RMH TELESERVICES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For Annual and Transition Reports Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

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

For the fiscal year ended September 30, 2002

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 of incorporation or organization)		(IRS Employer Identification No.)

15 Campus Boulevard

Newtown Square, PA 19073

(Address of principal executive offices and zip code)

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

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. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes x No ¨

As of January 10, 2003, 13,792,464 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 January 10, 2003 was approximately $74.6 million (based upon the closing sales price of these shares as reported by the NASDAQ Stock Market’s national market). The aggregate market value of the shares of common stock owned by non-affiliates of the registrant as of March 28, 2002 was approximately $135.2 million (based upon the closing sales price of these shares as reported by the NASDAQ Stock Market’s national market). Calculation of the number of shares held by non-affiliates is based on the assumption that the affiliates of the registrant include only directors, executive officers and individual shareholders filing Schedules 13D or 13G with the registrant. The information provided shall in no way be construed as an admission that any person whose holdings are excluded from the figure is an affiliate or that any person whose holdings are included is not an affiliate and any such admission is hereby disclaimed. The information provided is included solely for record keeping purposes by the Securities and Exchange Commission.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders are incorporated by reference in Part III.

TABLE OF CONTENTS

Item No.		Page

	PART I

1.	Business	3

2.	Properties	13

3.	Legal Proceedings	13

4.	Submission of Matters to a Vote of Security Holders	13

	Executive Officers of the Company	14

	PART II

5.	Market for Registrant’s Common Equity and Related Shareholder Matters	15

6.	Selected Financial Data	16

7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

7A.	Quantitative and Qualitative Disclosures about Market Risk	24

8.	Financial Statements and Supplementary Data	24

9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	24

	PART III

10.	Directors and Executive Officers of the Registrant	25

11.	Executive Compensation	25

12.	Security Ownership of Certain Beneficial Owners and Management	25

13.	Certain Relationships and Related Transactions	25

14.	Controls and Procedures	25

	PART IV

15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	26

	Signatures	27

	Exhibit Index	30

In this Annual Report on Form 10-K, “RMH,” “we,” “us,” and “our” refer to RMH Teleservices, Inc., a Pennsylvania corporation, and, when applicable, its subsidiaries.

References to a given fiscal year in this Annual Report on Form 10-K are to the fiscal year ending on September 30th of that year. For example, the phrases “fiscal 2002” or “2002 fiscal year” refer to the fiscal year ended September 30, 2002.

PART I

ITEM 1. BUSINESS

General

We are a provider of high-quality outsourced customer relationship management (“CRM”) services, offering customer interaction solutions that permit our clients to more effectively manage their relationships with their customers. We have developed strategic relationships with market leaders in the telecommunications, financial services, insurance, technology, retail and logistics industries. Our client base includes Aegon, AT&T, Chase, Citibank, MCI, Microsoft, Nextel, UPS and others. We distinguish ourselves through our vertical industry expertise, well-trained workforce and integrated customized technology solutions designed to meet the rigorous demands of our clients. We have established a strong track record of consistent growth with revenues growing at a compound annual growth rate of over 39% from $32.3 million in fiscal 1996 to $239.2 million in fiscal 2002. At September 30, 2002, we operated over 7,900 workstations in our network of 17 customer interaction centers in the United States and Canada, including, 77 workstations in our quality control center and 144 workstations which are managed by a third party in India. Our net revenues and loss from operations for fiscal 2002 were $239.2 million and $14.1 million, respectively. This represents an increase in net revenues of 37.5% and a decrease in loss from operations of 3.4%, compared to fiscal 2001.

The CRM industry provides a broad range of customer relationship management services to its clients on both an inbound and outbound basis. Inbound services typically include product service and support, response to customer inquiries and order processing. Outbound services may include direct sales, product inquiry and lead generation and appointment setting. These services are designed to improve the overall customer experience and build closer relationships between companies and their customers.

We believe that the growth in outsourced CRM services is driven by the following factors:

Intensifying Competition in Many Industries. The deregulation of industries such as telecommunications and financial services has increased the number of participating companies and the variety of products and services available to consumers. As companies in these competitive industries attempt to maintain their existing customer base and acquire new customers they are increasingly outsourcing their customer care activities to skilled providers.

Focus on the Customer. Consumers are increasingly able to quickly and easily choose among multiple competitors and enjoy reduced costs by switching from one vendor to another. At the same time, competition is increasing across industries and companies see greater value in retaining existing customers. Consequently, companies are devoting an increasing amount of resources toward maintaining their existing customer bases.

Trend Toward Outsourcing. Many businesses lack the expertise, resources and infrastructure necessary to efficiently provide optimal customer support. As businesses find they are unable to effectively meet their customer care needs, they are increasingly turning to experienced providers of outsourced services. Outsourcing their customer care needs to dedicated CRM providers affords companies access to the skills, expertise and technology necessary for proper customer care and allows them to focus on the delivery of their products and services.

Growth Strategy

Our objective is to become the market leader in outsourced CRM solutions in the vertical markets we target. We plan to capitalize on the substantial opportunities in our industry and position our company for sustainable profitable growth by:

Targeting Top-Tier Clients in Key Industries

We target larger and better-capitalized companies in the industries we serve and focus on becoming their preferred provider of CRM services. The larger contract size associated with such clients allows us to operate efficiently, and we expect our high level of service to allow us to obtain additional business from our existing clients, most of which have substantial and growing CRM needs. We focus our sales efforts on current and future clients in targeted industries with potentially significant needs for outsourced CRM services, primarily in the telecommunications, insurance, financial services, technology, retail and logistics industries. We believe that by developing and cultivating industry-specific expertise in-house, we are able to offer more customized and relevant solutions to our clients. The success of this approach is evidenced by our telecommunications vertical, which has grown from $46.7 million in net revenues for fiscal 2000 (35.6% of total net revenue) to $113.7 million in net revenues for fiscal 2002 (47.5% of net revenues). As part of this approach, we continue to evaluate opportunities in other industries that have a substantial, long-term need for outsourced solutions.

Providing High Quality CRM Services on a Cost-Effective Basis

Our strategy is to provide high quality, cost-effective CRM services that meet our clients’ high standards. We open large facilities in areas with substantial, well-qualified labor pools. Prior to opening a customer interaction center, we analyze the demographics of the targeted geographic area in order to determine the quality, quantity and availability of the local labor pool. Where appropriate, we will locate facilities in markets where we can obtain financial incentives from local and state governments to open and operate facilities in their respective jurisdictions. During fiscal 2002, we increased our capacity in the following markets:

Vancouver, British Columbia – 800 workstation center

High Point, North Carolina – 700 workstation center

Nanaimo, British Columbia – 300 workstation center expansion

Sarnia, Ontario – 200 workstation center expansion

Allentown, Pennsylvania – 150 workstation center expansion

For financial information relating to the geographic distribution of our assets, see the consolidated financial statements attached hereto.

We evaluate additional regions in which to locate new customer interaction centers on an ongoing basis. This careful attention to site selection has allowed us to lower our employee turnover and reduce the overall costs associated with operating a customer interaction center. In addition, we have invested aggressively in quality assurance practices and personnel. We operate one quality assurance center with a total of 77 dedicated workstations, which monitor all CRM representatives to ensure compliance with performance standards. We believe our low cost operations and focus on quality assurance have allowed us to provide our clients with cost-effective solutions while maintaining high quality service.

We made significant efforts in fiscal 2002 to reduce our cost structure. In the third quarter of fiscal 2002, we initiated a plan to close six of our older, higher-cost customer interaction centers in the United States. Separately, during the fourth quarter of fiscal 2002, we completed a workforce reduction at our corporate offices in an effort to reduce our general and administrative expenses.

Diversifying Our Revenue Base

Over the past several years we have worked to increase the predictability of our revenue stream by diversifying our revenue base across inbound and outbound calls and over a wider range of industries. For example, we have increased our inbound contract revenues, which are more predictable due to the longer-term nature of such contracts, from 21.8% of net revenues in fiscal 2000 to 47.4% of net revenues in fiscal 2002.

However, we rely on several clients for a significant portion of our revenues. One client, MCI WORLDCOM Communications, Inc. (“MCI”), a division of WorldCom, Inc. (“WorldCom”), accounted for 25.8% of our net revenues in fiscal 2002. In addition, three clients each accounted for over 10% of our net revenues in fiscal 2002: Aegon, Nextel Communications and Microsoft. In fiscal 2001, no client accounted for more than 20% of our net revenues and three clients, Aegon, MCI and Microsoft, each accounted for over 10% of our net revenues. We will consider further expanding the scope of our business by entering new vertical markets. We will also consider selectively acquiring companies that will supplement our technical expertise, allow us to acquire additional human resources or strategic customer relationships or expand our presence in key vertical or geographic markets.

We provide inbound and outbound CRM services to MCI under several agreements that expire through November 2006. MCI accounted for 25.8%, 19.2% and 20.1% of our revenues for 2002, 2001 and 2000, respectively. On July 21, 2002, WorldCom announced that it had filed for voluntary relief under Chapter 11 of the United States Bankruptcy Code. While we have continued to provide services to MCI, these events create uncertainty about our future business relationship with MCI, which, if not resolved in a manner favorable to us, could have an adverse impact on our future operating results.

We recorded a $7,669,000 charge for MCI related assets during the third quarter of fiscal 2002, of which $5,553,000 is included in selling, general and administrative expense and $2,116,000 is a reduction in revenues, in the accompanying consolidated statement of operations. Included in the $5,553,000 charge was a full reserve on a $1,011,000 loan to a client that derives all of its revenues from MCI, as further discussed in note 21 of the notes to the consolidated financial statements. We believe we have adequately reserved for all exposure created as a result of the WorldCom bankruptcy; however, there can be no assurance that additional charges will not be required in the future. At September 30, 2002, we had $13,152,000 in accounts receivable from MCI, of which $7,996,000 were for services provided prior to the date of the WorldCom bankruptcy filing and $5,156,000 were for services provided subsequent to the bankruptcy filing.

Six of our customer interaction centers provide all or a significant portion of their services to MCI. While we do 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 substantial operating costs being incurred with no related revenues and a significant charge associated with property and equipment impairment. The carrying value of property and equipment at the six customer interaction centers at September 30, 2002 was $12,207,000. Future operating lease commitments for the six customer interaction centers was $20,934,000 at September 30, 2002.

Emphasizing Management and Personnel Development

Management. We have successfully managed our growth and positioned ourselves for the future growth opportunities available to us by continuing to attract and retain a strong management team. Since John Fellows joined us as our Chief Executive Officer in 1998, we believe we have significantly strengthened our management team by attracting several highly experienced senior level managers.

Personnel. A key element of our success is our well-trained staff of approximately 11,000 CRM representatives across the United States and Canada. We select our employees through a standardized screening process that includes an initial telephone interview, followed by an in-person evaluation. We provide our new hires with extensive classroom and on-the-job training programs and thereafter continue to coach and train our representatives on an ongoing basis.

Our Services

Our services allow our clients to generate increased sales, strengthen their customer relationships and provide a high level of support to their customers. We design and implement customized CRM programs for our clients designed to meet their specific customer care requirements. We provide customer service, customer acquisition and customer retention services to our clients on both an integrated and individual basis. Our CRM services are generally classified as either inbound or outbound services. In the fourth quarter of 2002, we began measuring the performance of our business based on these two business segments, which are described as follows:

Inbound Services

Our inbound CRM services consist primarily of customer service programs, although some acquisition and retention services are also performed on an inbound basis. Inbound services involve the processing of incoming calls, often placed by our clients’ customers using toll-free numbers, to a customer service representative for service, order fulfillment or information. Our system receives an inbound call and directs it, together with scripting, pricing data, reference databases and any other relevant information, to an available CRM representative’s workstation.

Our customer service programs are designed to maintain and extend the customer relationship and maximize the long-term value of our clients’ relationships with their customers. We respond to billing and other account inquiries from our clients’ customers and manage customer complaints and product or service problems to promote faster resolution and follow predetermined procedures to ensure that the problems have been resolved. We offer help desk, product or service support, including troubleshooting and other first- and second-tier support services. We also confirm that products or services requested by customers have been delivered or provided and that changes requested by customers in products or services have been effected. In addition to these customer service initiatives, we use our inbound services to secure new customers for our clients by making direct sales in connection with providing traditional inbound services, by receiving orders for and processing purchases of products or services and by fulfilling information requests for product or service offerings. Finally, we use our inbound services to assist clients in regaining business from customers who have allowed their service to lapse. Inbound services represented 47.4% of our net revenues for fiscal 2002.

Outbound Services

We also provide outbound CRM services, which consist of customer acquisition and customer retention services. In providing our outbound services, our system receives data for target customers electronically from our clients. The data is retained in our database management systems and is then distributed for calling by our predictive dialing system. Once a live connection is established, the system transfers the call, along with the customer data and scripting information, to the workstation of a CRM representative trained for that specific client’s program. Our customer acquisition services are designed to secure new customers for our clients and can include a wide range of activities depending on our clients’ needs, including direct sales services, order processing, product inquiry and lead generation and appointment setting whereby we use information provided by our clients to identify and prioritize customer leads and schedule customer interactions with client representatives. Our customer retention services enable our clients to respond more effectively to their customers’ needs and concerns, reward customers for their continued patronage and reinstate customers who have previously canceled their service. These services include conducting satisfaction assessments to ascertain customer opinions regarding the quality of client product or service offerings and interacting with our clients’ customers who have allowed their service to lapse in an attempt to regain their business and learn their reasons for discontinuing service. Outbound business represented 52.6% of our net revenues for fiscal 2002.

For a summary of the operating results for each of our segments, see note 18 to the consolidated financial statements included with this report.

Our Client Contracts

Our client contracts are generally for terms of one to five years, with the longer term contracts typically associated with our growing inbound CRM business. Contracts are typically terminable by either party upon 60 days notice; however, in some cases, particularly in our longer term inbound contracts which often require substantial capital expenditures on our part, a client will be required to pay us a termination fee in connection with an early termination of the contract. Such a fee deters our clients from exercising their early termination rights and, in the event a client decides to terminate despite the penalty, helps ensure that we can recover all or a portion of our capital costs associated with preparing for performance under the contract and that we receive at least a portion of the revenues projected under the contract. In addition, our inbound contracts generally contain minimum volume commitments requiring our clients to provide us with agreed-upon levels of calls during the terms of the contracts. Our fees for services rendered under these contracts are based on pre-determined contracted chargeable rates that may include a base rate per hour plus a higher rate or “bonus” rate if we meet pre-determined objective performance criteria. These objective performance criteria include such items as sales generated during a defined period. Additionally, we may receive additional discretionary client determined bonuses based upon criteria established by our clients.

Our Technology

Our staff of highly skilled information technology professionals is focused on technological integration to meet our clients’ needs. We integrate our clients’ existing systems with our own systems to provide cost-effective, timely solutions that allow them to maximize their investment and minimize their costs. Where appropriate, we develop software systems to customize our services to a particular client.

Our customer interaction centers and network systems both use a flexible database architecture permitting the easy sharing of data among users of the system. As a result, we are able to configure our scalable systems to work cost-effectively at low and high volumes and permit the efficient addition of capacity. These technologies improve sales and customer service by providing our CRM representatives with enhanced access to real-time customer and product information. We have implemented procedures to protect our systems against power loss, fire and other disasters.

Sales and Marketing

Our core sales and marketing team is currently comprised of five sales executives, all of whom have significant sales experience and several of whom have significant experience in the CRM and similar customer service industries. In addition, members of our senior management, including our chief executive officer and leaders of our operations and technology departments, are active participants in the sales process. We believe their involvement enables us to better manage our clients’ expectations and our ability to meet or exceed these expectations. A significant portion of the compensation of our core sales and marketing team is commission-based.

Quality Assurance

We have consolidated our quality assurance program into one quality assurance center that has dedicated quality assurance personnel who monitor CRM representatives to ensure compliance with performance standards. Sales confirmations are digitally recorded with the customer’s consent to ensure accuracy and to provide a record of each sale. Our personnel review the audio file of certain completed sales for compliance with client specifications. This system is designed to respond to client requests to review details of a particular sale within minutes and is able to identify the program, the date and time of the interaction and the CRM representative who made the sale. Clients also participate in the monitoring process and are able to electronically access relevant information.

Our information systems enable us to provide our clients with customized reports on the status of their CRM programs. Access to this data enables our clients to modify or enhance an ongoing campaign in order to improve its effectiveness.

Competition

We compete with the internal operations of many of our existing and potential clients, as well as with other outsourced CRM service providers. The outsourced CRM industry is highly fragmented and competitive. Our competitors range from large independent firms to small firms catering to specialized programs and short-term projects. We believe that we distinguish ourselves from our competition by providing high quality CRM services at affordable prices that meet our clients’ needs for

scalability and time to market. We believe the principal competitive factors in our industry are quality of service, performance, price, experience and reporting capabilities.

Government Regulation

Telemarketing sales practices are regulated in the United States and Canada as discussed below.

United States

In the United States, there are two major federal laws that specifically address telemarketing. In 1991, Congress passed the Telephone Consumer Protection Act (“TCPA”) which authorized the Federal Communications Commission (“FCC”) to adopt rules implementing the TCPA. In 1994, Congress passed the Telemarketing and Consumer Fraud and Abuse Prevention Act (the “Fraud Prevention Act”) which authorized the Federal Trade Commission (“FTC”) to adopt the Telemarketing Sales Rule (“TSR”) which became effective on December 31, 1995. In addition, the states have various regulatory restrictions and requirements for telemarketing companies.

The TCPA places restrictions on unsolicited automated telephone calls to residential telephone subscribers by means of automatic telephone dialing systems, prerecorded or artificial voice messages and telephone fax machines. In addition the regulations require CRM firms to develop a “do not call” list and to train their CRM 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, we train our service representatives to comply with the regulations of the TCPA and program our call management system to avoid initiating telephone calls during restricted hours or to individuals maintained on our “do not call” list. On September 18, 2002, the FCC issued a Notice of Proposed Rulemaking seeking public comment on whether the FCC should refine its existing rules on the use of auto dialers, prerecorded messages and unsolicited telephone solicitations to account for new technologies and telemarketing practices; adopt any additional rules that would allow legitimate telemarketing practices while protecting individual privacy; and reconsider adopting a national “do not call” list, particularly in light of an amended TSR and state lists.

The FTC regulates both general sales practices and telemarketing specifically and has broad authority to prohibit a variety of advertising or marketing practices that may constitute “unfair or deceptive acts or 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 Fraud Prevention Act under which the FTC has issued the TSR prohibiting a variety of deceptive, unfair or abusive practices in direct telephone 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 direct telephone sales to prevent deception and require that a telemarketer identify promptly and clearly the seller on whose behalf the CRM representative is calling, the purpose of the call, the nature of the goods or services offered and that no purchase or payment is necessary to win a prize. The regulations also require that providers of services maintain records on various aspects of their businesses.

On December 18, 2002, the FTC amended the TSR. The major change was the creation of a centralized national “do not call” registry which the FTC expects to be in place four months after the FTC receives funding. A consumer who receives a telemarketing call despite being on the registry will be able to file a complaint with the FTC, either online or by calling a toll free number. Violators could be fined up to $11,000 per incident. In addition, the amended TSR restricts call abandonment (with certain safe harbors) and unauthorized billing and requires “caller id” transmission by the telemarketer.

In the past session of Congress, bills such as the “Know Your Caller Act of 2001” and the “Telemarketing Intrusive Practices Act” were introduced in the House and Senate, respectively. Both bills would have placed further restrictions and regulations on telemarketers. Neither bill passed in both houses and consequently would have to be reintroduced by their sponsors in the next Congress.

At the state level, most states have enacted consumer protection statutes prohibiting unfair or deceptive acts or practices as they relate to telemarketing sales. 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 parties conducting direct telephone sales from requesting credit card numbers in certain situations, and several other states require certain providers of such services to register annually, 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 at direct telephone sales practices. Some examples include laws regulating electronic monitoring of telephone calls and laws prohibiting any interference by direct telephone sales with “caller id” devices. Most of these statutes allow a private right of action for the recovery of damages or provide for enforcement by state agencies permitting the recovery of significant civil or criminal penalties, costs and attorneys’ fees. There can be no assurance that any such laws, if enacted, will not adversely affect or limit our current or future operations.

A growing number of states have also established statewide “do not call” lists. According to the FCC, as of September 2002, 16 states had “do not call” lists in effect and five more were implementing their lists. Fifteen more states had legislation pending proposing “do not call” databases.

The industries we serve are also subject to government regulation, and, from time to time, bills are introduced in Congress, which, if enacted, could affect our operations. We, and our employees who sell insurance products, are required to be licensed by various state and provincial insurance commissions for the particular type of insurance product to be sold and are required to participate in regular continuing education programs.

Telecommunications is another industry we serve that is subject to government regulation. For example, “slamming” is the illegal practice of changing a consumer’s telephone service without permission. The FCC has promulgated regulations regarding slamming rules that apply solely to the telecommunications carrier and not the telemarketer or the independent party verifying the service change. However, some state slamming rules may extend liability for violations to agents and other representatives of telecommunications carriers, such as telemarketers.

Our representatives undergo an extensive training program, part of which is designed to educate them about applicable laws and regulations and to try to ensure their compliance with such laws and regulations. Despite the specific training on such issues, we cannot guarantee that our employees will be in compliance with all applicable laws and regulations at all times. We believe that we operate in compliance with all applicable laws and regulations, but we cannot guarantee that we will be in compliance with all applicable laws and regulations at all times.

Canada

In Canada, the Canadian Radio-Television and Telecommunications Commission enforces rules regarding unsolicited communications using automatic dialing and announcing devices, live voice and fax. Companies that violate any of the restrictions on unsolicited calls may have their telephone service terminated after two business days’ notice from the telephone company.

In 2001, the federal government of Canada enacted the Personal Information Protection and Electronic Documents Act (the “Federal Act”). Effective January 1, 2004, the Federal Act requires companies to obtain consent for the collection, use, and disclosure of an individual’s personal information. If the Federal Act is determined to be applicable to us, it may have an adverse affect on or limit our current or future operations. The Federal Act permits any Province of Canada to enact legislation governing the subject matter of the Federal Act, in which case the legislation of the Province will apply. Our Canadian operations are located primarily in Ontario, British Columbia and New Brunswick. Each of these provinces may enact legislation governing the subject matter of the Federal Act. Ontario and British Columbia have indicated that they intend to do so. If any of these provinces, or any other provinces in which we operate, enact such legislation, there can be no assurance that any such laws will not adversely affect or limit our current or future operations.

The Federal Competition Act contains a number of provisions that regulate the conduct of telemarketers in Canada, in particular the manner in which outbound calls are to be conducted. Failure to comply with such legislation could adversely affect our business.

Employees

As of December 31, 2002, we employed 13,486 people, 6,265 of whom we employed on a full-time basis and 7,221 of whom we employed on a part-time basis. None of our employees are currently covered by collective bargaining agreements, although efforts have been made by some employees in support of such an agreement. We believe that our relations with our employees are good.

History

Our Company was founded in 1983 and completed an initial public offering of shares of common stock in September 1996. RMH Teleservices, Inc. is a Pennsylvania corporation and its principal business office is located at 15 Campus Boulevard, Newtown Square, Pennsylvania 19073. Our telephone number is (610) 325-3100.

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). These filings are available to the public over the Internet at the SEC’s web site at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, CD 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.

Our principal Internet address is www.rmh.com. We make available free of charge on www.rmh.com our annual, quarterly and current reports, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

RISK FACTORS

Investing in our common stock involves a high degree of risk. Any of the following risks could materially harm our business, results of operations or financial condition and could result in the complete loss of your investment. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock.

Risks Particular to Our Company

We may not be able to manage our growth effectively, which could adversely affect our results of operations.

We have experienced rapid growth over the past several years and currently plan to continue a high rate of growth. Rapid growth places a significant strain on our management, operations and resources. Our future performance and profitability will depend on our ability to:

•

build our infrastructure to meet the demands of our clients;

•

successfully recruit, train and retain qualified personnel;

•

maintain state-of-the-art technical capabilities to compete effectively in the CRM industry;

•

effectively oversee and manage our customer interaction centers as we expand geographically;

•

effectively manage the growth and implementation of our customer interaction centers;

•

penetrate and serve new vertical markets;

•

successfully integrate any acquired businesses; and

•

manage our business in light of general economic conditions and conditions which may affect in particular our clients and other companies in our vertical markets.

If we are unable to manage our growth successfully, our business and results of operations could be harmed.

There can be no assurance that we will be profitable in the future.

We sustained operating losses for the fiscal years 2002 and 2001. While we believe that we will be able to reduce such losses and become profitable in future periods, there can be no assurance that we will be able to do so.

We rely on a few major clients for a significant portion of our revenues. The loss of any of these clients or their failure to pay us could reduce our revenues and adversely affect our results of operations.

Substantial portions of our revenues are generated from a few key clients. One client, MCI, accounted for 25.8% of our net revenues in 2002. In addition, three other clients each accounted for over 10% of our net revenues in 2002. No client accounted for more than 20% of our net revenues and three clients each accounted for over 10% of our net revenues in 2001. Most of our clients are not contractually obligated to continue to use our services at historic levels or at all. If any of these clients were to significantly reduce the amount of services we perform for them, fail to pay us, or were to terminate the relationship altogether, our revenues and business could be harmed.

We recorded a $7,669,000 charge for MCI related assets during the third quarter of fiscal 2002, of which $5,553,000 is included in selling, general and administrative expense and $2,116,000 is a reduction in revenues, in the accompanying consolidated statement of operations. Included in the $5,553,000 charge was a full reserve on a $1,011,000 loan to a client that derives all of its revenues from MCI, as further discussed in note 21 of the notes to the consolidated financial statements. We believe we have adequately reserved for all exposure created as a result of the WorldCom bankruptcy, however, there can be no assurance that additional charges will not be required in the future. At September 30, 2002, we had $13,152,000 in accounts receivable from MCI, of which $7,996,000 were for services provided prior to the date of the WorldCom bankruptcy filing and $5,156,000 were for services provided subsequent to the bankruptcy filing.

A decrease in demand for our services in one or more of the industries to which we provide services could reduce our revenues and adversely affect our results of operations.

Our success is dependent in large part on continued demand for our services from businesses within the telecommunications, financial services, insurance, technology and logistics industries, which accounted for 47.5%, 21.8%, 13.1%, 11.4%, and 6.2% of our revenues for fiscal 2002, respectively, and 39.0%, 26.5%, 21.4%, 11.1% and 2.0% of our revenues for fiscal 2001, respectively. A reduction in or the elimination of the use of outsourced CRM services within any of these industries could harm our business.

We may be unable to hire or retain qualified personnel.

By its nature, our industry is labor intensive. CRM representatives, who make up a significant portion of our workforce, generally receive modest hourly wages. Our recruiting and training costs are increased and our operating efficiency and productivity are decreased by:

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any increases in hourly wages, costs of employee benefits or employment taxes;

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the high turnover rate experienced in our industry;

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the high degree of training necessary for some of our CRM service offerings, particularly insurance product customer acquisition and technology customer service;

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our rapid growth; and

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competition for qualified personnel with other CRM service firms and with other employers in labor markets in which our customer interaction centers are located.

Additionally, some of our employees have attempted to organize a labor union, which, if successful, could further increase our recruiting and training costs and could further decrease our operating efficiency and productivity. We may not be able to continue to cost-effectively recruit, train and retain a sufficient number of qualified personnel to meet the needs of our business or to support our growth. If we are unable to do so, our results of operations could be harmed.

Our results of operations may be subject to significant fluctuations.

Our quarterly and annual operating results have fluctuated in the past and may vary in the future due to a wide variety of factors including:

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the commencement and expiration of contracts;

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our revenue mix;

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the amount and timing of new business;

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the timing of clients’ telemarketing campaigns;

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the financial strength of our customers and the collectibility of our receivables;

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local, regional and national economic and political conditions;

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our ability to successfully open new customer interaction centers or to expand existing centers in a timely fashion;

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the loss or unavailability of economic incentives provided by local, state or provincial government authorities;

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bonus arrangements continuing to be negotiated with clients, and if negotiated, any amounts being earned;

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the timing of opening new customer interaction centers and expansion of existing customer interaction centers;

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the timing of additional selling, general and administrative expenses; and

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competitive conditions in our industry.

Due to these factors, our quarterly revenues, expenses and results of operations could vary significantly in the future. You should take these factors into account when evaluating past periods and, because of the potential variability in our quarterly results, you should not rely upon results of past periods as an indication of our future performance. In addition, because our operating results may vary significantly from quarter to quarter, results may not meet the expectations of securities analysts and investors, and this could cause the price of our common stock to fluctuate significantly.

Our business could be significantly disrupted if we lose members of our management team.

We believe that our success depends to a significant degree upon the continued contributions of our executive officers and other key personnel, both individually and as a group. Our future performance will be substantially dependent on our ability to retain them. The loss of the services of any of our executive officers, particularly John A. Fellows, our Chief Executive Officer, could prevent us from executing our business strategy.

Anti-takeover provisions in our articles of incorporation, bylaws and Pennsylvania law and the right of our Board of Directors to issue preferred stock without shareholder approval could make a third-party acquisition of us difficult.

Provisions of our articles of incorporation and bylaws may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt not approved by our board of directors, including those made at a premium over the prevailing market price of the common stock held by shareholders.

Our classified board of directors and the authority of our board to issue preferred stock and establish certain rights, preferences, privileges, limitations and other special rights thereof without any further vote or action by the shareholders could have the effect of delaying, impeding or discouraging the acquisition of control of our company in a transaction not approved by our board of directors.

The provision of our bylaws classifying the board of directors may only be repealed or amended by an affirmative vote of shareholders entitled to cast 75% of the votes at a shareholders meeting. In addition, we may obtain shareholder approval for certain actions without calling a meeting or soliciting proxies because our articles of incorporation and bylaws permit actions by written consent of shareholders holding a majority of the shares of common stock.

Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, which is applicable to us, may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider in his or her best interest, including those attempts that might result in a premium over the market price for the shares held by shareholders. In general, Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law delays for five years and imposes conditions upon “business combinations” between an “interested shareholder” and us, unless prior approval of our board of directors is given. The term “business combination” is defined broadly to include various merger, consolidation, division, exchange or sale transactions, including transactions using our assets for purchase price amortization or refinancing purposes. An “interested shareholder,” in general, would be a beneficial owner of shares entitling that person to cast at least 20% of the votes that all shareholders would be entitled to cast in an election of directors.

If we are unable to keep pace with technological changes, our business will be harmed.

Our business is highly dependent on our computer and telecommunications systems, including our customized software, predictive dialing equipment and automated customer interaction workstations. Our ability to compete effectively is dependent upon continued investment in advanced computer and telecommunications technology that is rapidly evolving. We cannot be assured that we will be successful in anticipating or adapting to technological changes or in selecting and developing new and enhanced technologies on a timely basis. In addition, the inability of equipment vendors to supply equipment on a timely basis could harm our operations and financial condition.

Interruptions or failures of our technology infrastructure could harm our business and reputation.

We are highly dependent on the stability of our computer equipment and systems. These systems could be interrupted by natural disasters, power losses, operating malfunctions or computer viruses and other disruptions caused by unauthorized or illegal access to our systems. Any interruption in or failure of our technology equipment systems could have a material adverse effect on both our business and our reputation.

An increase in telephone rates or a significant interruption in telephone service could harm our business.

Our ability to offer services at competitive rates is highly dependent upon the cost of local and long distance telephone service provided by various local and long distance telephone companies. Any change in the telecommunications market that would affect our ability to obtain favorable rates on telephone services could harm our business. Moreover, any significant interruption in telephone service or developments that could limit the ability of telephone companies to provide us with increased capacity in the future could harm our existing operations and prospects for future growth.

Fluctuations in currency exchange rates could adversely affect our business.

A significant portion of our operations is located in Canada. An increase in the value of the Canadian dollar in relation to the value of the United States dollar could increase our costs of doing business in Canada and adversely affect our results of operations. In addition, we expect to expand our operations into other countries and, accordingly, will face similar exchange rate risk with respect to the costs of doing business in such countries as a result of any increases in the value of the United States dollar in relation to the currencies of such countries.

While we have taken steps to mitigate our exposure to foreign currency risks, as further described in note 16 of the notes to our consolidated financial statements, there is no guarantee that we will be able to successfully hedge our foreign currency exposure in the future.

We may acquire other businesses. We may not be able to identify appropriate acquisition candidates, acquire them on favorable terms or properly integrate their businesses with ours.

From time to time, we may consider acquisitions of other businesses. We expect to face competition for acquisition candidates, which may limit the number of acquisition opportunities and may lead to higher acquisition prices. Also, we may not be able to identify, acquire on favorable terms or manage additional businesses profitably or to successfully integrate acquired businesses. Businesses that we acquire may have liabilities that we underestimate or do not discover during our pre-acquisition investigations. Some of the liabilities of the businesses we acquire, even if we do not expressly assume them, may be imposed on us. Further, each acquisition involves a number of other special risks that could cause an acquired business to fail to meet our expectations. For example:

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an acquired business may not achieve expected results;

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we may not be able to retain key personnel of an acquired business;

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we may incur substantial, unanticipated costs, delays or other operational or financial problems when integrating an acquired business;

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our management’s attention may be diverted; or

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our management may not be able to manage the combined entity effectively or to make acquisitions and grow our business internally at the same time.

We cannot determine the timing, size or success of any future acquisitions, our ability to integrate any acquired businesses or their associated capital requirements. In addition, we may not be able to obtain acquisition financing when required, and such financing may only be available on terms and conditions that are unacceptable to us. To the extent that we use shares of our common stock to pay for acquisitions, we could dilute the value of our shares already issued. To the extent that we complete acquisitions using cash rather than stock, we may need to raise additional capital.

Risks Related to Our Industry

We may not be able to effectively win business against our competition.

The CRM services industry is highly competitive. We compete with:

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the in-house CRM operations of our clients or potential clients;

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other outsourced CRM providers, some of which have greater resources than we have; and

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providers of other marketing and CRM formats and, in particular, other forms of direct marketing such as interactive shopping and data collection through television, the internet and other media.

Many businesses that are significant consumers of CRM services use more than one CRM services firm at a time and reallocate work among various firms from time to time. We and other firms seeking to perform outsourced CRM services are frequently required to compete with each other as individual programs are initiated. We cannot be certain that we will be able to compete effectively against our current competitors or that additional competitors, some of which may have greater resources than we have, will not enter the industry and compete effectively against us. As competition in the industry increases, we may face increasing pressure on the prices for our services. We will face continued pricing pressure as our competitors migrate call centers to lower cost labor markets.

Consumer resistance to our outbound services could harm our industry.

As the CRM services industry continues to grow, the effectiveness of CRM services as a direct marketing tool may decrease as a result of consumer saturation and increased consumer resistance to customer acquisition activities, particularly direct sales.

Government regulation of our industry and the industries we serve may increase our costs and restrict the operation and growth of our business.

Our industry is subject to an increasing amount of regulation in the United States and Canada. Most of the statutes and regulations in the United States allow a private right of action for the recovery of damages or provide for enforcement by the Federal Trade Commission, state attorneys general or state agencies permitting the recovery of significant civil or criminal penalties, costs and attorneys’ fees. The Canadian Radio-Television and Telecommunications Commission enforces rules regarding unsolicited communications using automatic dialing and announcing devices, live voice and fax. We cannot assure you that we will be in compliance with all applicable regulations at all times. We also cannot assure you that new laws, if enacted, will not adversely affect or limit our current or future operations.

Several of the industries served by us, particularly the insurance, financial services and telecommunications industries, are subject to government regulation. We could be subject to a variety of regulatory enforcement or private actions for our failure or the failure of our clients to comply with these regulations. Our results of operations could be adversely impacted if the effect of government regulation of the industries we serve is to reduce the demand for our services or expose us to potential liability. We and our employees who sell insurance products are required to be licensed by various state insurance commissions for the particular type of insurance product sold and to participate in regular continuing education programs. Our participation in these insurance programs requires us to comply with certain state regulations, changes in which could materially increase our operating costs associated with complying with these regulations.

For further discussion of regulatory issues, see Government Regulation in Part I, Item 1.

Recent terrorist activities and resulting military and other actions could adversely affect our business.

The continued threat of terrorism within the United States and Europe and the potential for military action and heightened security measures in response to this threat may cause significant disruption to commerce throughout the world. We are unable to predict whether the threat of terrorism or the responses thereto will result in any long-term commercial disruptions or if such activities or responses will have a long-term adverse effect on our business, results of operations or financial condition.

ITEM 2. PROPERTIES

Our corporate headquarters facility is located in Newtown Square, Pennsylvania. The approximately 50,000 square-foot building is leased to us through 2012. We also maintain an 8,672 square-foot corporate office in Frisco, Texas, which is leased to us through July 31, 2007.

We also lease all of the facilities used for our customer interaction centers. We believe that our existing facilities are suitable and adequate for our current operations, but additional facilities will be required to support growth. As of September 30, 2002, we operated nine customer interaction centers in the United States with 3,195 workstations, and eight customer interaction centers in Canada with 4,579 workstations, and 144 workstations which are managed by a third party in India. We operate a centralized quality assurance center located at our Thunder Bay, Ontario (77 quality assurance workstations) customer interaction center. We believe that suitable additional or alternative space will be available as needed on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

We have from time to time become involved in litigation incidental to our business activities. However, we are not currently subject to any material legal proceedings.

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	38	Director and Chief Executive Officer
J. Scot Brunke	43	Executive Vice President and Chief Financial Officer
Clint F. Streit	46	Executive Vice President and Chief Operating Officer
Paul J. Burkitt	41	Executive Vice President of Sales and Marketing
Paul W. Little	40	Executive Vice President of Human Resources

John A. Fellows joined us as Chief Executive Officer in September 1998 and was elected to the board of directors in December 1998. Prior to joining us, Mr. Fellows was President of Telequest Teleservices, an Arlington, Texas based teleservices company, from April 1997 to August 1998. From April 1993 to April 1997, Mr. Fellows was a Vice President of Paging Network, Inc., a wireless messaging company. Before joining PageNet, Mr. Fellows held various management positions at Pepsico, Inc.

J. Scot Brunke joined us as Executive Vice President and Chief Financial Officer in January 2001. Prior to joining RMH, Mr. Brunke was an investment banker at J.P. Morgan Chase & Co. (and its predecessors) for 15 years where he specialized in merger and acquisition advisory and capital raising for Fortune 1000 companies.

Clint F. Streit joined us as Executive Vice President and Chief Operating Officer in June 2002. Mr. Streit has nearly 20 years of extensive strategic and operating experience with public and privately held businesses in the cable television, wireless communication, teleservices and Internet industries. From July 2001 through June 2002, Mr. Streit served as Chief Executive Officer and President of Excell Agent Services, LLC, a telecommunications services company. From August 2000 through June 2001, Mr. Streit was Chief Operating Officer and Chief Financial Officer of Medias Group, LLC, a broadband services company. From September 1997 through July 2000 Mr. Streit was President and Chief Operating Officer of Signius Corporation, a teleservices company.

Paul J. Burkitt joined us in February 1999 as Senior Vice President of Sales and Marketing. From April 1997 to February 1999, Mr. Burkitt served as Vice President, Business Development for Tokai Financial, a financial leasing company, where he was responsible for that company’s sales and marketing efforts. From August 1994 to March 1997, Mr. Burkitt worked for Telespectrum World Wide, a teleservices company, as Executive Vice President of Sales and Marketing.

Paul W. Little joined us in May 1999 as the Senior Vice President of Human Resources. From June 1990 to May 1999, Mr. Little served as Director of Human Resources of Paging Network, Inc., a wireless messaging company.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

We completed our initial public offering on September 18, 1996, selling 3,220,000 shares of our common stock at a price of $12.50 per share. Since the initial public offering, our common stock has been quoted on the Nasdaq National Market under the symbol “RMHT.” Prior to our initial public offering, our 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 sale prices of our common stock as reported on the Nasdaq National Market during the fiscal years ended September 30, 2002 and 2001.

	HIGH		LOW
First Fiscal Quarter of 2001	$	18.75	$	8.44
Second Fiscal Quarter of 2001		9.25		3.50
Third Fiscal Quarter of 2001		12.91		4.85
Fourth Fiscal Quarter of 2001		17.98		9.10

First Fiscal Quarter of 2002

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