribution to Founders -- (4,600,000) -- Redemption of Preferred stock -- (6,500,000) -- Net proceeds from initial public offering -- 36,317,000 -- Dividends paid -- (204,000) -- ------------ ------------ ------------ Net cash provided by financing activities 618,000 14,177,000 285,000 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,165,000) 9,725,000 (190,000) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,047,000 322,000 512,000 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,882,000 $ 10,047,000 $ 322,000 ============ ============ ============
The accompanying notes are an integral part of these statements. 40 RMH TELESERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 1. BACKGROUND: RMH Teleservices, Inc. (the Company) provides outbound and inbound teleservices to major corporations in the insurance, financial services, telecommunications and utilities industries. The Company was founded in 1983 by two individuals (the Founders). On May 24, 1996, the Company completed a leveraged recapitalization (the Recapitalization) pursuant to which a portion of the Common stock owned by the Founders was redeemed and two investors (the Investors) purchased Preferred and Common stock (see Note 3). These transactions were accounted for as a sale of newly issued stock by the Company and a redemption of previously outstanding shares. Accordingly, the historical bases of the Company's assets and liabilities have been retained. On September 18, 1996, the Company completed an initial public offering of 3.2 million shares of Common stock, raising net proceeds of approximately $36.3 million. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Teleservices Management Company and Teleservices Technology Company. All intercompany transactions have been eliminated. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents at September 30, 1997 consist of $5,693,000 invested in domestic money market accounts. The Company maintains cash accounts, which at times, may exceed federally insured limits. The Company has not experienced any losses from maintaining cash accounts in excess of such limits. Management believes that it is not exposed to any significant credit risks on its cash accounts. 41 Marketable Securities Investments in marketable securities are categorized as either trading, available-for-sale, or held-to-maturity. On September 30, 1997, marketable securities consisted of debt securities of corporate commercial paper with contractual maturities of less than one year which are being held to maturity. The debt securities are stated at amortized cost. Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are provided over the estimated useful lives of the applicable assets using the straight-line method. The lives used are as follows: Computer 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 $66,000, with accumulated depreciation of $33,000 and $20,000 as of September 30, 1997 and 1996, respectively. During fiscal 1997, the Company entered into a refinancing transaction under which certain of the Company's telecommunications equipment was sold at the assets net book value of $658,000. Concurrently, the Company entered into a five-year operating lease for the equipment. Long-Lived Assets The Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," effective October 1, 1996. SFAS No. 121 requires that long-lived assets to be held and used or disposed of by an entity be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment is recognized to the extent that the sum of undiscounted estimated future cash flows expected to result from use of the assets is less than the carrying value. As of September 30, 1997, management has evaluated the Company's asset base, under the guidelines established by SFAS No. 121, and believes that no impairment has occurred. Revenue Recognition The Company recognizes revenues on programs as services are performed, generally based on hours incurred. 42 Advertising and Promotion Costs associated with advertising and promotion are generally charged to expense when incurred. Advertising and promotion expense was $182,000, $174,000 and $187,000 in fiscal 1997, 1996, and 1995, respectively. Income Taxes Prior to May 24, 1996, the Company was an S Corporation for federal and Pennsylvania income tax purposes and, accordingly, income was passed through to the shareholders and taxed at the individual level. The Company was not an S Corporation in New Jersey and, therefore, the Company paid income taxes on its taxable income in that state. The S Corporation status was terminated on May 24, 1996 (see Note 7). The Company applies SFAS No. 109, "Accounting for Income Taxes," which requires the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences, measured by enacted tax rates, attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards, for years which taxes are expected to be paid or recovered. Major Customers and Concentration of Credit Risk The Company is dependent on several large customers for a significant portion of its revenues. Two customers accounted for 51.6% and 15.5% of revenues for the year ended September 30, 1997. Three customers accounted for 45.0%, 17.6% and 12.2% of revenues for the year ended September 30, 1996. Four customers accounted for 29.2%, 18.8%, 14.6% and 12.7% of revenues for the year ended September 30, 1995. 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 7.1%, 11.2% and 8.3% of revenues for the years ended September 30, 1997, 1996 and 1995, respectively. As of September 30, 1997 and 1996, $503,000 and $690,000, respectively, were due from this customer and included in accounts receivable in the accompanying consolidated balance sheets. In fiscal 1997, 1996 and 1995, revenues from customers within the insurance industry accounted for 74.0%, 74.8% and 59.3% of revenues, respectively, and customers within the financial services industry accounted for 11.4%, 19.7% and 39.7% of revenues, respectively. In addition, during fiscal 1997, customers within the telecommunications industry accounted for 12.8% of revenues. Concentration of credit risk is limited to accounts receivable and is subject to the financial conditions of the Company's customers. Three of the Company's largest customers are engaged in transactions with each other and represent a single credit risk to the Company. The Company does not require collateral or other securities to support customer receivables. 43 At September 30, 1997, the accounts receivable from the customers that represent a single credit risk were $4,684,000. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the financial statements at fair value due to the short-term nature of those instruments. The carrying amount of marketable securities and capitalized lease obligations approximates fair value at September 30, 1997 and 1996, respectively. Net Income per Common Share The Company utilizes the treasury stock method to compute net income per Common share. Net income per Common share (primary net income per Common share) is computed using the weighted average number of Common shares and Common share equivalents (stock options and warrants) outstanding. Net income per Common share, assuming full dilution (fully diluted net income per Common share), is based upon an increased number of shares that would be outstanding assuming exercise of stock options and warrants when the Company's stock price at the end of the period is higher than the average price within the respective period. If the inclusion of Common stock equivalents has an anti-dilutive effect in the aggregate, it is excluded from the net income per share calculation. In fiscal 1997, the weighted average shares outstanding for primary net income per share were 8,262,000. Shares used to calculate fully diluted net income per Common share were not materially different from those used to calculate primary net income per Common share. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share," which supersedes APB 15. SFAS No. 128 requires dual presentation of basic and diluted earnings per share for complex capital structures on the face of the statements of operations. According to SFAS No. 128, basic earnings per share, which replaces primary earnings per share, is calculated by dividing net income available to Common shareholders by the weighted average number of Common shares outstanding for the period. Diluted earnings per share, which replaces fully diluted earnings per share, reflects the potential dilution from the exercise or conversion of securities into Common stock, such as stock options. SFAS No. 128 is required to be adopted for the Company's financial statements for the period ended December 31, 1997; earlier application is not permitted. The adoption of SFAS No. 128 will not have a material effect on the Company's earnings per share calculation. 44 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. Supplemental Cash Flow Information For the years ended September 30, 1997, 1996 and 1995, the Company paid interest of $3,000, $1,993,000 and $253,000, respectively. For the years ended September 30, 1997, 1996 and 1995, the Company paid income taxes of $103,000, $82,000 and $2,000, respectively. There were no new capital leases entered into during fiscal 1997. Capitalized lease obligations of $105,000 and $221,000, were incurred on equipment leases entered into in fiscal 1996 and 1995, respectively. New Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued SFAS No. 129, "Disclosure of Information about Capital Structure." This statement establishes standards for disclosing information about an entity's capital structure and is effective for periods ending after December 15, 1997. Management believes that implementation of this standard will not have a material effect on the Company's financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements and requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 is required to be adopted for the Company's fiscal year ending September 30, 1999. The adoption of this pronouncement is expected to have no impact on the Company's financial position or results of operations. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." This statement establishes additional standards for segment reporting in the financial statements and is effective for fiscal years beginning after December 15, 1997. Management believes that SFAS No. 131 will not have a material effect on the Company's financial statements. 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 45 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. Common Stock Redemption On May 24, 1996, the Company redeemed 8,500,000 shares of Class A Common for $20,136,000, as follows: Cash payment $ 16,002,000 Final redemption price adjustment (paid in August 1996) 437,000 Issuance of 6%, $3,000,000 subordinated note payable to Founders (the Founders' Note) 2,023,000 Issuance of 1,000,000 shares of 6%, Series A Preferred 524,000 Deferred tax liability for difference in basis of Founders' Note 477,000 Transaction costs 673,000 ------------- $ 20,136,000 ------------- The face amounts of the Founders' Note and Series A Preferred were discounted at estimated market rates of 14% and 15% for interest and dividends, respectively, on similar-type instruments. The original issue discounts were amortized over the terms of the Founders' Note and the Series A Preferred. On May 23, 1996, the Company distributed $4,600,000 of accounts receivable to the Founders as a Subchapter S distribution of previously taxed income. The Company collected these receivables on behalf of the Founders. The Founders' Note initially had a face amount of $3,000,000 and was subordinated to all other liabilities. The face amount of the Founders' Note was increased to $4,000,000 due to the achievement of certain financial goals as defined in the note, with the $1,136,000 difference in the estimated fair market value of the new note versus the carrying value of the original note being charged to interest expense. The Founders' Note bore interest at an annual rate of 6%, payable quarterly, and was due in two equal installments on May 24, 2003 and 2004, subject to acceleration upon the occurrence of certain defined events. Upon the completion of the initial public offering, the Founders' Note was satisfied through the issuance of 320,000 shares of Common stock at the offering price. The Series A Preferred had 1,000,000 shares outstanding, a face amount of $1,000,000 and required a dividend of 6% per year, payable quarterly. The Series A Preferred had no voting rights, was senior to the Series B Preferred upon liquidation and contained certain put features. Upon completion of the initial public offering, the Series A Preferred was converted 46 into 80,000 shares of Common stock at the offering price and accrued dividends of $22,000 were paid. Sale of Preferred and Common Stock On May 24, 1996, the Company issued Preferred and Common stock for $9,500,000 to the Investors, as follows: Series B Preferred stock $ 3,783,000 Class A Voting Common stock 3,279,000 Class B Non-Voting Common stock 2,438,000 ------------- $ 9,500,000 ============= The Company issued 6,500,000 shares of Series B Preferred for an aggregate of $6,500,000 or $1.00 per share. The Series B Preferred required a dividend of 8% per year, payable quarterly. The face amount of the Series B Preferred was discounted at the estimated market dividend rate of 15% and the discount of $2,717,000 was amortized over the expected term. Due to the discount applied to the face amount of the Series B Preferred, its value for accounting purposes was $.58 per share. The Series B Preferred had no voting rights, was senior to the Common stock upon liquidation and had a liquidation value of $6,500,000 plus unpaid dividends. The holders of the Series B Preferred could have required the Company to redeem their shares on May 24, 2004, subject to acceleration upon the occurrence of certain defined events, including an initial public offering. Upon completion of the initial public offering, the Series B Preferred was redeemed for $6,500,000 plus accrued dividends of $182,000. The Company issued 1,720,427 shares of Class A Common and 1,279,573 shares of Class B Common for an aggregate of $3,000,000 or $1.00 per share. The Common stock was valued at $1.91 per share based on the relative estimated fair values of the Series B Preferred and Class A and B Common stock issued to the Investors. The Class B Common shares were converted into an equal number of Class A Common shares upon the completion of the initial public offering and the division of Common stock between two classes was eliminated. 4. BANK DEBT: On May 24, 1996, the Company and its shareholders entered into an agreement with a bank (the Credit Agreement), which provided the Company with a $14,000,000 term loan (the Term Loan) and $6,000,000 in revolving credit loans (the Revolver). The Company incurred $505,000 in financing costs, which were deferred and were to be amortized over the term of the Credit Agreement. The borrowings on the Term Loan were used to fund a portion of the Common stock redemption, to repay a bank line of credit and to buy out certain leases. 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 fully exercisable. 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. 47 Upon completion of the Company's initial public offering, a portion of the net proceeds were used to repay the outstanding Term Loan. In connection with this repayment, the Company recorded an extraordinary loss, net of income tax benefit, in the statement of operations. The extraordinary loss consists of the write-off of the unamortized deferred financing costs and the unamortized discount on the Term Loan. On March 21, 1997, the Company entered into a new credit facility with a bank (the Credit Facility), consisting of a line of credit, which replaces the previous Credit Agreement and related Revolver. The credit facility is a $4,000,000 revolving line of credit that expires on April 1, 1998. There were no borrowings outstanding as of September 30, 1997. Borrowings bear interest at either a base rate, or euro-rate option, as selected by the Company and is payable either monthly under the base rate option or on the last day of the related euro-rate interest period. The bank has a security interest in essentially all assets of the Company and the credit facility provides for certain covenants. Such covenants, among other things, restrict the Company's ability to incur debt, pay dividends, or make capital expenditures and acquisitions. The Company is also subject to restrictive financial covenants, which include levels of tangible net worth and a ratio related to debt service. The Company did not incur interest expense under the Credit Agreement or Credit Facility for the year ended September 30, 1997. Interest expense under the Credit Agreement for the year ended September 30, 1996 was $470,000. 5. ACCRUED EXPENSES:
September 30 ----------------------------- 1997 1996 ------------- ------------- Payroll and related benefits $ 1,738,000 $ 1,234,000 Telecommunications expense 308,000 435,000 Other 333,000 740,000 ------------- ------------- $ 2,379,000 $ 2,409,000 ============= =============
6. CAPITALIZED LEASE OBLIGATIONS: The Company has various capitalized lease obligations payable to several finance companies. The obligations mature in 1998, and are collateralized by computer and other equipment with an aggregate cost of $66,000 as of September 30, 1997. The interest portion of the minimum future lease payments is $1,000. 7. INCOME TAXES: As a result of the sale of Preferred and Common stock, the Company's S Corporation status was terminated on May 24, 1996, and a net deferred income tax liability of $242,000 was recorded as additional income tax expense on that date. 48 Net income tax expense (benefit) for the years ended September 30, is as follows: 1997 1996 ----------- ----------- Current: Federal $ 89,000 $ -- State 91,000 -- ----------- ----------- 180,000 -- ----------- ----------- Deferred: Federal 1,571,000 (1,262,000) State 74,000 (287,000) ----------- ----------- 1,645,000 (1,549,000) ----------- ----------- $ 1,825,000 $(1,549,000) =========== =========== A reconciliation of the U.S. Federal Income Tax rate to the effective income tax rate is as follows:
For the Year Ended September 30 --------------------------------- 1997 1996 --------------- -------------- Federal statutory rate 34.0% 34.0% Income not subject to corporate taxes due to S Corporation status -- 3.7 Reinstatement of deferred taxes upon conversion to C Corporation status -- (11.3) State taxes 3.2 5.3 Other (2.0) (3.3) --------------- -------------- 35.2% 28.4% =============== ==============
49 Deferred income tax assets and liabilities are classified as current and noncurrent based on the financial reporting classification of the related assets and liabilities which gave rise to the temporary difference. Significant components of the deferred income tax assets and liabilities are as follows:
September 30 ----------------------------- 1997 1996 ------------- ------------ Current deferred income tax asset (liability): Other nondeductible expenses $ (517,000) $ 23,000 Net operating loss carryforward 106,000 1,059,000 Cash basis of accounting 67,000 30,000 ------------- ------------ (344,000) 1,112,000 ------------- ------------ Noncurrent deferred income tax asset (liability): Cash basis of accounting -- 59,000 Depreciation of property and equipment (379,000) (284,000) Other nondeductible expenses -- (55,000) Net operating loss carryforward 90,000 180,000 ------------- ------------ (289,000) (100,000) ------------- ------------ Net deferred income tax asset (liability) $ (633,000) $ 1,012,000 ============= ============
8. COMMITMENTS AND CONTINGENCIES: Leases The Company leases its offices and communications and computer equipment under noncancellable operating leases which expire through 2002. The rental payments for fiscal 1997, 1996 and 1995, were approximately $1,681,000, $808,000 and $911,000, respectively. Aggregate minimum rental payments under the noncancellable operating leases at September 30, 1997, are as follows: 1998 $ 2,369,000 1999 1,857,000 2000 1,720,000 2001 1,676,000 2002 920,000 --------------- $ 8,542,000 ===============
The Company has an agreement with a bank which provides up to $6 million for leasing call center equipment. The commitment expires on December 31, 1997 and the leases must be operating in nature. As of September 30, 1997, the Company has financed $3.2 million of equipment under this agreement. 50 Purchase Commitments 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 $2,400,000. Employment Agreements 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% 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. Management Fees The Company entered into an agreement with one of the Investors which required the payment of an annual management fee of $100,000, payable quarterly. The management agreement was terminated upon completion of the initial public offering. Beginning at that time, the Investors are to provide consulting services to the Company pursuant to a consulting agreement and will receive annual fees of $50,000. The consulting agreement expires on May 24, 2001. Litigation Since 1995 the Company has had a relationship with Kipany Productions, Ltd. (Kipany), an independent third party entity that arranges marketing campaigns on behalf of its clients. In April 1997, Kipany requested the Company to provide certain telemarketing services in connection with marketing campaigns Kipany had contracted to provide for two of its telecommunication clients. The calls for the campaign began on June 2, 1997 and ended on July 28, 1997. For services performed during this period, the Company billed Kipany $2,227,000, of which $728,000 was paid and $1,499,000 remains outstanding. On September 17, 1997, the Company filed a Demand for Arbitration along with other legal filings, for purposes of seeking the balances due on its outstanding invoices, attorneys' fees, arbitration costs and other consequential damages. On October 13, 1997, attorneys representing Kipany notified the Company that they were filing a complaint seeking injunctive relief with respect to the arbitration claiming that the Company did not have a contract with Kipany. In addition, Kipany filed a counterclaim against the Company on December 5, 1997 claiming damages resulting from execution of the campaign. Management and legal counsel are confident that the evidence suggests that a legally enforceable contract existed and, therefore, any disputes arising from this work should be settled in arbitration. Based upon the facts that are available at this time, management and legal counsel are confident that the outstanding amount of $1,499,000 is properly due and 51 payable in full. Management does not currently expect the ultimate resolution of these actions to have a material adverse effect on the Company's financial position. From time to time, the Company is involved in certain other legal actions arising in the ordinary course of business. In management's opinion, the outcome of such actions will not have a material adverse effect on the Company's financial position, results of operations or liquidity. 9. PROFIT SHARING PLAN: The Company has a defined contribution savings plan available to substantially all employees under Section 401(k) of the Internal Revenue Code. Employee contributions are generally limited to 15% of compensation. On an annual basis, the Company may match a portion of the participating employee's contribution. The Company's contributions in fiscal 1997, 1996 and 1995 were $36,000, $33,000 and $8,000, respectively. Employees are fully vested in their contributions, while vesting in the Company's contributions occurs ratably over seven years beginning in year three. 10. STOCK OPTION PLAN: In 1996 the Company established the 1996 Stock Incentive Plan (the Plan), which reserves 950,000 shares of Common stock for issuance in connection with a variety of awards including stock options, stock appreciation rights and restricted and unrestricted stock grants. The Plan is administered by a committee, which is comprised of two or more non-employee directors as designated by the Board of Directors. The committee will determine the price and other terms upon which awards shall be made. The exercise price of incentive stock options may not be less than the fair market value of Common stock on the date of grant. Information relative to the Plan is as follows:
Weighted Average Exercise Price Exercise Price Aggregate Options (Per Share) (Per Share) Proceeds ------- ----------- ----------- -------- Balance as of September 30, 1995 -- $ -- $ -- $ -- Granted 278,200 $ 12.50 $ 12.50 3,477,000 Exercised -- $ -- $ -- -- Terminated (6,000) $ 12.50 $ 12.50 (75,000) --------------- ----------------- ------------- ------------- Balance as of September 30, 1996 272,200 $ 12.50 $ 12.50 3,402,000 Granted 13,100 $ 7.00-$12.50 $ 8.30 109,000 Exercised -- $ -- $ -- -- Terminated (30,180) $ 12.50 $ 12.50 (377,000) --------------- ----------------- ------------- -------------- Balance as of September 30, 1997 255,120 $ 7.00-$12.50 $ 12.28 $ 3,134,000 =============== =============== ============= ============== Options exercisable as of $ 12.50 ============= September 30, 1997 85,300 ===============
52 The weighted average remaining contractual life of all options outstanding at September 30, 1997 is 9.0 years. The following table summarizes information relating to the Plan at September 30, 1997 based upon each exercise price:
Weighted Weighted Weighted Average Average Average Exercise Exercise Range of Options Remaining Price of Options Price of Exercise Outstanding at Contractual Outstanding Exercisable at Exercisable Prices September 30, Life Options September 30, Options (Per Share) 1997 (Years) (Per Share) 1997 (Per Share) - ---------------- ------------------ --------------- ---------------- ----------------- -------------- $7.00 -$ 7.75 13,100 9.5 $ 7.18 -- $ -- $ 12.50 242,020 9.0 $ 12.50 85,300 $ 12.50
The Company accounts for its option plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation cost has been recognized. In 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair value based method of accounting for stock-based compensation plans. This statement also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. SFAS No. 123 requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for the plan. Had the Company recognized compensation cost for its stock option plan consistent with the provisions of SFAS No. 123, the Company's net income and net income per share in 1997 would have decreased and the Company's net loss and pro forma net loss per Common share in 1996 would have increased to the following pro forma amounts: Year Ended September 30 ------------------------------ 1997 1996 ------------- ------------- Net Income (Loss): As reported $ 3,367,000 $ (4,213,000) ============= ============= Pro forma $ 2,907,000 $ (4,226,000) ============= ============= Pro Forma Net Income (Loss) per Common share: As reported $ .41 $ (.80) ============= ============= Pro forma $ .35 $ (.89) ============= ============= Since the SFAS No. 123 method of accounting has not been applied to options granted prior to October 1, 1995, the pro forma compensation cost disclosed above may not be representative of that to be expected in future years. 53 The weighted average fair value of the stock options granted during 1997 and 1996 was $3.89 and $8.62, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 1997 1996 ------------- ---------- Risk-free interest rate 7.0% 6.9% Volatility 60.0% 60.0% Expected dividend yield 0.0% 0.0% Expected life 7.5 years 7.5 years 54 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To RMH Teleservices, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements for RMH Teleservices, Inc. and have issued our report thereon dated December 5, 1997. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of valuation and qualifying accounts is presented for the purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Philadelphia Pennsylvania December 5, 1997 55 RMH TELESERVICES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED SEPTEMBER 30, 1997
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions Balance at Charged Balance at Beginning to End of of Period Expense Deductions (1) Period ---------- -------- ----------- -------- Allowance for doubtful accounts: September 30, 1997 $ 10,000 $ 27,000 $ - $ 37,000 ============= ============ ============= ============ September 30, 1996 $ 47,000 $ 38,000 $ 75,000 $ 10,000 ============= ============ ============= ============ September 30, 1995 $ 3,000 $ 44,000 $ - $ 47,000 ============= ============ ============= ============
(1) Represents accounts written off against the allowance. 56 EXHIBIT INDEX
Exhibit No. 2 Recapitalization and Stock Purchase Agreement among the Company, Advanta Partners, Glengar and the Founders, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 3.1 Articles of Incorporation of the Company, as amended (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 3.2 Form of Amended and Restated Bylaws of the Company (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 9 Voting Agreement among the Founders and Advanta Partners dated as of July 2, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.1 1996 Stock Incentive Plan (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.2 Shareholders' Agreement by and among the Company, the Founders, Advanta Partners and Glengar, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.3 Employment Agreement by and between the Company and Raymond J. Hansell, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.4 Employment Agreement by and between the Company and MarySue Lucci Hansell, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.5 Warrant for the Purchase of Class B Non-Voting Common Stock of the Company in favor of Chemical Bank (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.6 Letter Agreement with PNC Bank, N.A., dated March 21, 1997 (incorporated by reference to the Company's Form 10-Q filed for the period ended March 31, 1997). 10.12 Exchange and Conversion Agreement among the Company, the Founders, Advanta Partners and Glengar dated as of July 2, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.13 Consulting Agreement between the Company and Advanta Partners dated August 20, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, No. 333-07501). 10.15 Agreement on Post-Closing Adjustments, among the Company, Advanta Partners, the Founders and Glengar dated August 20, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, No. 333-07501). 16 Letter regarding change in certifying accountant, dated July 2, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 21 Subsidiaries of the Registrant (incorporated by reference to the Company's Form 10-K filed for the year ended September 30, 1996). * 27.1 Financial Data Schedule for year ended September 30, 1997.
* Filed herewith EX-27 2 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS YEAR SEP-30-1997 OCT-01-1996 SEP-30-1997 1 6,882,000 5,135,000 7,963,000 37,000 0 20,698,000 9,354,000 4,878,000 25,286,000 3,314,000 0 0 0 48,638,000 (27,405,000) 25,286,000 0 45,937,000 0 41,218,000 0 0 0 5,192,000 1,825,000 3,367,000 0 0 0 3,367,000 .41 .41
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