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Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2002

Commission File Number 0-21333

(Exact name of Registrant as specified in its charter)

15 Campus Boulevard, Newtown Square, PA 19073
(Address of principal executive offices and zip code)

(610) 325-3100
(Registrant’s telephone number, including area code)

Indicate by check 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 o

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: 13,659,173 shares of common stock outstanding as of August 9, 2002.

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RMH TELESERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q

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PART I. FINANCIAL INFORMATION

RMH TELESERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

The accompanying notes and the notes to the consolidated financial statements included in the Registrant’s Annual Report on Form 10-K/A are an integral part of these condensed consolidated financial statements.

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RMH TELESERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

The accompanying notes and the notes to the consolidated financial statements included in the Registrant’s Annual Report on Form 10-K/A are an integral part of these condensed consolidated financial statements.

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RMH TELESERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

The accompanying notes and the notes to the consolidated financial statements included in the Registrant’s Annual Report on Form 10-K/A are an integral part of these condensed consolidated financial statements.

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RMH TELESERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)

The accompanying notes and the notes to the consolidated financial statements included in the Registrant’s Annual Report on Form 10-K/A are an integral part of these condensed consolidated financial statements.

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RMH TELESERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1 - BASIS OF PRESENTATION:

            RMH Teleservices, Inc. and its subsidiaries (the “Company”) provide outsourced customer relationship management (“CRM”) services. The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows. Operating results for the three and nine months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the full fiscal year. The Company may experience quarterly variations in net revenues and operating income as a result of the timing of clients’ telemarketing campaigns, the commencement and expiration of contracts, the amount o f new business generated, the timing of additional selling, general and administrative expenses to acquire and support such new business and changes in the revenue mix among various customers. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules and regulations. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended September 30, 2001. Certain prior year amounts have been reclassified to conform with the current year presentation. The impact of these changes is not material and did not affect net loss.

            The Emerging Issues Task Force reached a consensus on accounting for certain sales incentives (“EITF Issue No. 00-14”). The Task Force consensus is that when recognized, the reduction in or refund of the selling price of a product or service resulting from any cash sales incentives should be classified as a reduction of revenue. The Company made up-front cash payments and concessions to a client in connection with securing the execution of contracts (see discussion under Note 2). Historically, the Company’s accounting policy was to capitalize upfront payments and concessions and amortize the deferred asset as a charge to cost of services over the contract period. The Company adopted EITF Issue No. 00-14, as codified by EITF Issue No. 01-09 on October 1, 2001, and as such, the financial statements for the three and nine months ended June 30, 2001 have been reclassified to conform to the current presentation as required. Amortization of capitalized costs for the three and nine months ended June 30, 2001 of $437,000 and $1,100,000, respectively, was reclassified from cost of services to a reduction of revenue. Amortization for the three and nine months ended June 30, 2002 was $990,000 and $1,622,000, respectively.

NOTE 2 - MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK:

            The Company is dependent on several large clients for a significant portion of net revenues. The loss of one or more of these clients, or an inability to collect amounts owed by such clients, could have a material adverse effect on the financial position and results of operations of the Company. Further, a significant portion of the Company’s revenues are derived from the telecommunications industry, including local, long-distance and wireless telecommunications companies. While the Company believes that the demand for CRM services within the telecommunications industry will continue to increase, the telecommunications industry is currently facing tremendous competitive pressures that have resulted in deterioration in the financial position and results of operations of certain companies within this sector. For the three and nine months ended June 30, 2002, $26,587,000 or 45% and $72,682,000 or 41% of our revenues were derived from the telecommunications industry (see Note 11).

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            The Company provides inbound and outbound CRM services to MCI WORLDCOM Communications, Inc. (“MCI”), a division of WorldCom, Inc. (“WorldCom”), under several agreements that expire through November 2006. MCI accounted for 28% and 22.4% of the Company’s revenues for the three- and nine-month periods ended June 30, 2002. WorldCom announced on June 25, 2002 that it was restating its financial statements for 2001 and the first quarter of 2002. On July 1, 2002, WorldCom announced that certain of its lenders had served notice that events of default had occurred under WorldCom’s credit facilities. On July 21, 2002, WorldCom announced that it had filed for voluntary relief under Chapter 11 of the United States Bankruptcy Code. These events create significant uncertainty about the Company’s future business relationship with MCI, which, if not resolved in a manner favorable to the Company, could have an adverse impact on the Company’s future operating results.

            The Company recorded a $7,669,000 charge for MCI related assets during the quarter ended June 30, 2002, of which $5,553,000 is included in selling, general and administrative expense and $2,116,000 is included in cost of services, in the accompanying condensed consolidated statement of operations. After the $7,669,000 charge, the Company was exposed on $2,863,000 of MCI related accounts receivable and intangible assets.

            While management believes accounts receivable due from MCI are properly valued at June 30, 2002, the WorldCom bankruptcy filing creates some uncertainty with respect to their ultimate collectibility. During the period from July 1, 2002 through July 21, 2002, the Company provided $4,390,000 of additional services to MCI. The realization of revenues related to these services may be adversely affected by the WorldCom bankruptcy filing. During the ninety day period ended July 21, 2002, the Company received $16,400,000 in cash payments from MCI.

            Up-front cash payments and non-cash concessions were made to MCI (the “MCI Intangibles”) to secure the execution of contracts. The upfront cash payments are refundable on a pro-rata basis over the contract term if the contract is terminated. Amortization of the MCI Intangibles is being recorded as a reduction of revenues over the remaining life of the contracts in accordance with EITF Issue No. 00-14. Management believes current projected levels of future services to MCI supports the carrying value of the MCI Intangibles at June 30, 2002.

            Six of the Company’s customer interaction centers provide all or a significant portion of their services to MCI. While management does not presently believe the property and equipment at these customer interaction centers is impaired, a significant decline in the level of services being provided to MCI as a result of the WorldCom bankruptcy filing could result in a significant charge associated with property and equipment impairment, obligations under operating leases, and workforce restructuring related costs. It is not possible to quantify the amount of such a potential charge at this time. The carrying value of property and equipment at the six customer interaction centers at June 30, 2002 was $11,482,000. Future operating lease commitments for the six customer interaction centers was $22,970,000 at June 30, 2002.

            Following an evaluation of amounts due from BrandDirect Marketing, Inc. (“BrandDirect”), $7,014,000 of bad debt expense was recorded during the three months ended June 30, 2001 to write off amounts due from BrandDirect and service levels were reduced such that services were being provided on a cash basis. During the quarter ended March 31, 2002, $5,908,000 of bad debt expense was recorded to write off the remaining amounts due from BrandDirect.

            On May 9, 2002, Provell, Inc. (“Provell”) filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. A charge of $2,762,000 was recorded in the second quarter of 2002 to write off amounts due from Provell. Provell represented 0.3% and 2.4% of our net revenues for the three and nine months ended June 30, 2002.

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            The following table summarizes the percent of net revenues in the nine months ended June 30, 2002 and 2001 derived from each client that represented at least 10 percent of net revenues and the amount receivable from each at June 30, 2002 and 2001, respectively:

______________

The contract with Customer B contains a termination clause under which the Company would be required to pay a penalty for terminating the contract, without cause, prior to its July 31, 2007 termination date. It is not possible to estimate the amount of the payment which might be required should the Company terminate the contract. The Company’s other contracts do not include similar early termination penalties.

NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:

            For the nine months ended June 30, 2002 and 2001, cash paid for interest was $756,000 and $228,000, respectively, and cash paid for income taxes was $99,000 and $988,000, respectively. The Company incurred capital lease obligations of $1,615,000 and $5,853,000 during the nine months ended June 30, 2002 and 2001, respectively.

NOTE 4 – NET LOSS PER SHARE:

            The following table presents the calculation of basic and diluted net loss per share:

            The following potential common shares outstanding at June 30, 2002 and 2001 were not included in the computation of diluted net loss per share as their effect would have been anti-dilutive:

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On February 28, 2002, at the Company’s Annual Meeting of Shareholders the shareholders approved, among other things, a proposal to amend the 1996 Stock Incentive Plan (“Plan”) to increase the number of shares available under the Plan from 1,450,000 to 1,950,000.

NOTE 5 – COMPREHENSIVE LOSS:

            Comprehensive loss includes net loss and gains and losses from foreign currency translation adjustments and changes in the value of the Company's derivatives as discussed in Note 8. Total comprehensive loss is as follows:

NOTE 6 – RESTRUCTURING CHARGE:

            During the quarter ended June 30, 2002, the Company recorded a $4,467,000 restructuring charge in connection with a plan designed to reduce its cost structure by closing six sites, resulting in the abandonment of fixed assets and a reduction in workforce. Of this restructuring charge, $1,920,000 and $2,547,000 relate to the Company’s insurance and financial services segments, respectively. The restructuring plan will be completed by the end of calendar year 2002. The restructuring costs include site closure costs, which are the estimated costs for closing the customer interaction centers, including obligations under signed equipment and real estate lease agreements and the write-off of leasehold improvements and certain fixed asset balances and severance costs for terminated employees. An $868,000 restructuring charge was recorded in the quarter ended December 31, 2000 related to call center closures. In the quarter ended December 31, 2001, the termination of a customer interaction center lease was settled for $302,000 less than the balance of the lease payments that had been accrued, resulting in the reversal of the remaining accrual.

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Restructuring activity is summarized as follows: