-----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, Iz58HPLbPNEO4LTpz8RiGalWCOucPWFt3WHHYC9R1r+WwvKiSYpxylIWdbiqNKhM 6CFVPKRpT97FD5hcklxOHw== 0001036050-98-002186.txt : 19981229 0001036050-98-002186.hdr.sgml : 19981229 ACCESSION NUMBER: 0001036050-98-002186 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981228 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-K SEC ACT: SEC FILE NUMBER: 000-21333 FILM NUMBER: 98776418 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-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended September 30, 1998 or [_] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Commission File Number 0-21333 RMH TELESERVICES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-2250564 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 40 Morris Avenue Bryn Mawr, PA 19010 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (610) 520-5300 Securities registered pursuant to section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to section 12(g) of the Act: Common Stock, no par value per share (Title of each class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of December 23, 1998, 8,120,000 shares of common stock were outstanding. The aggregate market value of the shares of common stock owned by non-affiliates of the Registrant as of December 23, 1998 was approximately $11.7 million (based upon the closing sales price of these shares as reported by the Nasdaqs Stock Market's national market). Calculation of the number of shares held by non-affiliates is based on the assumption that the affiliates of the Company include only directors, executive officers and stockholders filing Schedules 13D or 13G with the Company. The information provided shall in no way be construed as an admission that any person whose holdings are excluded from the figure is an affiliate or that any person whose holdings are included is not an affiliate and any such admission is hereby disclaimed. The information provided is included solely for record keeping purposes by the Securities and Exchange Commission. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on February 23, 1999 are incorporated by reference in Part III. Table of Contents Item No. Page PART I 1. Business...................................................................1 2. Properties.................................................................7 3. Legal Proceedings..........................................................8 4. Submissions of Matters to a Vote of Security Holders.......................8 Executive Officers of the Company..........................................8 PART II 5. Market for Registrant's Common Equity and Related Shareholder Matters.....10 6. Selected Financial Data...................................................11 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................................12 7.A. Quantitative and Qualitative Disclosures about Market Risk..............20 8. Financial Statements and Supplementary Data...............................20 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................................20 PART III 10. Directors and Executive Officers of the Registrant.......................20 11. Executive Compensation...................................................20 12. Security Ownership of Certain Beneficial Owners and Management...........21 13. Certain Relationships and Related Transactions...........................21 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........21 Signatures...............................................................22 PART I ITEM 1. BUSINESS -------- General RMH Teleservices, Inc. (the "Company") provides outbound and inbound teleservices predominantly to major corporations in the insurance, financial services, telecommunications and membership services industries. The Company distinguishes itself through its high quality service and disciplined management approach which has led to long-term client relationships and sustained profitable growth. The Company originated relationships with Mass Marketing Insurance Group ("MMIG"), JCPenney Life Insurance Company ("JCPenney") and AT&T/Universal Card Services ("AT&T") over seven years ago and, since fiscal 1991, the Company's aggregate volume with these clients has grown each year. The Company believes its innovative approach to producing quality service distinguishes it from its competitors and has led to the Company's sustained growth and its retention of key clients despite severe recruiting and retention challenges brought about by a tight labor market. The Company's net revenue has increased 14.1% over the last year. The Company was founded in 1983 by Raymond J. Hansell, former Vice Chairman and Chief Executive Officer, and MarySue Lucci, former Director, President and Chief Operating Officer (the "Founders"). In May 1996, the Company completed a leveraged recapitalization (the "Recapitalization") pursuant to which Advanta Partners LP ("Advanta Partners"), a venture capital affiliate of Advanta Corp., became the largest equity holder of the Company. The Company completed the Recapitalization to permit Advanta Partners to invest substantial financial and other resources in the Company and to permit the Founders to realize a portion of the economic value of their initial investment in the Company. The Company is a Pennsylvania corporation and its principal business office is located at 40 Morris Avenue, Bryn Mawr, Pennsylvania 19010. Its telephone number is (610) 520-5300. In September 1996, the Company completed an Initial Public Offering of 3,220,000 shares of Common Stock ("Common Stock") from which it realized aggregate proceeds, after deduction of underwriting discounts and commissions of $37,448,000 (the "Initial Public Offering"). On September 18, 1996 the Company's Common Stock was included on the Nasdaq Stock Market's National Market under the symbol "RMHT". The Company's revenue and income from operations for fiscal 1998 were $52.4 million and $327,000, respectively. This represents an increase of 14.1% and a decrease of 93.1% respectively, compared to fiscal 1997. Overview of the Teleservices Industry The teleservices industry includes outbound and inbound telephone marketing, as well as customer support and service programs and other value-added services. Teleservices provide customized service with higher response rates and higher customer acquisition and retention rates at a lower cost per transaction than other marketing media. As a result, call centers have become robust channels for the marketing and sale of a wide variety of products and services as sophisticated telemarketers are able to market effectively and collect valuable customer data. According to Direct Marketing Magazine, telemarketing expenditures in the United States grew from approximately $34 billion in 1984 to approximately $77 billion in 1994. An increasing percentage of teleservices business is currently being outsourced to independent providers, and the Company believes that both the total market and the percentage of this market that is outsourced will increase as businesses continue to recognize the benefits of such services. Historically, the call center services industry has been extremely fragmented and continues to include a large number of small, independent organizations. However, over the past several years, the industry has further segmented itself by the public or secondary offerings of common stock by ten companies. Consequently, the sector has further defined itself by those companies that have been able to raise monies in the public marketplace. 1 Many large companies have begun to outsource their telemarketing and customer support services in order to access the industry expertise, breadth of services and specialized capabilities of large-scale, technologically- sophisticated teleservices providers such as the Company. Using such providers enables these companies to concentrate on their core businesses and improve the quality and cost-effectiveness of their customer contact functions. As a result, the Company believes that the enhanced quality and economic advantages provided by independent teleservices companies will accelerate the outsourcing trend in the industry. In addition, the Company believes that the deregulation of the telecommunications industry will significantly increase the demand for telemarketing services. The Company believes that businesses considering outsourcing their telemarketing activities increasingly are seeking to partner with a teleservices company that possesses industry expertise and the resources to serve their long-term needs efficiently. Additionally, because teleservices involve direct interaction with a client's customers, the teleservices provider's reputation for quality is critical to winning new clients. As a recognized provider of high quality teleservices, the Company has positioned itself as an attractive partner to large users of call center services. The Company's Services Outbound Teleservices --------------------- Historically, the Company has concentrated on providing outbound business-to-consumer teleservices. In this market, the Company has sought and established relationships with large corporate clients, many of which have been clients of the Company for over seven years. Outbound teleservices refers to the service the Company performs when its telephone service representatives ("TSRs"), place calls to parties targeted by the client to offer products or services or to obtain information. At the beginning of a typical outbound program, the Company receives customer data files that the client has selected to match the demographic profile of the targeted customer for the product or service being offered. These files contain each targeted customer's name, address, phone number and other relevant data. The Company's data management system sorts the records, removes information regarding customers whom the Company is prohibited from contacting and assigns each file electronically to one of its outbound call centers. Actual telephone calling at the centers is controlled by computerized call management systems that utilize predictive dialers to automatically dial the telephone numbers in the files. The call management system then forwards all connected calls, along with the customer's name and other information, electronically to the workstation of a TSR who has been trained for the client's program. The TSR then uses a prepared script to solicit an order for the product or service or to request information that will be added to the client's database. Information regarding sales and other aspects of the program is captured by the Company's proprietary software systems and made available to clients in customized report formats. During fiscal 1998, the Company opened a new outbound call center facility in Ewing Township, NJ and commenced construction of another facility in Largo, Florida which opened in October 1998. Insurance. The Company is a major telemarketer of insurance products throughout the United States. Management believes this sector to be an extremely attractive area in business-to-consumer telemarketing from the perspective of the teleservices provider due to its large size, relative predictability and relative lack of seasonality. The Company works with large consumer insurance companies and their agents to market such products as accidental death and dismemberment policies, graded benefit life insurance and other niche insurance products primarily to credit card customers. The Company has also assisted clients in marketing supplemental dental and vision coverage to credit card holders. 2 As of September 30, 1998, the Company employed 162 insurance agents licensed to sell insurance in a total of 46 states. The Company's significant relationships in this industry include those with MMIG, AT&T, and JCPenney, which were responsible for 43.7%, 6.5%, and 15.9%, respectively, of the Company's revenues for fiscal 1998. The Company originated its relationship with MMIG over ten years ago and originated its relationships with JCPenney and AT&T over seven years ago. The Company's aggregate revenues from this group of clients have grown respectively, each year since fiscal 1991. In fiscal 1998, 66.2% of the Company's revenues were generated from services related to insurance products. Financial Services. The Company provides teleservices to several of the largest credit card issuers, banks and other financial institutions in the United States. The Company's services include customer account acquisition, customer retention programs, and programs to sell credit card enhancement features such as higher credit limits, lower interest rates and lower fees. The Company also cross-sells additional services such as home equity loans and related banking services. In fiscal 1998, 23.2% of the Company's revenues were generated from services related to financial services products. Telecommunications. The Company expects the demand for teleservices within the telecommunications industry to increase as the industry continues to be deregulated and as the number of products (e.g., long distance, cellular, paging and "800" services) and call features (e.g., call waiting, caller identification and voice mail) increases. On behalf of several telecommunication companies, the Company completed several of these outbound campaigns during the current fiscal year. Membership Services. The Company provides services on behalf of a company that provides membership services to a variety of interest groups. These memberships generally entitle the members to a discount on selected goods and services purchased. In fiscal 1998, 7.0% of the Company's revenues were generated from services related to membership services products. Inbound Teleservices - -------------------- Inbound teleservices involves the processing of incoming calls, often placed by customers using toll-free numbers, to a customer service representative for service, order fulfillment or product information. Inbound teleservices include activities such as customer care services, credit card and loan application processing and catalog sales. More sophisticated inbound programs assist clients in responding to customer inquiries, offering technical and product support services and assessing overall customer satisfaction. The Company currently operates inbound customer service centers in its Lansdowne, PA and Delran, NJ call center facilities. During 1998, the Company grew its inbound business in the financial services and membership services industries which were offset by the loss of a client in the telecommunications industry. Business-to-Business Teleservices - --------------------------------- The Company believes that the dynamics of the business-to-business teleservices marketplace have now changed so as to permit the development of the type of long-term client relationships and large-scale campaigns that have formed the core of the Company's business-to-consumer services. The Company expects that the demand for business-to-business applications will grow, especially among telecommunications and membership services companies, as many large companies recognize that telemarketing is a more efficient method of reaching business customers than a field sales force. Growth in the business-to-business teleservices market has the potential for the Company to leverage its existing workstation capacity because such services are provided primarily during the day while business-to-consumer services are provided primarily during the evening. The Company believes that its prior experience in business-to-business teleservices and current expertise in business-to-consumer teleservices position it to take advantage of the growth in this market. Though this business has not grown dramatically during 1998, the Company believes that the business-to-business marketplace is embracing teleservices and opportunities may present themselves in future periods. 3 The Company's Operations Management - ---------- At the beginning of fiscal 1998 an executive search was undertaken for a Chief Executive Officer in anticipation of the expiration of the Founders' employment agreements in fiscal 1999. On August 13, 1998 the Board of Directors approved the employment of Mr. John A. Fellows as Chief Executive Officer. Concurrently the Board of Directors approved consulting agreements for the Founders expiring on May 31, 1999. Sales, Marketing and Account Management - --------------------------------------- During fiscal 1998 the Company continued the national account sales program that was initiated in 1996. This program focuses its direct sales efforts on developing relationships with the leading users of teleservices in its targeted industries. This initiative was re-inforced by the addition of a Vice President of Sales and a Vice President of Business Development in fiscal 1998, both with extensive experience in the communications and telemarketing industries. Supporting this initiative, the Company will continue to market its services by attending trade shows, advertising in industry publications, responding to requests for proposals, pursuing client referrals and cross-selling to existing clients. A critical element of the Company's effort to build long-term client relationships is its account management program. To improve the effectiveness of the client's program, account managers offer proactive advice and consulting services. The account managers initially provide advice on all aspects of program implementation, including scripting, performance specifications and reporting, and then manage the process on behalf of the client through interaction with each of the Company's internal departments. Periodic internal audits are performed by the account manager to determine compliance with the applicable program specifications. The Company believes that this detailed attention to account management has contributed significantly to retaining clients, expanding business from existing clients and attracting new clients. Personnel and Training - ---------------------- The Company emphasizes the recruitment, training and development of its TSRs, which management believes enables the Company to increase productivity, reduce employee turnover and enhance the quality of its services. TSRs are selected through a three-step process that includes an initial telephone screening interview, followed by an in-person interview and extensive testing to gauge competence, suitability for telemarketing projects and integrity. Newly-hired TSRs receive an intensive three-day training course that emphasizes modeling and role-playing as well as instruction on effective sales techniques and product knowledge. New TSRs are closely monitored for an initial 30-day period and thereafter receive ongoing coaching and training. As of September 30, 1998, the Company employed 162 licensed insurance agents specializing in the marketing of insurance-related products. These licensed agents receive continuing insurance-related education to comply with applicable state licensing requirements. To further assure the continuity and consistency of management practices, each call center has dedicated recruiting and training personnel who report directly to corporate management. The Company also provides significant on-going training to its supervisory and management personnel on coaching, counseling and total quality management techniques. The Company has developed an innovative compensation and performance recognition plan in order to motivate employees and reduce turnover. The Company generally attempts to target base TSR compensation at higher levels than is paid by other businesses competing for the same labor pool. In addition, the Company offers a benefits package, including health insurance, for qualifying full-time TSRs. For performance recognition, the Company pays cash bonuses to TSRs who achieve sales targets and quality benchmarks and also offers non-cash incentives and creative programs to improve performance and maintain morale. Although it is typical in the teleservices industry for TSRs to be part-time employees, over 61.2% of the Company's TSRs are full-time employees (working at least 33 hours per week). The Company believes that its relatively high proportion of full-time employees provides a more stable 4 workforce and reduces the Company's recruiting and training expenditures. As of September 30, 1998, the Company employed 2,566 persons, of whom more than 2,260 were TSRs. None of the Company's employees are represented by a labor union. The Company considers its relations with its employees to be good. Quality Assurance ----------------- The Company believes that its reputation for quality services is critical to acquiring and retaining clients. The Company is committed to the principles of total quality management in order to continuously improve its operational processes. The Company establishes both internal and external benchmarks as a means to measure continuous improvement. The Company measures the quality of its services on the basis of sales per hour, level of customer inquiries, call abandonment rates and other quality performance criteria. In order to provide continuing improvement to the TSRs' performance and to assure compliance with the Company's quality standards, quality assurance personnel monitor each TSR on a frequent basis and provide coaching to the TSR based on this review. Clients also participate in the monitoring process. Sales confirmations are recorded with the customer's consent to ensure accuracy and to provide a record of the sale. Company personnel review all sales confirmation tapes for compliance with client specifications. In addition, these tapes are selectively reviewed in order to provide additional coaching to TSRs. The Company's information systems enable it to provide its clients with customized reports on the status of an on-going telemarketing campaign and can transmit information electronically to clients if desired. Access to this data enables the Company's clients to modify or enhance an on-going campaign in order to improve its effectiveness. Each Company call center has dedicated quality assurance personnel who provide on-going employee training and coaching to the center's TSRs. Technology ---------- The Company was an early user of predictive dialing technology and was an early adopter of centralized management systems. The Company continues to invest strategically in proven systems and software technologies in order to enhance operational efficiency and maintain high quality services. These technologies reduce the cost per call and improve sales and customer service by providing the Company's TSRs and account management personnel with enhanced real-time access to customer and production information. As of September 30, 1998, the Company's management information systems department consisted of 56 technical professionals who maintain, upgrade and expand the Company's systems. The Company's call management and database systems have been designed to ensure quality service to its clients and to provide effective tools for the management of the Company's business. The Company uses UNIX-based predictive dialing systems at each call center, which are linked via a wide-area network to network servers at the Company's corporate headquarters. The Company's call center and network systems both use a flexible database architecture permitting the easy sharing of data among users of the system. As a result, the Company's scaleable systems can be configured to work cost-effectively at low and high volumes and permit the efficient addition of capacity. During fiscal 1998, the Company continued to expand its focus and invest its capital in the outbound and inbound teleservices marketplace by adding a total of 326 workstations in its new and two existing facilities. To effectively manage and control calling campaigns, the Company has developed its own proprietary software. The Company uses its Track System to monitor the status and performance of each client program throughout its life cycle. Information relating to each customer file (including a complete record of each sale transaction) is archived to ARCHIVE 2000, an internally generated suite of programs that retains call history for a client specified period of time, normally 2 years. This system is designed to respond to a client request to review details of a particular sales call in minutes and is able to identify the program, the date and time of the call and the TSR who recorded the sale. The Company has implemented procedures to protect the integrity of data against power loss, fire and other casualty. 5 Certain Customer Relationships The Company is dependent on several large customers for a significant portion of its revenues. Mass Marketing Insurance Group accounted for 43.7%, JCPenney Insurance Company Ltd accounted for 15.9% and Citicorp Credit Services, Inc. accounted for 10.8% of revenues for the year ended September 30, 1998. The loss of or diminution in business from one or more of these customers without a corresponding increase in business from other customers could have a material adverse effect on the Company's business. Competition The teleservices industry is intensely competitive and the Company's principal competition in its primary markets comes from large teleservices organizations, including APAC TeleServices, Inc., ICT Group, Inc., and SITEL Corporation, to name a few. In addition, the Company competes with the in-house telemarketing operations of many of its clients or potential clients. The Company also competes with direct mail, television, radio and other advertising media, as well as emerging direct marketing channels, such as interactive shopping and data collection through the television, the Internet and other media. Competition with other teleservices organizations is based primarily upon performance (measures include sales per hour, contact rate, conversion ratio and cost per sale), technological and reporting capabilities, industry experience, quality of client services and staff and price. The Company believes that it generally compares favorably with its competitors with respect to each of these factors. Government Regulation Telemarketing sales practices are regulated at both the federal and state level. The Telephone Consumer Protection Act ("TCPA") enforced by the Federal Communications Commission ("FCC"), imposes restrictions on unsolicited automated telephone calls to residential telephone subscribers. Under the TCPA and the regulations promulgated thereunder, it is unlawful to initiate telephone solicitations to residential telephone subscribers before 8:00 a.m. or after 9:00 p.m., local time at the subscriber's location, or to use automated telephone dialing systems or artificial or prerecorded voices to call certain subscribers. Additionally, the TCPA regulations require telemarketing firms to develop a written policy implementing a "do not call" list and to train its telemarketing personnel to comply with these restrictions. The TCPA creates a right of action for both consumers and state attorneys general. A court may award damages or impose penalties of $500 per violation, which may be trebled for willful or knowing violations. Currently, the Company trains its service representatives to comply with the regulations of the TCPA and programs its call management system to avoid initiating telephone calls during restricted hours or to individuals maintained on the Company's "do not call" list. The FTC regulates both general sales practices and telemarketing specifically. Under the Federal Trade Commission ("FTC") Act, the FTC has broad authority to prohibit a variety of advertising or marketing practices that may constitute "unfair or deceptive acts and practices." Pursuant to its general enforcement powers, the FTC can obtain a variety of types of equitable relief, including injunctions, refunds, disgorgement, the posting of bonds and bars from continuing to do business for a violation of the acts and regulations it enforces. The FTC also administers the Telemarketing and Consumer Fraud and Abuse Prevention Act of 1990 ("TCFAPA") under which the FTC has issued regulations prohibiting a variety of deceptive, unfair or abusive practices in telemarketing sales. Generally, these rules prohibit misrepresentations of the cost, quantity, terms, restrictions, performance or characteristics of products or services offered by telephone solicitation or of refund, cancellation or exchange policies. The regulations also regulate the use of prize promotions in telemarketing to prevent deception and require that a telemarketer identify promptly and clearly the seller on whose behalf the telemarketer is calling, the purpose of the call, the nature of the goods or services offered and, if applicable, that no purchase or payment is necessary to win a prize. The regulations also require that a telemarketer maintain records on various aspects of its business. 6 Most states have enacted statutes similar to the FTC Act prohibiting unfair or deceptive acts and practices. For example, telephone sales in certain states are not final until a written contract is delivered to and signed by the buyer, and such a contract often may be canceled within three business days. At least one state also prohibits telemarketers from requiring credit card payment, and several other states require certain telemarketers to obtain licenses, post bonds or submit sales scripts to the state's attorney general. Under these general enabling statutes, depending on the willfulness and severity of the violation, penalties can include imprisonment, fines and a range of equitable remedies such as consumer redress or the posting of bonds before continuing in business. Additionally, some states have enacted laws and others are considering enacting laws targeted directly at telemarketing practices. Most of these statutes allow a private right of action for the recovery of damages or provide for enforcement by state agencies permitting the recovery of significant civil or criminal penalties, costs and attorneys' fees. There can be no assurance that any such laws, if enacted, will not adversely affect or limit the Company's current or future operations. The industries served by the Company are also subject to government regulation, and, from time to time, bills are introduced in Congress which, if enacted, would affect the Company's operations. The Company and its employees who sell insurance products are required to be licensed by various state insurance commissions for the particular type of insurance product to be sold and are required to participate in regular continuing education programs, which are currently paid for by the Company. The Company believes that it is in compliance with all applicable regulations. ITEM 2. PROPERTIES ---------- The Company's corporate headquarters facility is located in Bryn Mawr, Pennsylvania in an approximately 45,000 square-foot building leased to the Company through December 2001. The Company also leases all of the facilities used in its call center operations. The Company believes that its existing facilities are suitable and adequate for its current operations, but additional facilities will be required to support growth. As of November 30, 1998, the Company operated the following call centers. Date of Date of Initial Most Recent Current Location Opening Workstations Expansion Workstations - -------- ------- ------------ --------- ------------ Bryn Mawr, PA(1)........ March 1985 15 November 1996 112 Lansdowne, PA(2)........ October 1990 80 November 1996 120 Pleasantville, NJ....... November 1992 64 February 1996 96 Scranton, PA............ July 1993 64 May 1996 88 Wilkes-Barre, PA........ April 1994 64 March 1996 88 Reading, PA............. February 1995 64 October 1996 96 Ocean Township, NJ...... November 1995 80 November 1996 96 Allentown, PA........... April 1996 80 June 1997 106 Harrisburg, PA.......... October 1996 80 March 1997 96 Delran, NJ(3)........... March 1997 100 June 1998 304 York, PA(4)............. June 1997 80 May 1998 184 Ewing Township, NJ...... July 1998 64 November 1998 124 Largo, FL............... October 1998 96 October 1998 96 ---- TOTAL 1,606 ===== (1) Facilities transferred from Wynnewood, PA (the original headquarters) to Bryn Mawr in September 1995. (2) Includes a 24-seat inbound capability. (3) Includes a 70-seat inbound capability. (4) Includes a 40-seat inbound capability. The Company believes that suitable additional or alternative space will be available as needed on commercially reasonable terms. 7 ITEM 3. LEGAL PROCEEDINGS ----------------- None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- Not Applicable. Executive Officers of the Company The executive officers of the Company are as follows:
Name Age Position - ---- --- -------- John A. Fellows........... 34 Director and Chief Executive Officer Robert M. Berwanger....... 42 Chief Operating Officer Michael J. Scharff........ 52 Executive Vice President and acting Chief Financial Officer Diane Bowser.............. 45 Senior Vice President of Operations David Clautice............ 56 Vice President of Management Information Systems Christina Johnson......... 55 Vice President of Corporate Training and Process Development Darrell Jones............. 37 Vice President of Business Development Eric Kligman.............. 35 Vice President of Outbound Operations Dean McCarney............. 33 Vice President of Account Management - Financial Services Ellen Ritson.............. 45 Vice President of Operations Recruiting, Training & Quality Suzanne Snyder............ 35 Vice President of Account Management - Insurance James Wallace............. 46 Vice President of MIS Systems and Programming Michael Weston............ 38 Vice President of Sales
Mr. Fellows joined the Company as Chief Executive Officer in September 1998 and was elected to the Board of Directors in December 1998 to fill the unexpired term of Raymond J. Hansell who resigned from the Board of Directors in December 1998. Prior to joining the Company, Mr. Fellows held various management positions at Pepsico, Inc. and then served in senior positions at Paging Network, Inc. before becoming President of Telequest Teleservices, an Arlington, Texas based teleservices company. While President of Telequest Teleservices, Mr. Fellows had responsibility for a business with ten call centers and was very successful in helping refocus Telequest's historical product offerings, including retooling and enhancing the inbound portfolio of their teleservices business. Mr. Berwanger joined the Company as Senior Vice President of Operations in March 1997 and was named an Executive Vice President in December 1997. In March 1998, Mr. Berwanger was named Chief Operating Officer. For 14 years prior to joining the Company, Mr. Berwanger was employed by American Transtech, a wholly-owned teleservices subsidiary of AT&T where he most recently served as Director, New Business Development. Mr. Berwanger's tenure at AT&T included oversight of American Transtech's outbound telemarketing operation, start-up and oversight of a large-scale call center in Canada, and management of the AT&T multi-lingual call centers in San Jose, California. 8 Mr. Scharff is the Company's Executive Vice President and acting Chief Financial Officer and since November 1994 has been Treasurer of the Company. Mr. Scharff was Senior Vice President of Finance of the Company from November 1995 to September 1996 and Vice President of Finance of the Company from November 1994 to November 1995. From January 1994 to November 1994, Mr. Scharff was an Assistant Vice President of the Company and, from the time he joined the Company in October 1988 until January 1994, Mr. Scharff served as the Company's Controller. From 1984 until joining the Company, Mr. Scharff was the President of Audobon Automotive Supply Co., an automotive parts distributor. Mr. Scharff was a divisional controller of Safeguard Business Systems from 1979 to 1984. Ms. Bowser recently joined RMH as Senior Vice President of Operations responsible for the Financial and General Business Partners. Ms Bowser comes from Fleet Financial/ Advanta Corporation where she served in various operational functions from 1981. Ms Bowser managed a customer base of over 6 million and 900 employees in three operational sites. Ms Bowser was also responsible for employee training, vendor management and quality assurance. Mr. Clautice serves as the Company's Vice President of Management Information Systems. From June 1995 to December 1995, Mr. Clautice served as the Company's Director of Methods and Procedures. Prior to joining the Company in June 1995, Mr. Clautice was President of Clautice Associates, Inc., an information systems consulting firm he founded in 1974. From 1974 to 1985, Mr. Clautice was President of Electronic Processing Center, a data processing service organization. Ms. Johnson currently serves as Vice President of Corporate Training and Process Development. Ms Johnson joined the Company in 1994, after nearly seventeen years with Safeguard Business Systems. While at Safeguard, Ms. Johnson served as Director of Quality Initiative (TQM) and was responsible for corporate training and human resources. Prior to that, Ms. Johnson served as Marketing Director for the core product line. Mr. Jones recently joined the Company as Vice President of Business Development. Prior to joining the Company, Mr. Jones was Director of Business Development for Telequest Teleservices and National Sales Manager for Century Telecommunications. From 1991 to 1997 Mr. Jones was Territory Manager for NMI Corporation. Mr. Jones served as Senior Account Executive for AT&T Wireless Services from 1989 to 1991. Mr. Kligman serves as Vice President of Outbound Operations, managing all insurance product call centers. Mr. Kligman joined the company in 1990 as a supervisor in one of the call centers and, prior to assuming his current position, served as General Manager of one site. Mr. McCarney is Vice President of Account Management for Financial Services and General business partners. Since joining the Company in 1990, Mr. McCarney has managed various areas of the Company including technical training, sales to national accounts and client services. Ms. Ritson is the Company's Vice President of Operations Recruiting, Training & Quality. Ms. Ritson joined the Company in 1993 and comes to the Company with over 15 years of experience in retail operations management. Ms. Snyder serves as Vice President of Account Management for the Insurance Division. Ms. Snyder joined the Company in 1990 after nearly five years in the retail management arena. Ms. Snyder manages the activity of the Company's insurance customers and oversees the licensing department, the Company compliance function and overall recruitment of licensed agents. 9 Mr. Wallace is Vice President of MIS Systems and Programming and is responsible for the coordinating, testing, and implementing of all Company and customer programming needs. Prior to joining the Company, Mr. Wallace was an independent systems consultant servicing a broad range of clients with both programming and project management needs. Mr. Weston is currently Vice President of Sales. Prior to joining the Company, Mr. Weston served as National Sales Director of Telequest Teleservices from May 1996 to September 1998. From October 1994 to May 1996 Mr. Weston was an Account Executive at Somar. Mr. Weston also served in various sales capacities with two major insurance companies. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS --------------------------------------------------------------------- The Company completed the Initial Public Offering on September 18, 1996 selling 3,220,000 shares of its Common Stock at a price of $12.50 per share. Since the Initial Public Offering, the Company's Common Stock has been quoted on the Nasdaq National Market under the symbol "RMHT." Prior to the Initial Public Offering, the Common Stock was not listed or quoted on any organized market system. The following table sets forth for the periods indicated the high and low closing sale prices of the Common Stock as reported on the Nasdaq National Market during the fiscal years ended September 30, 1997 and 1998. HIGH LOW ---- --- First Fiscal Quarter of 1997................. $17.00 $ 6.13 Second Fiscal Quarter of 1997................ 8.25 5.00 Third Fiscal Quarter of 1997................. 8.50 4.88 Fourth Fiscal Quarter of 1997................ 9.13 6.25 First Fiscal Quarter of 1998................. 8.88 4.75 Second Fiscal Quarter of 1998................ 6.25 3.44 Third Fiscal Quarter of 1998................. 4.38 3.25 Fourth Fiscal Quarter of 1998................ 3.38 1.63 As of December 21, 1998 there were 36 shareholders of record of the Common Stock. The Company has not declared dividends on the Common Stock during the past two fiscal years. The Company currently intends to retain future earnings to finance its growth and development and therefore does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's credit facilities restrict the payment of cash dividends by the Company. Payment of any future dividends will depend upon the future earnings and capital requirements of the Company and other factors which the Board of Directors consider appropriate. The Company sold no securities during fiscal 1998. 10 ITEM 6. SELECTED FINANCIAL DATA ----------------------- The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Financial Statements of the Company and notes thereto included elsewhere in the Report.
For The Year Ended September 30 ------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (in thousands, except per share data) Statement of Operations Data: Revenues ....................................................... $ 52,434 $ 45,937 $ 32,316 $ 25,545 $ 17,105 -------- -------- -------- -------- -------- Operating expenses Cost of services ............................................ 39,646 31,749 22,212 18,210 13,286 Selling, general and administrative (1) ..................... 12,461 9,469 6,669 5,312 3,007 Special bonuses (2) ......................................... -- -- 6,087 -- -- -------- -------- -------- -------- -------- Total operating expenses ................................. 52,107 41,218 34,968 23,522 16,293 -------- -------- -------- -------- -------- Operating income (loss) .................................. 327 4,719 (2,652) 2,023 812 Interest income (expense) (3) .................................. 541 473 (1,893) (261) (170) -------- -------- -------- -------- -------- Income (loss) before income taxes (benefit) and extraordinary item ................................... 868 5,192 (4,545) 1,762 642 Income taxes (benefit) (4) ..................................... 364 1,825 (1,222) 21 40 -------- -------- -------- -------- -------- Income (loss) before extraordinary item .................. 504 3,367 (3,323) 1,741 602 Extraordinary item, net of tax benefit (5) ..................... -- -- 582 -- -- -------- -------- -------- -------- -------- Net income (loss) .............................................. 504 3,367 (3,905) 1,741 602 Preferred stock dividends ...................................... -- -- 308 -- -- -------- -------- -------- -------- -------- Net income (loss) available to Common shareholders (4) ............................................ $ 504 $ 3,367 $ (4,213) $ 1,741 $ 602 ======== ======== ======== ======== ======== Basic Income (Loss) Per Common Share Income (loss) before extraordinary item ..................... $ .06 $ .41 $ (.47) $ .17 $ .06 Extraordinary item .......................................... -- -- (.08) -- -- -------- -------- -------- -------- -------- Basic net income (loss) per Common share .................... $ .06 $ .41 $ (.55) $ .17 $ .06 ======== ======== ======== ======== ======== Diluted Income (Loss) Per Common Share Income (loss) before extraordinary item ..................... $ .06 $ .41 $ (.47) $ .17 $ .06 Extraordinary item .......................................... -- -- (.08) -- -- -------- -------- -------- -------- -------- Diluted net income (loss) per Common share .................. $ .06 $ .41 $ (.55) $ .17 $ .06 ======== ======== ======== ======== ======== September 30 -------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (in thousands) Balance Sheet Data: Working capital ................................................ $ 18,162 $ 17,384 $ 12,899 $ 1,061 $ 829 Total assets ................................................... 27,335 25,286 22,555 8,757 5,576 Long-term debt, less current maturities ........................ -- -- -- 592 355 Capitalized lease obligations, less current maturities ......... -- -- 2 436 623 Loans payable to shareholders .................................. -- -- -- 133 125 Shareholders' equity ........................................... 22,187 21,683 18,315 3,668 1,927
- ---------------- 1) Selling, general and administrative expenses include Founders' compensation of $415,000, $400,000, $598,000, $766,000 and $660,000 for fiscal 1998, 1997, 1996, 1995 and 1994, respectively. 2) Special bonuses in fiscal 1996 are bonuses and related payroll taxes in the amount of $6,087,000 paid to the Founders. Pursuant to employment contracts entered into and effective in May 1996, the Founders' compensation was fixed at a combined base amount of $400,000 per year for three years (subject to annual adjustment based on the inflation rate), plus a discretionary bonus which was not expected to exceed 20% of base compensation. On August 14, 1998, the Founders entered into consulting agreements with the Company which replace the aforementioned employment contracts. The agreements commenced on September 9, 1998 and expire on May 31, 1999. The agreements require annual basis payments of $104,000 for each of the Founders. 3) In fiscal 1996 interest expense includes a one-time charge of $1,177,000 relating to interest expense on a Founders' note. 11 4) The Company operated as an S Corporation for income tax purposes since April 1, 1990 and terminated such status in connection with the Recapitalization. 5) The $582,000 extraordinary expense, net of an income tax benefit, represents the write-off of certain deferred financing costs associated with the early extinguishment of bank indebtedness. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS ------------- Safe Harbor For Forward Looking Statements The following discussion of the Company's historical results of operations and its liquidity and capital resources should be read in conjunction with "Selected Financial Information" and the Financial Statements of the Company and Notes thereto appearing elsewhere in this document. From time-to-time, the Company may publish statements which are not historical facts but are forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provided a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include, but are not limited to: (i) reliance on principal client relationships in the insurance and financial services industry; (ii) fluctuations in quarterly results of operations due to the timing of clients' telemarketing campaigns, the timing of opening of new call centers and expansion of existing call centers and changes in competitive conditions affecting the telemarketing industry; (iii) difficulties of managing growth profitably; (iv) dependence on the services of the Company's executive officers and other key operations and technical personnel; (v) changes in the availability of qualified employees (vi) performance of its automated call-processing systems and other technological factors; (vii) the impact of Year 2000 issues on the Company; (viii) reliance on independent long-distance companies; (ix) changes in government regulations affecting the teleservices and telecommunications industries; (x) competition from other outside providers of teleservices and in-house telemarketing operations of existing and potential clients; and (xi) competition from providers of other marketing formats, such as existing formats such as direct mail and emerging strategies such as interactive shopping and marketing over the Internet. Overview The Company is a leading provider of outbound and inbound teleservices to major corporations in the insurance, financial services, telecommunications, and membership services industries. Founded in 1983 by Raymond J. Hansell and MarySue Lucci to provide direct marketing and sales consulting, the Company opened its first call center focusing on business-to-business teleservices in 1985 to support the marketing efforts of its consulting customers. By the late 1980s, outbound business-to-consumer teleservices had become the predominant business of the Company. On May 24, 1996, the Company completed the Recapitalization which included the purchase of a significant equity interest in the Company by Advanta Partners. On September 24, 1996 the Company completed the Initial Public Offering from which it realized proceeds, after the deduction of underwriting discounts and commissions of $37.4 million. In connection with the Initial Public Offering, the Company redeemed all outstanding preferred stock. Specifically, the Company: (i) issued an aggregate of 400,000 shares of the Common Stock to the Founders in exchange for Series A Preferred Stock and a 6% subordinate promissory note for $4.0 million (the "Founders' Note") held by the Founders; and (ii) redeemed an aggregate of 6,500,000 shares of Series B Preferred Stock held by Advanta Partners and Glengar International Investments Limited. The Company also combined existing classes of common stock by converting shares of Class B Common Stock into an equal number of shares of Class A Common Stock, thereby leaving the Common Stock as the sole equity security of the Company. 12 The Company's business has grown rapidly, resulting in increases in revenues during each of the last three fiscal years. The increase in revenues from $32.3 million in fiscal 1996 to $52.4 million in fiscal 1998, has largely been driven by increases in call volumes from existing clients, primarily in the insurance industry, coupled with the development of new clients primarily in the financial services, membership services and telecommunications industry. There is no assurance that the Company will be able to maintain its historical profit margins, which may be adversely affected by, among other factors, the pricing of such business and additional technological, labor and other costs involved in servicing such business. Operating income (exclusive of any special compensation expenses and one-time charges) decreased from $3.4 million or 10.6% of revenues in fiscal 1996 to $327,000 or 0.6% of revenues in fiscal 1998. Operating income decreased in 1998 when compared to 1997 as a result of the increase in cost of services as a percentage of revenues, partially offset by growth in revenue. Cost of services, which primarily consists of labor, telephone and other call center-related operating and support expenses, increased from 69.1% of revenues in fiscal 1997 to 75.6% of revenues in fiscal 1998. These costs have increased as a percentage of revenues as the Company has encountered a tight labor market, resulting in higher average hourly pay rates coupled with difficulties in staffing its existing call centers. In 1997, cost of services increased slightly as a percentage of revenues from 68.7% in 1996 to 69.1% in 1997 as certain factors that caused cost of services to decline were offset by pricing pressures and the costs of opening new call centers that were under utilized in 1997. These factors included expansion of call centers into lower cost geographic areas, improved operating efficiencies, negotiation of more favorable long distance rates and the maintenance of hourly wage rates. Selling, general and administrative expenses are comprised principally of corporate expenses, including management, sales and marketing activities, account management services, accounting and finance, human resources, information services and other administrative costs. The Company was subject to taxation under Subchapter S of the Internal Revenue Code of 1986, as amended, from April 1, 1990 to May 24, 1996. As a result, the net income of the Company, for federal and certain state tax purposes, was taxed directly to the Company's Founders rather than the Company. Upon completion of the Recapitalization, the Company terminated its Subchapter S status. In fiscal 1996, certain charges were incurred in connection with the Recapitalization of the Company and the Initial Public Offering. As a result of these charges the Company incurred a net operating loss for fiscal 1996. In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, a calculation as to the realizability of the net operating loss carry forward was made taking into account the Company's ability to generate sufficient taxable income and thereby realize the benefit of the net operating loss prior to its expiration. As a result of this analysis, the Company recorded a deferred tax asset of $1.1 million in fiscal 1996. Results of Operations The following table sets forth statements of operations and other data as a percentage of revenues from services provided by the Company for the periods indicated: For The Year Ended September 30 ------------------------------- 1998 1997 1996 ------ ------ ------ Revenues 100.0% 100.0% 100.0% ------ ------ ------ Operating expenses: Cost of services 75.6 69.1 68.8 Selling, general and administrative(1) 23.8 20.6 20.6 Special bonuses(2) -- -- 18.8 ------ ------ ------ Total operating expenses 99.4 89.7 108.2 ------ ------ ------ Operating income (loss) 0.6 10.3 (8.2) Interest income (expense)(3) 1.1 1.0 (5.9) ------ ------ ------ Income (loss) before income taxes (benefit) and extraordinary item 1.7 11.3 (14.1) Income taxes (benefit) 0.7 4.0 (3.8) Extraordinary item, net of tax benefit(4) -- -- 1.8 ------ ------ ------ Net income (loss) 1.0% 7.3% (12.1)% ====== ====== ====== 13 (1) Compensation to Founders represents approximately 0.8%, 0.9% and 1.9% of revenues for fiscal 1998, fiscal 1997 and fiscal 1996, respectively. (2) Special Bonuses in fiscal 1996 include cash bonuses and related payroll taxes in the amount of $6,087,000 paid to the Founders. (3) During 1996, 3.6% of revenues represents interest expense incurred as the result of the exchange of the Founders' Note for Common Stock. (4) During 1996, the Company incurred an extraordinary loss of $582,000, net of taxes, on the early extinguishment of bank indebtedness. Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September 30, 1997 Revenues. Revenues increased to $52.4 million in fiscal 1998 from $45.9 million in fiscal 1997, an increase of $6.5 million or 14.1%. Of such increase in revenues, approximately $9.8 million was attributable to increased calling volumes from existing clients, $3.6 million to new clients in the membership services industry, $0.6 million to new clients in the financial services industry and $0.6 million to new clients in other industries, which together offset any decreases in revenues from other existing clients. To meet the demands of increased call volumes, the Company added a total of 326 workstations during the year, 64 at one new call center in Ewing Township, New Jersey, and expanded capacity in two existing call centers by 262 workstations. Cost of Services. Cost of services increased to $39.6 million in fiscal 1998 from $31.7 million in fiscal 1997. As a percentage of revenues, cost of services increased to 75.6% in fiscal 1998 from 69.1% in fiscal 1997. The increase during fiscal 1998 was the result of labor cost pressure and pricing pressures incurred together with costs associated with opening one new call center and increasing capacity in two others which were less than fully utilized over the twelve-month period. The Company anticipates that cost of services, as a percentage of revenues, may increase during the next year to the degree that large volume opportunities warrant the Company offering appropriate pricing discounts, to the extent that the Company requires a longer period of time to generate acceptable levels of utilization at its new call centers, and/or the Company experiences upward pressures on hourly wages as a result of tighter or more competitive labor markets. Selling, General, and Administrative. Selling, general and administrative expenses increased to $12.5 million in fiscal 1998 from $9.5 million in fiscal 1997. As a percentage of revenues, selling, general and administrative expenses increased to 23.8% in fiscal 1998 from 20.6% in fiscal 1997. The dollar increase was primarily the result of increasing staffing and operating costs required to support both the growth in the Company's revenues and the on-going requirements of its customers with respect to technology and programming requirements. Interest Income. Interest income was $541,000 and $473,000 for fiscal 1998 and 1997 respectively and was earned by investing the remaining proceeds of the Company's Initial Public Offering in short term investments. Income Tax Expense. Income tax expense was $364,000 and $1.8 million for fiscal 1998 and 1997 respectively and represents income taxes based upon the Company's effective tax rate. This tax rate is reflective of both the federal tax rate in effect and those state tax rates in effect where the Company does business coupled with certain tax planning strategies implemented in fiscal 1996. 14 Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30, 1996 Revenues. Revenues increased to $45.9 million in fiscal 1997 from $32.3 in fiscal 1996, an increase of $13.6 million or 42.1%. Of such increase in revenues, approximately $9.0 million was attributable to increased calling volumes from existing clients, $4.5 million to new clients in the telecommunications industry, $1.7 million to new clients in the financial services industry and $800,000 to new clients in other industries, which together offset any decreases in revenues from other existing clients. To meet the demands of increased call volumes, the Company added a total of 364 workstations during the year, spread across three new call centers in Harrisburg, PA, Delran, NJ, and York, PA, and expanded capacity in three existing call centers by 58 workstations. Cost of Services. Cost of services increased to $31.7 million in fiscal 1997 from $22.2 million in fiscal 1996. As a percentage of revenues, cost of services increased to 69.1% in fiscal 1997 from 68.8% in fiscal 1996. This increase was the result of specific pricing pressures incurred in its insurance business coupled with the costs of opening three new call centers, during the year, which were less than fully utilized over the twelve-month period. Selling, General, and Administrative. Selling, general and administrative expenses increased to $9.5 million in fiscal 1997 from $6.7 million in fiscal 1996. As a percentage of revenues, selling, general and administrative expenses remained fixed at 20.6% during fiscal years 1997 and 1996. The dollar increase was primarily the result of increasing staffing and operating costs required to support both the growth in the Company's revenues and the on-going requirements of its customers with respect to technology and programming requirements. Interest Income (Expense). Interest income was $473,000 for fiscal 1997 and was earned by investing the remaining proceeds of the Company's Initial Public Offering in short term investments. Interest expense was $1.9 million for fiscal 1996 of which $1.6 million relates to certain interest incurred as a result of the Company's Recapitalization and interest paid on the Founders' Note. Income Tax Expense (Benefit). Income tax expense was $1.8 million for fiscal 1997 and represents income taxes based upon the Company's effective tax rate. This tax rate is reflective of both the federal tax rate in effect and those state tax rates in effect where the Company does business coupled with certain tax planning strategies implemented in fiscal 1996. During 1996, the Company generated a net operating loss carry forward. In accordance with SFAS No. 109, a calculation as to the realizability of the net operating loss carry forward was made taking into account the Company's ability to generate sufficient taxable income and thereby realize the benefit of the net operating loss prior to its expiration. As a result of this analysis, the Company recorded a tax benefit of $1.6 million in fiscal 1996. Liquidity and Capital Resources Historically, the Company's primary sources of liquidity have been cash flow from operations and borrowings under its credit facilities. These funds, combined with borrowings under capitalized lease obligations, have provided the liquidity to finance the growth of the Company. On September 24, 1996 the Company completed the Initial Public Offering and raised net proceeds of approximately $37.4 million. The Company used approximately $27.9 million of these proceeds to repay all bank indebtedness, redeem outstanding Series B Preferred Stock and pay the Special Bonuses. The remaining $9.5 million has been and will continue to be used for working capital and general corporate purposes. Upon completion of the Company's Initial Public Offering, the Company issued 400,000 shares of the Common Stock to the Founders in exchange for Series A Preferred Stock and the Founders' Note. 15 On March 21, 1997, the Company entered into a new $4.0 million line of credit facility (the "Credit Line") with PNC Bank (the "Bank"). The Credit Line replaces the Company's former Term Loan and Credit Facility originated in conjunction with the Recapitalization. The Credit Line expired on April 1, 1998, but was extended by the Bank to April 1, 1999. Outstanding balances bear interest at the Company's option at either the LIBOR rate plus 95 basis points or at the Bank's prime rate minus fifty basis points. The Credit Line is secured by all of the assets of the Company and contains financial covenants and certain restrictions on the Company" ability to incur additional debt or dispose of its assets. As of September 30, 1998, the Company had no draws outstanding on the Credit Line. This Credit Line compares favorably with a former term loan and credit facility which bore interest at either the LIBOR rate plus 250 to 300 basis points or the prime rate plus 100 to 150 basis points and required an annual fee of $15,000 and an annual commitment fee of one-half of 1% on the average unused portion of such term loan and credit facility. Although total borrowing capability is $4.0 million under the Company's Credit Line versus $6.0 million under its former term loan and credit facility, the Company believes that the existing line will be sufficient to finance its current operations at least through the end of fiscal 1999. Under a separate agreement dated February 22, 1997, with PNC Leasing Corporation, the Company has up to $6.0 million available for purposes of leasing call center equipment. The $6.0 million commitment expired on April 1, 1998, and required that such leases meet the accounting definition of an operating lease with rent to be paid over a period not to exceed sixty months. As of September 30, 1998, the Company had financed $4.1 million of equipment purchases under this facility. Under a separate agreement dated March 10, 1998, with PNC Leasing Corporation, the Company has established an additional lease facility of $6.0 million available for purposes of leasing call center equipment. The $6.0 million commitment expires on April 1, 1999, and requires that such leases meet the accounting definition of an operating lease with rent to be paid over a period not to exceed sixty months. As of September 30, 1998, the Company has financed $2.3 million of equipment purchases under this facility. Cash provided by operating activities was approximately $144,000 and $2.5 million for the fiscal years ended September 30, 1998 and 1997 respectively. The reduction in cash provided by operations was the result of the decrease in the Company's net income in 1998 and a reduction in non-cash income taxes offset by an increase in accounts payable and accrued expenses. The Company's teleservices operations will continue to require significant capital expenditures. Capital expenditures, including capitalized leases, in applicable periods, were $2.9 million in fiscal 1996, $1.1 million in fiscal 1997 and $1.2 million in fiscal 1998. The Company expects to spend approximately $9.4 million on capital expenditures in fiscal 1999, primarily for the enhancement of technology used throughout its call center operations and additional call center expansion. However, in conjunction with such expenditures, the Company is evaluating whether to lease or buy such assets and may decide to enter into operating leases for their acquisition. The Company believes that funds generated from operations, together with the remaining proceeds of its Initial Public Offering and available credit under the Credit Line and the lease line of credit will be sufficient to finance its current operations and planned capital expenditures at least through fiscal 1999. 16 Quarterly Results of Operations The following table sets forth statement of operations data for each of the four quarters of fiscal 1997 and 1998, as well as such data expressed as a percentage of revenues. This quarterly information is unaudited, but has been prepared on a basis consistent with the audited Financial Statements of the Company presented elsewhere and, in the Company's opinion, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented. The results for any quarter are not necessarily indicative of results for any future period.
Quarter Ended -------------------------------------------------------------------------------------- Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 1996 1997 1997 1997 1997 1998 1998 1998 -------- -------- -------- -------- -------- -------- -------- -------- (amounts in thousands) Revenues $ 9,749 $ 11,322 $ 12,698 $ 12,168 $ 12,247 $ 12,337 $ 13,212 $ 14,638 -------- -------- -------- -------- -------- -------- -------- -------- Operating expenses: Cost of services 6,623 7,580 8,858 8,688 8,983 9,313 $ 10,155 $ 11,195 Selling, general and admin 2,032 2,437 2,553 2,447 2,564 3,612 3,052 3,233 -------- -------- -------- -------- -------- -------- -------- -------- Total operating expenses 8,655 10,017 11,411 11,135 11,547 12,925 13,207 14,428 -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss) 1,094 1,305 1,287 1,033 700 (588) 5 210 Interest income 111 102 133 127 148 121 145 127 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes (benefit) 1,205 1,407 1,420 1,160 848 (467) 150 337 Income taxes (benefit) 434 506 477 408 305 (168) 54 173 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 771 $ 901 $ 943 $ 752 $ 543 $ (299) $ 96 $ 164 ======== ======== ======== ======== ======== ======== ======== ========
Quarter Ended -------------------------------------------------------------------------------------- Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 1996 1997 1997 1997 1997 1998 1998 1998 -------- -------- -------- -------- -------- -------- -------- -------- Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% -------- -------- -------- -------- -------- -------- -------- -------- Operating expenses: Cost of services 67.9 67.0 69.8 71.4 73.3 75.5 76.9 76.5 Selling, general and admin 20.8 21.5 20.1 20.1 21.0 29.3 23.1 22.1 Total operating expenses 88.7 88.5 89.9 91.5 94.3 104.8 100.0 98.6 -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss) 11.3 11.5 10.1 8.5 5.7 (4.8) 0.0 1.4 Interest income 1.1 .9 1.1 1.0 1.2 1.0 1.1 0.9 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes (benefit) 12.4 12.4 11.2 9.5 6.9 (3.8) 1.1 2.3 Income taxes (benefit) 4.5 4.5 3.8 3.3 2.5 (1.4) 0.4 1.2 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) 7.9% 7.9% 7.4% 6.2% 4.4% (2.4)% 0.7% 1.1% ======== ======== ======== ======== ======== ======== ======== ========
The Company has experienced and expects to continue to experience quarterly variations in operating results, principally as a result of the timing of clients' telemarketing campaigns, the commencement and expiration of contracts, the timing and amount of new business generated by the Company, the Company's revenue mix, the timing of the opening of call centers or expansion of existing centers, the timing of additional selling, general and administrative expenses and competitive conditions in the teleservices industry. While the effects of seasonality on the Company's business have historically been obscured by its growing revenues, the Company's business tends to be slower in the fourth quarter of its fiscal year due to a certain segment of its workforce turning over coupled with a slowdown in client marketing programs during the summer months. 17 RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------- In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements and requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 is required to be adopted for the Company's fiscal year ending September 30, 1999. The adoption of this pronouncement is expected to have no material impact on the Company's financial position or results of operations. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company will adopt SFAS No. 131 for its fiscal year ending September 30, 1999 financial statements. Management believes that SFAS No. 131 will not have a material effect on the Company's financial statements. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software, and is effective for fiscal years beginning after December 15, 1998. The statement also requires that costs related to the preliminary project stage and post implementation/operations stage in an internal-use computer software development project be expensed as incurred. During the fiscal year ended September 30, 1998, the Company recorded all applicable costs in accordance with the guidance proscribed in SOP 98-1. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities," which is effective for fiscal years beginning after December 15, 1998 and provides guidance on the financial reporting of start-up activities and organization costs. It requires costs of start-up activities to be expensed as incurred. SOP 98-5 is required to be adopted for the Company's fiscal year ending September 30, 1999. The adoption of this pronouncement is expected to have no material impact on the Company's financial position or results of operations. YEAR 2000 READINESS DISCLOSURE - ------------------------------ The year 2000 problem arises as a result of computer programs being written using two digits rather than four to define the applicable year. In other words, date-sensitive software, including those with embedded microprocessors, may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system and equipment failures or malfunctions causing disruptions of operations, including among others, a temporary inability to process calls, transactions and information, or engage in similar normal business activities. The Company's Internal Systems. The Company has evaluated its infrastructure as it relates to information technology and has developed a plan to ensure its Year 2000 compliance. This plan includes, among other things, replacing certain systems with new internally developed Year 2000 compliant systems, upgrading the remaining software systems to be Year 2000 compliant. Year 2000 compliant upgrades to the Company's predictive dialing equipment are approximately 40% complete with full completion planned by February 1999. These processes will allow the Company to receive lead information, make and receive calls, and produce reports on compliant and non-compliant date formats. Modification and testing of all information and noninformation systems are scheduled to be completed by March 1999. In addition, the Company will also be replacing 55 non-compliant personal computer workstations by February 1999. 18 The Company is also in the process of evaluating its security systems, copiers and other noninformation technology infrastructure in which non-compliant software or embedded microprocessors might exist. The Company believes that all material components in this infrastructure will be Year 2000 compliant by the end of fiscal 1999. Readiness of Third Parties. The Company has requested information from its third party vendors and clients on their Year 2000 readiness to determine the extent to which their inability to be Year 2000 compliant will affect the Company. This process has included identifying vendors and defining the readiness of their products and services. The Company's primary focus as it relates to vendors is on those that support the teleservices platform and information technology platforms, followed by all others. The Company is approximately 25% through the vendor compliance documentation process which includes use of vendor compliance documentation published on the internet. A similar process will be followed with clients to assess their Year 2000 readiness. The Company's software is being modified to accept two digit year or four digit century inputs, and will output in either format. Accordingly, the Company is prepared for either occurrence and should not be adversely affected by year format. Cost of Year 2000 Compliance. The Company has incurred minimal costs to date in addressing the Year 2000 issue. The Year 2000 evaluation, modification and testing that has been undertaken to date has not had a material effect on the Company's ability to deliver reports and other output on a timely basis. However, the Company anticipates that the Year 2000 project could affect development of internal systems nearing the latter part of fiscal 1999. The Company currently expects that the total costs to become Year 2000 compliant will not exceed $750,000. Hardware costs are projected to be approximately $300,000, software costs are projected to be approximately $250,000, and consulting and testing costs are projected to be approximately $200,000. The Company is researching the use of a third party to independently review its plan and processes. New capital equipment which the Company will require will be either purchased or financed under the Company's operating lease line. The remaining costs will be financed out of operating working capital. Risks Associated with the Year 2000. The extent of the Company's Year 2000 exposure, the costs of achieving Year 2000 compliance and the time period within which the Company believes it will achieve its Year 2000 compliance are based on management's knowledge to date and its best estimates. The Company is not aware, at this time, of any internal or third party vendor Year 2000 non-compliance that will not be fixed by the Year 2000 and that will materially affect the Company. However, these estimates were derived using numerous assumptions, and some risks that the Company faces include: the failure of internal information systems, the failure of third parties to provide services, such as electricity and telecommunication services and a slow down in clients ability to make payments. There can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel, the ability to identify and correct all Year 2000 impacted areas, the ability of third party vendors and clients to be Year 2000 compliant and other similar uncertainties. Contingency Plans. The Company believes that the most reasonably likely worst case scenario, other than the loss of telecommunications and power, is loss of the dialers which will prevent the Company from generating revenue. It is reasonable to assume that there might be some interruptions related to specific campaigns and applications. The Company is in the process of developing contingency plans. Such plans are expected to be completed by July 1999. 19 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- INTEREST RATE RISK. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments with high credit quality issuers and limits the amount of credit exposure to any one issuer. The Company is averse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk and reinvestment risk. The Company mitigates default risk by investing in only the safest and highest credit quality securities and by constantly positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer, guarantor or depository. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. The table below presents principal (or notional) amounts and related weighted average interest rates for the Company's investment portfolio as of September 30, 1998. All investments mature in one year or less. Principal Amount Fair Value ---------------- ---------- (In Thousands) ------------ Assets Cash equivalents: Variable rate $ 2,141 $ 2,141 Average interest rate 5.26% 5.26% Marketable securities: Fixed rate 6,950 6,779 Average interest rate 5.51% 5.51% --------- --------- Total investments $ 9,091* $ 8,920 ========= ========= * Includes $83,000 of unaccrued interest to be received at maturity. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- Financial statements and supplementary financial information specified by this Item, together with the Reports of the Company's independent accountants thereon, are included in this Annual Report on Form 10-K on pages F-1 through F-22 below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- The information required by this Item with respect to the directors of the Company and with respect to Item 405 of Regulation S-K is incorporated herein by reference to the information set forth in the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on February 23, 1999 (the "Proxy Statement"). The information required by this Item with respect to executive officers of the Company is furnished in a separate item captioned "Executive Officers of the Company" and included in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION ---------------------- The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement. 20 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (a) Documents filed as a part of this Report: (1) Financial Statements. Page ---- Report of Independent Accountants--------------------------F-1 Consolidated Balance Sheets--------------------------------F-2 Consolidated Statements of Operations----------------------F-3 Consolidated Statements of Shareholders' Equity------------F-4 Consolidated Statements of Cash Flows----------------------F-5 Notes to Consolidated Financial Statements-----------------F-6 (2) Financial Statement Schedules. Schedule II - Valuation & Qualifying Accounts for the Three Year Ended September 30, 1998 Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at Additions Balance at Beginning Charged to End of of Period Expense Deductions(1) Period --------- ------- ---------- ------ Allowance for doubtful accounts: September 30, 1998 $ 37,000 $114,000 $114,000 $ 37,000 September 30, 1997 $ 10,000 $ 27,000 $ -- $ 37,000 September 30, 1996 $ 47,000 $ 38,000 $ 75,000 $ 10,000 (1) Represents accounts written off against the allowance. (3) Exhibits See attached (b) Reports on Form 8-K None 21 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. RMH TELESERVICES, INC. Dated: December 28, 1998 By: /s/ John A. Fellows ----------------------------- John A. Fellows Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signatures Title Date ---------- ----- ---- /s/ John A. Fellows Chief Executive Officer December 28, 1998 - ------------------------ (Principal Executive Officer) John A. Fellows /s/ Michael J. Scharff Executive Vice President December 28, 1998 - ------------------------ and acting Chief Financial Officer Michael J. Scharff (Principal Financial, Accounting Officer) /s/ William A. Rosoff Chairman December 28, 1998 - ------------------------ William A. Rosoff /s/ Derek Lubner Director December 28, 1998 - ------------------------ Derek Lubner /s/ Gary Neems Director December 28, 1998 - ------------------------ Gary Neems /s/ Herbert Kurtz Director December 28, 1998 - ------------------------ Herbert Kurtz /s/ David P. Madigan Director December 28, 1998 - ------------------------ David P. Madigan RMH TELESERVICES, INC. AND SUBSIDIARIES --------------------------------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Page ---- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1 CONSOLIDATED BALANCE SHEETS - September 30, 1998 and 1997 F-2 CONSOLIDATED STATEMENTS OF OPERATIONS - For the Years F-3 Ended September 30, 1998, 1997 and 1996 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - For the Years Ended September 30, 1998, 1997 and 1996 F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years F-5 Ended September 30, 1998, 1997 and 1996 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To RMH Teleservices, Inc.: We have audited the accompanying consolidated balance sheets of RMH Teleservices, Inc. (a Pennsylvania corporation) and subsidiaries as of September 30, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1998. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of RMH Teleservices, Inc. and subsidiaries as of September 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998 in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II, Valuation and Qualifying Accounts, is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Philadelphia, Pennsylvania November 10, 1998 F-1 RMH TELESERVICES, INC. AND SUBSIDIARIES --------------------------------------- CONSOLIDATED BALANCE SHEETS ---------------------------
September 30 -------------------------------------- ASSETS 1998 1997 ------ ---------------- ------------------ CURRENT ASSETS: Cash and cash equivalents $ 4,179,000 $ 6,882,000 Marketable securities 6,779,000 5,135,000 Accounts receivable, net of allowance for doubtful accounts of $37,000 10,739,000 7,926,000 Prepaid expenses and other current assets 1,463,000 755,000 ----------------- ----------------- Total current assets 23,160,000 20,698,000 ----------------- ----------------- PROPERTY AND EQUIPMENT: Communications and computer equipment 7,769,000 7,198,000 Furniture and fixtures 1,606,000 1,354,000 Leasehold improvements 1,155,000 802,000 ----------------- ----------------- 10,530,000 9,354,000 Less- Accumulated depreciation and amortization (6,483,000) (4,878,000) ----------------- ----------------- Net property and equipment 4,047,000 4,476,000 ----------------- ----------------- OTHER ASSETS 128,000 112,000 ----------------- ----------------- $ 27,335,000 $ 25,286,000 ================= ================= September 30 -------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997 ------------------------------------ ---------------- ------------------ CURRENT LIABILITIES: Current portion of capitalized lease obligations $ -- $ 8,000 Accounts payable 1,423,000 583,000 Accrued expenses 3,021,000 2,379,000 Deferred income taxes 554,000 344,000 ----------------- ----------------- Total current liabilities 4,998,000 3,314,000 ----------------- ----------------- DEFERRED INCOME TAXES 150,000 289,000 ----------------- ----------------- COMMITMENTS AND CONTINGENCIES (Note 8) SHAREHOLDERS' EQUITY: Preferred stock, $1 par value, 10,000,000 shares authorized, none issued and outstanding -- -- Common stock, no par value, 20,000,000 shares authorized, 8,120,000 shares issued and outstanding 48,638,000 48,638,000 Common stock warrant outstanding 450,000 450,000 Accumulated deficit (26,901,000) (27,405,000) ----------------- ----------------- Total shareholders' equity 22,187,000 21,683,000 ----------------- ----------------- $ 27,335,000 $ 25,286,000 ================= =================
The accompanying notes are an integral part of these statements. F-2 RMH TELESERVICES, INC. AND SUBSIDIARIES --------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS -------------------------------------
For the Year Ended September 30 -------------------------------------------------- 1998 1997 1996 --------------- ---------------- --------------- REVENUES $ 52,434,000 $ 45,937,000 $ 32,316,000 --------------- --------------- --------------- OPERATING EXPENSES: Cost of services 39,646,000 31,749,000 22,212,000 Selling, general and administrative 12,461,000 9,469,000 6,669,000 Special bonuses -- -- 6,087,000 --------------- --------------- --------------- Total operating expenses 52,107,000 41,218,000 34,968,000 --------------- --------------- --------------- Operating income (loss) 327,000 4,719,000 (2,652,000) INTEREST INCOME (EXPENSE) 541,000 473,000 (1,893,000) --------------- --------------- --------------- Income (loss) before income taxes (benefit) and extraordinary item 868,000 5,192,000 (4,545,000) INCOME TAXES (BENEFIT) 364,000 1,825,000 (1,222,000) --------------- --------------- --------------- Income (loss) before extraordinary item 504,000 3,367,000 (3,323,000) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, net of $327,000 tax benefit -- -- 582,000 --------------- --------------- --------------- NET INCOME (LOSS) 504,000 3,367,000 (3,905,000) PREFERRED STOCK DIVIDENDS -- -- 308,000 --------------- --------------- --------------- NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 504,000 $ 3,367,000 $ (4,213,000) =============== =============== =============== BASIC INCOME (LOSS) PER COMMON SHARE: Income (loss) before extraordinary item $ .06 $ .41 $ (.47) Extraordinary item -- -- (.08) --------------- --------------- ----------------- Basic net income (loss) per Common share $ .06 $ .41 $ (.55) =============== =============== =============== SHARES USED IN COMPUTING BASIC INCOME (LOSS) PER COMMON SHARE 8,120,000 8,120,000 7,694,000 =============== =============== =============== DILUTED INCOME (LOSS) PER COMMON SHARE: Income (loss) before extraordinary item $ .06 $ .41 $ (.47) Extraordinary item -- -- (.08) --------------- --------------- --------------- Diluted net income (loss) per Common share $ .06 $ .41 $ (.55) =============== =============== =============== SHARES USED IN COMPUTING DILUTED INCOME (LOSS) PER COMMON SHARE 8,314,000 8,262,000 7,694,000 =============== =============== ===============
The accompanying notes are an integral part of these statements. F-3 RMH TELESERVICES, INC. AND SUBSIDIARIES --------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -----------------------------------------------
Class A Voting Class B Nonvoting Common Stock Common Stock -------------------------------------------------------------------- Shares Amount Shares Amount ------------- --------------- --------------- ---------------- BALANCE, SEPTEMBER 30, 1995 10,000,000 $ 80,000 -- $ -- Distribution of accounts receivable -- -- -- -- Sale of Class A and Class B Common stock 1,720,427 3,279,000 1,279,573 2,438,000 Redemption of Class A Common stock (8,500,000) (68,000) -- -- Reclassification of Redeemable Class A Common stock outside of shareholders' equity (1,500,000) (12,000) -- -- Cancellation of redemption features of warrant -- -- -- -- Conversion of Redeemable Class A Common stock to Class A Common stock 1,500,000 2,865,000 -- -- Conversion of Class B to Class A Common stock 1,279,573 2,438,000 (1,279,573) (2,438,000) Conversion of Series A Preferred stock to Common stock 80,000 539,000 -- -- Conversion of Founders' Note to Common stock 320,000 3,200,000 -- -- Initial public offering of Common stock, net of expenses 3,220,000 36,317,000 -- -- Redemption of Series B Preferred stock -- -- -- -- Net loss -- -- -- -- Dividends on Series A and Series B Preferred stock -- -- -- -- ------------- --------------- -------------- ---------------- BALANCE, SEPTEMBER 30, 1996 8,120,000 48,638,000 -- -- Net income -- -- -- -- ------------- --------------- -------------- ---------------- BALANCE, SEPTEMBER 30, 1997 8,120,000 48,638,000 -- -- Net income -- -- -- -- ------------- --------------- -------------- ---------------- BALANCE, SEPTEMBER 30, 1998 8,120,000 $ 48,638,000 -- $ -- ============= =============== ============= ================ Common Retained Total Stock Earnings Shareholders' Warrants (Deficit) Equity ---------------- ---------------- ----------------- BALANCE, SEPTEMBER 30, 1995 $ -- $ 3,588,000 $ 3,668,000 Distribution of accounts receivable -- (4,600,000) (4,600,000) Sale of Class A and Class B Common stock -- -- 5,717,000 Redemption of Class A Common stock -- (20,068,000) (20,136,000) Reclassification of Redeemable Class A Common stock outside of shareholders' equity -- (2,853,000) (2,865,000) Cancellation of redemption features of warrant 450,000 -- 450,000 Conversion of Redeemable Class A Common stock to Class A Common stock -- -- 2,865,000 Conversion of Class B to Class A Common stock -- -- -- Conversion of Series A Preferred stock to Common stock -- -- 539,000 Conversion of Founders' Note to Common stock -- -- 3,200,000 Initial public offering of Common stock, net of expenses -- -- 36,317,000 Redemption of Series B Preferred stock -- (2,626,000) (2,626,000) Net loss -- (3,905,000) (3,905,000) Dividends on Series A and Series B Preferred stock -- (308,000) (308,000) ---------------- ---------------- ----------------- BALANCE, SEPTEMBER 30, 1996 450,000 (30,772,000) 18,316,000 Net income -- 3,367,000 3,367,000 ---------------- ---------------- ----------------- BALANCE, SEPTEMBER 30, 1997 450,000 (27,405,000) 21,683,000 Net income -- 504,000 504,000 ---------------- ---------------- ----------------- BALANCE, SEPTEMBER 30, 1998 $ 450,000 $ (26,901,000) $ 22,187,000 ================ ================ =================
The accompanying notes are an integral part of these statements. F-4 RMH TELESERVICES, INC. AND SUBSIDIARIES --------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
For the Year Ended September 30 ----------------------------------------------- 1998 1997 1996 ------------- ------------- -------------- OPERATING ACTIVITIES: Net income (loss) $ 504,000 $ 3,367,000 $ (4,213,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization 1,624,000 1,439,000 1,089,000 Deferred income taxes 71,000 1,645,000 (1,021,000) Extraordinary loss on early extinguishment of debt, net -- -- 582,000 Imputed interest and dividends -- -- 186,000 Amortization of deferred financing costs -- -- 10,000 Imputed interest on Founders' Note -- -- 1,136,000 Changes in operating assets and liabilities-- Accounts receivable (2,813,000) (2,377,000) (1,100,000) Prepaid expenses and other current assets (708,000) (427,000) (145,000) Other assets (16,000) (48,000) 41,000 Accounts payable 840,000 (1,099,000) 555,000 Accrued expenses 642,000 (30,000) 1,203,000 ------------- ------------- ------------- Net cash provided by (used in) operating activities 144,000 2,470,000 (1,677,000) ------------- ------------- ------------- INVESTING ACTIVITIES: Purchases of property and equipment (1,195,000) (1,118,000) (2,775,000) Purchases of marketable securities (13,700,000) (6,135,000) -- Maturities of marketable securities 12,056,000 1,000,000 -- ------------- ------------- ------------ Net cash used in investing activities (2,839,000) (6,253,000) (2,775,000) ------------- ------------- ------------- FINANCING ACTIVITIES: Net repayments on lines of credit -- -- (975,000) Proceeds from long-term debt -- -- 15,100,000 Repayments on long-term debt -- -- (15,897,000) Repayments on capitalized lease obligations (8,000) (40,000) (848,000) Proceeds from refinanced equipment -- 658,000 -- Deferred financing costs -- -- (505,000) Borrowings from Founders -- -- 1,006,000 Repayments to Founders -- -- (1,105,000) Proceeds from sale of Preferred and Common stock -- -- 9,500,000 Redemption of Common stock -- -- (17,112,000) Distribution to Founders -- -- (4,600,000) Redemption of Preferred stock -- -- (6,500,000) Net proceeds from initial public offering -- -- 36,317,000 Dividends paid -- -- (204,000) ------------- ------------- ------------- Net cash provided by (used in) financing activities (8,000) 618,000 14,177,000 ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,703,000) (3,165,000) 9,725,000 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,882,000 10,047,000 322,000 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,179,000 $ 6,882,000 $ 10,047,000 ============= ============= =============
The accompanying notes are an integral part of these statements. F-5 RMH TELESERVICES, INC. AND SUBSIDIARIES --------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ SEPTEMBER 30, 1998 ------------------ 1. BACKGROUND: ---------- RMH Teleservices, Inc. (the "Company") provides outbound and inbound teleservices to major corporations in the insurance, financial services, telecommunications and membership services industries. The Company was founded in 1983 by two individuals (the "Founders"). On May 24, 1996, the Company completed a leveraged recapitalization (the "Recapitalization") pursuant to which a portion of the Common stock owned by the Founders was redeemed and two investors (the "Investors") purchased Preferred and Common stock (see Note 3). These transactions were accounted for as a sale of newly issued stock by the Company and a redemption of previously outstanding shares. Accordingly, the historical bases of the Company's assets and liabilities have been retained. On September 18, 1996, the Company completed an initial public offering of 3.2 million shares of Common stock, raising net proceeds of approximately $36.3 million. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ------------------------------------------ Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Teleservices Management Company and Teleservices Technology Company. All intercompany transactions have been eliminated. Cash and Cash Equivalents - ------------------------- The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents at September 30, 1998 and 1997 consist of $2,141,000 and $5,693,000, respectively, invested in domestic money market accounts. The Company maintains cash accounts, which at times may exceed federally insured limits. The Company has not experienced any losses from maintaining cash accounts in excess of such limits. Management believes that it is not exposed to any significant credit risks on its cash accounts. F-6 Marketable Securities - --------------------- Investments in marketable securities are categorized as either trading, available-for-sale, or held-to-maturity. At September 30, 1998 and 1997, marketable securities consist of corporate commercial paper with contractual maturities of less than one year which are being held to maturity. The debt securities are stated at amortized cost. Property and Equipment - ---------------------- Property and equipment are recorded at cost. Depreciation and amortization are provided over the estimated useful lives of the applicable assets using the straight-line method. The lives used are as follows: Computer software 2-3 years Computer equipment 5 years Communications equipment 5-7 years Furniture and fixtures 7 years Leasehold improvements Lesser of lease term or useful life Repairs and maintenance are charged to expense as incurred, while additions and betterments are capitalized. Gains or losses on the disposition of property and equipment are charged to operations. Equipment under capital leases at September 30, 1997, included in property and equipment was $66,000, with accumulated depreciation of $33,000. There were no capital lease obligations outstanding at September 30, 1998. During the year ended September 30, 1997, the Company entered into a refinancing transaction under which certain of the Company's telecommunications equipment was sold at the net book value of $658,000. Concurrently, the Company entered into a five-year operating lease for the equipment. As of September 30, 1998, deposits of $501,000 primarily on telecommunications and computer equipment were included in other current assets in the accompanying balance sheet. The Company plans to finance this equipment under its lease line of credit (see Note 8) during the year ending September 30, 1999. Long-Lived Assets - ----------------- The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," effective October 1, 1996. SFAS No. 121 requires that long-lived assets to be held and used or disposed of by an entity be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. An F-7 impairment is recognized to the extent that the sum of undiscounted estimated future cash flows expected to result from use of the assets is less than the carrying value. As of September 30, 1998, management has evaluated the Company's asset base, under the guidelines established by SFAS No. 121, and believes that no impairment has occurred. Revenue Recognition - ------------------- The Company recognizes revenues on programs as services are performed, generally based on hours incurred. Advertising and Promotion - ------------------------- Costs associated with advertising and promotion are generally charged to expense when incurred. Advertising and promotion expense was $131,000, $182,000 and $174,000 for the years ended September 30, 1998, 1997 and 1996, respectively. Income Taxes - ------------ Prior to May 24, 1996, the Company was an S Corporation for federal and Pennsylvania income tax purposes and, accordingly, income was passed through to the shareholders and taxed at the individual level. The Company was not an S Corporation in New Jersey and, therefore, the Company paid income taxes on its taxable income in that state. The S Corporation status was terminated on May 24, 1996 (see Note 7). The Company applies SFAS No. 109, "Accounting for Income Taxes," which requires the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences, measured by enacted tax rates, attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards, for years which taxes are expected to be paid or recovered. Major Customers and Concentration of Credit Risk - ------------------------------------------------ The Company is dependent on several large customers for a significant portion of its revenues. Three customers accounted for 43.7%, 15.9% and 10.8% of revenues for the year ended September 30, 1998. Two customers accounted for 51.6% and 15.5% of revenues for the year ended September 30, 1997. Three customers accounted for 45.0%, 17.6% and 12.2% of revenues for the year ended September 30, 1996. The loss of one or more of these customers could have a materially adverse effect on the Company's business. As a result of the issuance of the Preferred and Common stock to one of the Investors (see Note 3), the Company is now affiliated with one of its customers. This customer represented 6.2%, 7.1% and 11.2% of revenues for the years ended September 30, 1998, 1997 and 1996, respectively. At September 30, 1998 and 1997, $978,000 and $503,000, respectively, were due from this customer and included in accounts receivable in the accompanying consolidated balance sheets. F-8 For the years ended September 30, 1998, 1997 and 1996, revenues from customers within the insurance industry accounted for 66.2%, 74.0% and 74.8% of revenues, respectively, and customers within the financial services industry accounted for 23.2%, 11.4% and 19.7% of revenues, respectively. In addition, for the year ended September 30, 1997, customers within the telecommunications industry accounted for 12.8% of revenues. Concentration of credit risk is limited to accounts receivable and is subject to the financial conditions of the Company's customers. Three of the Company's largest customers are engaged in transactions with each other and represent a single credit risk to the Company. The Company does not require collateral or other securities to support customer receivables. At September 30, 1998, the accounts receivable from the customers that represent a single credit risk were $6,088,000. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments - ----------------------------------- Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the financial statements at fair value due to the short-term nature of those instruments. The carrying amount of marketable securities and capitalized lease obligations approximates fair value at September 30, 1998 and 1997, respectively. Earnings (Loss) per Common Share - -------------------------------- In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share," which supersedes Accounting Principles Board ("APB") Opinion No. 15. SFAS No. 128 requires dual presentation of basic and diluted earnings (loss) per Common share for complex capital structures on the face of the statements of operations. According to SFAS No. 128, basic earnings (loss) per Common share, which replaced primary earnings (loss) per Common share, is calculated by dividing net income (loss) available to Common shareholders by the weighted average number of Common shares outstanding for the period. Diluted earnings (loss) per Common share, which replaced fully diluted earnings (loss) per Common share, reflects the potential dilution from the exercise or conversion of securities into Common stock, such as stock options. The Company was required to and did adopt SFAS No. 128 during the period ended December 31, 1997, as earlier application was not permitted. As required by SFAS No. 128, all prior-period earnings (loss) per Common share data has been restated to conform with the provisions of this statement. F-9 The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share computations.
For the Year Ended September 30, 1998 ---------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ------------- ------------- ------------ Basic earnings per Common share - Net income $ 504,000 8,120,000 $ 0.06 =========== Effect of dilutive securities - Stock warrants -- 142,000 Stock options -- 52,000 ------------- -------------- Diluted earnings per Common share - Net income and assumed conversions $ 504,000 8,314,000 $ 0.06 ============= ============= =========== For the Year Ended September 30, 1997 ---------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ------------- --------------- ------------ Basic earnings per Common share - Net income $ 3,367,000 8,120,000 $ 0.41 =========== Effect of dilutive securities - Stock warrants -- 142,000 Stock options -- -- ------------- --------------- Diluted earnings per Common share - Net income and assumed conversions $ 3,367,000 8,262,000 $ 0.41 ============= =============== =========== For the Year Ended September 30, 1996 ---------------------------------------------------- Loss Shares Per Share (Numerator) (Denominator) Amount -------------- --------------- ------------ Basic loss per Common share - Net loss $ (4,213,000) 7,694,000 $ (0.55) =========== Effect of dilutive securities - Stock warrants -- -- Stock options -- -- ------------- --------------- Diluted loss per Common share - Net loss and assumed conversions $ (4,213,000) 7,694,000 $ (0.55) ============= =============== ===========
Options to purchase 4,700 shares of Common stock with an exercise price per share of $12.50 were outstanding during the year ended September 30, 1998, but were not included in the computation of diluted earnings per Common share because the options' exercise F-10 prices were greater than the average market price of the Common shares during the period. The options, which expire in September 2006, were still outstanding as of September 30, 1998. In addition, the 100,000 shares of restricted stock to be awarded subsequent to September 30, 1998, were not included in the computation of diluted earnings per Common share as they would have been anti-dilutive. Options to purchase 245,120 shares of Common stock with an average exercise price per share of $12.28 were outstanding during the year ended September 30, 1997, but were not included in the computation of diluted earnings per Common share because the options' exercise prices were greater than the average market price of the Common shares during the period. Warrants to purchase 142,105 shares of Common stock with an exercise price of $.01 per share and options to purchase 272,200 shares of Common stock with an exercise price per share of $12.50 were outstanding during the year ended September 30, 1996, but were not included in the computation of diluted loss per Common share because the Company had a net loss for the year and all outstanding warrants and options would have been anti-dilutive. Supplemental Cash Flow Information - ---------------------------------- The Company did not pay interest expense during the year ended September 30, 1998. For the years ended September 30, 1997 and 1996, the Company paid interest of $3,000 and $1,993,000, respectively. For the years ended September 30, 1998, 1997 and 1996, the Company paid income taxes of $180,000, $103,000 and $82,000, respectively. There were no new capital leases entered into during the years ended September 30, 1998 or 1997. Capitalized lease obligations of $105,000 were incurred on equipment leases entered into during the year ended September 30, 1996. New Accounting Pronouncements - ----------------------------- In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements and requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 is required to be adopted for the Company's year ending September 30, 1999. The adoption of this pronouncement is not expected to have any impact on the Company's financial position or results of operations. F-11 In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company will adopt SFAS No. 131 in the year ending September 30, 1999. Management believes that SFAS No. 131 will not have a material effect on the Company's financial statements. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software, and is effective for fiscal years beginning after December 15, 1998. The statement also requires that costs related to the preliminary project stage and post implementation/operations stage in an internal-use computer software development project be charged to expense as incurred. During the year ended September 30, 1998, the Company recorded all applicable costs in accordance with the guidance proscribed in SOP 98-1. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities," which is effective for fiscal years beginning after December 15, 1998 and provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be charged to expense as incurred. SOP 98-5 is required to be adopted for the Company's year ending September 30, 1999. The adoption of this pronouncement is not expected to have a material impact on the Company's financial position or results of operations. 3. RECAPITALIZATION: ---------------- On May 24, 1996, the Company authorized (i) 20,000,000 shares of Common stock, no par value, consisting of 10,000,000 shares of Class A Voting Common stock (the "Class A Common") and 10,000,000 shares of Class B Nonvoting Common stock (the "Class B Common"), and (ii) 10,000,000 shares of Preferred stock, of which 1,000,000 shares were designated as Series A Preferred stock (the "Series A Preferred") and 6,500,000 shares were designated as Series B Preferred stock (the "Series B Preferred"). The previously outstanding Common stock was converted into 10,000,000 shares of Class A Common. All references in the accompanying financial statements to the number of Common shares have been retroactively restated to reflect the recapitalization. F-12 Common Stock Redemption - ----------------------- On May 24, 1996, the Company redeemed 8,500,000 shares of Class A Common for $20,136,000, as follows: Cash payment $ 16,002,000 Final redemption price adjustment (paid in August 1996) 437,000 Issuance of 6%, $3,000,000 subordinated note payable to Founders (the "Founders' Note") 2,023,000 Issuance of 1,000,000 shares of 6%, Series A Preferred 524,000 Deferred tax liability for difference in basis of Founders' Note 477,000 Transaction costs 673,000 -------------- $ 20,136,000 ============== The face amounts of the Founders' Note and Series A Preferred were discounted at estimated market rates of 14% and 15% for interest and dividends, respectively, on similar-type instruments. The original issue discounts were amortized over the terms of the Founders' Note and the Series A Preferred. On May 23, 1996, the Company distributed $4,600,000 of accounts receivable to the Founders as a Subchapter S distribution of previously taxed income. The Company collected these receivables on behalf of the Founders. The Founders' Note initially had a face amount of $3,000,000 and was subordinated to all other liabilities. The face amount of the Founders' Note was increased to $4,000,000 due to the achievement of certain financial goals as defined in the note, with the $1,136,000 difference in the estimated fair market value of the new note versus the carrying value of the original note being charged to interest expense. The Founders' Note bore interest at an annual rate of 6%, payable quarterly, and was due in two equal installments on May 24, 2003 and 2004, subject to acceleration upon the occurrence of certain defined events. Upon the completion of the initial public offering, the Founders' Note was satisfied through the issuance of 320,000 shares of Common stock at the offering price. The Series A Preferred had 1,000,000 shares outstanding, a face amount of $1,000,000 and required a dividend of 6% per year, payable quarterly. The Series A Preferred had no voting rights, was senior to the Series B Preferred upon liquidation and contained certain put features. Upon completion of the initial public offering, the Series A Preferred was converted into 80,000 shares of Common stock at the offering price and accrued dividends of $22,000 were paid. F-13 Sale of Preferred and Common Stock - ---------------------------------- On May 24, 1996, the Company issued Preferred and Common stock for $9,500,000 to the Investors, as follows: Series B Preferred stock $ 3,783,000 Class A Voting Common stock 3,279,000 Class B Non-Voting Common stock 2,438,000 ------------- $ 9,500,000 ============= The Company issued 6,500,000 shares of Series B Preferred for an aggregate of $6,500,000 or $1.00 per share. The Series B Preferred required a dividend of 8% per year, payable quarterly. The face amount of the Series B Preferred was discounted at the estimated market dividend rate of 15% and the discount of $2,717,000 was amortized over the expected term. Due to the discount applied to the face amount of the Series B Preferred, its value for accounting purposes was $0.58 per share. The Series B Preferred had no voting rights, was senior to the Common stock upon liquidation and had a liquidation value of $6,500,000 plus unpaid dividends. The holders of the Series B Preferred could have required the Company to redeem their shares on May 24, 2004, subject to acceleration upon the occurrence of certain defined events, including an initial public offering. Upon completion of the initial public offering, the Series B Preferred was redeemed for $6,500,000 plus accrued dividends of $182,000. The Company issued 1,720,427 shares of Class A Common and 1,279,573 shares of Class B Common for an aggregate of $3,000,000 or $1.00 per share. The Common stock was valued at $1.91 per share based on the relative estimated fair values of the Series B Preferred and Class A and B Common stock issued to the Investors. The Class B Common shares were converted into an equal number of Class A Common shares upon the completion of the initial public offering and the division of Common stock between two classes was eliminated. 4. BANK DEBT: --------- On May 24, 1996, the Company and its shareholders entered into an agreement with a bank (the "Credit Agreement"), which provided the Company with a $14,000,000 term loan (the "Term Loan") and $6,000,000 in revolving credit loans (the "Revolver"). The Company incurred $505,000 in financing costs, which were deferred and were to be amortized over the term of the Credit Agreement. The borrowings on the Term Loan were used to fund a portion of the Common stock redemption, to repay a bank line of credit and to buy out certain leases. F-14 In connection with the Credit Agreement, the bank received a warrant to purchase 236,842 shares of Class B Common for $0.01 per share. The warrant expires on May 31, 2006, and is fully exercisable. The number of shares to be purchased upon exercise of the warrant was subject to reduction based on the timing of the initial public offering and is 142,105. For financial reporting purposes, the warrant has been valued at $450,000 based on the estimated fair value of the Class B Common, and was recorded as original issue discount on the Term Loan. Upon completion of the Company's initial public offering, a portion of the net proceeds were used to repay the outstanding Term Loan. In connection with this repayment, the Company recorded an extraordinary loss, net of income tax benefit, in the statement of operations. The extraordinary loss consists of the write-off of the unamortized deferred financing costs and the unamortized discount on the Term Loan. On March 21, 1997, the Company entered into a new credit facility with a bank (the "Credit Facility"), consisting of a line of credit, which replaces the previous Credit Agreement and related Revolver. The Credit Facility is a $4,000,000 revolving line of credit that originally expired on April 1, 1998, but was extended to April 1, 1999. There were no borrowings on the line of credit during the years ended September 30, 1998 and 1997. Borrowings bear interest at either a base rate, or euro-rate option, as selected by the Company and is payable either monthly under the base rate option or on the last day of the related euro-rate interest period. The bank has a security interest in essentially all assets of the Company and the Credit Facility provides for certain covenants. Such covenants, among other things, restrict the Company's ability to incur debt, pay dividends, or make capital expenditures and acquisitions. The Company is also subject to restrictive financial covenants, which include levels of tangible net worth and a ratio related to debt service. The Company did not incur interest expense under the Credit Agreement or Credit Facility for the years ended September 30, 1998 and 1997. Interest expense under the Credit Agreement for the year ended September 30, 1996 was $470,000. 5. ACCRUED EXPENSES: ---------------- September 30 ------------------------------ 1998 1997 ------------- -------------- Payroll and related benefits $ 2,000,000 $ 1,738,000 Telecommunications expense 461,000 308,000 Other 560,000 333,000 ------------- ------------- $ 3,021,000 $ 2,379,000 ============= ============= F-15 6. CAPITALIZED LEASE OBLIGATIONS: The Company had various capitalized lease obligations payable to several finance companies. The obligations were repaid during the year ended September 30, 1998. 7. INCOME TAXES: As a result of the sale of Preferred and Common stock, the Company's S Corporation status was terminated on May 24, 1996, and a net deferred income tax liability of $242,000 was recorded as additional income tax expense on that date. Net income tax expense (benefit) is as follows: For the Year Ended September 30 ------------------------------------------------- 1998 1997 1996 ------------- ------------- ------------ Current: Federal $ 200,000 $ 89,000 $ -- State 93,000 91,000 -- ------------- ------------- ------------ 293,000 180,000 -- ------------- ------------- ------------ Deferred: Federal 99,000 1,571,000 (1,262,000) State (28,000) 74,000 (287,000) ------------- ------------- ------------- 71,000 1,645,000 (1,549,000) ------------- ------------- ------------- $ 364,000 $ 1,825,000 $ (1,549,000) ============= ============= ============= A reconciliation of the U.S. Federal Income Tax rate to the effective income tax rate is as follows:
For the Year Ended September 30 -------------------------------------------- 1998 1997 1996 ----------- ----------- ------------- Federal statutory rate 34.0% 34.0% 34.0% Income not subject to corporate taxes due to S Corporation status -- -- 3.7 Reinstatement of deferred taxes upon conversion to C Corporation status -- -- (11.3) State taxes 7.5 3.2 5.3 Other 0.4 (2.0) (3.3) --------- --------- --------- 41.9% 35.2% 28.4% ========= ========= =========
F-16 Deferred income tax assets and liabilities are classified as current and noncurrent based on the financial reporting classification of the related assets and liabilities which gave rise to the temporary difference. Significant components of the deferred income tax assets and liabilities are as follows:
September 30 ------------------------------- 1998 1997 ------------- -------------- Current deferred income tax asset (liability): Other nondeductible expenses $ (729,000) $ (683,000) Net operating loss carryforward 38,000 106,000 Other tax credit carryforwards 103,000 166,000 Cash basis of accounting 34,000 67,000 ------------- ------------- (554,000) (344,000) ------------- ------------- Noncurrent deferred income tax asset (liability): Depreciation of property and equipment (101,000) (379,000) Other nondeductible expenses (49,000) -- Net operating loss carryforward -- 90,000 ------------- ------------- (150,000) (289,000) ------------- ------------- Net deferred income tax liability $ (704,000) $ (633,000) ============= =============
F-17 8. COMMITMENTS AND CONTINGENCIES: Leases The Company leases its offices and communications and computer equipment under noncancelable operating leases which expire through 2003. The rental payments for the years ended September 30, 1998, 1997 and 1996, were approximately $2,828,000, $1,681,000 and $808,000, respectively. Aggregate minimum rental payments under the noncancelable operating leases at September 30, 1998, are as follows: 1999 $ 3,868,000 2000 3,459,000 2001 2,795,000 2002 1,915,000 2003 796,000 --------------- $ 12,833,000 =============== The Company had an agreement with the same bank that provides the Credit Facility under which it had up to $6,000,000 available for leasing call center equipment. The original $6,000,000 commitment expired on December 31, 1997, was extended through April 1, 1998, and was subsequently renewed with a maturity date of April 1, 1999, to coincide with the expiration of the Company's Credit Facility. As of September 30, 1998, the lease line of credit requires that the leases be operating in nature. The Company financed $4,100,000 of equipment under the original agreement and $2,334,000 under the $6,000,000 renewed lease line. Purchase Commitments The Company has entered into agreements with its telephone long distance carriers which currently range from one to three years, which provide for, among other things, annual minimum purchases and termination penalties. The annual minimum purchases under such agreements total approximately $2,580,000. Employment/Consulting Agreements The Company has employment agreements with three executive officers that expire at various times through fiscal 2002, subject to renewal. The agreements provide for aggregate base compensation of $650,000 in fiscal 1999, $694,000 in fiscal 2000, $615,000 in fiscal 2001 and $160,000 in fiscal 2002, plus incentive compensation based on performance of the Company. The agreements also provide for certain other fringe benefits and payments upon termination of the agreements or a change in control of the Company. The Founders had previously entered into employment contracts which were to expire on May 31, 1999. The contracts required an annual base compensation of $200,000 per employee subject to an annual inflation adjustment, plus a discretionary annual bonus not expected to exceed 20% of base compensation. In addition, during the year ended September 30, 1996, the Founders each received a one-time $3,000,000 bonus based upon the successful completion of the Company's initial public offering. Payroll taxes of approximately $87,000 were recorded in connection with the bonus payments. F-18 On August 14, 1998, the Founders entered into consulting agreements with the Company which replace the aforementioned employment contracts. The agreements commenced on September 9, 1998 and expire on May 31, 1999. The agreements require payments of $104,000 for each of the Founders. Management Fees The Company entered into an agreement with one of the Investors which required the payment of an annual management fee of $100,000, payable quarterly. The management agreement was terminated upon completion of the initial public offering. Beginning at that time, the Investors are to provide consulting services to the Company pursuant to a consulting agreement and will receive annual fees of $50,000. The consulting agreement expires on May 24, 2001. Litigation Since 1995, the Company has had a relationship with Kipany Productions, Ltd. ("Kipany"), an independent third-party entity that arranges marketing campaigns on behalf of its clients. In April 1997, Kipany requested the Company to provide certain telemarketing services in connection with marketing campaigns Kipany had contracted to provide for two of its telecommunication clients. The calls for the campaign began on June 2, 1997 and ended on July 28, 1997. For services performed during this period, the Company billed Kipany $2,227,000, of which $728,000 was paid and $1,499,000 remained outstanding. On September 17, 1997, the Company filed a Demand for Arbitration along with other legal filings, for purposes of seeking the balances due on its outstanding invoices, attorneys' fees, arbitration costs and other consequential damages. On October 13, 1997, attorneys representing Kipany notified the Company that they were filing a complaint seeking injunctive relief with respect to the arbitration claiming that the Company did not have a contract with Kipany. In addition, Kipany filed a counterclaim against the Company on December 5, 1997 claiming damages resulting from execution of the campaign. During the year ended September 30, 1998, the Company reached a settlement with Kipany which resulted in the write-off of $244,000 of the $1,499,000 in outstanding receivables as of September 30, 1997 and the Company retaining its business relationship with Kipany. The remaining receivables have since been paid. From time to time, the Company is involved in certain other legal actions arising in the ordinary course of business. In management's opinion, the outcome of such actions will not have a material adverse effect on the Company's financial position, results of operations or liquidity. 9. PROFIT SHARING PLAN: The Company has a defined contribution savings plan available to substantially all employees under Section 401(k) of the Internal Revenue Code. Employee contributions are generally limited to 15% of compensation. On an annual basis, the Company may match a portion of the participating employee's contribution. The Company's contributions for the F-19 years ended September 30, 1998, 1997 and 1996 were $51,000, $36,000 and $33,000, respectively. Employees are fully vested in their contributions, while vesting in the Company's contributions occurs ratably over seven years beginning in year three. 10. STOCK OPTION PLAN: In 1996, the Company established the 1996 Stock Incentive Plan (the "Plan"), which reserves 950,000 shares of Common stock for issuance in connection with a variety of awards including stock options, stock appreciation rights and restricted and unrestricted stock grants. The Plan is administered by a committee, which is comprised of two or more non-employee directors as designated by the Board of Directors. The committee will determine the price and other terms upon which awards shall be made. The exercise price of incentive stock options may not be less than the fair market value of Common stock on the date of grant. As of September 30, 1998, 355,700 options are available for future grants. Information relative to the Plan is as follows:
Weighted Average Exercise Price Exercise Price Aggregate Options (Per Share) (Per Share) Proceeds --------------- -------------- -------------- --------------- Balance as of September 30, 1995 -- $ -- $ -- $ -- Granted 278,200 12.50 12.50 3,477,000 Exercised -- -- -- -- Terminated (6,000) 12.50 12.50 (75,000) --------------- ------------- ------------- ------------- Balance as of September 30, 1996 272,200 12.50 12.50 3,402,000 Granted 13,100 7.00-12.50 8.32 109,000 Exercised -- -- -- -- Terminated (30,180) 12.50 12.50 (377,000) --------------- ----------------- -------------- -------------- Balance as of September 30, 1997 255,120 7.00-12.50 12.29 3,134,000 Granted 779,600 2.44-4.13 3.55 2,767,000 Exercised -- -- -- -- Terminated (440,420) 3.69-12.50 8.61 (3,792,000) --------------- -------------- -------------- -------------- Balance as of September 30, 1998 594,300 $ 2.44-$12.50 $ 3.55 $ 2,109,000 =============== ============== ============= ============== Options exercisable as of September 30, 1998 1,940 $ 12.50 =============== =============
On March 12, 1998, the Company modified 248,820 options granted to certain employees during the years ended September 30, 1997 and 1996. The effect of this modification was to exchange the original options of which 85,499 were vested, with a weighted average exercise price of $12.22 and a weighted average remaining contractual life of 8.5 years with 521,100 new options with an exercise price of $3.69, which was the fair market value of Common stock on the date of the modification. The new options are not vested and will vest over four years and have a contractual life of 10 years. F-20 The weighted average remaining contractual life of all options outstanding at September 30, 1998 is 9.5 years. The following table summarizes information relating to the Plan at September 30, 1998 based upon each exercise price:
Weighted Weighted Weighted Average Average Average Exercise Exercise Range of Options Remaining Price of Options Price of Exercise Outstanding at Contractual Outstanding Exercisable at Exercisable Prices September 30, Life Options September 30, Options (Per Share) 1998 (Years) (Per Share) 1998 (Per Share) - ---------------- ------------------ --------------- ---------------- ----------------- -------------- $ 2.44 100,000 9.9 $ 2.44 -- $ -- 3.69 489,600 9.4 3.69 -- -- 12.50 4,700 8.0 12.50 1,940 12.50
The Company accounts for its option plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation cost has been recognized. In 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair value based method of accounting for stock-based compensation plans. This statement also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. SFAS No. 123 requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for the Plan. Had the Company recognized compensation cost for its stock option plan consistent with the provisions of SFAS No. 123, the Company's net income and basic and diluted net income per Common share for the years ended September 30, 1998 and 1997 would have decreased and the Company's net loss and basic and diluted net loss per Common share for the year ended September 30, 1996 would have increased to the following pro forma amounts:
For the Year Ended September 30 ------------------------------------------------- 1998 1997 1996 ------------- ------------- -------------- Net income (loss): As reported $ 504,000 $ 3,367,000 $ (4,213,000) ============= ============= ============= Pro forma $ 80,000 $ 2,907,000 $ (4,226,000) ============= ============= ============= Basic net income (loss) per Common share: As reported $ .06 $ .41 $ (.55) ============= ============= ============= Pro forma $ .01 $ .36 $ (.55) ============= ============= ============= Diluted net income (loss) per Common share: As reported $ .06 $ .41 $ (.55) ============= ============= ============= Pro forma $ .01 $ .35 $ (.55) ============= ============= =============
F-21 The weighted average fair value of the stock options granted during the years ended September 30, 1998, 1997 and 1996 was $2.75, $3.89 and $8.62, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: For the Year Ended September 30 --------------------------------------------- 1998 1997 1996 ------------- ------------- ------------ Risk-free interest rate 5.7% 7.0% 6.9% Volatility 85.0% 60.0% 60.0% Expected dividend yield 0.0% 0.0% 0.0% Expected life 7.0 years 7.5 years 7.5 years 11. RESTRICTED STOCK: In September 1998, the Company agreed to award 100,000 shares of restricted Common stock to the new Chief Executive Officer. The primary restriction will be the officer's continued employment over a five-year period, and the restrictions will lapse on 20,000 shares per year on each anniversary date. The value of such stock will be established by the market price on the date of grant and unearned compensation will be at the date of grant and unearned compensation will be recorded at that time. The unearned compensation will be presented as a reduction of shareholders' equity in the consolidated balance sheet and will be amortized ratably over the five-year restriction period. F-22 EXHIBIT INDEX Exhibit No. 2 Recapitalization and Stock Purchase Agreement among the Company, Advanta Partners, Glengar and the Founders, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 3.1 Articles of Incorporation of the Company, as amended (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 3.2 Form of Amended and Restated Bylaws of the Company (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 9 Voting Agreement among the Founders and Advanta Partners dated as of July 2, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.1 1996 Stock Incentive Plan (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.2 Shareholders' Agreement by and among the Company, the Founders, Advanta Partners and Glengar, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.3 Employment Agreement by and between the Company and Raymond J. Hansell, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.4 Employment Agreement by and between the Company and MarySue Lucci Hansell, dated May 24, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.5 Warrant for the Purchase of Class B Non-Voting Common Stock of the Company in favor of Chemical Bank (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.6 Letter Agreement with PNC Bank, N.A., dated March 21, 1997 (incorporated by reference to the Company's Form 10-Q filed for the period ended March 31, 1997). *10.7 Employment Agreement by and between the Company and John Fellows, dated August 14, 1998. *10.8 Employment Agreement by and between the Company and Robert Berwanger, dated March 18, 1998. *10.9 Employment Agreement by and between the Company and Michael Scharff, dated August 27, 1998. *10.10 Consulting Agreement by and between the Company and Raymond J. Hansell, dated August 14, 1998. *10.11 Consulting Agreement by and between the Company and MarySue Lucci, dated August 14, 1998. 10.12 Exchange and Conversion Agreement among the Company, the Founders, Advanta Partners and Glengar dated as of July 2, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 10.13 Consulting Agreement between the Company and Advanta Partners dated August 20, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, No. 333-07501). 10.14 Agreement on Post-Closing Adjustments, among the Company, Advanta Partners, the Founders and Glengar dated August 20, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, No. 333- 07501). 16 Letter regarding change in certifying accountant, dated July 2, 1996 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-07501). 21 Subsidiaries of the Registrant (incorporated by reference to the Company's Form 10-K filed for the year ended September 30, 1996). *23.1 Consent of Arthur Andersen LLP *27.1 Financial Data Schedule for year ended September 30, 1998. * Filed herewith EX-10.7 2 EMPLOYMENT AGREEMENT FOR JOHN FELLOWS Exhibit 10.7 [LETTERHEAD OF RMH TELESERVICES, INC. APPEARS HERE] August 14, 1998 Mr. John Fellows 2824 Sun Meadow Drive Flower Mound, TX 75128 Dear John: This will reflect the terms for your joining RMH Teleservices, Inc. 1. Position - Chief Executive Officer -------- 2. Base Salary - $275,000 per annum, for the first year of your employment, ----------- $300,000 per annum for the second year of your employment and $325,000 per annum for the third year of your employment with annual increases thereafter to be determined by the Board. 3. Start Date - The Start Date will be September 8, 1998. ---------- 4. Annual Bonus - You may be eligible to receive an Annual Bonus, in the ------------ range of $75,000 to $100,000, as determined by the Board, based on performance goals set by the Board. 5. Options - You will be granted options, pursuant to the RMH Teleservices, ------- Inc., 1996 Stock Incentive Plan to purchase 100,000 RMH common shares at the closing price on the Start Date. The options for 25% of the shares will vest when you have been employed by RMH for one year and an additional 25% of the shares will vest at the end of the second, third and fourth year of employment respectively. 6. Signing Bonus - You will be entitled to a signing bonus of $75,000 payable ------------- in 12 consecutive monthly installments coordinated upon your continued employment at the time each installment is due. 7. Restricted Stock Grant - You will be granted 100,000 shares of the ---------------------- Company's restricted common stock which shall vest at the rate of 20,000 shares per year over each of the first five anniversaries of the Start Date, provided you are employed by the Company on the anniversary date. 8. Place of Employment - Your principal place of business will be RMH ------------------- headquarters in Bryn Mawr, Pennsylvania. The Company will reimburse you for your reasonable relocation expenses, up to $125,000, which includes income taxes. 9. Benefits - You are entitled to participate in medical, disability, life -------- insurance, sick leave or other benefits or programs made available to other similarly situated employees of the Company. In addition the Company will pay for the premium for family coverage under the Company's health plan made applicable to other similarly situated employees of the Company. 10. Non-Compete, Trade Secrets, Etc. - From the Start Date until 24 months -------------------------------- following the termination of your employment with the Company, for any or no reason, whether initiated by you or the Company, you will not, directly or indirectly, engage in any capacity or be financially interested in any business operating within the United States or Canada which provides telemarketing services materially the same as the services the Company provides to third parties, or any other business activities which are materially the same and which are in direct competition with the Company at the time of your termination, or any other business activities which are materially the same a those provided by the Company for any of the Company's past, present or prospective clients, customers or accounts. Additionally, from the Start Date until 24 months following the termination of your employment with the Company, for any or no reason, whether initiated by you or the Company, you will not, directly or indirectly, employ, induce or attempt to influence any employee, customer, independent contractor or supplier of the Company to terminate employment or any other relationship with the Company. You will not use for your own personal benefit or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm or company other than the Company, any confidential information of the Company during the term of your employment and for a period of five years after you cease to be employed by the Company, for any or no reason whether initiated by you or the Company At the termination of your employment with the Company you shall return to Company all copies of confidential information in any medium, including computer tapes and other forms of data storage. Any and all writings, inventions, improvements, processes, procedures and/or techniques which you may make, conceive, discover or develop, either solely or jointly with any other person or persons, at any time when you are an employee, which relate to or are useful in connection with the Company's business or with any business now or hereafter carried on or contemplated by the Company, including developments or expansions of its present fields of operations, shall be the sole and exclusive property of the Company. 11. Severance - If the Company terminates your employment without Cause, you --------- shall be entitled to your then current Base Salary payable for a period of 18 months following such termination so long as you execute and do not revoke a separation agreement and general release agreement acceptable to the Company. Cause shall include your breach or neglect of the material duties you are required to perform under this Agreement, your conviction of a felony or a crime of moral turpitude or your entering into an plea of nolo contendere (or similar plea) to a charge of such an offense, your use of alcohol or any unlawful controlled substance while performing your duties under this Agreement and/or such use materially interferes with the performance of your duties under this Agreement, you commit any act of criminal fraud, material dishonesty or misappropriation relating to or involving the Company, you materially violate a rule, regulation, policy or plan governing employee performance or an express direction of the Board, you engage in any unauthorized disclosure of confidential information of the Company or you act in a manner that is materially contrary to the best interest of the Company. 12. Miscellaneous - The laws of the Commonwealth of Pennsylvania will govern ------------- your employment arrangements. All compensation for the calendar year 1998 will be pro rated based on the -2- number of days during 1998 of your employment. Cause, for purposes of this letter, shall mean your willful refusal to perform a material and substantial part of your duties which has not been cured after 30 days written notice of the failure, or your commission of personal dishonesty, materially injurious to the company, or any act of fraud, misappropriation or criminal conduct. If the foregoing accurately reflects our understanding, please sign a copy of this letter and return it to me. Sincerely, /s/ William A. Rosoff William A. Rosoff Chairman of the Board Accepted and agreed to this 16th day of August, 1998. /s/ John Fellows - -------------------------- John Fellows -3- EX-10.8 3 EMPLOYMENT AGREEMENT FOR ROBERT BERWANGER Exhibit 10.8 ------------ EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, made this 18th day of March 1998, by and between RMH Teleservices, Inc., a Pennsylvania corporation (hereinafter called "Company"), and Robert Berwanger, an individual residing at 4604 Merchant Square Place, Lansdale, Pennsylvania, 19446 (hereinafter called "Employee"). W I T N E S S E T H: - - - - - - - - - - Company wishes to continue to employ Employee and Employee wishes to continue to be in the employ of Company on the terms and conditions contained in this Agreement. WHEREAS, due to Company's desire to promote Employee to Chief Operating Officer and to gain the protections and benefits contained in this Employment Agreement, Company and Employee agree to the covenants and restrictions contained herein; WHEREAS, due to Employee's desire to obtain a promotion to Chief Operating Officer and the protections and benefits contained in this Employment Agreement, Employee agrees to the covenants and restrictions contained herein; NOW, THEREFORE, in consideration of the facts, mutual promises and covenants contained herein and intending to be legally bound hereby, Company and Employee agree as follows: 1. Definitions. As used herein, the following terms shall have the ----------- meanings set forth below unless the contexts otherwise requires. "Affiliate" shall mean a person who (i) with respect to any entity, --------- directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such entity; or (ii) with respect to Employee, is a parent, spouse or issue of Employee, including persons in an adopted or step relationship. "Annual Bonus" shall mean the bonus payments set forth in Section ------------ 5(b), as such amount may be adjusted from time to time. "Base Compensation" shall mean the annual rate of compensation set ----------------- forth in Section 5(a), as such amount may be adjusted from time to time. "Board" shall mean the Board of Directors of Company. ----- "Business" shall mean the business conducted by Company or any -------- Subsidiary or corporate parent thereof or entity sharing a common corporate parent with the Company on the date of execution of this Agreement, including business activities in developmental stages, business activities which may be developed by the Company, or by any Subsidiary or corporate parent thereof or entity sharing a common corporate parent with the Company, during the period of Employee's employment by Company, and all other business activities which flow from a reasonable expansion of any of the foregoing during Employee's employment with the Company and about which Employee had or has constructive or actual knowledge. "Cause" shall include but not be limited to any one or more of the ----- following: (a) Employee breaches or neglects the material duties that Employee is required to perform under the terms of this Agreement, including if Employee performs his duties in an incompetent manner. (b) Employee is convicted of a felony or a crime of moral turpitude or has entered a plea of nolo contendere (or similar plea) to a charge of such an offense; (c) Employee uses alcohol or any unlawful controlled substance while performing his duties under this Agreement and/or if such use materially interferes with the performance of Employee' duties under this Agreement; (d) Employee commits any act of criminal fraud, material dishonesty or misappropriation relating to or involving the Company; (e) Employee materially violates a rule(s), regulation(s), policy(ies) or plan(s) governing employee performance or express direction(s) of the Board; or (f) Employee engages in the unauthorized disclosure of Confidential Information; (g) Employee acts in a manner that is materially contrary to the best interest of the Company. "Change of Control" shall be deemed to have occurred upon the earliest ----------------- to occur of the following events: (a) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("the Exchange Act") (other than the Company, any subsidiary of the Company, any "person" (as defined herein) acting on behalf of the Company as underwriter pursuant to an offering who is temporarily holding securities in -2- connection with such offering, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any "person" who, on the date the RMH Teleservices, Inc. 1996 Stock Incentive Plan (the "Plan") is effective, shall have been the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of or have voting control over shares of capital stock of the Company possessing more than thirty percent (30%) of the combined voting power of the Company's then outstanding securities) is or becomes the "beneficial owner" (as hereinabove defined), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; (b) during any period of not more than two consecutive years (not including any period prior to the date the Plan is effective), individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a "person" who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this definition) whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation or other legal entity, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person"(other than a "person" who, on the date the Plan is effective, shall have been the "beneficial owner" of or have voting control over shares of capital stock of the Company possessing more than thirty percent (30%) of the combined voting power of the Company's then outstanding securities) acquires more than thirty percent (30%) of the combined voting power of the Company's then outstanding securities; (d) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect); or (e) a "change of control" as hereinafter defined by the Board of Directors for the express purposes of this Plan has occurred. "Commencement Date" shall have the meaning specified in Section 4 ----------------- hereof. -3- "Confidential Information" shall have the meaning specified in ------------------------ Section 12(c) hereof. "Disability" shall mean Employee's inability, for a period of ---------- thirteen (13) consecutive weeks, or a cumulative period of 120 business days (i.e., Mondays through Fridays, exclusive of days on which Company is generally closed for a holiday) out of a consecutive period of twelve (12) months, to perform the essential duties of Employee's position, due to a disability as that term is defined in the American With Disabilities Act. "Principal Stockholders" shall mean Raymond J. Hansell, MarySue ---------------------- Lucci Hansell and Advanta Partners LP. "Restricted Area" shall have the meaning specified in Section --------------- 12(a) hereof. "Restricted Period A" shall have the meaning specified in ------------------- Section 12(a) hereof. "Restricted Period B" shall have the meaning specified in ------------------- Section 12(b) hereof. "Subsidiary" shall mean any company in which Company owns ---------- directly or indirectly 50% or more of the Voting Stock or 50% or more of the equity; or any other venture in which it owns either 50% or more of the voting rights or 50% or more of the equity. "Term of Employment" shall mean the period specified in Section ------------------ 4 hereof as the same may be terminated in accordance with this Agreement. "Voting Stock" shall mean capital stock of any class or classes ------------ having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a company. 2. Employment. Company hereby employs Employee as Chief Operating ---------- Officer and Employee hereby accepts employment by Company for the period and upon the terms and conditions specified in this Agreement. 3. Office and Duties. ----------------- (a) Employee shall be promoted to Chief Operating Officer of Company. In such capacity, Employee shall render such services as are necessary and desirable to protect and advance the best interests of Company, acting, in all instances, under the supervision of and in accordance with the policies set by the Board. As Chief Operating Officer, Employee shall be responsible for managing the day-to-day operations of the business and shall have the responsibility and authority, subject to policies set by and with the approval of the Board, to employ and terminate employees, sign agreements and otherwise to implement the -4- policies and directives of the Board, all subject to the provisions of any operating budget or budgets as may be approved from time to time by the Board and subject to the By-Laws of the Company. Employee shall perform any other duties reasonably required by the Board and reasonably related to his responsibilities as Chief Operating Officer. (b) For as long as Employee shall remain an employee of Company, Employee's entire working time, energy, skill and best efforts shall be devoted to the performance of Employee's duties hereunder in a manner which will faithfully and diligently further the business and interests of Company. Employee may engage in charitable, civic, fraternal, trade and professional association activities that do not interfere with Employee's obligations to Company, but Employee shall not work for any other for-profit business without so disclosing such activity to the Board, in which event the Board may not unreasonably withhold its consent to such activity. 4. Term. Employee shall be employed by Company for an ---- initial Term of Employment (the "Initial Term"), commencing April 1, 1998 (the "Commencement Date"), and ending on April 1, 2001, unless sooner terminated as hereinafter provided. 5. Compensation and Benefits. ------------------------- (a) For all of the service rendered by Employee to Company, Employee shall receive Base Compensation at the gross annual rate of One Hundred and Eighty Thousand ($180,000) payable in installments in accordance with Company's regular payroll practices in effect from time to time. The Base Compensation shall be reviewed annually, on or around the anniversary date of the Commencement Date of this Agreement to ascertain, in the sole discretion of the President and the Chairman of the Board, the amount the Employee's Base Compensation should be increased. In no event shall the increase be less than the greater of five (5) percent of Employee's Base Compensation or the minimum of the percentage increase of the Wage Increase for the metropolitan statistical area of Philadelphia. (b) In addition to the foregoing compensation, Employee may be eligible to receive an annual bonus (the "Annual Bonus") in an amount, if any, as shall be determined by the Board of Directors in its sole discretion. The Annual Bonus, to the extent earned, shall be payable in a single lump-sum payment within ninety (90) days after the end of each calendar year. No Annual Bonus is guaranteed. To be eligible for an Annual Bonus, Employee must be actively employed by the Company on the last day of the calendar year for which the Annual Bonus is at issue. (c) Employee may be eligible for certain stock options pursuant to the terms, conditions and restrictions of the RMH Teleservices, Inc. 1996 Stock Incentive Plan and pursuant to the grant as reflected in Attachment "A" hereto. (d) If Employee's employment is terminated by the Company at any time within three months before, or six month after the occurrence of a Change in Control, -5- Employee shall be entitled to the following severance, in lieu of any other Base Compensation, Annual Bonus, Additional Bonus or any other compensation and benefits provided herein: (i) The Company shall pay as severance pay to Employee, no later than the tenth business day following the termination, a lump sum severance payment equal to 100% of Employee's Base Compensation for seventeen (17) months. (ii) For seventeen (17) months after such termination, Employee shall be entitled to all Fringe Benefits described in 6(a) herein, subject to the terms, conditions and restrictions of the specific plans, except for sick time. The Company shall use its best efforts to arrange to provide Employee with group health benefits substantially similar to those which Employee was receiving immediately prior to the termination. Fringe Benefits otherwise receivable by the Employee pursuant to this paragraph (ii) will be reduced to the extent comparable benefits are actually received by Employee during such period. (iii) Employee shall not be required to mitigate the amount of any payment provided for in this Section 5(d) by seeking employment or otherwise. (iv) In the event that any payment or benefit received or to be received by Employee in connection with a Change in Control or the termination of Employee's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company) (collectively the "Total Payments"), would not be deductible (in whole or in part) as a result of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), by the Company, an Affiliate or other person making such payment or providing such benefit, the payments or benefits shall be so reduced until no portion of the Total Payments is not deductible. Employee shall be entitled to elect which payments or benefits shall be so reduced. For purposes of this limitation, (1) no portion of the Total Payments the receipt or enjoyment of which Employee shall have effectively waived in writing prior to the date of payment shall be taken into account, (2) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and acceptable to Employee does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, and (3) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of Sections 280(d)(3) and (4) of the Code. (e) Employee agrees and acknowledges that his employment and the other protections and benefits of this Agreement are full, adequate and sufficient consideration for the restrictions and obligations set forth in Sections 11 and 12 of this Agreement. 6. Fringe Benefits. As an inducement to Employee to commence --------------- employment hereunder, and in consideration of Employee's covenants under this Agreement, Employee shall be entitled to the benefits set forth below (the "Fringe Benefits") during the Term of Employment: -6- (a) Employee shall be eligible to participate in any health, life, accident or disability insurance, sick leave or other benefit plans or programs made available to other similarly situated employees of Company as long as the plans and programs are kept in force by Company and provided that Employee meets the eligibility requirements and other terms, conditions and restrictions of the respective plans and programs. (b) Employee shall be entitled to four (4) weeks paid vacation during each year, subject to Company's generally applicable policies relating to vacations, and excluding standard Company holidays. Employee shall give the President (or his or her designee) written notice at least seven (7) days prior to the commencement of any vacation in excess of five (5) business days. (c) Company will reimburse Employee for all reasonable and necessary expenses incurred by Employee in connection with the performance of Employee's duties hereunder upon receipt of documentation therefor in accordance with Company's regular reimbursement procedures and practices in effect from time to time. (d) Company will pay the premiums ("the Company Paid Amount") on a life insurance policy to be owned by the Company in the face amount of $1,000,000.00, insuring the life of Employee, subject to the restrictions and limitations contained in the insurance agreement or agreements, and provided that the Employee passes each insurance company's required medical examination and is insurable at standard rates. Employee shall at all times have the option to pay any premiums to acquire additional coverage beyond the Company Paid Amount. 7. Disability. If Employee suffers a Disability as that term is ---------- defined herein, the Company may terminate Employee's employment relationship with Company at any time thereafter by giving Employee ten (10) days written notice of termination. Thereafter, Company shall have no obligation to Employee for Base Compensation, Annual Bonus, Fringe Benefits or any other form of compensation or benefit to Employee, except as otherwise required by law or by benefit plans provided at Company expense, other than (a) amounts of Base Compensation accrued through the date of termination, (b) vested Stock Options and (c) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment. Any compensation Employee receives from any Company paid for insurance, benefit plan or policy under which the Employee was covered at the time of his inability, due to his disability, including but not limited to workers' compensation payments and payments from a Company disability plan will be deducted from the Company's Base Compensation payment to Employee. 8. Death. If Employee dies during the Term of Employment, the ----- Term of Employment and Employee's employment with Company shall terminate as of the date of Employee's death. Company shall have no obligation to Employee or Employee's estate for Base Compensation, Annual Bonus, Fringe Benefits or any other form of compensation or -7- benefit, except as otherwise required by law or by benefit plans provided at Company expense, other than (a) amounts of Base Compensation that have accrued through the date of Employee's death, (b) vested Stock Options and (c) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment. 9. Termination for Cause. Company may terminate Employee's employment --------------------- relationship with Company at any time for Cause. Upon termination of Employee under this Section 9, Company shall have no obligation to Employee for Base Compensation, Annual Bonus, Fringe Benefits, or any other form of compensation or benefits other than (a) amounts of Base Compensation accrued through the date of termination, and (b) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment. 10. Termination without Cause. ------------------------- (a) Company may terminate Employee's employment relationship with Company at any time without Cause upon thirty (30) days written notice. Notwithstanding termination of Employee under this Section 10, Company shall continue to pay Employee's Base Compensation, as such Base Compensation would have accrued through a seventeen (17) month period following such termination so long as Employee executes and does not revoke a Separation Agreement and General Release Agreement acceptable to Company which will be substantially in the form attached hereto as Exhibit "B". (b) Employee may terminate his employment with Company for any or no reason, upon thirty (30) days written notice. If such notice is provided by Employee, Employer, in its sole discretion, may waive the notice period or any portion thereof, without pay (Base Compensation, Annual Bonus, etc.) or Fringe Benefits to Employee for the remaining notice period. The Company shall then consider the Employee's employment terminated on the date on which Employee first gave written notice to the Company. Upon termination by Employee of his employment under the provisions of this Subsection 10(b), the Company shall have no obligation to Employee for Base Compensation, Annual Bonus, Fringe Benefits or any other form of compensation or benefits other than (a) amounts of Base Compensation accrued through the date of termination, and (b) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for his termination of his employment. (c) Termination of Employee's employment pursuant to Sections 7 through 10 shall release the Company of all its liabilities and obligations under this Agreement, except as expressly provided in Sections 7 through 10. Termination of Employee's employment pursuant to this Section shall not, however, release Employee from Employee's obligations and restrictions as stated in Sections 11 and 12 of this Agreement. -8- (d) Employee shall not be entitled to any payment or benefit under any Company severance plan other than as reflected herein under Section 10, practice or policy, if any, in effect at or after the time of Employee's termination since this Agreement supersedes all such plans, practices and policies. 11. Company Property. All advertising, sales, manufacturers' and other ---------------- materials or articles or information, including without limitation data processing reports, computer programs, software, customer information and records, business records, price lists or information, samples, or any other materials or data of any kind physically furnished to Employee by Company or developed by Employee on behalf of Company or at Company's direction or for Company's use or otherwise in connection with Employee's employment hereunder, are and shall remain the sole property of Company, including in each case all copies thereof in any medium, including computer tapes and other forms of information storage. If Company requests the return of such materials at any time during or at or after the termination of Employee's employment, Employee shall deliver all copies of the same to Company immediately. 12. Noncompetition, Trade Secrets, Etc. Employee hereby acknowledges that, ---------------------------------- during and solely as a result of his employment by Company, Employee will have access to Confidential Information as that term is defined herein. In consideration of such special and unique opportunities afforded by Company to Employee as a result of Employee's employment and the other benefits referred to within this Agreement, the Employee hereby agrees as follows: (a) From the date hereof until six (6) months following the termination of Employee's employment with Company, for any or no reason, whether initiated by Employee or Company, ("Restricted Period A"), Employee shall not, for his own benefit or the benefit of any third party, directly or indirectly engage in (as a principal, shareholder, partner, director, officer, agent, employee, consultant or otherwise) or be financially interested in any business operating within the United States or Canada (the "Restricted Area"), which provides telemarketing services materially the same as the services Company provides to third parties, or any other business activities which are materially the same as and which are in direct competition with the Business, or with any business activities carried on by Company or being planned by Company, at the time of the termination of Employee's employment, or any other business activities which are materially the same as the Business for any of the Company's past, present or prospective clients, customers or accounts; provided however, nothing contained in this Section 12 shall prevent Employee from holding for investment less than five percent (5%) of any class of equity securities of a company whose securities are publicly traded on a national securities exchange or in a national market system. (b) From the date hereof until twenty-four (24) months following the termination of Employee's employment with the Company, for any or no reason, whether initiated by Employee or Company, ("Restricted Period B"), Employee shall not, for his own benefit or the benefit of any third party, directly or indirectly, induce or attempt to influence any employee, customer, independent contractor or supplier of Company to terminate employment -9- or any other relationship with Company. During "Restricted Period B", while Employee is still employed by the Company, Employee shall not, directly or indirectly, disclose or otherwise communicate to any of the clients, customers or accounts of Company, its Affiliates or any Subsidiary thereof that he has been terminated, is considering terminating or has decided to terminate employment with Company. (c) Employee shall not use for Employee's personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm, association or company other than Company, any "Confidential Information" which term shall mean any information regarding the business methods, business policies, policies, procedures, techniques, research or development projects or results, historical or projected financial information, budgets, trade secrets, or other knowledge or processes of or developed by Company or any names and addresses of customers or clients or any data on or relating to past, present or prospective Company customers or clients or any other confidential information relating to or dealing with the business operations or activities of Company, made known to Employee or learned or acquired by Employee while in the employ of Company. Confidential Information shall not include (1) information unrelated to the Company which was lawfully received by Employee free of restriction from another source having the right to so furnish such Confidential Information; or (2) information after it has become generally available to the public without breach of this Agreement by the Employee; or (3) information which at the time of disclosure to the Employee was known to the Employee to be free of restriction as evidenced by documentation from the Company which the Employee possesses, or (4) information which Company agrees in writing is free of such restrictions. All memoranda, notes, lists, records, files, documents and other papers and other like items (and all copies, extracts and summaries thereof) made or compiled by Employee or made available to Employee concerning the business of Company shall be Company's property and shall be delivered to Company promptly upon the termination of Employee's employment with Company or at any other time on request. The foregoing provisions of this Subsection 12(c) shall apply during and for a period of five (5) years after Employee is an employee of Company and shall be in addition to (and not a limitation of) any legally applicable protections of Company's interest in confidential information, trade secrets and the like. At the termination of Employee's employment with Company, Employee shall return to Company all copies of Confidential Information in any medium, including computer tapes and other forms of data storage. (d) Any and all writings, inventions, improvements, processes, procedures and/or techniques which Employee may make, conceive, discover or develop, either solely or jointly with any other person or persons, at any time when Employee is an employee of Company, whether or not during working hours and whether or not at the request or upon the suggestion of Company, which relate to or are useful in connection with the Business or with any business now or hereafter carried on or contemplated by Company, including developments or expansions of its present fields of operations, shall be the sole and exclusive property of Company. Employee shall make full disclosure to Company of all such writings, inventions, improvements, processes, procedures and techniques, and shall do everything necessary or desirable to vest the absolute title thereto in Company. Employee shall write and prepare all -10- specifications and procedures regarding such inventions, improvements, processes, procedures and techniques and otherwise aid and assist Company so that Company can prepare and present applications for copyright or Letters Patent therefor and can secure such copyright or Letters Patent wherever possible, as well as reissues, renewals, and extensions thereof, and can obtain the record title to such copyright or patents so that Company shall be the sole and absolute owner thereof in all countries in which it may desire to have copyright or patent protection. Employee shall not be entitled to any additional or special compensation or reimbursement regarding any and all such writings, inventions, improvements, processes, procedures and techniques. (e) Employee acknowledges that the restrictions contained in the foregoing Subsections (a), (b), (c) and (d), in view of the nature of the business in which Company is engaged, are reasonable and necessary in order to protect the legitimate interests of Company, that their enforcement will not impose a hardship on Employee or significantly impair Employee's ability to earn a livelihood, and that any violation thereof would result in irreparable injuries to Company. Employee and Company acknowledge that, in the event either party believes the other party has violated any of the terms of this Agreement, the other party shall be entitled to seek from any court of competent jurisdiction, without attempting arbitration, preliminary and permanent injunctive relief. (f) If the Restricted Periods "(A" or "B") or the Restricted Area specified in Subsections (a) and (b) above should be adjudged unreasonable in any proceeding, then the period of time shall be reduced by such amount or the area shall be reduced by the elimination of such portion or both such reductions shall be made so that such restrictions may be enforced for such time and in such area as is adjudged to be reasonable. If Employee violates any of the restrictions contained in the foregoing Subsections (a) or (b), the relevant Restricted Period shall be extended by a period equal to the length of time from the commencement of any such violation until such time as such violation shall be cured by Employee to the satisfaction of Company. Employee hereby expressly consents to the jurisdiction of any court within the Eastern District of Pennsylvania for the purpose of seeking a preliminary or permanent injunction as described above in Section 12(e), and agrees to accept service of process by mail relating to any such proceeding. Company may supply a copy of Section 12 of this Agreement to any future or prospective employer of Employee or to any person to whom Employee has supplied information if Company determines in good faith that there is a reasonable likelihood that Employee has violated or will violate such Section. 13. Prior Agreements. Employee represents to Company that there are no ---------------- restrictions, agreements or understandings, oral or written, to which Employee is a party or by which Employee is bound that prevent or make unlawful Employee's execution or performance of this Agreement. -11- 14. Miscellaneous. ------------- (a) Indulgences, Etc. Neither the failure nor any delay on the part of ---------------- either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. (b) Controlling Law. This Agreement and all questions relating to its --------------- validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman. (c) Notices. All notices, requests, demands and other communications ------- required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received only when personally delivered, on the day specified for delivery when deposited with a recognized national or regional courier service for delivery to the intended addressee or two (2) days following the day when deposited in the United States mails, first class postage prepaid, addressed as set forth below: (i) If to Employee: Mr. Robert Berwanger 4604 Merchant Square Place Lansdale, PA 19446 with a copy, given in the manner prescribed above, to: Richard Thayer (ii) If to Company: RMH Teleservices, Inc. 40 Morris Avenue Bryn Mawr, PA 19010 Attention: MarySue Lucci -12- with a copy, given in the manner prescribed above, to: Jay Dubow, Esquire Wolf, Block, Schorr and Solis-Cohen LLP Twelfth Floor Packard Building 111 South 15th Street Philadelphia, PA 19102-2678 In addition, notice by mail shall be by air mail if posted outside of the continental United States. Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section for the giving of notice. (d) Binding Nature of Agreement. This Agreement shall be binding upon --------------------------- Company and shall inure to the benefit of Company, its present and future Subsidiaries, Affiliates, successors and assigns including any transferee of the business operation, as a going concern, in which Employee is employed and shall be binding upon Employee, Employee's heirs and personal representatives. None of the rights or obligations of Employee hereunder may be assigned or delegated, except that in the event of Employee's death or Disability, any rights of Employee hereunder shall be transferred to Employee's estate or personal representative, as the case may be. Company may assign its rights and obligations under this Agreement in whole or in part to any one or more Affiliates or successors, but no such assignment shall relieve Company of its obligations to Employee if any such assignee fails to perform such obligations. (e) Execution in Counterparts. This Agreement may be executed in any ------------------------- number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. (f) Provisions Separable. The provisions of this Agreement are -------------------- independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. (g) Entire Agreement. This Agreement contains the entire understanding ---------------- among the parties hereto with respect to the employment of Employee by Company, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. Notwithstanding the foregoing, nothing herein shall limit the application of any generally applicable Company policy, practice, plan or the terms of any -13- manual or handbook applicable to Company's employees generally, except to the extent the foregoing directly conflict with this Agreement, in which case the terms of this Agreement shall prevail. (h) Section Headings. The Section headings in this Agreement are for ---------------- convenience only; they form no part of this Agreement and shall not affect its interpretation. (i) Number of Days. Except as otherwise provided herein, for example, -------------- in the context of vacation days, in computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or holiday on which federal banks are or may elect to be closed, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or such holiday. (j) Gender, Etc. Words used herein, regardless of the number and gender ----------- specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. (k) Dispute Resolution. In the event of any disagreement of any nature ------------------ whatsoever between the parties to this Employment Agreement in any way relating to this Employment Agreement, except for the ability of the parties to seek a preliminary or permanent injunction as described above in Sections 12(e) and (f), which need not be discussed between the parties or arbitrated, the parties shall meet to attempt to resolve such disagreement. In the event of their failure to do so within fifteen (15) days or such longer period of time as shall be mutually agreed upon by the parties, either party may serve notice in writing upon the other party requesting arbitration, which notice shall specify in reasonable detail the nature of the dispute. Any arbitration under this Section shall be held in Philadelphia, Pennsylvania or such other place as shall be mutually agreed to by the parties, and conducted in accordance with the procedures set forth hereafter and, to the extent not inconsistent with this Section, in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association in effect on the date of this Agreement. Company shall have the right and remedy to ask the arbitrator to require Employee to account for any pay over to Company all compensation, profits, monies, accruals, increments or other benefits derived or received by Employee as the result of any transactions constituting a breach of Section 12, and Employee shall account for and pay over such amounts to Company upon the arbitrator's determination thereof. (1) Any arbitration under this Section shall be before an arbitrator who shall be experienced in the area of employment law. The arbitrator shall be selected by the parties from lists provided by the American Arbitration Association. The parties agree to exchange all relevant documents prior to any hearing, and further agree that any dispute over such exchange may be submitted to the arbitrator for decision, which decision shall be binding on the parties. The parties further agree to exchange hearing exhibits and designations of witnesses to be called at the hearing at least ten (10) calendar days before any hearing as a -14- party may not offer at the hearing as part of its direct case any witness, evidence or document not so disclosed, unless such witness(es), evidence or document(s) became available and/or known to the party who wishes to introduce such witness(es), evidence and/or document(s) within the ten (10) calendar days prior to the arbitration, and such witness(es), evidence or document(s) is immediately provided to the arbitrator and the other party. (2) Within 60 days of the production of all documents, evidence and witness list as outlined in the preceding section, the arbitrator shall conduct the arbitration hearing. Each party will have one day to present its case, unless, upon request the arbitrator determines that more or less time is appropriate. Within 30 days of the arbitration hearing, the arbitrator shall render a decision in writing to each party. (3) Any arbitration award must (i) be rendered in accordance with applicable law as described in this Employment Agreement and (ii) be set forth in a written decision which sets forth the reasons (including, without limitation, the conclusions of fact and/or law) upon which such award is rendered. Judgment upon an arbitration award may be rendered in any court of competent jurisdiction or application may be made to any such state or federal court of competent jurisdiction for judicial acceptance of an order to enforcement of an arbitration award, as the case may be. Any arbitration award shall be final and binding on the parties. Once an issue has been arbitrated pursuant hereto, the decision of the arbitrator shall be res judicata with respect to such issue. (4) The arbitrator shall have the power to issue subpoenas compelling testimony and/or the production of documents from any person whether or not a party hereto, which subpoenas shall be enforceable in all courts of competent jurisdiction in the Eastern District of Pennsylvania. In addition, the arbitrator and attorney-of-record shall have the power to request through the above-mentioned courts of competent jurisdiction the taking of depositions from any person, not a party or a director, officer, employee or agent of a party, who cannot be subpoenaed or is unable to attend the arbitration, whose testimony the arbitrator deems both important and relevant to the resolution of the issues presented for arbitration. (5) The cost of the arbitration and all attorney fees shall be borne by the parties in such proportion as the arbitrator shall direct, with such arbitrator to give due consideration to the fault of the parties. (6) Notwithstanding the foregoing, the parties need not arbitrate any request for preliminary or permanent injunctive relief, may be brought by either party in any state or federal court in the Eastern District of Pennsylvania. Such litigation will toll the Restricted Periods beginning on the alleged date of Employee's violation until the date the dispute is resolved. (l) Jurisdiction of Courts. Any legal suit, action, claim, proceeding ---------------------- or investigation arising out of or relating to Sections 11 or 12 of this Agreement may be instituted in any state or federal court in the Eastern District of Pennsylvania, and each of the parties -15- hereto waives any objection which party may now or hereafter have to such venue of any such suit, action, claim, proceeding or investigation, and irrevocably submits to the jurisdiction of any such court. Any and all service of process and any other notice in any such suit, action, claim, proceeding or investigation shall be effective against any party if given by registered or certified mail, return receipt requested, or by any other means of mail which requires a signed receipt, postage prepaid, mailed to such party as herein provided. If for any reason such service of process by mail is ineffective, then (i) Company shall be deemed to have appointed Jay Dubow, Esquire, Wolf, Block, Schorr and Solis-Cohen LLP, Twelfth Floor Packard Building, 111 South 15th Street, Philadelphia, Pennsylvania 19102 as the authorized agent of Company to accept and acknowledge, on behalf of Company service of any and all process which may be served in any such suit, action, claim, proceeding or investigation; and (ii) Employee shall be deemed to have appointed Richard E. Thayer, Esquire, as Employee's authorized agent to accept and acknowledge, on Employee's behalf, service of any and all process which may be served in any such suit, action, claim, proceeding or investigation. Nothing herein contained shall be deemed to affect the right of any party to serve process in any manner permitted by law or to commence legal proceedings or otherwise proceed against any other party in any jurisdiction other than Pennsylvania. (m) Survival. All provisions of this agreement which by their terms -------- survive the termination of Employee's employment with Company, including without limitation the covenants of Employee set forth in Sections 11 and 12 and the obligations of Company to make any post-termination payments under this Agreement, shall survive termination of Employee's employment by Company and shall remain in full force and effect thereafter in accordance with their terms. IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement in Philadelphia, Pennsylvania as of the date first above written. RMH TELESERVICES, INC. By: /s/ MarySue Lucci Hansell ----------------------------------- Name: MarySue Lucci Hansell Title: President /s/ Robert Berwanger ----------------------------------- Robert Berwanger -16- EX-10.9 4 EMPLOYMENT AGREEMENT FOR MICHAEL SCHARFF Exhibit 10.9 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, made this 27th day of August, 1998, by and between RMH Teleservices, Inc., a Pennsylvania corporation (hereinafter called "Company"), and Michael Scharff, an individual residing at 409 Militia Drive, Lansdale, Pennsylvania, 19446 (hereinafter called "Employee"). W I T N E S S E T H: - - - - - - - - - - Company wishes to continue to employ Employee and Employee wishes to continue to be in the employ of Company on the terms and conditions contained in this Agreement. WHEREAS, due to Company's desire to continue to employ Employee as Executive Vice President and to gain the protections and benefits contained in this Employment Agreement, Company and Employee agree to the covenants and restrictions contained herein; WHEREAS, due to Employee's desire to continue employment with the Company as Executive Vice President and obtain the protections and benefits contained in this Employment Agreement, Employee agrees to the covenants and restrictions contained herein; NOW, THEREFORE, in consideration of the facts, mutual promises and covenants contained herein and intending to be legally bound hereby, Company and Employee agree as follows: 1. Definitions. As used herein, the following terms shall have the ----------- meanings set forth below unless the contexts otherwise require. "Affiliate" shall mean a person who (i) with respect to any --------- entity, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such entity; or (ii) with respect to Employee, is a parent, spouse or issue of Employee, including persons in an adopted or step relationship. "Annual Bonus" shall mean the bonus payments set forth in ------------ Section 5(b), as such amount may be adjusted from time to time. "Base Compensation" shall mean the annual rate of compensation set ----------------- forth in Section 5(a), as such amount may be adjusted from time to time. "Board" shall mean the Board of Directors of Company. ----- "Business" shall mean the business conducted by Company or any -------- Subsidiary or corporate parent thereof or entity sharing a common corporate parent with the Company on the date of execution of this Agreement, including business activities in developmental stages, business activities which may be developed by the Company, or by any Subsidiary or corporate parent thereof or entity sharing a common corporate parent with the Company, during the period of Employee's employment by Company, and all other business activities which flow from a reasonable expansion of any of the foregoing during Employee's employment with the Company and about which Employee had or has constructive or actual knowledge. "Cause" shall include but not be limited to any one or more of the ----- following: (a) Employee breaches or neglects the material duties that Employee is required to perform under the terms of this Agreement, including if Employee performs his duties in an incompetent manner. (b) Employee is convicted of a felony or a crime of moral turpitude or has entered a plea of nolo contendere (or similar plea) to a charge of such an offense; (c) Employee uses alcohol or any unlawful controlled substance while performing his duties under this Agreement and/or if such use materially interferes with the performance of Employee' duties under this Agreement; (d) Employee commits any act of criminal fraud, material dishonesty or misappropriation relating to or involving the Company; (e) Employee materially violates a rule(s), regulation(s), policy(ies) or plan(s) governing employee performance or express direction(s) of the Board; or (f) Employee engages in the unauthorized disclosure of Confidential Information; (g) Employee acts in a manner that is materially contrary to the best interest of the Company. "Change of Control" shall be deemed to have occurred upon the ----------------- earliest to occur of the following events: (a) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("the Exchange Act") (other than the -2- Company, any subsidiary of the Company, any "person" (as defined herein) acting on behalf of the Company as underwriter pursuant to an offering who is temporarily holding securities in connection with such offering, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any "person" who, on the date the RMH Teleservices, Inc. 1996 Stock Incentive Plan (the "Plan") is effective, shall have been the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of or have voting control over shares of capital stock of the Company possessing more than thirty percent (30%) of the combined voting power of the Company's then outstanding securities) is or becomes the "beneficial owner" (as hereinabove defined), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; (b) during any period of not more than two consecutive years (not including any period prior to the date the Plan is effective), individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a "person" who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this definition) whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation or other legal entity, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (other than a "person" who, on the date the Plan is effective, shall have been the "beneficial owner" of or have voting control over shares of capital stock of the Company possessing more than thirty percent (30%) of the combined voting power of the Company's then outstanding securities) acquires more than thirty percent (30%) of the combined voting power of the Company's then outstanding securities; (d) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect); or -3- (e) a "change of control" as hereinafter defined by the Board of Directors for the express purposes of this Plan has occurred. "Commencement Date" shall have the meaning specified in Section 4 ----------------- hereof. "Confidential Information" shall have the meaning specified in ------------------------ Section 12(c) hereof. "Disability" shall mean Employee's inability, for a period of ---------- thirteen (13) consecutive weeks, or a cumulative period of 120 business days (i.e., Mondays through Fridays, exclusive of days on which Company is generally closed for a holiday) out of a consecutive period of twelve (12) months, to perform the essential duties of Employee's position, due to a disability as that term is defined in the American With Disabilities Act. "Principal Stockholders" shall mean Raymond J. Hansell, MarySue ---------------------- Lucci Hansell and Advanta Partners LP. "Restricted Area" shall have the meaning specified in --------------- Section 12(a) hereof. "Restricted Period A" shall have the meaning specified in ------------------- Section 12(a) hereof. "Restricted Period B" shall have the meaning specified in ------------------- Section 12(b) hereof. "Subsidiary" shall mean any company in which Company owns directly ---------- or indirectly 50% or more of the Voting Stock or 50% or more of the equity; or any other venture in which it owns either 50% or more of the voting rights or 50% or more of the equity. "Term of Employment" shall mean the period specified in Section 4 ------------------ hereof as the same may be terminated in accordance with this Agreement. "Voting Stock" shall mean capital stock of any class or classes ------------ having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a company. 2. Employment. Company hereby employs Employee as Executive Vice ---------- President and Employee hereby accepts employment by Company for the period and upon the terms and conditions specified in this Agreement. -4- 3. Office and Duties. ----------------- (a) As Executive Vice President, Employee shall render such services as are necessary and desirable to protect and advance the best interests of Company, acting, in all instances, under the supervision of and in accordance with the policies set by the Board. As Executive Vice President, Employee shall be responsible for managing the day-to-day operations of the business and shall have the responsibility and authority, subject to policies set by and with the approval of the Board, to employ and terminate employees, sign agreements and otherwise to implement the policies and directives of the Board, all subject to the provisions of any operating budget or budgets as may be approved from time to time by the Board and subject to the By-Laws of the Company. Employee shall perform any other duties reasonably required by the Board and reasonably related to his responsibilities as Executive Vice President. (b) For as long as Employee shall remain an employee of Company, Employee's entire working time, energy, skill and best efforts shall be devoted to the performance of Employee's duties hereunder in a manner which will faithfully and diligently further the business and interests of Company. Employee may engage in charitable, civic, fraternal, trade and professional association activities that do not interfere with Employee's obligations to Company, but Employee shall not work for any other for-profit business without so disclosing such activity to the Board, in which event the Board may not unreasonably withhold its consent to such activity. 4. Term. Employee shall be employed by Company for an initial Term of ---- Employment (the "Initial Term"), commencing August 27, 1998 (the "Commencement Date"), and ending on August 31, 2002, unless sooner terminated as hereinafter provided. 5. Compensation and Benefits. ------------------------- (a) For all of the service rendered by Employee to Company, Employee shall receive Base Compensation at the gross annual rate of One Hundred and Fifty Thousand Dollars ($150,000) payable in installments in accordance with Company's regular payroll practices in effect from time to time. The Base Compensation shall be reviewed annually, on or around the anniversary date of the Commencement Date of this Agreement to ascertain, in the sole discretion of the President and the Chairman of the Board, whether and to what extent, if any, the amount the Employee's Base Compensation should be increased. In no event shall the increase be less than the greater of five (5) percent of Employee's Base Compensation or the minimum of the percentage increase of the Wage Increase for the metropolitan statistical area of Philadelphia. (b) In addition to the foregoing compensation, Employee may be eligible to receive an annual bonus (the "Annual Bonus") in an amount, if any, as shall be determined by the Board of Directors in its sole discretion. The Annual Bonus, to the extent -5- earned, shall be payable in a single lump-sum payment within ninety (90) days after the end of each calendar year. No Annual Bonus is guaranteed. To be eligible for an Annual Bonus, Employee must be actively employed by the Company on the last day of the calendar year for which the Annual Bonus is at issue. (c) Employee may be eligible for certain stock options pursuant to the terms, conditions and restrictions of the RMH Teleservices, Inc. 1996 Stock Incentive Plan and pursuant to the grant as reflected in Attachment "A" hereto. (d) If there is a Change in Control, whether or not the Change of Control causes Employee's termination; (i) the Company shall pay Fifty Thousand Dollars ($50,000), minus taxes and other deductions/withholdings, to Employee as a Change of Control Bonus. The Change of Control Bonus is in addition to any other Base Compensation, Annual Bonus, or any other compensation, severance or benefits otherwise provided herein and will be paid to Employee no later than the thirtieth (30) business day following the Change in Control. (ii) Employee shall not be required to mitigate the amount of any payment provided for in this Section 5(d) by seeking employment or otherwise. (e) In the event that any payment or benefit received or to be received by Employee in connection with a Change in Control or the termination of Employee's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company) (collectively the "Total Payments"), would not be deductible (in whole or in part) as a result of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), by the Company, an Affiliate or other person making such payment or providing such benefit, the payments or benefits shall be so reduced until no portion of the Total Payments is not deductible. Employee shall be entitled to elect which payments or benefits shall be so reduced. For purposes of this limitation, (1) no portion of the Total Payments the receipt or enjoyment of which Employee shall have effectively waived in writing prior to the date of payment shall be taken into account, (2) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and acceptable to Employee does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, and (3) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of Sections 280(d)(3) and (4) of the Code. (f) Employee agrees and acknowledges that his employment and the other protections and benefits of this Agreement are full, adequate and sufficient consideration for the restrictions and obligations set forth in Sections 11 and 12 of this Agreement. -6- (g) Execution of this Agreement by Employee makes Employee ineligible for any compensation or benefits under the two page Term Sheet given to Employee on January 31, 1998 which allowed for the payment of $250,000 to Employee on change of control as defined within the Term Sheet. More specifically, the two page Term Sheet (attached as Attachment "B" to this Agreement) is null and void upon Employee's execution of this Agreement. The only other prior agreement which will survive this agreement is the Employee's rights under the 1996 Stock Incentive Plan. 6. Fringe Benefits. As an inducement to Employee to commence --------------- employment hereunder, and in consideration of Employee's covenants under this Agreement, Employee shall be entitled to the benefits set forth below (the "Fringe Benefits") during the Term of Employment: (a) Employee shall be eligible to participate in any health, life, accident or disability insurance, sick leave or other benefit plans or programs made available to other similarly situated employees of Company as long as the plans and programs are kept in force by Company and provided that Employee meets the eligibility requirements and other terms, conditions and restrictions of the respective plans and programs. (b) Employee shall be entitled to four (4) weeks paid vacation during each year, subject to Company's generally applicable policies relating to vacations, and excluding standard Company holidays. Employee shall give the President (or his or her designee) written notice at least seven (7) days prior to the commencement of any vacation in excess of five (5) business days. (c) Company will reimburse Employee for all reasonable and necessary expenses incurred by Employee in connection with the performance of Employee's duties hereunder upon receipt of documentation therefor in accordance with Company's regular reimbursement procedures and practices in effect from time to time. (d) Company will continue to pay the premiums ("the Company Paid Amount") on a life insurance policy to be owned by the Company in the face amount of $100,000, insuring the life of Employee, subject to the restrictions and limitations contained in the insurance agreement or agreements, and provided that the Employee passes each insurance company's required medical examination and is insurable at standard rates. Employee shall at all times, while the policy is in existence, have the option to pay any premiums to acquire additional coverage beyond the Company Paid Amount so long as the insurance agreement allows. (e) The Company will continue to pay the yearly premiums ($5,000) for the Section 162 Executive Bonus Plan for Michael Scharff ("Section 162 Plan") (Policy Number 9605245) as long as the terms, conditions and restrictions of the Plan allow. However, -7- the Board and/or CEO of the Company has the right to modify, eliminate or alter the Executive Bonus Agreement under which the Company had agreed to pay the Employee's premiums for the Section 162 Plan. 7. Disability. If Employee suffers a Disability as that term is ---------- defined herein, the Company may terminate Employee's employment relationship with Company at any time thereafter by giving Employee ten (10) days written notice of termination. Thereafter, Company shall have no obligation to Employee for Base Compensation, Annual Bonus, Fringe Benefits or any other form of compensation or benefit to Employee, except as otherwise required by law or by benefit plans provided at Company expense, other than (a) amounts of Base Compensation accrued through the date of termination, (b) vested Stock Options and (c) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment. Any compensation Employee receives from any Company paid for insurance, benefit plan or policy under which the Employee was covered at the time of his inability, due to his disability, including but not limited to workers' compensation payments and payments from a Company disability plan will be deducted from the Company's Base Compensation payment to Employee. 8. Death. If Employee dies during the Term of Employment, the Term of ----- Employment and Employee's employment with Company shall terminate as of the date of Employee's death. Company shall have no obligation to Employee or Employee's estate for Base Compensation, Annual Bonus, Fringe Benefits, severance or any other form of compensation or benefit, except as otherwise required by law or by benefit plans provided at Company expense, other than (a) amounts of Base Compensation that have accrued through the date of Employee's death, (b) vested Stock Options and (c) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment. 9. Termination for Cause. Company may terminate Employee's employment --------------------- relationship with Company at any time for Cause. Upon termination of Employee under this Section 9, Company shall have no obligation to Employee for Base Compensation, Annual Bonus, Fringe Benefits, severance or any other form of compensation or benefits other than (a) amounts of Base Compensation accrued through the date of termination, and (b) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment. -8- 10. Termination without Cause. ------------------------- (a) Company may terminate Employee's employment relationship with Company at any time without Cause upon thirty (30) days written notice. Notwithstanding the termination of Employee under this Section 10(a): (i) Company shall continue to pay Employee's Base Compensation, as such Base Compensation would have accrued through a seventeen (17) month period following such termination, so long as Employee executes and does not revoke a Separation Agreement and General Release Agreement acceptable to Company which will be substantially in the form attached hereto as Attachment "C". (Payments will be made in installments in accordance with the Company's regular payroll practices); and (ii) Employee shall be entitled to all Fringe Benefits described in 6(a) herein, except for sick time, subject to the terms, conditions and restrictions of the specific plans, for seventeen (17) months after such termination without Cause. During the 17 months, the Company shall use its best efforts to arrange for and to pay for health coverage for Employee which is substantially similar to the individual coverage which Employee was receiving immediately prior to his termination without Cause. The Company will not be responsible for paying the premiums for the coverage of any of Employee's dependents. Fringe Benefits otherwise receivable by the Employee pursuant to this paragraph (ii) will be reduced to the extent comparable benefits are actually received by Employee during such period. (b) Employee may terminate his employment with Company for any or no reason, upon thirty (30) days written notice. If such notice is provided by Employee, Employer, in its sole discretion, may waive the notice period or any portion thereof, without pay (Base Compensation, Annual Bonus, etc.) or Fringe Benefits to Employee for the remaining notice period. The Company shall then consider the Employee's employment terminated on the date on which Employee first gave written notice to the Company. Upon termination by Employee of his employment under the provisions of this Subsection 10(b), the Company shall have no obligation to Employee for Base Compensation, Annual Bonus, Fringe Benefits, severance or any other form of compensation or benefits other than (a) amounts of Base Compensation accrued through the date of termination, and (b) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for his termination of his employment. (c) Termination of Employee's employment pursuant to Sections 7 through 10 shall release the Company of all its liabilities and obligations under this Agreement, except as expressly provided in Sections 7 through 10. Termination of Employee's employment pursuant to this Section shall not, however, release Employee from Employee's obligations and restrictions as stated in Sections 11 and 12 of this Agreement. -9- (d) Employee shall not be entitled to any payment or benefit under any Company severance plan other than as reflected herein under Section 10, practice or policy, if any, in effect at or after the time of Employee's termination since this Agreement supersedes all such plans, practices and policies, including the two-page Term Sheet attached as Attachment "B". 11. Company Property. All advertising, sales, manufacturers' and ---------------- other materials or articles or information, including without limitation data processing reports, computer programs, software, customer information and records, business records, price lists or information, samples, or any other materials or data of any kind physically furnished to Employee by Company or developed by Employee on behalf of Company or at Company's direction or for Company's use or otherwise in connection with Employee's employment hereunder, are and shall remain the sole property of Company, including in each case all copies thereof in any medium, including computer tapes and other forms of information storage. If Company requests the return of such materials at any time during or at or after the termination of Employee's employment, Employee shall deliver all copies of the same to Company immediately. 12. Noncompetition, Trade Secrets, Etc. Employee hereby ---------------------------------- acknowledges that, during and solely as a result of his employment by Company, Employee will have access to Confidential Information as that term is defined herein. In consideration of such special and unique opportunities afforded by Company to Employee as a result of Employee's employment and the other benefits referred to within this Agreement, the Employee hereby agrees as follows: (a) From the date hereof until six (6) months following the termination of Employee's employment with Company, for any or no reason, whether initiated by Employee or Company, ("Restricted Period A"), Employee shall not, for his own benefit or the benefit of any third party, directly or indirectly engage in (as a principal, shareholder, partner, director, officer, agent, employee, consultant or otherwise) or be financially interested in any business operating within the United States or Canada (the "Restricted Area"), which provides telemarketing services materially the same as the services Company provides to third parties, or any other business activities which are materially the same as and which are in direct competition with the Business, or with any business activities carried on by Company or being planned by Company, at the time of the termination of Employee's employment, or any other business activities which are materially the same as the Business for any of the Company's past, present or prospective clients, customers or accounts; provided however, nothing contained in this Section 12 shall prevent Employee from holding for investment less than five percent (5%) of any class of equity securities of a company whose securities are publicly traded on a national securities exchange or in a national market system. (b) From the date hereof until twenty-four (24) months following the termination of Employee's employment with the Company, for any or no reason, whether -10- initiated by Employee or Company, ("Restricted Period B"), Employee shall not, for his own benefit or the benefit of any third party, directly or indirectly, induce or attempt to influence any employee, customer, independent contractor or supplier of Company to terminate employment or any other relationship with Company. During "Restricted Period B", while Employee is still employed by the Company, Employee shall not, directly or indirectly, disclose or otherwise communicate to any of the clients, customers or accounts of Company, its Affiliates or any Subsidiary thereof that he has been terminated, is considering terminating or has decided to terminate employment with Company. (c) Employee shall not use for Employee's personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm, association or company other than Company, any "Confidential Information" which term shall mean any information regarding the business methods, business policies, policies, procedures, techniques, research or development projects or results, historical or projected financial information, budgets, trade secrets, or other knowledge or processes of or developed by Company or any names and addresses of customers or clients or any data on or relating to past, present or prospective Company customers or clients or any other confidential information relating to or dealing with the business operations or activities of Company, made known to Employee or learned or acquired by Employee while in the employ of Company. Confidential Information shall not include (1) information unrelated to the Company which was lawfully received by Employee free of restriction from another source having the right to so furnish such Confidential Information; or (2) information after it has become generally available to the public without breach of this Agreement by the Employee; or (3) information which at the time of disclosure to the Employee was known to the Employee to be free of restriction as evidenced by documentation from the Company which the Employee possesses, or (4) information which Company agrees in writing is free of such restrictions. All memoranda, notes, lists, records, files, documents and other papers and other like items (and all copies, extracts and summaries thereof) made or compiled by Employee or made available to Employee concerning the business of Company shall be Company's property and shall be delivered to Company promptly upon the termination of Employee's employment with Company or at any other time on request. The foregoing provisions of this Subsection 12(c) shall apply during and for a period of five (5) years after Employee is an employee of Company and shall be in addition to (and not a limitation of) any legally applicable protections of Company's interest in confidential information, trade secrets and the like. At the termination of Employee's employment with Company, Employee shall return to Company all copies of Confidential Information in any medium, including computer tapes and other forms of data storage. (d) Any and all writings, inventions, improvements, processes, procedures and/or techniques which Employee may make, conceive, discover or develop, either solely or jointly with any other person or persons, at any time when Employee is an employee of Company, whether or not during working hours and whether or not at the request or upon the suggestion of Company, which relate to or are useful in connection with the Business or with -11- any business now or hereafter carried on or contemplated by Company, including developments or expansions of its present fields of operations, shall be the sole and exclusive property of Company. Employee shall make full disclosure to Company of all such writings, inventions, improvements, processes, procedures and techniques, and shall do everything necessary or desirable to vest the absolute title thereto in Company. Employee shall write and prepare all specifications and procedures regarding such inventions, improvements, processes, procedures and techniques and otherwise aid and assist Company so that Company can prepare and present applications for copyright or Letters Patent therefor and can secure such copyright or Letters Patent wherever possible, as well as reissues, renewals, and extensions thereof, and can obtain the record title to such copyright or patents so that Company shall be the sole and absolute owner thereof in all countries in which it may desire to have copyright or patent protection. Employee shall not be entitled to any additional or special compensation or reimbursement regarding any and all such writings, inventions, improvements, processes, procedures and techniques. (e) Employee acknowledges that the restrictions contained in the foregoing Subsections (a), (b), (c) and (d), in view of the nature of the business in which Company is engaged, are reasonable and necessary in order to protect the legitimate interests of Company, that their enforcement will not impose a hardship on Employee or significantly impair Employee's ability to earn a livelihood, and that any violation thereof would result in irreparable injuries to Company. Employee and Company acknowledge that, in the event either party believes the other party has violated any of the terms of this Agreement, the other party shall be entitled to seek from any court of competent jurisdiction, without attempting arbitration, preliminary and permanent injunctive relief. (f) If the Restricted Periods ("A" or "B") or the Restricted Area specified in Subsections (a) and (b) above should be adjudged unreasonable in any proceeding, then the period of time shall be reduced by such amount or the area shall be reduced by the elimination of such portion or both such reductions shall be made so that such restrictions may be enforced for such time and in such area as is adjudged to be reasonable. If Employee violates any of the restrictions contained in the foregoing Subsections (a) or (b), the relevant Restricted Period shall be extended by a period equal to the length of time from the commencement of any such violation until such time as such violation shall be cured by Employee to the satisfaction of Company. Employee hereby expressly consents to the jurisdiction of any court within the Eastern District of Pennsylvania for the purpose of seeking a preliminary or permanent injunction as described above in Section 12(e), and agrees to accept service of process by mail relating to any such proceeding. Company may supply a copy of Section 12 of this Agreement to any future or prospective employer of Employee or to any person to whom Employee has supplied information if Company determines in good faith that there is a reasonable likelihood that Employee has violated or will violate such Section. -12- (g) Any prior non-competition agreement entered into by Employee is null and void as this covenant supersedes and replaces any such agreements, including the non-competition provision of the Grant of Option. 13. Prior Agreements. Employee represents to Company that there are ---------------- no restrictions, agreements or understandings, oral or written, to which Employee is a party or by which Employee is bound that prevent or make unlawful Employee's execution or performance of this Agreement. 14. Miscellaneous. ------------- (a) Indulgences, Etc. Neither the failure nor any delay on ---------------- the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. (b) Controlling Law. This Agreement and all questions --------------- relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman. (c) Notices. All notices, requests, demands and other ------- communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received only when personally delivered, on the day specified for delivery when deposited with a recognized national or regional courier service for delivery to the intended addressee or two (2) days following the day when deposited in the United States mails, first class postage prepaid, addressed as set forth below: (i) If to Employee: Mr. Michael Scharff 409 Militia Drive Lansdale, PA 19446 with a copy, given in the manner prescribed above, to: -13- ------------------------- ------------------------- ------------------------- (ii) If to Company: RMH Teleservices, Inc. 40 Morris Avenue Bryn Mawr, PA 19010 Attention: MarySue Lucci with a copy, given in the manner prescribed above, to: Jay Dubow, Esquire Wolf, Block, Schorr and Solis-Cohen LLP Twelfth Floor Packard Building 111 South 15th Street Philadelphia, PA 19102-2678 In addition, notice by mail shall be by air mail if posted outside of the continental United States. Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section for the giving of notice. (d) Binding Nature of Agreement. This Agreement shall be --------------------------- binding upon Company and shall inure to the benefit of Company, its present and future Subsidiaries, Affiliates, successors and assigns including any transferee of the business operation, as a going concern, in which Employee is employed and shall be binding upon Employee, Employee's heirs and personal representatives. None of the rights or obligations of Employee hereunder may be assigned or delegated, except that in the event of Employee's death or Disability, any rights of Employee hereunder shall be transferred to Employee's estate or personal representative, as the case may be. Company may assign its rights and obligations under this Agreement in whole or in part to any one or more Affiliates or successors, but no such assignment shall relieve Company of its obligations to Employee if any such assignee fails to perform such obligations. (e) Execution in Counterparts. This Agreement may be ------------------------- executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. -14- (f) Provisions Separable. The provisions of this Agreement -------------------- are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. (g) Entire Agreement. This Agreement contains the entire ---------------- understanding among the parties hereto with respect to the employment of Employee by Company, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. Notwithstanding the foregoing, nothing herein shall limit the application of any generally applicable Company policy, practice, plan or the terms of any manual or handbook applicable to Company's employees generally, except to the extent the foregoing directly conflict with this Agreement, in which case the terms of this Agreement shall prevail. Both parties agree that the two-page Term Sheet, attached to this Agreement as Attachment "B", is null and void. (h) Section Headings. The Section headings in this Agreement ---------------- are for convenience only; they form no part of this Agreement and shall not affect its interpretation. (i) Number of Days. Except as otherwise provided herein, for -------------- example, in the context of vacation days, in computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or holiday on which federal banks are or may elect to be closed, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or such holiday. (j) Gender, Etc. Words used herein, regardless of the number ----------- and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. (k) Dispute Resolution. In the event of any disagreement of ------------------ any nature whatsoever between the parties to this Employment Agreement in any way relating to this Employment Agreement, except for the ability of the parties to seek a preliminary or permanent injunction as described above in Sections 12(e) and (f), which need not be discussed between the parties or arbitrated, the parties shall meet to attempt to resolve such disagreement. In the event of their failure to do so within fifteen (15) days or such longer period of time as shall be mutually agreed upon by the parties, either party may serve notice in writing upon the other party requesting arbitration, which notice shall specify in reasonable detail the nature of the dispute. Any arbitration under this Section shall be held in Philadelphia, Pennsylvania or such -15- other place as shall be mutually agreed to by the parties, and conducted in accordance with the procedures set forth hereafter and, to the extent not inconsistent with this Section, in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association in effect on the date of this Agreement. Company shall have the right and remedy to ask the arbitrator to require Employee to account for any pay over to Company all compensation, profits, monies, accruals, increments or other benefits derived or received by Employee as the result of any transactions constituting a breach of Section 12, and Employee shall account for and pay over such amounts to Company upon the arbitrator's determination thereof. (i) Any arbitration under this Section shall be before an arbitrator who shall be experienced in the area of employment law. The arbitrator shall be selected by the parties from lists provided by the American Arbitration Association. (ii) Within 60 days of the production of all documents, evidence and witness list as outlined in the preceding section, the arbitrator shall conduct the arbitration hearing. Each party will have one day to present its case, unless, upon request the arbitrator determines that more or less time is appropriate. Within 60 days of the arbitration hearing, the arbitrator shall render a decision in writing to each party. (iii) Any arbitration award must (i) be rendered in accordance with applicable law as described in this Employment Agreement and (ii) be set forth in a written decision which sets forth the reasons (including, without limitation, the conclusions of fact and/or law) upon which such award is rendered. Judgment upon an arbitration award may be rendered in any court of competent jurisdiction or application may be made to any such state or federal court of competent jurisdiction for judicial acceptance of an order to enforcement of an arbitration award, as the case may be. Any arbitration award shall be final and binding on the parties. Once an issue has been arbitrated pursuant hereto, the decision of the arbitrator shall be res judicata with respect to such issue. (iv) The arbitrator shall have the power to issue subpoenas compelling testimony and/or the production of documents from any person whether or not a party hereto, which subpoenas shall be enforceable in all courts of competent jurisdiction in the Eastern District of Pennsylvania. In addition, the arbitrator and attorney-of-record shall have the power to request through the above-mentioned courts of competent jurisdiction the taking of depositions from any person, not a party or a director, officer, employee or agent of a party, who cannot be subpoenaed or is unable to attend the arbitration, whose testimony the arbitrator deems both important and relevant to the resolution of the issues presented for arbitration. (v) The cost of the arbitration and all attorney fees shall be borne by the parties in such proportion as the arbitrator shall direct, with such arbitrator to give due consideration to the fault of the parties. (vi) Notwithstanding the foregoing, the parties need not arbitrate any request for preliminary or permanent injunctive relief, may be brought by either -16- party in any state or federal court in the Eastern District of Pennsylvania. Such litigation will toll the Restricted Periods beginning on the alleged date of Employee's violation until the date the dispute is resolved. (l) Jurisdiction of Courts. Any legal suit, action, claim, ---------------------- proceeding or investigation arising out of or relating to Sections 11 or 12 of this Agreement may be instituted in any state or federal court in the Eastern District of Pennsylvania, and each of the parties hereto waives any objection which party may now or hereafter have to such venue of any such suit, action, claim, proceeding or investigation, and irrevocably submits to the jurisdiction of any such court. Any and all service of process and any other notice in any such suit, action, claim, proceeding or investigation shall be effective against any party if given by registered or certified mail, return receipt requested, or by any other means of mail which requires a signed receipt, postage prepaid, mailed to such party as herein provided. If for any reason such service of process by mail is ineffective, then (i) Company shall be deemed to have appointed Jay Dubow, Esquire, Wolf, Block, Schorr and Solis-Cohen LLP, Twelfth Floor Packard Building, 111 South 15th Street, Philadelphia, Pennsylvania 19102 as the authorized agent of Company to accept and acknowledge, on behalf of Company service of any and all process which may be served in any such suit, action, claim, proceeding or investigation; and (ii) Employee shall be deemed to have appointed ___________________ as Employee's authorized agent to accept and acknowledge, on Employee's behalf, service of any and all process which may be served in any such suit, action, claim, proceeding or investigation. Nothing herein contained shall be deemed to affect the right of any party to serve process in any manner permitted by law or to commence legal proceedings or otherwise proceed against any other party in any jurisdiction other than Pennsylvania. (m) Survival. All provisions of this agreement which by -------- their terms survive the termination of Employee's employment with Company, including without limitation the covenants of Employee set forth in Sections 11 and 12 and the obligations of Company to make any post-termination payments under this Agreement, shall survive termination of Employee's employment by Company and shall remain in full force and effect thereafter in accordance with their terms. IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement in Philadelphia, Pennsylvania as of the date first above written. By: /s/ Michael Scharff By: /s/ Raymond J. Hansell ------------------------------ ----------------------------- Michael Scharff Raymond J. Hansell Chief Executive Officer RMH TELESERVICES, INC. Date: August 27, 1998 Date: August 27, 1998 ---------------------------- --------------------------- -17- Witness: Witness: -------------------------- ------------------------- -18- EX-10.10 5 CONSULTANT AGREEMENT FOR RAYMOND J. HANSELL Exhibit 10.10 CONSULTANT AGREEMENT OF RAYMOND J. HANSELL This Agreement, made this 14th day of August, 1998, by and between RMH Teleservices, Inc. (the "Company") and Raymond J. Hansell, residing at 506 Chaumont Drive, Villanova, Pennsylvania 19085 ("Consultant"). In recognition of Consultant's long term services for the Company, including as one of its founders and one of its principal officers, and his unique knowledge of the Company and the industry, Company wishes to engage Consultant and Consultant wishes to be engaged as a consultant of the Company on the terms and conditions contained in this Agreement. Now, therefore, in consideration of the facts, mutual promises and covenants contained herein and intending to be legally bound hereby, Company and Consultant agree as follows: 1. Employment Agreements. The Employment Agreement between Raymond --------------------- J. Hansell and the Company dated May 26, 1996 shall be terminated on the date provided in paragraph 3 below, and as of such date, neither the Company nor Mr. Hansell shall have any further obligations under such agreement. 2. Consultant Status. The Company hereby agrees to engage Consultant ----------------- to provide such consultation services to the Company, from time to time, as are hereinafter defined: (a) Consultant shall perform part-time advisory and consultative services for the Company, at such times and at such places as the Company and Consultant from time to time agree. (b) Consultant's services will primarily be performed by telephone, and Consultant will not be required to devote a major or substantial part of Consultant's time to such services. (c) Consultant shall not be required to render any such services during vacation periods or during periods of illness or other incapacity. (d) At no time shall Consultant be asked to perform any management duties, nor to participate in the day-to-day administration of the Company. (e) Such services shall not interfere with the ability of Consultant to engage in outside employment or other activities which are not inconsistent with the terms of this Agreement. 3. Term. This agreement shall commence on the date on which the ---- Company's new CEO begins work for the Company and end on May 31, 1999. 4. Compensation. For all of the services rendered by Consultant to ------------ the Company, Consultant shall receive base compensation at the gross annual rate of One Hundred and Four Thousand, Two Hundred and Thirty-Nine Dollars ($104,239), which is 50% of the gross annual rate of Base Compensation to which he was entitled when employed by the Company as of the date hereof, payable in installments in accordance with Company's regular payroll practices in place from time to time, provided that there shall be no payroll tax or other such withholding, unless required by law. 5. Fringe Benefits. From the date hereof until the date of the --------------- termination of the Consultant's services to the Company hereunder, Consultant shall be entitled to participate in any health, life, accident or disability insurance, sick leave or other benefit plans or programs -2- made available to Consultant in connection with his prior employment status with the Company, as of the date hereof, as long as such plans or programs are kept in force by the Company. In the event that the Consultant does not meet the eligibility requirements under the terms, conditions and restrictions of the respective plans and programs, the Company shall reimburse Consultant the amount that the Company would have paid Consultant for such benefit plans or programs, had Consultant been eligible. 6. Non-Compete, Trade Secrets, Etc. - From the date hereof until ------------------------------- the later of two years after the termination of the Consultant's services to the Company hereunder and May 24, 2002, (the "Restrictive Period"), Consultant shall not, directly or indirectly, render services for or be financially interested in any business operating within the United States or Canada which provides telemarketing services materially the same as the services the Company provides to third parties, or any other business activities which are materially the same and which are in direct competition with the Company for any of the Company's clients, customers or accounts during the past five years, or prospective clients or customers that were actively solicited by the Company during the past three years; provided however, nothing contained in this Section 6 shall prevent Consultant from holding for investment less than 5% of any class of equity securities of a company whose securities are publicly traded on a national securities exchange or any national market system. Additionally, during the Restrictive Period, Consultant shall not, directly or indirectly, induce or attempt to influence any employee, customer, independent contractor or supplier of the Company to terminate employment or any other relationship with the Company, and, without the Company's consent, Consultant shall not employ any employee of the Company. Consultant shall not use for his own personal benefit or -3- disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm or company other than the Company, any confidential information of the Company for a period beginning on the date of this Agreement and ending on a date which is the later of five years after the termination of Consultant's services under this Agreement and May 31, 2004. At the termination of the Consultant's services under this Agreement, Consultant shall return to Company or destroy all copies of confidential information in any medium, including computer tapes and other forms of data storage, except Consultant may retain records relevant to the filings of Consultant's personal income taxes and business records of the Company relevant to Consultant's discharge of Consultant's duties as a director of the Company or other legitimate noncompetitive business purpose. Any and all writings, inventions, improvements, processes, procedures and/or techniques which Consultant may make, conceive, discover or develop, either solely or jointly with any other person or persons, at any time when Consultant was an employee of the Company, which relate to or are useful in connection with the Company's business or with any business now or hereafter carried on or contemplated by the Company, including developments or expansions of its present fields of operations, shall be the sole and exclusive property of the Company. 7. In the event of a change in control of the Company, then Consultant shall immediately be paid the balance of the compensation due hereunder through May 31, 1999, and this Agreement shall immediately terminate, provided that the provisions of paragraph 6 above shall survive for the periods specified therein. However, in the event that such payment would prevent the ability of the companies involved in such change of control to use the pooling method of accounting or other desirable tax or accounting treatment, then such lump sum -4- payment shall not be made so long as the Company, or any successor entity, agrees to assume all of the payment obligations of the Company hereunder. IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement in Bryn Mawr, Pennsylvania as of the date first above written. RMH TELESERVICES, INC. By: /s/ William A. Rosoff ----------------------------- Name: William A. Rosoff Title: Chairman of the Board RAYMOND J. HANSELL, Consultant /s/ Raymond J. Hansell, Consultant ----------------------------------- -5- EX-10.11 6 CONSULTANT AGREEMENT OF MARYSUE LUCCI HANSELL Exhibit 10.11 CONSULTANT AGREEMENT OF MARYSUE LUCCI HANSELL This Agreement, made this 14th day of August, 1998, by and between RMH Teleservices, Inc. (the "Company") and MarySue Lucci Hansell, residing at 506 Chaumont Drive, Villanova, Pennsylvania 19085 ("Consultant"). In recognition of Consultant's long term services for the Company, including as one of its founders and one of its principal officers, and her unique knowledge of the Company and the industry, Company wishes to engage Consultant and Consultant wishes to be engaged as a consultant of the Company on the terms and conditions contained in this Agreement. Now, therefore, in consideration of the facts, mutual promises and covenants contained herein and intending to be legally bound hereby, Company and Consultant agree as follows: 1. Employment Agreements. The Employment Agreement between MarySue --------------------- Lucci Hansell and the Company dated May 26, 1996 shall be terminated on the date provided in paragraph 3 below, and as of such date, neither the Company nor Ms. Hansell shall have any further obligations under such agreement. 2. Consultant Status. The Company hereby agrees to engage ----------------- Consultant to provide such consultation services to the Company, from time to time, as are hereinafter defined: (a) Consultant shall perform part-time advisory and consultative services for the Company, at such times and at such places as the Company and Consultant from time to time agree. (b) Consultant's services will primarily be performed by telephone, and Consultant will not be required to devote a major or substantial part of Consultant=s time to such services. (c) Consultant shall not be required to render any such services during vacation periods or during periods of illness or other incapacity. (d) At no time shall Consultant be asked to perform any management duties, nor to participate in the day-to-day administration of the Company. (e) Such services shall not interfere with the ability of Consultant to engage in outside employment or other activities which are not inconsistent with the terms of this Agreement. 3. Term. This agreement shall commence on the date on which the ---- Company's new CEO begins work for the Company and end on May 31, 1999. 4. Compensation. For all of the services rendered by Consultant to ------------ the Company, Consultant shall receive base compensation at the gross annual rate of One Hundred and Four Thousand, Two Hundred and Thirty-Nine Dollars ($104,239), which is 50% of the gross annual rate of Base Compensation to which she was entitled when employed by the Company as of the date hereof, payable in installments in accordance with Company's regular payroll practices in place from time to time, provided that there shall be no payroll tax or other such withholding, unless required by law. 1. 5. Fringe Benefits. From the date hereof until the date of the --------------- termination of the Consultant's services to the Company hereunder, Consultant shall be entitled to participate in any health, life, accident or disability insurance, sick leave or other benefit plans or programs -2- made available to Consultant in connection with her prior employment status with the Company, as of the date hereof, as long as such plans or programs are kept in force by the Company. In the event that the Consultant does not meet the eligibility requirements under the terms, conditions and restrictions of the respective plans and programs, the Company shall reimburse Consultant the amount that the Company would have paid Consultant for such benefit plans or programs, had Consultant been eligible. 1. 6. Non-Compete, Trade Secrets, Etc. - From the date hereof until -------------------------------- the later of two years after the termination of the Consultant"s services to the Company hereunder and May 24, 2002, (the "Restrictive Period"), Consultant shall not, directly or indirectly, render services for or be financially interested in any business operating within the United States or Canada which provides telemarketing services materially the same as the services the Company provides to third parties, or any other business activities which are materially the same and which are in direct competition with the Company for any of the Company"s clients, customers or accounts during the past five years, or prospective clients or customers that were actively solicited by the Company during the past three years; provided however, nothing contained in this Section 6 shall prevent Consultant from holding for investment less than 5% of any class of equity securities of a company whose securities are publicly traded on a national securities exchange or any national market system. Additionally, during the Restrictive Period, Consultant shall not, directly or indirectly, induce or attempt to influence any employee, customer, independent contractor or supplier of the Company to terminate employment or any other relationship with the Company, and, without the Company"s consent, Consultant shall not employ any employee of the Company. Consultant shall not use for her own personal benefit or -3- disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm or company other than the Company, any confidential information of the Company for a period beginning on the date of this Agreement and ending on a date which is the later of five years after the termination of Consultant"s services under this Agreement and May 31, 2004. At the termination of the Consultant"s services under this Agreement, Consultant shall return to Company or destroy all copies of confidential information in any medium, including computer tapes and other forms of data storage, except Consultant may retain records relevant to the filings of Consultant"s personal income taxes and business records of the Company relevant to Consultant"s discharge of Consultant"s duties as a director of the Company or other legitimate noncompetitive business purpose. Any and all writings, inventions, improvements, processes, procedures and/or techniques which Consultant may make, conceive, discover or develop, either solely or jointly with any other person or persons, at any time when Consultant was an employee of the Company, which relate to or are useful in connection with the Company's business or with any business now or hereafter carried on or contemplated by the Company, including developments or expansions of its present fields of operations, shall be the sole and exclusive property of the Company. 7. In the event of a change in control of the Company, then Consultant shall immediately be paid the balance of the compensation due hereunder through May 31, 1999, and this Agreement shall immediately terminate, provided that the provisions of paragraph 6 above shall survive for the periods specified therein. However, in the event that such payment would prevent the ability of the companies involved in such change of control to use the pooling method of accounting or other desirable tax or accounting treatment, then such lump sum -4- payment shall not be made so long as the Company, or any successor entity, agrees to assume all of the payment obligations of the Company hereunder. IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement in Bryn Mawr, Pennsylvania as of the date first above written. RMH TELESERVICES, INC. By: /s/ William A. Rosoff ----------------------------- Name: William A. Rosoff Title: Chairman of the Board MARYSUE LUCCI HANSELL, Consultant /s/ MarySue Lucci -------------------------------- -5- EX-23.1 7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To RMH Teleservices, Inc.: As independent public accountants, we hereby consent to the incorporation of our report, included in this Form 10-K, into the Company's previously filed Form S-8 Registration Statement File No. 333-58785. /s/ ARTHUR ANDERSEN LLP Philadelphia, Pennsylvania December 23, 1998 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 1 4,179,000 6,779,000 10,739,000 37,000 0 23,160,000 10,530,000 6,483,000 27,335,000 4,998,000 0 0 0 48,638,000 (26,451,000) 27,187,000 0 52,434,000 0 52,107,000 0 114,000 0 868,000 364,000 504,000 0 0 0 504,000 0.06 0.06
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