SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Commission File No.: 000-21557
ACI TELECENTRICS, INC.
(Name of Small Business Issuer as specified in its charter)
MINNESOTA 41-1572571
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3100 WEST LAKE STREET, SUITE 300, MINNEAPOLIS, MINNESOTA, 55416
(Address of principal executive offices)(Zip Code)
Issuer's telephone number, including area code: (612) 928-4700
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, no par value per share
Check whether the Issuer (1) has 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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B 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-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $9,991,427
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of February 28, 1997 was approximately $8,431,252 based upon the
average of the closing bid and asked prices of the Registrant's Common Stock on
such date.
There were 5,706,528 shares of Common Stock, no par value, outstanding as of
February 28, 1997.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference pursuant to Rule 12b-23: Portions of the
Registrant's 1996 Annual Report to Shareholders for fiscal year ended December
31, 1996 and Proxy Statement for its 1997 Annual Meeting of Shareholders are
incorporated by reference into Items 6 and 7 of Part II and Items 9, 10, 11 and
12 of Part III, respectively.
Transitional Small Business Disclosure Format (check one). Yes [ ] No [X]
I N D E X
Description Page
- - ----------- ----
PART I
ITEM 1. DESCRIPTION OF BUSINESS............................... 1
ITEM 2. DESCRIPTION OF PROPERTY............................... 3
ITEM 3. LEGAL PROCEEDINGS..................................... 4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS............................................... 4
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................... 5
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 5
ITEM 7. FINANCIAL STATEMENTS.................................. 5
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................... 6
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT...................................... 6
ITEM 10. EXECUTIVE COMPENSATION................................ 6
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT....................................... 6
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........ 6
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...................... 6
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
ACI Telecentrics, Inc. (the "Company") was incorporated under the name
Automated Communications, Incorporated under Minnesota law on January 13, 1987
and changed its name to ACI Telecentrics, Inc. on July 26, 1996. The Company
provides telephone based sales and marketing services, broadly defined as
teleservices. The Company operates 289 workstations in 5 call centers located in
Minnesota, North Dakota and South Dakota.
Prior to June 28, 1996, each of the Company's four existing call
centers was operated as a separate corporation owned by Rick N. Diamond and Gary
B. Cohen, the founders of the company. In preparation for the Company's initial
public offering, these corporations were merged into Automated Communications,
Inc. on June 28, 1996 (the "Reorganization").
The Company has focused its client base primarily on the
telecommunications, publishing and financial services industries. During 1996,
the telecommunications industry became the largest client segment of ACI's
business, and ACI became one of the primary vendors for the largest manufacturer
of caller ID systems. In conjunction with Regional Bell Operating Companies
("RBOC's") and the manufacturer, ACI sells caller ID services to RBOC current
customers. ACI also provides a sales force for long distance and other custom
calling services. With respect to the publishing industry, the Company's
telemarketing programs assist newspaper, magazine, and book publishers in
acquiring new subscribers, soliciting subscription renewals, and cross-selling
products. In the financial services industry, the Company conducts telemarketing
projects for banks and financial services companies in the areas of insurance;
credit card customer acquisition, retention and renewal; credit card enhancement
services; account generation and retention; and customer service.
INDUSTRY AND MARKET
The Company believes that the telemarketing sector of marketing
expenditures will continue to grow and that the trend towards outsourcing
telemarketing programs will continue. In addition, the telecommunications and
financial services industries, which ACI already serves, are undergoing
deregulation or consolidation, which provides the Company with additional growth
opportunities as these businesses search for low cost solutions for their
marketing, sales and customer support needs. In 1996, businesses within the
telecommunications, publishing and financial services industries accounted for
most of the Company's revenues. The industries targeted by the Company and the
principal services provided are described below.
TELECOMMUNICATIONS. The Company entered the telecommunications segment of the
market in 1996, and in that year revenues from this segment accounted for 42.6%
of revenues. In February 1996, a far-reaching telecommunications law was passed
which permits the RBOC's and long distance carriers to compete in each other's
markets. This new ability to market basic telephone services, in addition to
such other services as Caller ID, call waiting, and voice mail, has created a
new market for teleservices organizations such as the Company. The expansion of
the internet has also provided revenue for the company, as it is selling web
page sights for one of its clients. The Company's principal telecommunications
customer is CIDCO, Inc.
PUBLISHING. ACI provides telemarketing services to publishers, including
subscription renewals, subscription sales, and customer services. The Company's
program managers work closely with publishing clients to develop individually
tailored programs to enhance their marketing and sales efforts. The Company has
conducted telemarketing services for such companies as Cahners Publishing
Company and Cy DeCosse, Incorporated.
FINANCIAL SERVICES. ACI provides banks and financial services companies with a
wide range of telemarketing services, including offering insurance products,
acquiring, retaining and renewing credit card customers, enhancing card
services, generating new and retaining current accounts and providing a range of
customer services. The Company has conducted telemarketing services for such
companies as Safecard Services, Inc. and several bank card providers.
SALES AND MARKETING
ACI's marketing strategy emphasizes customized marketing solutions
tailored to meet the individual client's needs. The Company currently has three
sales people. The Company attracts clients through its sales force and by (i)
encouraging referrals from existing clients who are satisfied with the Company's
quality service, (ii) attending trade shows, (iii) advertising in trade
publications, and (iv) conducting direct mail programs to selected large
purchasers of telemarketing services.
PRINCIPAL CUSTOMERS
In 1996, the Company's three largest clients and the percentage of 1996
revenues attributable to such clients were CIDCO Inc., a marketer of caller ID
systems (39.2%), Cahners Publishing Company, a publisher of trade publications
(10.1%), Cy DeCosse Incorporated, a publisher of book continuity programs
(14.8%).
COMPETITION
The telemarketing industry is highly competitive, but also highly
fragmented. The Company competes with both in-house telemarketing organizations
as well as other independent out-source telemarketing operations. In-house
telemarketing organizations provide a variety of services to their organizations
and comprise the majority of the telemarketing industry. Independent
telemarketing organizations range from numerous small, single-facility
operations to large, multi-facility operations such as MATRIXX Marketing Inc.,
SITEL Corporation, APAC Teleservices Inc., ITI Marketing Services, Inc., and
West Telemarketing Corporation. The Company also competes with other forms of
marketing such as direct mail, television and radio. The Company believes that
the primary competitive factors in the telephone-based marketing industry are
reputation for quality service, marketing results, technological expertise,
price, and the ability to design customized marketing programs which address the
needs of clients. The Company believes that most of its competitors are, like
ACI, highly dependent on a small number of clients for a large percentage of
their business.
GOVERNMENT REGULATION
The telemarketing industry is subject to a significant amount of
federal and state regulation. The federal Telephone Consumer Protection Act of
1991 (the "TCPA") prohibits telemarketers from using automated telephone dialing
equipment to call certain types of telephone numbers such as hospital emergency
room telephone numbers. In addition, the TCPA prohibits the initiation of
telephone calls to any residential telephone line using an artificial or
prerecorded voice to deliver a message without the prior consent of the called
party. The federal Telemarketing and Consumer Fraud and Abuse Prevention Act of
1994 (the "TCFAPA") broadly authorizes the Federal Trade Commission (the "FTC")
to issue regulations prohibiting misrepresentation in telemarketing sales. In
August 1995, the FTC issued regulations under the TCFAPA which, among other
things, prohibit initiating an outbound telephone call to a person that has
stated that he or she does not wish to receive an outbound call on behalf of the
seller whose goods or services are being offered, prohibit calls at any time
other than between 8:00 a.m. and 9:00 p.m. local time, require a telemarketer to
make certain disclosures to the person receiving the call, and prohibit
misrepresentations regarding the cost, terms, restrictions, or performance of
products or services offered by phone. To the best of the Company's knowledge,
its telemarketing procedures comply with all state and federal rules.
A number of states have enacted or are considering legislation to
regulate telemarketing. For example, telephone sales in certain states cannot be
final unless a written contract is delivered to and signed by the buyer and may
be cancelled within three business days. At least one state provides that
telemarketers may not require payment by credit card, and several other states
impose license or bond requirements upon telemarketers. From time to time bills
are introduced in the U.S. Congress or state legislatures which could further
regulate certain aspects of the telemarketing business. The Company cannot
predict whether any such proposed legislation will become law or what effect
such laws would have on the business of the Company.
Several of the industries served by the Company are subject to varying
degrees of government regulation, particularly the financial services industry.
Clients in these industries are obligated to provide the Company with scripts
for the Company's telemarketers which comply with applicable industry
regulations. Although compliance with these regulations is generally the
responsibility of the Company's clients, the Company could be subject to a
variety of enforcement or private actions for its failure or the failure of its
clients to comply with such regulations as the same relate to telemarketing
operations.
PERSONNEL
At February 28, 1997 the Company had approximately 615 full and part
time employees. None of the Company's employees are subject to a collective
bargaining agreement and the Company believes its relationship with its
employees is good.
ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
The Company's corporate headquarters, which also serves as one of the
Company's five call centers, is located in Minneapolis, Minnesota in a leased
facility consisting of approximately 12,000 square feet of office space. The
lease expires on July 31, 2000.
The Company also leases four other call center facilities, located in
Twin Valley, Minnesota, Valley City, North Dakota, Devils Lake, North Dakota and
Redfield, South Dakota. The lease for Valley City is for five year term, expires
in 2000 and contains a renewal option for an additional five year period. The
lease for Devils Lake is for a five year term, expires in 2001 and contains a
renewal option for an additional five year period. The lease for Twin Valley is
for five years and expires in August 1998. The lease in Redfield, South Dakota
is for a five-year term, expires in August, 2001 and contains a renewal option
for an additional five-year period. The Company believes that these call centers
are adequate for its current operations, but additional call centers will be
required to support the Company's anticipated growth. Management believes that
suitable additional space will be available as needed on commercially reasonable
terms. The dates on which each of the Company's facilities were opened and the
number of workstations in each facility at December 31, 1996 are set forth
below:
LOCATION Year Opened Number of Workstations
- - -------- ----------- ----------------------
Minneapolis, MN ...................... 1987 45
Twin Valley, MN ...................... 1993 40
Valley City, ND ...................... 1995 60
Devils Lake, ND....................... 1996 96
Redfield, SD ......................... 1996 48
---
Total Workstations at 1996 year-end....................... 289
====
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is its property the subject of, any
material pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders of the
Company during the fourth quarter of 1996.
EXECUTIVE OFFICERS OF THE COMPANY
The name and ages of all of the Company's executive officers and the
positions held by them are listed below.
Name Age Position
---- --- --------
Rick N. Diamond 34 Chairman of the Board, Chief Executive
Officer and Secretary
Gary B. Cohen 35 President and Director
Steven A. Kahn 48 Vice President and Chief Financial Officer
Dana A. Olson 35 Vice President - Telemarketing Operations
Lois J. Dirksen 41 Vice President - Customer Service
Gregg Kunz 36 Vice President - Sales
RICK N. DIAMOND is co-founder of the Company and has served as the
Chief Executive Officer and a director of the Company since its inception in
1987. Mr. Diamond holds a B.A. degree from the University of Wisconsin and J.D.
degree from Washington University in St. Louis, Missouri. Prior to and since
founding the Company, he has been active in community and business affairs.
GARY B. COHEN is co-founder of the Company and has served as the
Company's President and as a director since its inception in 1987. Mr. Cohen
holds a B.S. degree from the University of Minnesota. Prior to and since
founding the Company, he has been active in community and business affairs.
STEVEN A. KAHN joined the Company as Vice President and Chief Financial
Officer in July 1996. Mr. Kahn was Vice President and Chief Financial Officer of
Shuffle Master, Inc., a supplier to the gaming industry, from September 1995 to
June 1996. Prior to Shuffle Master, Inc., Mr. Kahn was Vice President and
Controller of ConAgra Trading Companies in Minneapolis, Minnesota. He holds a
B.S. degree in business administration from Northeastern University in Boston,
Massachusetts and is a Certified Public Accountant.
DANA A. OLSON joined ACI in September 1990, serving as shift manager
before becoming Operations Manager in April 1991 and Vice President of
Telemarketing Operations in March 1994. Mr. Olson attended Mankato State
University, majoring in Business Administration.
LOIS J. DIRKSEN joined ACI as Vice President of Sales and Service in
May 1995 and became Vice President of Customer Service in August 1996. Prior to
joining the Company, Ms. Dirksen was Vice President of Sales for Rezound
International, a publisher of audio books, from April 1994 to May 1995 and
Director of Direct Response for Minnesota Mutual from March 1990 to April 1994.
Ms. Dirksen holds a B.S. degree in Political Science from Arizona State
University.
GREGG KUNZ joined ACI as Vice President of Sales in August 1996. Prior
to joining the Company, Mr. Kunz was employed by American Business Information,
a provider of information based marketing solutions, as Regional Manager, from
October 1993 to August 1996. From November 1988 to October 1993, Mr. Kunz was
employed by Dun & Bradstreet Information Services as District Manager. Mr. Kunz
received his B.S. degree in Business Administration and foreign languages from
the University of Arizona in 1983.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq SmallCap
Market under the symbol ACIT since October 21, 1996. Prior to that date, the
Company's Common Stock was not publicly traded. The following table sets forth
the high and low bid prices, as reported by either the Nasdaq SmallCap Market or
the National Quotation Bureau Incorporated of Jersey City, New Jersey or Metro
Data Company of Minneapolis, Minnesota. The bid quotations represent interdealer
prices and do not include retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
Fiscal Year Ended
December 31, 1996 Low High
----------------- --- ----
Fourth Quarter $5.00 $6.125
On February 28, 1997, the fair market value of the Company's Common
Stock was $34,952,484 based on the average of the closing bid and asked prices
on at that date. As of December 31, 1996, the Company had approximately 542
shareholders of record.
The Company has never paid cash dividends on its Common Stock since its
initial public offering of stock. The Board of Directors presently intends to
retain earnings for use in the Company's business and does not anticipate paying
cash dividends on Common Stock in the foreseeable future. Any future
determinations as to the payment of dividends will depend on the financial
condition of the Company and such other factors as are deemed relevant by the
Board of Directors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by Item 6 is incorporated herein by reference
to the Section labeled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" which appears in the Registrant's 1996
Annual Report to Shareholders.
ITEM 7. FINANCIAL STATEMENTS
The information required by Item 7 is incorporated herein by reference
to the Consolidated Financial Statements, Notes thereto and Independent
Auditor's Report thereon which appears in the Registrant's 1996 Annual Report to
Shareholders.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by Item 9 regarding the Company's executive
officers is set forth in Part I of this report. The information required by Item
9 concerning the directors of the Company is incorporated by reference from the
Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders
under the caption "Election of Directors." The Company's proxy statement will be
filed pursuant to Rule 14a within 120 days after the close of the fiscal year
for which this report is filed.
The information required by Item 9 relating to compliance with Section
16(a) of the Exchange Act is incorporated herein by reference from the Company's
definitive proxy statement for its 1997 Annual Meeting of Shareholders under the
caption "Compliance with Section 16(a)of the Exchange Act". The Company's proxy
statement will be filed pursuant to Rule 14a within 120 days after the close of
the fiscal year for which this report is filed.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by reference
to the section labeled "Executive Compensation" which appears in the
Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders. The Company's proxy statement will be filed pursuant to Rule 14a
within 120 days after the close of the fiscal year for which this report is
filed.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated herein by reference
to the section labeled "Principal Shareholders and Management Shareholdings"
which appears in the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders. The Company's proxy statement will be filed pursuant to
Rule 14a within 120 days after the close of the fiscal year for which this
report is filed.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated by reference to the
section labeled "Certain Transactions" which appears in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders. The
Company's proxy statement will be filed pursuant to Rule 14a within 120 days
after the close of the fiscal year for which this report is filed.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Exhibits are numbered in accordance with Item 601 of Regulation
S-B. See "Exhibit Index" immediately following the signature page of this Form
10-KSB.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
fiscal quarter of the Registrant's 1996 fiscal year.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACI TELECENTRICS, INC.
Dated: March __, 1997 By: /s/ RICK N. DIAMOND
-----------------------------------
Rick N. Diamond, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act 1934, this
Report has been signed by the following persons on behalf of the Company, in the
capacities, and on the dates, indicated.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints RICK
N. DIAMOND and GARY B. COHEN as true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any or all
amendments to this Annual Report on Form 10-KSB and to file the same, with all
exhibits thereto, and other documents in connection thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
SIGNATURE AND TITLE DATE
/s/ RICK N. DIAMOND March 17, 1997
- - ------------------------------------------
Rick N. Diamond, Chief Executive Officer
and Director (principal executive officer)
/s/ GARY B. COHEN March 17, 1997
- - ------------------------------------------
Gary B. Cohen, President and Director
/s/ STEVEN A. KAHN March 17, 1997
- - ------------------------------------------
Steven A. Kahn, Vice President and Chief
Financial Officer (principal financial and
accounting officer)
/s/ DOUGLAS W. FRANCHOT March 17, 1997
- - ------------------------------------------
Douglas W. Franchot, Director
/s/ PHILLIP T. LEVIN March 17, 1997
- - ------------------------------------------
Phillip T. Levin, Director
/s/ SEYMOUR LEVY March 17, 1997
- - ------------------------------------------
Seymour Levy, Director
/s/ JAMES W. LUPIENT March 17, 1997
- - ------------------------------------------
James W. Lupient, Director
/s/ THOMAS F. MADISON March 17, 1997
- - ------------------------------------------
Thomas F. Madison, Director
ACI TELECENTRICS, INCORPORATED
EXHIBIT INDEX TO FORM 10-KSB
Exhibit
Number Description
- - ------ -----------
3.1 Restated Articles of Incorporation (Incorporated by reference to
Exhibit 3.1 to Registration Statement on Form SB-2, SEC File No.
333-05370)
3.2 Restated Bylaws (Incorporated by reference to Exhibit 3.2 to
Registration Statement on Form SB-2, SEC File No. 333-05370)
4.1 Form of Stock Certificate (Incorporated by reference to Exhibit 4.1
to Registration Statement on Form SB-2, SEC File No. 333-05370)
4.2 Articles of Incorporation (filed as Exhibit 3.1)
4.3 Bylaws (filed as Exhibit 3.2)
10.1 1996 Stock Option Plan (Incorporated by reference to Exhibit 10.1 to
Registration Statement on Form SB-2, SEC File No. 333-05370)**
10.2 1996 Employee Stock Purchase Plan (Incorporated by reference to
Exhibit 10.2 to Registration Statement on Form SB-2, SEC File No.
333-05370)**
10.3 Employment Agreement with Rick N. Diamond, dated June 30, 1996
(Incorporated by reference to Exhibit 10.3 to Registration Statement
on Form SB-2, SEC File No. 333- 05370)**
10.4 Employment Agreement with Gary B. Cohen, dated June 30, 1996
(Incorporated by reference to Exhibit 10.4 to Registration Statement
on Form SB-2, SEC File No. 333- 05370)**
10.5 Buy/Sell Agreement by and among Automated Communications,
Incorporated, Rick N. Diamond and Gary B. Cohen, dated June 30, 1996
(Incorporated by reference to Exhibit 10.5 to Registration Statement
on Form SB-2, SEC File No. 333-05370)**
10.6 Promissory Note by Automated Communications, Incorporated in favor
of Riverside Bank, dated June 5, 1996 (including documents related
thereto) (Incorporated by reference to Exhibit 10.6 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.7 Installment Note by Twin Valley Communications, Incorporated in
favor of Northwest Minnesota Initiative Fund, dated June 15, 1994
(including documents related thereto) (Incorporated by reference to
Exhibit 10.7 to Registration Statement on Form SB-2, SEC File No.
333-05370)
10.8 Promissory Note by Twin Valley Communications, Incorporated in favor
of City of Twin Valley, dated June 15, 1994 (including documents
related thereto) (Incorporated by reference to Exhibit 10.8 to
Registration Statement on Form SB-2, SEC File No. 333-05370)
10.9 Promissory Note by Automated Communications, Incorporated in favor
of Riverside Bank, dated November 16, 1995 (including documents
related thereto) (Incorporated by reference to Exhibit 10.9 to
Registration Statement on Form SB-2, SEC File No. 333-05370)
10.10 Note by Automated Communications, Incorporated in favor of Twin
Valley State Bank, dated September 13, 1993 (including documents
related thereto) (Incorporated by reference to Exhibit 10.10 to
Registration Statement on Form SB-2, SEC File No. 333-05370)
10.11 Loan Commitment Agreement by and between Twin Valley Communications,
Incorporated and Northwest Regional Development Commission, dated
June 15, 1994 (including documents related thereto) (Incorporated by
reference to Exhibit 10.11 to Registration Statement on Form SB-2,
SEC File No. 333-05370)
10.12 Lease Agreement by and between ACKY-3100 Lake Limited Partnership
and Automated Communications, Incorporated, dated June 13, 1995
(Incorporated by reference to Exhibit 10.12 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.13 Sublease by and between Valley City-Barnes County Development
Corporation and Valley City Communications, Incorporated, dated
April 24, 1995 (Incorporated by reference to Exhibit 10.13 to
Registration Statement on Form SB-2, SEC File No. 333-05370)
10.14 Sublease by and between Forward Devils Lake Corporation and Devils
Lake Communications, Incorporated, dated January 2, 1996
(Incorporated by reference to Exhibit 10.14 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.15 Lease by and between Twin Valley-Ulen Telephone Company, Inc. and
Twin Valley Communications, Incorporated, dated September 1, 1993
(Incorporated by reference to Exhibit 10.15 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.16 Agreement of Lease by and among EIS Leasing Corp., Automated
Communications, Incorporated and Devils Lake Communications,
Incorporated, dated March 22, 1996 (including documents related
thereto) (Incorporated by reference to Exhibit 10.16 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.17 Agreement of Lease by and among EIS Leasing Corp., Automated
Communications, Incorporated and Valley City Communications,
Incorporated, dated June 5, 1995 (including documents related
thereto) (Incorporated by reference to Exhibit 10.17 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.18 Agreement of Lease by and between EIS Leasing Corp. and Automated
Communications, Incorporated, dated December 28, 1994 (including
documents related thereto) (Incorporated by reference to Exhibit
10.18 to Registration Statement on Form SB-2, SEC File No.
333-05370)
10.19 Rental Agreement by and between Electronic Information Systems, Inc.
and Automated Communications, Incorporated, dated December 16, 1993
(including documents related thereto) (Incorporated by reference to
Exhibit 10.19 to Registration Statement on Form SB-2, SEC File No.
333-05370)
10.20 Agreement of Lease by and between EIS Leasing Corp. and Automated
Communications, Incorporated, dated December 15, 1993 (including
documents related thereto) (Incorporated by reference to Exhibit
10.20 to Registration Statement on Form SB-2, SEC File No.
333-05370)
10.21* Amended and Restated Equipment Lease (with Purchase Option) by and
between Valley City-Barnes County Development Corporation and Valley
City Communications, Incorporated, dated June 15, 1995
10.22 Vehicle Lease Agreement by and between Lupient Leasing and Automated
Communications, Incorporated, dated December 15, 1995 (Incorporated
by reference to Exhibit 10.22 to Registration Statement on Form
SB-2, SEC File No. 333-05370)**
10.23 Lease Agreement by and between Automated Communications,
Incorporated and NTFC Capital Corporation, dated August 7, 1995
(Incorporated by reference to Exhibit 10.23 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.24 Equipment Lease by and between Forward Devils Lake Corporation and
Devils Lake Communications, Incorporated, dated May 1, 1996
(Incorporated by reference to Exhibit 10.24 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.25 Lease Agreement by and between Sanwa Leasing Corporation and
Automated Communications, Incorporated, dated July 20, 1995
(Incorporated by reference to Exhibit 10.25 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.26 Promissory Note by ACI Telecentrics, Incorporated in favor of
Riverside Bank dated September 30, 1996 (including documents related
thereto) (Incorporated by reference to Exhibit 10.26 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.27 Agreement for telemarketing services with Cy DeCosse, Inc.
(Incorporated by reference to Exhibit 10.27 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.28 Agreement for telemarketing services with CIDCO, Inc. (Incorporated
by reference to Exhibit 10.28 to Registration Statement on Form
SB-2, SEC File No. 333-05370)
10.29* Lease Agreement by and between Redfield Industrial Development
Corporation and ACI Telecentrics, Incorporated, dated November 26,
1996
11.1 Statement Regarding Computation of Per Share Earnings.
13.1* 1996 Annual Report to Shareholders.
23.1* Consent of Deloitte & Touche LLP, independent public accountants
24* Power of Attorney (included on signature page of the Registration
Statement)
27* Financial Data Schedule
- - -------------------------
* Filed herewith
** Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-KSB
AMENDED AND RESTATED
EQUIPMENT LEASE (WITH PURCHASE OPTION)
That certain Equipment Lease (With Purchase Option) entered into on
June 15, 1995, between the parties identified below, is hereby amended and
restated in its entirety, as follows:
1. PARTIES. This agreement is made this 15th day of June 1995, between
VALLEY CITY-BARNES COUNTY DEVELOPMENT CORPORATION, a North Dakota nonprofit
corporation, of 205 2nd Street N.E., Valley City, North Dakota 58072
(hereinafter called "Lessor"), and VALLEY CITY COMMUNICATIONS, INCORPORATED, a
North Dakota corporation, of 2425 West Main Street, Valley City, North Dakota
58072 (hereinafter called "Lessee").
2. LEASE OF EQUIPMENT. For and in consideration of the covenants and
agreements hereinafter contained, to be kept and performed by Lessee, Lessor has
leased and does hereby lease to Lessee the personal property purchased by Lessor
at the cost of $107,000.00 as listed and described on Exhibit A attached hereto
and incorporated herein by reference, hereafter designated as "equipment," to
have and to hold the same unto Lessee for the period of five years from the date
of delivery thereof as endorsed hereon and upon the conditions and agreements
hereinafter stipulated.
3. DELIVERY AND RETURN OF PROPERTY. Lessor shall deliver equipment to
Lessee's telemarketing operation at 2425 West Main Street, Valley City, North
Dakota.
4. RENT. Monthly rent will be waived for each month of the initial
five-year period that Lessee remains operational at its leased telemarketing
center at 2425 West Main Street, Valley City, North Dakota 58072, where said
equipment will be located.
5. RESERVATION OF TITLE. Equipment and all parts thereof shall, unless
a purchase thereof is made as is herein provided and until full payment of such
purchase price and all interest which may be due thereon is made in cash to the
Lessor, retain its character as personal property and the title thereto shall
not pass to Lessee but shall remain in Lessor. Lessee shall not remove, conceal
or otherwise interfere with the title or ownership of said equipment until and
unless equipment is purchased and full payment therefor is made as herein
provided.
6. OPTION TO PURCHASE. Lessor does hereby grant to Lessee the option to
purchase said equipment upon the conclusion of the initial five-year period
referenced herein for the sum of $1.00.
7. DISCLAIMER OF WARRANTIES. The parties agree that there are no
express warranties other than those appearing in this agreement and there are no
implied warranties, either of merchantability or fitness for a particular
purchase, in connection with either the lease of the equipment or any exercise
of the option to purchase hereunder.
8. REPOSSESSION. If Lessee shall sell, assign or attempt to sell or
assign, equipment or any interest therein, or if Lessee defaults in any of the
covenants, conditions or provisions of this lease, it is agreed that Lessor may
immediately and without notice take possession of equipment wheresoever found
and to remove and keep or dispose of the same. If any step is taken by legal
action or otherwise by Lessor to recover possession of equipment or otherwise
enforce this agreement or to collect moneys due hereunder and Lessor shall
prevail, Lessee shall pay Lessor the equivalent of the moneys expended or
charges incurred by Lessor in such behalf, including reasonable attorney's fees.
9. LOCATION AND USE. Lessee shall use equipment only at its leased
premises at 2425 West Main Street, Valley City, North Dakota, and shall not at
any time remove the same from said place except in returning the same to Lessor
or except as may be permitted by Lessor by consent thereto in writing. Lessee
shall use equipment at all times in a workmanlike manner and in such manner as
will not injure the same except by the ordinary wear and tear of such equipment
when in good workmanlike use and shall at Lessee's costs and expense replace
with new parts any and/or all parts which may require replacement during the
term of this lease. In the installation, location and use of equipment Lessee
shall comply fully with all the laws of the State in which equipment is located
and with all county or municipal ordinances.
10. INDEMNIFICATION OF LESSOR. Lessee shall and does hereby agree to
protect and save Lessor harmless against any and all losses or damage to
equipment by fire, flood, explosion, tornado or theft and Lessee shall and does
hereby assume all liability to any person whomsoever arising from the location,
condition or use of equipment, and shall indemnify and does indemnify Lessor of
and from all liability, claim and demand whatsoever arising from the location,
condition, or use of equipment whether in operation or not, and growing out of
any cause, including alleged imperfect or defective equipment, and from every
other liability, claim and demand whatsoever during the term of this lease or
arising while equipment is in the possession of Lessee. Lessee shall keep said
equipment insured and shall provide evidence of such insurance coverage to
Lessor.
11. TIME OF ESSENCE. Time is the essence of this agreement.
12. ASSIGNMENT. Lessee is authorized to assign this lease and agreement
to a North Dakota corporation to be formed, provided Rick N. Diamond and Gary
Cohen remain the sole stockholders therein, provided said newly formed
corporation receives an assignment of all the assets subject to all of the
liabilities of the Lessee related to the operation of a telemarketing business
in Valley City, North Dakota. Lessee shall not otherwise assign this lease
without the prior written consent of the Lessor.
13. CHOICE OF LAW. This lease and agreement shall be deemed to have
been executed and entered into in the State of North Dakota and shall be
construed, enforced and performed in accordance with the laws thereof.
14. EXCLUSION OF ORAL STATEMENTS. This lease contains all of the
agreements of the parties. No oral or other statements, proposals or agreements
shall be binding on either of the parties hereto.
15. CONDITIONAL REPURCHASE OF EQUIPMENT AND GUARANTEES THEREOF. As a
condition of this Equipment Lease, the parties understand and agree that
termination of the Lessee's business operations at 2425 West Main Street, Valley
City, North Dakota, within the first three (3) years of the five-year initial
term of the sublease thereof, will obligate the Lessee to purchase the equipment
subject to the lease from the Lessor for the sum of $107,000.00. This obligation
will be personally guaranteed by Rick N. Diamond and Gary Cohen, each for
$53,500.00, by endorsement hereon and by separate document to be executed by
said guarantors.
Dated this 15th day of June, 1995.
VALLEY CITY-BARNES COUNTY
DEVELOPMENT CORPORATION
By
-------------------------------------
Steve Jorissen
Its President
By
-------------------------------------
Jennifer Feist
Its Secretary
LESSOR
VALLEY CITY COMMUNICATIONS, INCORPORATED
By
-------------------------------------
Its _____________
By
-------------------------------------
Its _____________
LESSEE
ENDORSEMENT GUARANTEEING CONDITIONAL PURCHASE OF
EQUIPMENT The undersigned hereby severally guarantee the conditional
repurchase of equipment, each to a maximum of $53,500.00, as set forth in
paragraph 15 of the Equipment Lease.
-------------------------------------
Rich N. Diamond
-------------------------------------
Gary Cohen
LEASE
THIS AGREEMENT made this 26th day of November, 1996, by and between
Redfield Industrial Development Corporation, which has an address of 626 North
Main Street, Redfield, South Dakota, 57469, referred to herein as "Landlord",
and ACI Telecentrics, Incorporated, which has an address of 3100 West Lake
Street, Suite 300, Minneapolis, Minnesota, 55416, referred to herein as
"Tenant."
WITNESSETH:
A. Tenant is leasing and has an option to purchase certain real
property and the improvements located thereon in the city of Redfield, County of
Spink, State of South Dakota, which property is legally described as follows, to
wit:
Lot A, Block Three (3), Redfield Lakeside Addition, Redfield, Spink
County, South Dakota (the "Building").
B. Landlord has agreed to purchase and provide to Tenant on a rent free
basis the personal property set forth on the attached Schedule A, having a value
of not more than $300,000.00 (the "Equipment"), and Landlord has agreed to allow
Tenant the option to purchase the Equipment at its fair market value at the end
of the initial five year term of this lease.
C. Landlord desires to lease the Building to Tenant, and Tenant desires
to lease the same from Landlord, which lease is subject to the following terms
and conditions.
D. Tenant desires to have an option to purchase the Building, and
Landlord has agreed to grant Tenant an option to purchase the Building.
E. Tenant desires to have an option to purchase the Equipment, and
Landlord has agreed to grant Tenant an option to purchase the Equipment.
F. Tenant and Landlord agree that fair market value, as used herein,
shall be determined by an appraisal from a mutually agreed upon qualified
appraiser.
NOW THEREFORE, based upon the mutual terms and provisions, and the
consideration set forth in this agreement, the terms and provision in this Lease
and Option to Purchase are as follows:
TERMS OF AGREEMENT
1. Premises. Landlord hereby leases and lets to Tenant the Building,
and Tenant hereby accepts said lease, the Building upon the terms and provisions
set forth in this agreement.
2. Term. The term of this lease shall be for a period of five (5) years
commencing September 1, 1996, and terminating August 31, 2001. At the option of
Tenant, the lease can be renewed for an additional five (5) year period on the
same terms and conditions as set forth herein, except for lease payments as set
forth in Section 3 below, provided Tenant has notified Landlord, in writing, no
later than August 1, 2001, of Tenant's intention to renew said lease.
3. Lease Payment. The lease payment to be paid by Tenant to Landlord
shall be the sum of $2,500 per month, which rental shall be paid on or before
the first day of each day of the month during the term of this lease, with the
first rental payment due on or before September 1, 1996. Should Tenant exercise
its option to renew the lease for an additional five (5) year period of time,
commencing September 1, 2001, Landlord agrees that it will not increase the rent
by more than five (5) percent of the $2,500.00 during the second five year term
of the lease.
It is understood by and between the parties that $400.00 per month of
said rent is payment in lieu of taxes and $100.00 per month is for insurance
costs on the leased premises.
4. Improvements and Alterations. Tenant has the right, upon taking
possession of the Building, to improve or alter the Building in accordance with
plans and specifications to be approved in writing by Landlord, which approval
will not be unreasonably withheld. Landlord shall pay up to $200,000 for
improvements and alterations to the Building, including but not limited to
security systems, parking lot, electrical data and telephone cabling, signage,
plumbing, HVAC, interior and exterior wall treatment, roof office partitions -
affixed and non-affixed, and other items as necessary. All improvements or
alterations to the Building shall, on expiration or termination of this lease,
belong to Landlord without compensation to Tenant unless otherwise agreed to in
writing.
5. Maintenance. Tenant, at its sole cost and expense, shall maintain
the interior of the Building in good order and condition, reasonable wear and
tear and casualty damage excepted. Landlord, at its sole cost and expense, shall
maintain the exterior and all structural components of the Building in good
order and condition.
6. Utilities. Tenant shall pay for all utilities furnished to the
Building during the term of this lease, including but not limited to
electricity, gas, water, sewer, garbage. Tenant shall pay for all telephone
utilities and usage fees.
7. Liabilities of the Parties - Insurance. Tenant shall procure and
maintain, at its expense, during the term of this lease, public liability
insurance from a reliable insurance company, protecting against loss by reason
of liability imposed by law or contract upon the property, because of death,
sickness, or disease sustained by any person or persons, and damage to property
by reason of the use and maintenance of the property by Tenant.
Landlord covenants that fire and extended insurance coverage, including
plate glass insurance coverage and liability insurance coverage, will be
provided by Landlord on the Building, including additions or improvements, if
there are any made by Tenant. Tenant shall provide all fire and extended
insurance coverage on the Equipment that Tenant moves onto the property or is
provided by Landlord, in addition to the liability insurance coverage referenced
herein.
8. Landlord's Access. Landlord will have reasonable access to the
Building during normal business hours for purposes of inspecting the same and
making such repairs, replacements, and improvements as they shall elect, but
such access shall not unreasonably interfere with Tenant's business operation.
Landlord shall notify Tenant a minimum of 24 hours before access is necessary,
except in cases of emergency.
9. Destruction of Damage of Building. In the event the Building shall
be partially destroyed by fire or other casualty, the same shall be repaired and
restored as speedily as possible at the expense of Landlord. In case the damage
is so extensive as to render the Building untenantable, or the Equipment
unusable, the rent shall cease until such time as the Building and Equipment
shall be put in complete repair; provided, however, that Tenant shall have the
right to terminate this lease if the damage cannot be repaired within ninety
days.
10. Default. If Tenant defaults in the payment of rent or in the
performance of any other term or condition of this lease, and fails to correct
such default or commence corrective action within 30 days after receipt of
written notice from Landlord describing the default, Tenant will be considered
to have breached this lease. In that event, Landlord shall have the right to
re-enter the property upon notice to Tenant, perform necessary maintenance and
repairs, and relet the premises.
11. Option to Purchase Building. Landlord, in further consideration of
foregoing the lease, hereby grants to Tenant, prior to the expiration of the 5
year period of the lease, the sole, exclusive and irrevocable right to purchase
the Building for a sum not to exceed fair market value. Tenant must exercise the
option by mailing a written notice of exercise of said option to Landlord or by
delivering such written notice to Landlord personally on or before September 1,
2001. Landlord will then provide Tenant with an abstract of title within thirty
days thereafter, which abstract will show good and merchantable title in
Landlord as of October 1, 2001. Tenant shall then have a period of 10 days from
the receipt of the abstract to notify Landlord in writing, of any defects or
objections to the title, and Landlord will have until November 1, 2001, in which
to remedy those defects. The closing of the sale shall then be scheduled on or
before December 15, 2001. The real estate taxes and special assessments shall be
prorated as of the date of closing, and the special assessments which will be
prorated will be those which have been certified as due and payable. Tenant
acknowledges that none of the payments which it makes under this lease agreement
will be applied to or considered as a reduction towards the purchase price of
the Building. At the closing, Landlord will provide Tenant with a warranty deed
transferring good title to Tenant, and Tenant will tender to Landlord the
purchase price.
12. Option to Purchase Equipment. Landlord, in further consideration of
foregoing the lease, hereby grants to Tenant, prior to the expiration of the 5
year period of the lease but not before September 1, 1999, the sole, exclusive
and irrevocable right to purchase the Equipment for a sum not to exceed fair
market value. Tenant must exercise the option by mailing or delivering a written
notice of exercise of said option to Landlord on or before September 1, 2001.
Landlord shall deliver to Tenant a warranty Bill of Sale for the Equipment
within ten days after receipt of such written notice from Tenant.
13. Confidential Information. Tenant will retain sole and exclusive
ownership and use of any and all intangible rights and properties that may be
used by Tenant in connection with its operation from the Building. From and
after the terms of this lease, the nature of Tenant's business operations and
all information relating to customers, financial affairs, and the like shall be
considered and kept as the private and privileged records of Tenant, and any
such information, however obtained by Landlord, will not be used, given or
divulged to any person, firm, corporation, or other entity by Landlord except
upon direct written authorization by Tenant.
14. Assignment and Sublease. Tenant shall not assign this lease or
sublet the Building or permit any other party to occupy or use the Building
without prior written consent of Landlord, which consent will not be
unreasonably withheld.
15. Binding Effect. This lease and option to purchase and all of the
terms and conditions set forth herein shall endure to the benefit and bind the
heirs, successors, and assigns of the respective parties hereto, as well as the
parties themselves.
16. Timely Performance. Time is of the essence in the performance of
each and every term and provision of this agreement.
17. Notices. Notices to be given under the provision of this lease
shall be sent, certified mail, to the parties as follows:
Attn: Rick Diamond Redfield Industrial Development
ACI Corporation
3100 West Lake Street 626 North Main Street
Suite 300 Redfield, SD 57469
Minneapolis, MN 55416 Tel: (605) 472-0880
Tel: (612) 928-4777
IN WITNESS WHEREOF, the parties have executed this agreement the day
and year first above written.
ACI (Tenant) Redfield Industrial Development Corp.
(Landlord)
By: /s/ Steven A. Kahn By: /s/ Stanley Schultz
--------------------------------- --------------------------------
Its: Vice President Its: President RIDC
-------------------------------- -------------------------------
STATE OF MINNESOTA )
) SS.
COUNTY OF HENNEPIN )
On this _____ day of ____________________, 1996, before me
_____________________________, the undersigned officer, personally appeared
______________________________, who acknowledged himself to be the
___________________________ of ACI, a corporation, and that he as such
___________________ being authorized to do so, executed the foregoing instrument
for the purposes therein contained, by signing the name of the corporation by
himself as __________________________.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
____________________________________
NOTARY PUBLIC
(SEAL)
My Commission Expires
_________________________.
STATE OF SOUTH DAKOTA )
) SS.
COUNTY OF SPINK )
On this _____ day of _______________________, 1996, before me
____________________________, the undersigned officer, personally appeared
_____________________________, who acknowledged himself to be the
_________________ of Redfield Industrial Development Corp., and that he as such
__________________ being authorized to do so, executed the foregoing instrument
for the purposes therein contained, by signing the name of the corporation by
himself as ___________________.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
____________________________________
NOTARY PUBLIC
(SEAL)
My Commission Expires
__________________________.
GUARANTY
FOR VALUE RECEIVED, and specifically for and in consideration of an
Equipment Lease (With Purchase Option) between VALLEY CITY-BARNES COUNTY
DEVELOPMENT CORPORATION, a North Dakota nonprofit corporation, whose post office
address is 205 2nd Street N.E., Valley City, North Dakota 58072, (hereinafter
called "Lessor"), and VALLEY CITY COMMUNICATIONS, INCORPORATED, a North Dakota
corporation, whose post office address is 2425 West Main Street, Valley City,
North Dakota 58072 (hereinafter called "Lessor"), providing for a waiver of
monthly rental and an option to purchase at the end of a five-year term for
$1.00, but also requiring the purchase of leased equipment by the Lessor from
the Lessee in the sum of $107,000.00 in the event Lessee's business operations
cease within three years of Lessee's occupancy of its business premises in
Valley City, North Dakota, the undersigned guarantors, RICK N. DIAMOND and GARY
COHEN, at the special instance and request of Lessor, do hereby unconditionally
guarantee the purchase of equipment subject to the above referenced lease in the
event the termination of Lessee's business operations triggers such purchase
obligation on the part of the Lessee.
In such event, the guarantors will be obligated to pay to the Lessor,
on demand, the repurchase price called for in the lease. However, each
guarantor's obligation will not exceed the sum of $53,500.00, being one-half of
the total purchase price of $107,000.00. The undersigned guarantor shall also
pay to Lessor all costs and expenses incurred by it in collecting any
indebtedness of the Lessee guaranteed hereunder or enforcing this guaranty
against guarantors.
This guaranty is absolute and continuing and any notice of indebtedness
due and owing under said repurchase clause of the lease by the Lessee to Lessor
is hereby waived. Prior action or suit against the Lessee shall not be a
prerequisite to the right of Lessor to proceed hereunder in case of Lessee's
default triggering such repurchase obligation guaranteed hereby.
This agreement shall inure to the benefit of Lessor, its successors and
assigns, and shall be binding upon the guarantors and guarantors' heirs and
assigns.
IN WITNESS WHEREOF, the guarantors have executed this guaranty this
15th day of June, 1995.
____________________________________
Rick N. Diamond
____________________________________
Gary Cohen
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ACI was founded in 1987 by Rick N. Diamond, Chief Executive Officer, and by Gary
B. Cohen, President. ACI provides telephone-based sales and marketing services
primarily to the telecommunications, publishing and financial services
industries. The Company has grown steadily since inception and in 1996 revenues
were approximately $10 million.
The telemarketing services provided by the Company are performed in five
leased call centers located in Minneapolis and Twin Valley, Minnesota; Valley
City and Devils Lake, North Dakota; and Redfield, South Dakota. These call
centers collectively have 289 workstations, where over 550 teleservice
representatives are employed.
Revenues from telemarketing services are recognized as these services are
performed and are generally based on an hourly rate. Cost of services includes
compensation and commissions for telephone sales representatives, payroll taxes
and other benefits associated with such personnel, telephone expenses and other
direct costs associated with providing services to customers. Selling, general
and administrative expenses include administrative, sales, marketing, occupancy,
depreciation and other indirect costs.
In October 1996, the Company completed a public offering of 1,505,000
shares of common stock at a price of $5.00 per share, resulting in net proceeds
to the Company of approximately $6,378,000.
Operating results for 1996 were highlighted by the opening of two new call
centers and the Company's obtaining clients in the telecommunications industry.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED
DECEMBER 31, 1995
ACI posted record revenues for the sixth consecutive year increasing by 71% from
1995. The revenue increase was attributable in its entirety to new clients ACI
developed in 1996. Revenues, which approximated $10 million in 1996, were
$4,141,577 higher than last year. In 1995, ACI's revenue base had been evenly
split between clients in the financial services and publishing industries. The
Company made a strategic decision to seek clients in the telecommunications
industry in 1996, and as a result, 42.6% of its revenues were derived from these
customers, while publishing, financial services and other industry groups
accounted for 28.4%, 24%, and 5% of revenues, respectively. One new
telecommunications client accounted for 39.2% of 1996 revenues.
The Company prices its services in connection with bids for client
contracts. In 1996, billable telemarketing service representative hours
increased 70%. The Company opened two new telemarketing centers in Devils Lake,
North Dakota and Redfield, South Dakota during 1996, which doubled the number of
telemarketing workstations from 145 to 289.
Cost of services increased 75% to $5,309,753 in 1996 from $3,042,001 in
1995. Cost of services as a percentage of revenue in 1996 was 53% compared to
52% in 1995. In 1996, the Company utilized other telemarketing companies to
perform some of its services. This was primarily for an overabundance of foreign
language calls where the Company did not have qualified telemarketers. These
outsourced calls accounted for approximately $1.2 million in revenue, with a
cost of services of approximately 81%. Cost of services for internally generated
telemarketing services was 49% which compares favorably to the 52% reported in
1995. The labor
10
component of the cost of services, as a percentage of revenue, was 3.9% less in
1996. This improvement was achieved as the Company more efficiently utilized its
labor force and expanded its base in rural communities where labor rates are
lower than the urban call center. In addition, long distance telephone rates
were lower in 1996, reducing this component of cost of services, as a percentage
of revenues, by 4.7%.
Selling, general, and administrative expenses increased 57% to $3,848,730.
As a percentage of revenue, selling, general and administrative expenses
declined 3% from 42% to 39%. The dollar increase was the result of adding a
management level infrastructure to the Company in preparation for its
anticipated growth and for the public offering of its common shares.
Additionally, these expenses increased due to revenue and volume related
expenses and the costs of the two new call centers.
As a result of the factors discussed above, operating income increased 133%
to $832,944 (8.3% of revenue) versus $357,834 (6.1% of revenue).
Other income and expenses improved by $109,312 over 1995. The Company was
favorably impacted by approximately $101,000 related to a mutually agreed upon
contract termination settlement with a former client.
Prior to October 21, 1996, the date of the initial public offering ("IPO"),
the Company was a Sub Chapter S Corporation. As a result, any income tax
liability was the responsibility of the individual shareholders and no provision
for income taxes or income tax liability was recorded in the financial
statements. Effective with the IPO, the Company terminated its status as an S
Corporation and became subject to federal and state income taxes. Accordingly,
for informational purposes, earnings for the years ended December 31, 1995 and
1996 include pro forma information for income taxes which would have been
recorded if the Company had been a C Corporation for the entire year, based on
the tax laws in effect during those periods. Pro forma net income includes an
estimated federal and state tax provision of 40%.
Accordingly, pro forma net income was $504,665, or $.11 per share, compared
to $161,753, or $.04 per share, in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues increased 31% to $5,849,850 in 1995 from $4,475,390 in 1994.
Approximately 20% of the growth was attributable to net growth in new clients
while the balance resulted from increased revenues from existing clients. In
1995 and 1994, approximately 90% of the revenues were evenly split between the
financial services and publishing industries. Billable telemarketing service
representative hours increased approximately 39% from 1994 to 1995. In June
1995, the Company opened a 60 workstation call center in Valley City, North
Dakota. This center accounted for 21% of the total billable telemarketing
service representative hours in 1995.
Cost of services increased 23% to $3,042,001 in 1995 from $2,470,315 in
1994. As a percentage of revenues, cost of services decreased to 52% in 1995
from 55% in 1994. The increase in cost of services was due to revenue growth.
Additional personnel, commissions and related costs increased by $506,186 in
1995 over 1994, but were partially offset by a decrease of $98,651 in temporary
labor costs, while telephone costs increased by $137,804. As a percentage of
revenue, cost of services declined primarily due to savings from switching from
temporary labor to ACI employees.
Selling, general and administrative expenses increased 38% to $2,450,015 in
1995. As a percentage of revenues, selling, general and administrative expenses
increased to 42% in 1995 from 40% in 1994. The increases were primarily related
to revenue growth and the opening of the new call center in
11
June 1995. Salaries, benefits and commissions increased $308,082 and travel
increased $81,778, as additional sales and administrative personnel were added
in support of increased revenue. Increases of $112,456 in depreciation and rent
of $100,260 were both attributable to the opening of new call centers and
corporate headquarters, and bad debt expense increased by approximately $80,000
to reflect the Company's expectation of a collection loss on one of its clients.
Other income and expenses increased $35,179 in 1995 to $88,081 from $52,902
in 1994. This increase reflected higher average outstanding borrowings which
were used to finance working capital needs and capital leases to open the new
call center and to purchase related equipment.
Pro forma net income increased to $161,753 or 2.8% of revenues for 1995,
from $115,378 or 2.6% of revenues in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet strengthened significantly in 1996 as a result
of its IPO. The Company sold 1,505,000 shares in its IPO with net proceeds to
the Company, after expenses, of approximately $6,378,000. The Company utilized a
portion of these funds to reduce debt and $634,436 to pay a dividend to the two
majority shareholders related to the operations of the Company prior to its IPO.
As a result, at December 31, 1996, the Company has cash and cash equivalents of
$5,005,813 compared to $67,483 at December 31, 1995. The Company has adopted
investment guidelines which restrict the types and quality of investments which
may be acquired. At December 31, 1996, the Company had invested approximately
$244,000 in money market funds, approximately $3,633,000 in commercial paper
rated a minimum of A-1/P-1 and approximately $795,000 in U.S. Government agency
notes.
Prior to the IPO, the Company's primary sources of liquidity were cash flow
from operating activities, bank borrowings, capital lease financing and public
and private financing in connection with the opening of call centers. At
December 31, 1996, the Company has an unused revolving line of credit agreement
of $400,000 which is limited to a borrowing base equal to 75% of eligible
accounts receivable (as defined in the agreement) and accrues interest at the
bank's reference rate plus 1.5% (9.75% at December 31, 1996).
In connection with the opening of call centers, the Company has often
received various forms of public or private industry subsidies, consisting of
low interest rate loans, forgivable lease arrangements, expense reimbursements,
and reimbursements for leasehold improvements. 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 March 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
five years, $150,000 in leasehold improvements and a 6% loan of $50,000. In
September 1996, in connection with the opening of the call center in Redfield,
South Dakota, the Company received a $500,000 assistance grant, $200,000 of
which related to leasehold improvements and $300,000 related to equipment.
Cash flows from operating activities increased to $1,108,728 compared to
$131,034 in 1995. The increase was primarily the result of increased net income
of $230,012 and increased non cash charges, including deferred taxes of $206,412
and the net change in operating assets and liabilities of $453,782.
Investing activities consumed $295,798 of cash in 1996 compared to $534,297
in 1995. Capital expenditures increased to $610,185 in 1996 compared to $306,327
in 1995 as the
12
Company invested in equipment needed to open new call centers. In addition,
$546,551 of capital was initially financed by capital leases in 1996, which were
subsequently paid with the proceeds of the IPO.
The Company received $4,125,400 in 1996 from financing activities compared
to $388,152 in 1995. IPO net cash proceeds of $6,378,258 were partially utilized
for a dividend of $634,436 and a net overall reduction in short- and long-term
debt and notes payable to officers of approximately $1,619,000.
The Company believes that funds available at December 31, 1996 together
with funds which should be generated from future operations, equipment and
financial leases, and revolving credit arrangements will be sufficient to
finance its current operations and planned capital expenditures at least through
1997.
INFLATION
Inflation has not had a material impact on operating results, and the Company
does not expect it to have a significant impact in the future. However, there
can be no assurance that the Company's business will not be affected by
inflation in the future.
QUARTERLY RESULTS
The telemarketing industry tends to be slower in the first and third
quarters of the year because client marketing and customer service programs are
typically slower in the post- holiday and summer months. The Company has
experienced and expects to continue to experience quarterly variations in
revenues and operating income principally as a result of the timing of clients'
telemarketing campaigns, the commencement of new contracts, changes in the
Company's revenue mix, start-up of new call centers, and the additional selling,
general and administrative expenses to acquire and support such new business.
OUTLOOK
Certain of the statements contained in the President's Letter to Shareholders
and repeated in this section are "forward-looking statements" within the meaning
of the federal securities laws. The following forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed or implied by such statements.
Management believes that businesses will continue to increasingly outsource
the telemarketing component of their business, which should result in continued
increases in the Company's outbound calling revenue in 1997. In order to meet
this increased demand, the Company plans to open at least two new outbound call
centers in 1997 and to endeavor to maintain annual revenue in the range of
$40,000 - $50,000 per telemarketing seat. In addition, the Company will continue
to invest in technology to serve its clients' needs and be a standard setter in
providing exceptional service. In 1997, the Company expects to spend
approximately $800,000, net of economic development incentives on capital
expenditures, to achieve these goals. In addition, the Company is contemplating
entering the inbound teleservices industry in 1997 either by acquisition of an
existing business or the building of a new center for this purpose.
There is no assurance that the Company's marketing efforts will generate
sufficient new business to fully utilize the additional call center capacity to
be created for 1997 or that businesses will continue to outsource their
telemarketing needs. Likewise, there is no assurance that the Company can
continue to grow its revenues in excess of industry growth averages. In
addition, inbound telemarketing is a highly competitive business requiring
techniques of operation and personnel skills that are different from the
Company's experience with outbound telemarketing, and there is no assurance that
the Company will undertake such an expansion in 1997 or that it will be
successful if it does so.
13
INDEPENDENT AUDITORS' REPORT
Board of Directors
ACI Telecentrics, Inc.
Minneapolis, Minnesota
We have audited the accompanying balance sheets of ACI Telecentrics, Inc.
(formerly Automated Communications, Inc.) as of December 31, 1995 and 1996 and
the related statements of earnings, shareholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1995 and 1996 and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 10, 1997
14
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 1995 1996
- - -----------------------------------------------------------------------------------------------
ASSETS (NOTE 2)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 67,483 $5,005,813
Trade receivables, less allowance for doubtful
accounts of $70,000 and $73,000, respectively 972,788 1,130,451
Other current assets 74,818 149,064
---------- ----------
Total current assets 1,115,089 6,285,328
PROPERTY AND EQUIPMENT (Note 3):
Furniture and fixtures 294,216 515,450
Equipment 1,372,213 2,264,289
Leasehold improvements 5,300 48,726
---------- ----------
1,671,729 2,828,465
Less accumulated depreciation 561,918 927,622
---------- ----------
Net property and equipment 1,109,811 1,900,843
OTHER ASSETS:
Restricted investments (Note 5) 300,000 --
Other 24,036 9,449
---------- ----------
Total other assets 324,036 9,449
---------- ----------
$2,548,936 $8,195,620
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit (Notes 2 and 6) $ 300,000 $ --
Trade accounts payable 387,335 520,318
Accrued expenses 136,002 176,975
Income taxes payable (Note 9) -- 144,200
Current portion of long-term debt and capital
lease obligations (Notes 2, 3, 4 and 6) 193,628 104,384
---------- ----------
Total current liabilities 1,016,965 945,877
LONG-TERM LIABILITIES:
Long-term debt and capital lease obligations,
less current portion (Notes 2, 3 and 6) 602,984 121,757
Deferred capital lease liabilities,
less current portion (Note 4) 107,000 156,000
Notes payable to officers (Note 5) 300,000 --
Deferred income taxes (Note 9) -- 206,412
---------- ----------
Total long-term liabilities 1,009,984 484,169
COMMITMENTS AND CONTINGENCIES (Notes 3 and 7)
SHAREHOLDERS' EQUITY (Note 6):
Common stock, no par value; 15,000,000 shares authorized;
4,200,000 and 5,705,000 issued and outstanding, respectively 1,000 6,577,563
Undesignated stock, no par value; 5,000,000 shares authorized;
none issued and outstanding -- --
Additional paid-in capital 25,567 --
Retained earnings 495,420 188,011
---------- ----------
Total shareholders' equity 521,987 6,765,574
---------- ----------
$2,548,936 $8,195,620
========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1995 AND 1996 1995 1996
- - ---------------------------------------------------------------------------------------
<S> <C> <C>
TELEMARKETING REVENUES $ 5,849,850 $ 9,991,427
COST OF SERVICES 3,042,001 5,309,753
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 2,450,015 3,848,730
----------- -----------
5,492,016 9,158,483
----------- -----------
OPERATING INCOME 357,834 832,944
OTHER INCOME (EXPENSE):
Interest income 6,570 62,090
Interest expense (94,001) (150,931)
Other, net (Note 8) (650) 109,962
----------- -----------
Total other (expense) income (88,081) 21,121
----------- -----------
INCOME BEFORE INCOME TAXES 269,753 854,065
----------- -----------
INCOME TAX EXPENSE:
Income Taxes - C Corp -- 132,600
Income Taxes - S Corp to C Corp Conversion -- 221,700
----------- -----------
Total income taxes -- 354,300
----------- -----------
NET INCOME $ 269,753 $ 499,765
=========== ===========
PRO FORMA DATA (Note 1):
Historical income before income taxes $ 269,753 $ 854,065
Proforma income taxes 108,000 349,400
----------- -----------
PRO FORMA NET INCOME $ 161,753 $ 504,665
=========== ===========
PRO FORMA NET INCOME PER SHARE $ .04 $ .11
=========== ===========
SHARES USED IN COMPUTING
PRO FORMA NET INCOME PER SHARE 4,288,000 4,566,600
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<TABLE>
<CAPTION>
STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1994 4,200,000 $ 1,000 $ 25,567 $ 331,683 $ 358,250
Net income 269,753 269,753
Dividends paid (Note 6) (106,016) (106,016)
--------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1995 4,200,000 1,000 25,567 495,420 521,987
Recapitalization 25,567 (25,567) --
Proceeds from sale of common stock,
net of offering costs of $1,146,742 1,505,000 6,378,258 6,378,258
Net income prior to conversion to C Corp.,
net of cumulative deferred income taxes
of $221,700 (Note 9) 311,754 311,754
Capitalization of retained earnings
in conjunction with conversion to C Corp 172,738 (172,738)
Net income subsequent to conversion to C Corp 188,011 188,011
Dividends paid (Note 6) (634,436) (634,436)
--------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1996 5,705,000 $ 6,577,563 $ -- $ 188,011 $ 6,765,574
========= =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996 1995 1996
- - --------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 269,753 $ 499,765
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 228,816 365,904
Amortization of deferred capital lease liabilities -- (49,600)
Deferred income taxes -- 206,412
Changes in operating assets and liabilities:
Trade receivables (334,833) (157,663)
Other current assets (37,001) (74,246)
Accounts payable and accrued expenses 4,299 173,956
Income taxes -- 144,200
----------- -----------
Net cash provided by operating activities 131,034 1,108,728
CASH FLOWS UTILIZED IN INVESTING ACTIVITIES:
Purchases of property and equipment (306,327) (610,185)
Decrease in other assets -- 14,387
(Purchase of) proceeds from restricted investments (300,000) 300,000
Repayments from officers 72,030 --
----------- -----------
Net cash used in investing activities (534,297) (295,798)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock -- 6,378,258
Checks written in excess of book balance (113,124) --
Net proceeds from (payments on) revolving line of credit 300,000 (300,000)
Proceeds from issuance of long-term debt 150,000 200,000
Repayments on long-term debt and capital leases (142,708) (1,218,422)
Proceeds from (payments to) officers 300,000 (300,000)
Dividends (Note 6) (106,016) (634,436)
----------- -----------
Net cash provided by financing activities 388,152 4,125,400
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,111) 4,938,330
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 82,594 67,483
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 67,483 $ 5,005,813
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH
TRANSACTION INFORMATION:
Cash paid for interest $ 93,390 $ 151,000
=========== ===========
Equipment acquired through capital leases $ 263,263 $ 546,551
=========== ===========
Income taxes paid -- $ 3,700
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - ACI Telecentrics, Incorporated (ACI) (formerly Automated
Communications, Incorporated and Affiliates) provides telephone-based sales and
marketing services primarily to the telecommunications, publishing, and
financial services industries. ACI was established in 1987 in Minneapolis,
Minnesota. Since that time, the Company has opened additional call center
locations in Twin Valley, Minnesota (August 1993); Valley City, North Dakota
(July 1995); Devils Lake, North Dakota (April 1996); and Redfield, South Dakota
(September 1996). Prior to June 1996, all of the call centers were operated as
affiliated corporations through common ownership. Effective June 28, 1996,
Automated Communications Incorporated and its affiliated companies were merged
to form ACI Telecentrics, Incorporated. The merger was recorded at the
historical carrying value of the assets, liabilities, and shareholders' equity.
These financial statements include the results of operations of all companies
for all periods presented.
REVENUE RECOGNITION - Revenues from telemarketing services are recognized
as services are provided, generally based on hours incurred.
CREDIT CONCENTRATIONS - The Company earned the following percentages of its
total revenues from major customers during the years ended December 31:
1995 1996
- - --------------------------------------------------------
Customer A - % 39 %
Customer B 17 5
Customer C 19 15
Customer D 19 10
At December 31, 1996, amounts receivable from four customers represented
45%, 19%, 11%, and 7% of total accounts receivable. The Company does not require
collateral to support customer receivables.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS - Short-term investments (which include government
securities and commercial paper) that generally have a maturity of three months
or less from the date of purchase are classified as cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment are carried at cost.
Depreciation is based on the straight-line method over estimated useful lives of
the assets ranging from five to seven years.
RESTRICTED INVESTMENTS - Restricted investments consist of certificates of
deposit and are carried at cost. The carrying value approximates its fair value
due to the market rate of interest.
FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS - The estimated fair value
of long-term debt, capital lease obligations, and amounts due to officers
approximates its carrying value due to variable rates of interest or fixed rates
which approximate current market rates. The fair value of all other financial
instruments, other than investments as discussed above, approximates the
carrying value due to the short-term nature of the financial instruments.
INCOME TAXES - Prior to October 21, 1996, the effective date of the initial
public offering, the Company was a Subchapter S Corporation. As a result, any
income tax liability was the sole responsibility of the individual stockholders,
and no provision for income taxes or income tax liability was recorded in the
financial statements.
PRO FORMA STATEMENT OF EARNINGS - Effective October 21, 1996, the Company
terminated its status as an S Corporation and was subject to federal and state
income taxes thereafter. Accordingly, for informational purposes, the
accompanying statements of earnings for the years ended December 31, 1995 and
1996 include unaudited pro forma information for income taxes which would have
been recorded if the Company had
19
been a C Corporation for all periods presented, based on the tax laws in effect
during the respective periods.
PRO FORMA NET INCOME PER COMMON SHARE - Pro forma net income per common
share for the years ended December 31, 1995 and 1996 is computed using the
weighted average number of shares of common stock and stock options, outstanding
during the periods presented after giving effect to the application of
Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No.
83. Pursuant to SAB No. 83, common stock issued by the Company at prices less
than the initial public offering price during the 12 months immediately
preceding the initial public offering, plus stock options granted at exercise
prices less than the initial public offering price during the same period, have
been included in the calculation of shares used in the calculation of net income
per share as if they were outstanding for all periods prior to the initial
public offering, using the treasury stock method. In addition, shares which
would have been issued to generate proceeds for the payment of estimated
distributions to S Corporation shareholders (using the $5.00 per share initial
public offering price), were deemed to be outstanding for all periods presented.
RECLASSIFICATION - Certain prior-year items have been reclassified to
conform with the 1996 presentation. Such reclassifications had no effect on net
income or shareholders' equity as previously reported.
2. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT
At December 31, 1996, the Company had a revolving line of credit agreement for
$400,000, which expires on July 5, 1997. Interest on outstanding borrowings is
calculated based upon the First Bank National Association Reference Rate
(FBNARR) + 1.5% (9.75% as of December 31, 1996). The borrowing base, as defined
within the agreement, is the lesser of $400,000 or 75% of the aggregate amount
of eligible accounts receivable. At December 31, 1995 and 1996, the outstanding
balances under the revolving line of credit agreement were $300,000 and $0,
respectively.
Long-term debt consists of the following
AT DECEMBER 31: 1995 1996
- - ----------------------------------------------------------
Promissory Notes (Note 4) -
monthly payments of $3,345,
including interest at 6%,
due June 15, 1999; secured
by assets of the Company
and guaranteed by the two
majority stockholders $ 126,418 $ 92,958
Promissory Note (Note 4) -
monthly payments of $967,
including interest at 6%,
due May 1, 2001 - 44,166
Promissory Note -
monthly payments of
$3,219, including interest
at the FBNARR +1.0%,
due October 15, 2000;
secured by assets of the
Company and guaranteed
by the two majority
stockholders; paid in 1996 147,928 -
Promissory Note -
monthly payments of
$2,031, including interest
at the New York Prime + 2%,
due September 20, 1998;
secured by assets of the
Company; paid in 1996 62,202 -
-----------------------
336,548 137,124
Less current maturities 80,223 44,679
-----------------------
$ 256,325 $ 92,445
=======================
20
At December 31, 1996, aggregate maturities of long-term debt during the
next five years are as follows:
YEARS ENDING DECEMBER 31:
- - ----------------------------------------------------------
1997 $ 44,679
1998 47,435
1999 30,035
2000 10,955
2001 4,020
The revolving line of credit and various notes payable are subject to
certain covenants, including a net worth ratio, and a restriction on the payment
of dividends. At December 31, 1996, the Company was in compliance with such
covenants.
3. LEASES
The Company has operating leases for certain office space and call centers and a
capital lease for certain equipment utilized at the corporate office. Several of
these leases include renewals.
Future payments under the capital lease obligation at December 31, 1996 are
as follows:
YEARS ENDING DECEMBER 31:
- - ----------------------------------------------------------
1997 $ 13,416
1998 13,416
1999 13,416
2000 8,945
-----------
49,193
Less amount representing interest 11,577
-----------
37,616
Less current portion 8,304
-----------
$ 29,312
===========
Assets under capital leases had a carrying value of approximately $482,000
and $28,200 at December 31, 1995 and 1996, respectively. Cash generated from the
Company's initial public offering (Note 6) was utilized to reduce outstanding
lease obligations of approximately $810,000, including all of the assets
acquired by capital leases in 1996.
At December 31, 1996, future minimum obligations under operating leases
that have initial noncancelable lease terms in excess of one year, not including
shared operating costs, are as follows:
YEARS ENDING DECEMBER 31:
- - ----------------------------------------------------------
1997 $ 223,000
1998 222,000
1999 209,000
2000 142,000
2001 29,000
-----------
$ 825,000
===========
Rent expense incurred on operating leases was approximately $195,000 and
$280,000 for the years ended December 31, 1995 and 1996, respectively.
4. GRANT AGREEMENTS
One of the Company's strategies is to locate its call centers in small, rural
communities in the Upper Midwest. These communities often provide advantageous
economic incentives for locating facilities in these areas. These incentives
include grants, low interest loans, favorable facility leases, funds for
employee training and equipment subsidies.
In July 1995, in connection with the opening of the Valley City, North
Dakota facility, the Company received assistance from Valley City Development
Corporation, including $25,000 to reimburse start-up costs, approximately
$150,000 in leasehold improvements, and a $107,000 equipment lease for which the
lease payments will be forgiven on a monthly basis over the life of the lease if
the Company continues operating in Valley City.
In April 1996, the Company opened a call center in Devils Lake, North
Dakota. The Company received assistance from Devils Lake Community Development
Corporation, including $25,000 for reimbursement of start-up costs, $150,000 in
equipment leases which will be forgiven over five years, $150,000 in leasehold
improvements, and a 6%, $50,000 loan.
21
In September 1996, the Company opened a call center in Redfield, South
Dakota. The Company received a $500,000 assistance grant from the Redfield
Industrial Development Corporation including $200,000 of leasehold improvements
and $300,000 for equipment.
The reimbursement of start-up costs was offset against the corresponding
expense, and the payments for leasehold improvements and the Redfield equipment
reduced the recorded assets. The two equipment leases are recorded as deferred
liabilities as of December 31, 1995 and 1996 and are being amortized as a
reduction of the related depreciation expense when amounts are forgiven which is
scheduled as follows:
1997 $ 51,400
1998 51,400
1999 51,400
2000 40,700
2001 12,500
In most cases, the Company is obligated to continue operating the call
center for five years from when it was opened and certain loans and leases are
guaranteed by the two majority shareholders.
5. RELATED-PARTY TRANSACTIONS
In December 1995, the Company borrowed $300,000, $150,000 from each of the two
majority shareholders. These borrowings accrued interest at 7.35%. The proceeds
of the original borrowings were invested in certificates of deposit bearing
interest at 5.35%. In July 1996, the certificates of deposit were redeemed, and
the proceeds were used to repay the borrowings. Interest paid on these
borrowings was approximately $11,000 in 1996. The certificates of deposit were
collateral for certain debt owed by the shareholders.
Interest on advances to shareholders totaled $6,570 and $0 for the years
ended December 31, 1995 and 1996, respectively.
6. STOCKHOLDERS' EQUITY
COMMON STOCK - Effective June 28, 1996, the Company amended its Articles of
Incorporation to increase its authorized common stock to 15,000,000 shares and
authorized 5,000,000 shares of undesignated stock. In addition, all issued
common stock was canceled, 4,200,000 shares of new, no par common stock was
issued and additional paid-in capital was reclassified to common stock. All
references to the number of common shares and per-share amounts in the
accompanying financial statements have been retroactively restated to reflect
the 4,200,000 shares.
DIVIDENDS - During 1995 and 1996, dividends of $106,016 and $634,436,
respectively, were paid to the two majority shareholders related to operations
of the Company prior to its conversion to a C Corporation.
INITIAL PUBLIC OFFERING - During 1996, the Company completed an
underwritten public offering of 1,505,000 shares of its common stock (including
105,000 shares of the underwriter's overallotment) at a public offering price of
$5.00 per share ("the Offering"). The net proceeds of the Offering, after
related expenses, were approximately $6,378,000. A portion of the net proceeds
from the offering was used to repay approximately $1,387,000 of outstanding
short-term and long-term indebtedness and capital lease obligations.
EMPLOYEE STOCK PURCHASE PLAN - Effective June 30, 1996, the Company adopted
the 1996 Employee Stock Purchase Plan (the Stock Purchase Plan), which allows
participants to purchase common stock at 85% of the common stock's fair market
value at the commencement or termination of two six-month phases each year.
Employees must have six months of service to be eligible to participate in the
Stock Purchase Plan. The Board of Directors has reserved 100,000 shares of
common stock for issuance under the Stock Purchase Plan. No shares were issued
under the plan in 1996.
STOCK OPTIONS - Effective June 30, 1996, the Company adopted the 1996 Stock
Option Plan (the Stock Option Plan), which authorized the grant of up to 280,000
shares of the Company's common stock in the form of incentive stock options and
nonqualified stock options. The Stock Option Plan requires that the exercise
price of all options granted be
22
the fair market value of the Company's common stock on the date of grant.
The following table summarizes stock option activity:
SHARES UNDER WEIGHTED AVERAGE
OPTION PRICE PER SHARE
- - -----------------------------------------------------------
Balance at
December 31,
1994 and 1995 - -
Options granted 266,000 $4.67
------------------------------
Balance at
December 31, 1996 266,000 $4.67
==============================
Shares exercisable at
December 31, 1996 123,500 $4.24
==============================
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation". The Company has
elected to continue following the accounting guidance of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" for measurement
and recognition of stock-based transactions with employees. No compensation cost
has been recognized for options issued under the Stock Option Plan because the
exercise price of all options granted was at least equal to the fair value of
the common stock on the date of grant. Had compensation cost for the stock
options issued to certain directors and employees been determined based on the
fair value at the grant date, consistent with the provisions of SFAS No. 123,
the Company's 1996 pro forma net income would have been decreased to the pro
forma, as adjusted amount indicated below:
PER
AMOUNT SHARE
- - ----------------------------------------------------------
Pro forma net income $ 504,665 $ .11
========================
Pro forma net income,
as adjusted $ 366,107 $ .08
========================
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions and results:
Dividend yield 0%
Expected volitility 5%
Risk free interest rate 6%
Expected life of options 10 Years
Fair value of options on grant dates $ 2.06
STOCK WARRANTS - On October 21, 1996, warrants to purchase 140,000 shares
of Common Stock (the "Underwriter's Warrants") were issued in connection with
the initial public offering. The Underwriter's Warrants may be exercised in
whole or in part from October 21, 1997 through October 20, 2001, at an exercise
price of $6.00 per share.
7. COMMITMENTS & CONTINGENCY
EMPLOYMENT AGREEMENTS - Each of the two majority share- holders has entered into
an employment agreement with the Company providing for a minimum annual base
salary of $175,000 and for 24 months' continuation of base salary and health
benefits if employment is terminated by either party for any reason during the
initial two-year term of the agreement. The agreements also require the Company
to pay premiums for life insurance intended to fund the buy/sell agreements to
which the two majority shareholders are parties, as described below. If
employment is terminated by either party following the initial two-year term,
the two majority shareholders will receive 12 months' salary and health
benefits. These agreements require each of the two majority shareholders to vote
his shares for election of the other to serve on the Company's Board of
Directors. Each of these agreements includes strict confidentiality protections
and prohibits each of the two majority shareholders from competing with the
Company for a period equal to the period during which the Company is obligated
to make severance payments.
BUY/SELL AGREEMENTS - Each of the two majority shareholders has entered
into a Buy/Sell Agreement (the Agreement) with the Company and each other. Under
this agreement, the Company may have the option to purchase shares from the two
shareholders.
23
8. OTHER INCOME
Included in the other income for the year ended December 31, 1996 is a gain of
approximately $101,000 relating to the settlement of a contract with a former
client.
9. INCOME TAXES
Prior to October 21, 1996 the effective date of the Initial Public Offering
("IPO"), the Company had been treated for federal and state income tax purposes
as an S Corporation under Subchapter S of the Internal Revenue Code of 1986, as
amended (the "Code") and comparable state tax laws. As a result, earnings of the
Company had been taxed for federal and state income tax purposes directly to the
shareholders of the Company, rather than to the Company. In connection with the
IPO, the Company was converted from an S Corporation to a C Corporation under
the Code. In addition, as a result of the termination of its S Corporation
status, in accordance with SFAS No. 109, "Accounting for Income Taxes," the
Company recorded a net deferred income tax liability and corresponding deferred
income tax expense of $221,700.
The provision for income taxes for the period from October 21, 1996 to
December 31, 1996 consists of the following:
Current:
Federal $ 116,500
State 31,400
----------
147,900
Deferred (15,300)
----------
Income taxes expense C Corporation 132,600
Conversion from S Corporation
to C Corporation 221,700
----------
$ 354,300
==========
Differences between the provision for income taxes at the federal statutory
rate and the recorded provision for the year ended December 31, 1996 are
summarized as follows:
Income taxes at federal statutory rate $ 299,000
State income taxes, net of federal benefit 43,000
S Corporation taxes (216,800)
Conversion from S Corporation
to C Corporation 221,700
Other, net 7,400
----------
$ 354,300
==========
Net deferred tax liabilities at December 31, 1996 are comprised of the
following:
Excess of tax over book depreciation $ 179,000
Allowance for doubtful accounts (29,200)
Cash to accrual accounting 56,612
----------
$ 206,412
==========
24
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-17281 and No. 333-17283 of ACI Telecentrics Incorporated on Form S-8 of our
report dated February 10, 1997 incorporated by reference in this Annual Report
on Form 10-KSB of ACI Telecentrics Incorporated for the year ended December 31,
1996.
Deloitte & Touche LLP
Minneapolis, Minnesota
March 17, 1997
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,005,813
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0
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<INCOME-CONTINUING> 499,765
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