UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
XXX QUARTERLY REPORT UNDER UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- - --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
- - ---
For the transition period from ________ to __________
Commission File Number 000-21557
ACI Telecentrics, Incorporated
(Exact name of business issuer as specified in its charter)
Minnesota 41-1572571
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3100 West Lake Street, Suite 300, Minneapolis, MN 55416-4510
(Address of principal executive offices)
(612) 928-4700
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 ___
The Company had 5,705,000 shares of common stock, no par value per
share, outstanding as of December 2, 1996.
Transitional Small Business Disclosure Format (Check One ): YES ____ NO __X__
ACI TELECENTRICS, INCORPORATED
FORM 10QSB
TABLE OF CONTENTS
PAGE #
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Statements of Operations 3
Balance Sheets 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
a. Exhibits
27. Financial Data Schedule
b. Reports on Form 8-K
No current reports on Form 8-K were filed in the
fiscal quarter ended September 30, 1996.
Signature Page 11
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ACI TELECENTRICS, INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
TELEMARKETING REVENUES $ 2,159,375 $ 1,314,683 $ 6,191,437 $ 4,170,043
COST OF SERVICES 1,286,135 651,463 3,233,829 2,167,083
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,047,252 599,019 2,630,240 1,691,766
----------- ----------- ----------- -----------
OPERATING INCOME (174,012) 64,201 327,368 311,194
OTHER INCOME (EXPENSE):
Interest income 10,168 -- 12,101 --
Interest expense (53,509) (21,858) (128,664) (58,832)
Other, net (2,392) -- (2,392) (650)
----------- ----------- -----------
Total other expense (45,733) (21,858) (118,955) (59,482)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (219,745) $ 42,343 $ 208,413 $ 251,712
=========== =========== =========== ===========
PRO FORMA DATA
Historical net (loss) income $ (219,745) $ 42,343 $ 208,413 $ 251,712
Pro forma provision for income tax
benefit (expense) 88,000 (17,000) (83,000) (101,000)
----------- ----------- ----------- -----------
Pro forma net (loss) income (131,745) 25,343 125,413 150,712
=========== =========== =========== ===========
Pro forma net income per share $ (0.03) $ 0.01 $ 0.03 $ 0.04
=========== =========== =========== ===========
Shares used in computing pro forma
net income per share 4,288,000 4,288,000 4,288,000 4,288,000
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
ACI TELECENTRICS INCORPORATED
BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 23,703 $ 67,483
Trade receivables, less allowance for doubtful
accounts of $70,600 and $70,000 respectively 1,468,956 972,788
Other current assets 276,086 74,818
---------- ----------
Total Current Assets 1,768,745 1,115,089
PROPERTY AND EQUIPMENT, NET 1,827,282 1,109,811
OTHER ASSETS
Restricted Investments -- 300,000
Other 44,802 24,036
---------- ----------
Total Other Assets 44,802 324,036
---------- ----------
$3,640,829 $2,548,936
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 400,000 $ 300,000
Trade accounts payable 748,672 387,335
Accrued expenses 413,696 136,002
Dividends payable 350,000 --
Current portion of long-term debt and capital
lease obligations 442,863 193,628
---------- ----------
Total current liabilities 2,355,231 1,016,965
LONG TERM LIABILITIES:
Long-term debt and capital lease obligations,
less current portion 731,122 602,984
Deferred capital lease liabilities 174,076 107,000
Notes payable to officers -- 300,000
---------- ----------
Total long-term liabilities 905,198 1,009,984
SHAREHOLDERS' EQUITY:
Common stock, no par value 26,567 1,000
Additional paid in capital -- 25,567
Retained earnings 353,833 495,420
---------- ----------
Total shareholders' equity 380,400 521,987
---------- ----------
$3,640,829 $2,548,936
========== ==========
</TABLE>
See notes to financial statements
<TABLE>
<CAPTION>
ACI TELECENTRICS INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,:
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 208,413 $ 251,712
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation 250,857 140,184
Amortization of deferred capital leases (7,500) --
Changes in operating assets and liabilities:
Trade receivables (496,168) (82,404)
Other assets (201,268) 21,775
Accounts payable and accrued expenses 639,031 (13,980)
--------- ---------
Net cash provided by operating activities 393,365 317,287
CASH FLOWS (UTILIZED IN) FROM INVESTING ACTIVITIES:
Purchases of property and equipment (297,202) (223,670)
Proceeds from sale of restricted investment 300,000 --
Increase in other assets (20,766) (2,151)
--------- ---------
Net cash used in investing activities (17,968) (225,821)
CASH FLOWS (UTILIZED IN) FROM FINANCING ACTIVITIES:
Checks written in excess of bank balance -- (113,124)
Net proceeds from revolving line of credit 100,000 50,000
Repayments of long term debt and capital leases (219,177) (97,653)
Payments on notes payable to officers (300,000) --
--------- ---------
Net cash used in financing activities (419,177) (160,777)
--------- ---------
NET DECREASE IN CASH (43,780) (69,311)
CASH AT BEGINNING OF PERIOD 67,483 82,594
--------- ---------
CASH AT END OF PERIOD $ 23,703 $ 13,283
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 129,000 $ 59,000
========= =========
Dividend declared but not paid $ 350,000 $ --
========= =========
Equipment acquired through capital leases $ 671,127 $ 263,263
========= =========
</TABLE>
See notes to financial statements
ACI TELECENTRICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited and reflect all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair presentation. Operating results
for the three and nine month periods ended September 30, 1996, are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1996.
The financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31,
1995, previously filed with the SEC as part of the Company's Registration
Statement on Form SB-2, which became effective October 21, 1996.
Prior to the public offering referred to in Note 2, the Company elected
to be treated for federal and state income tax purposes as an S Corporation
under the Internal Revenue Code ("Code") and comparable state tax laws. As
a result, income tax expense (benefit) for federal and state income tax
purposes related to the Company for the three and nine months ended
September 30, 1996 and 1995 is the responsibility of the shareholders of
the Company, rather than the Company. As of October 21, 1996 (the effective
date of the offering) the Company converted from an S Corporation to a C
Corporation under the Code. The results of operations for all periods
include pro forma net income, after assuming a provision for federal and
state income taxes as if the Company had been subject to federal and state
corporate income taxes for all periods. This pro forma provision is
computed using a combined federal and state income tax rate of 40%.
2. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
On October 21, 1996, the Company sold 1,400,000 Common Shares in an
initial public offering. Net proceeds to the Company were approximately
$6,050,000, after deducting offering costs (including underwriting
commissions) of approximately $950,000. In connection with the Company's
initial public offering of common stock the Company also issued an option
to the underwriters to purchase up to 210,000 shares solely to cover
overallotments. The underwriter exercised 105,000 shares of this option in
November, 1996, resulting in additional net proceeds of approximately
$472,500, after deducting offering costs (including underwriting
commissions) of approximately $52,500.
INCOME TAXES
On the effective date of the public offering the Company changed from
an S Corporation to a C Corporation status for tax purposes. In accordance
with Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR
INCOME TAXES, the Company will be required to record an income tax expense
and deferred tax liability representing the tax effect of the cumulative
differences between the financial reporting and income tax basis of certain
assets and liabilities in its quarter ended December 31, 1996. The income
tax expense to be charged to earnings in the fourth quarter 1996 related to
this change will be approximately $280,000.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
REVENUES
Revenues increased $844,692, or 64.3%, to $2,159,375 in the three
months ended September 30, 1996, from $1,314,683 in the comparable period in
1995. Billable telemarketing service representative hours increased
approximately 65.7% from the three month period of 1995 to the comparable period
in 1996. The majority of this increase was the result of the Company opening a
96 workstation call center in Devils Lake, North Dakota in April, 1996, and a 48
workstation call center in Redfield, South Dakota in September, 1996. The
Minneapolis call center was reduced in size from 96 to 45 workstations in
September, 1995. Despite the revenue increase, demand for telemarketing services
typically decreases in the third quarter because clients cut back telemarketing
projects in the summer months. In 1996, the Company included in revenue
approximately $339,000 of billable time, outsourced to other teleservices
companies. There were no outsourced services in 1995.
COST OF SERVICES
Cost of services increased $634,672, or 97.4%, to $1,286,135 in the
three months ended September 30, 1996, from $651,463 in the comparable period in
1995. The increase in cost of services was attributable to the additional
personnel and telephone costs associated with the revenue growth. In addition,
due to a shift in certain client contracts from the third to the fourth quarter
and the general slowdown experienced in the telemarketing industry in the third
quarter, the Company experienced certain downtime and, therefore, did not
operate efficiently. Certain fixed costs were incurred against a low revenue
base. This also decreased utilization and increased labor costs from 28% of
telemarketing revenue in 1995 to 35.1% in 1996, resulting in cost of services
performed by the Company increasing to 55.5% of telemarketing revenue in 1996,
from 49.6% in 1995, while the cost of services which were related to outsourced
revenue was 81.3%, yielding a blended cost of services in 1996 of 59.6%. As a
result, total cost of services as a percentage of revenues increased to 59.6% in
1996, compared to 49.6% in 1995.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses increased $448,233, or
74.8%, to $1,047,252 for the three months ended September 30, 1996, from
$599,019 in the three months ended September 30, 1995. The increase was
primarily related to increased volume and the opening of new call centers in
April 1996, and September 1996, as discussed under Revenues above. Primary
components of the increase were an increase in salaries, payroll taxes and
related benefits of $226,591, and increased travel of $32,872 as additional
sales and administrative personnel were added in support of the increased
revenue and public offering of the Company's stock. In addition, depreciation
increased $47,906, which is primarily attributable to the opening of the new
call centers and the relocation of the corporate office previously discussed.
OTHER INCOME/EXPENSE
Other income/expense, which is primarily interest, increased by $23,875
to $45,733 in the three months ended September 30, 1996, from $21,858 in the
comparable three months of 1995. This increase reflected higher average
outstanding borrowings to finance working capital needs and capital leases which
were used to open the new call centers and to purchase related equipment.
PRO FORMA NET INCOME (LOSS)
For the three months ended September 30, 1996, the proforma net loss
was $131,745 (6.1% of revenues) compared to a profit of $25,343 (1.9% of
revenues) in the comparable three months of 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
REVENUES
Revenues increased $2,021,394, or 48.5%, to $6,191,437 in the nine
months ended September 30, 1996, from $4,170,043 in the comparable period in
1995. Billable telemarketing service representative hours increased
approximately 53.4% from the first nine months of 1995 to the comparable period
in 1996. The majority of this increase was the result of the Company opening a
60 workstation call center in Valley City, North Dakota in June 1995, a 96
workstation call center in Devils Lake, North Dakota in April 1996, and a 48
workstation call center in Redfield, South Dakota in September, 1996. The
Minneapolis call center was reduced in size from 96 to 45 workstations in
September, 1995, subsequent to the opening of the Valley City, North Dakota call
center. In 1996 the Company included in revenue approximately $435,000 of
billable time, outsourced to other teleservices companies. There were no
outsourced services in 1995.
The Company prices its services in connection with each bid for a
client contract. Generally, pricing depends on a number of factors, including
the size and term of the contract, the Company's capacity and utilization at the
time of the bid, the Company's expectation of the pricing, which may be offered
by competitors, and the financial goals of the Company. The average hourly
billing rate for the period was approximately 3% lower than that of the
comparable nine month period in 1995 as the Company adjusted its pricing to
compete for large volume accounts.
COST OF SERVICES
Cost of services increased $1,066,746, or 49.2%, to $3,233,829 in the
nine months ended September 30, 1996, from $2,167,083 in the comparable period
in 1995. The increase in cost of services was attributable to the additional
personnel and telephone costs associated with the revenue growth. As a
percentage of revenues, total cost of services increased to 52.2% in 1996
compared to 52% in 1995. The cost of services performed by the Company decreased
from 52% to 50.1% from 1995 to 1996, due to savings in long-distance costs (as a
result of a change in long-distance service provider at one of the Company's
call centers), which declined as a percentage of revenues from 16% in 1995 to
12.5% in 1996; however, the cost of services which were related to outsourced
revenue was 80.6%, yielding a blended cost of services in 1996 of 52.2%.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses increased $938,474, or
55.5%, to $2,630,240 for the nine months ended September 30, 1996, from
$1,691,766 for the nine months ended September 30, 1995. The increase was
primarily related to increased volume and the opening of new call centers as
discussed under Revenues above. Primary components of the increase were an
increase in salaries, payroll taxes and related benefits of $490,218, and
increased travel of $67,008 as additional sales and administrative personnel
were added in support of the increased revenue. In addition, depreciation
increased $110,673, which is primarily attributable to the opening of the new
call centers and the relocation of the corporate office in order to consolidate
office space from three non-contiguous offices in our previous location to one
contiguous office in our present location.
OTHER INCOME/EXPENSE
Other income/expense, which is primarily interest, increased by $59,473
to $118,955 in the nine months ended September 30, 1996, from $59,482 in the
first nine months of 1995. This increase reflected higher average outstanding
borrowings to finance working capital needs and capital leases which were used
to open the new call centers and to purchase related equipment.
PRO FORMA NET INCOME
Pro forma net income decreased to $125,413, or 2.0%, of revenues for
the first nine months of 1996, from $150,712, or 3.6%, of revenues in the
comparable period of 1995. Prior to the public offering, referred to in the
Liquidity and Capital Resources section below, the Company elected to be treated
for federal and state income tax purposes as an S Corporation under the Internal
Revenue Code ("Code") and comparable state tax laws. As a result, earnings of
the Company for the three and nine months ended September 30, 1996, have been
taxed for federal and state income tax purposes directly to the shareholders of
the Company, rather than to the Company. As of October 21, 1996 (the effective
date of the offering), the Company converted from an S Corporation to a C
Corporation under the Code. The results of operations for all periods include
pro forma net income, after assuming a provision for federal and state income
taxes as if the Company had been subject to federal and state corporate income
taxes for all periods. This pro forma provision is computed using a combined
federal and state tax rate of 40%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have historically been cash
flow from operating activities, bank borrowings, and capital lease financing. In
addition, in connection with the opening of call centers, the Company has often
received various forms of government or private industry subsidies consisting of
low interest rate loans, forgivable lease arrangements, expense reimbursements,
and reimbursements for leasehold improvements.
On October 21, 1996, the Company sold 1,400,000 Common Shares in an
initial public offering. Net proceeds to the Company were approximately
$6,050,000, after deducting offering costs of $950,000, including underwriting
commissions of approximately $700,000. In connection with the Company's initial
public offering of Common Stock, the Company issued an option to the
underwriters to purchase up to 210,000 shares solely to cover over-allotments.
The underwriter exercised 105,000 shares of this option in December, 1996,
resulting in additional net proceeds of approximately $472,500, after deducting
underwriting commissions of $52,500. The Company has used approximately
$1,400,000 of the proceeds of the offering to reduce short-term and long-term
debt and lease obligations.
In October, 1996, the Company increased its revolving line of credit
from $300,000 to $500,000. The borrowing base is equal to the lesser of
$500,000, or 75% of the eligible accounts receivable (as defined in the
agreement) and accrues interest at the bank's reference rate plus 1.5% (9.75% at
September 30, 1996). At September 30, 1996, the outstanding borrowings under the
agreement was $400,000. This amount was subsequently repaid with the proceeds of
the public offering discussed above. This agreement is subject to certain
covenants, including prompt reporting of litigation, maintenance of books and
records, furnishing financial statements, maintenance of insurance, and a net
worth ratio, as defined, of less than 3:1. At September 30, 1996, the Company
had a net worth ratio of 8.6:1, but has obtained a waiver from the lender
through January 1, 1997. This line of credit is collateralized by substantially
all of the Company's assets and personal guarantees by the principal
shareholders and expires on July 5, 1997.
In July, 1995, in connection with the opening of the Valley City, North
Dakota call center, the Company received grants of $25,000 for the reimbursement
of start-up costs, $150,000 in leasehold improvements, and $107,000 in an
equipment lease which is forgivable over five years. In April, 1996, in
connection with the opening of a call center in Devils Lake, North Dakota, the
Company received assistance including $25,000 to cover moving and start-up
costs, a $150,000 equipment lease which is forgivable over 5 years, $150,000 in
leasehold improvements, and a 6% loan of $50,000. In September 1996, the Company
opened a call center in Redfield, South Dakota. In connection with this call
center the Company received $200,000 for leasehold improvements and will lease
its facility with equipment having a fair value of $300,000 for $30,000 per
annum for 5 years.
Cash provided by operating activities for the nine months ended
September 30, 1996, was $393,365, reflecting $451,770 from net income and
depreciation and amortization offset by a $58,405 change in operating assets and
liabilities. This compares to cash provided by operating activities of $317,287
in the comparable 1995 period which was the result of $391,896 of net income and
depreciation offset by a change in operating assets and liabilities of $74,609.
Cash utilized in investing activities during 1996 was $17,968. This
consists primarily of purchases of property and equipment of $297,202, offset by
proceeds of $300,000 from the sale of an investment. In 1995, cash used in
investing activities was $225,821, consisting primarily of purchases of property
and equipment.
Cash utilized in financing activities was $419,177 during 1996.
Proceeds from an increase of $100,000 in the revolving line of credit were
offset by $219,177 in repayments of long-term debt and capital leases and
payments on notes payable to officers of $300,000. In 1995, cash utilized in
financing activities was $160,777, consisting primarily of an increase in the
line of credit of $50,000, offset by repayments of long-term debt, capital
leases, and checks written in excess of bank balance of $210,777.
The Company believes that funds generated from operations together with
the net proceeds to the Company from the public offering, equipment and
financing leases, future grants, and the revolving credit arrangement will be
sufficient to finance its current operations and planned capital expenditures at
least through 1997.
RECENTLY ISSUED ACCOUNTING STANDARD
In October, 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. The Company has elected to continue following the
guidance of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, for measurement and recognition of stock-based transactions
with employees. The Company will provide the disclosure requirements of SFAS No.
123 in the 1996 annual financial statements.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the matters
discussed in this section may contain forward-looking statements that involve
risks and uncertainties that could cause actual results to differ materially
from those set forth above. Such risks and uncertainties include, among others,
the maintenance of key customers, opening of new call centers, acquisitions, the
impact of competitive pricing, and the other risks detailed from time to time in
the Company's reports filed with the Securities and Exchange Commission,
including the Company's registration statement on Form SB-2 which became
effective October 21, 1996.
SIGNATURES
Pursuant to the requirements 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.
ACI TELECENTRICS, INCORPORATED
Registrant
Dated December 4, 1996 By: /s/Steven A. Kahn
Steven A. Kahn
Vice President and
Chief Financial Officer
Dated December 4, 1996 By: /s/Rick N. Diamond
Chief Executive Officer and
Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 23,703
<SECURITIES> 0
<RECEIVABLES> 1,539,556
<ALLOWANCES> 70,600
<INVENTORY> 0
<CURRENT-ASSETS> 1,768,745
<PP&E> 2,648,348
<DEPRECIATION> 821,066
<TOTAL-ASSETS> 3,640,829
<CURRENT-LIABILITIES> 2,355,231
<BONDS> 905,198
0
0
<COMMON> 26,567
<OTHER-SE> 353,833
<TOTAL-LIABILITY-AND-EQUITY> 3,640,829
<SALES> 6,191,437
<TOTAL-REVENUES> 6,191,437
<CGS> 3,233,829
<TOTAL-COSTS> 5,864,069
<OTHER-EXPENSES> 118,955
<LOSS-PROVISION> 35,000
<INTEREST-EXPENSE> 128,664
<INCOME-PRETAX> 208,413
<INCOME-TAX> 83,000
<INCOME-CONTINUING> 125,413
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125,413
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
