UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
XXX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to __________
Commission File Number 000-21557
ACI Telecentrics, Incorporated
- --------------------------------------------------------------------------------
(Exact name of business issuer as specified in its charter)
Minnesota 41-1572571
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3100 West Lake Street, Suite 300, Minneapolis, MN 55416-4510
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(612) 928-4700
- --------------------------------------------------------------------------------
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES _X_ NO ___
The Company had 5,708,583 shares of common stock, no par value per
share, outstanding as of October 31, 1997.
Transitional Small Business Disclosure Format (Check One ): YES __ NO X
<PAGE>
ACI TELECENTRICS, INCORPORATED
FORM 10-QSB
TABLE OF CONTENTS
Page #
------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6 and 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 to 11
PART II OTHER INFORMATION 12
Item 6 Exhibits and Reports on Form 8-K
a. Exhibits
b. Reports on Form 8-K
Signature Page 13
<PAGE>
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
ACI TELECENTRICS, INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
1997 1996 1997 1996
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
TELEMARKETING REVENUES $ 3,427,756 $ 2,159,375 $ 10,680,423 $ 6,191,437
COST OF SERVICES 1,986,911 1,286,135 5,629,825 3,233,829
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,853,454 1,047,252 4,723,463 2,630,240
------------ ------------- ------------- ------------
OPERATING (LOSS) INCOME (412,609) (174,012) 327,135 327,368
OTHER INCOME (EXPENSE)
Interest income 48,657 10,168 159,787 12,101
Interest expense (2,996) (53,509) (10,502) (128,664)
Other, net 988 (2,392) 22,618 (2,392)
------------ ------------- ------------- ------------
Total other income (expense) 46,649 (45,733) 171,903 (118,955)
------------ ------------- ------------- ------------
INCOME (LOSS) BEFORE TAXES (365,960) (219,745) 499,038 208,413
INCOME TAX (BENEFIT) EXPENSE (139,100) -- 189,600 --
------------ ------------- ------------- ------------
NET (LOSS) INCOME $ (226,860) $ (219,745) $ 309,438 $ 208,413
============ ============= ============= ============
PRO FORMA DATA
Historical (loss) income
before income taxes $ (365,960) $ (219,745) $ 499,038 208,413
Pro forma income taxes (139,100) (88,000) 189,600 83,000
------------ ------------- ------------- ------------
Pro forma net (loss) income $ (226,860) $ (131,745) $ 309,438 $ 125,413
============ ============= ============= ============
Pro forma net (loss) income per share $ (.04) $ (0.03) $ .05 $ .03
=========== ============ ============= ============
Shares used in computing Pro forma
net (loss) income per share 5,709,000 4,288,000 5,716,000 4,288,000
============ ============= ============= ============
</TABLE>
See notes to consolidated financial statements
<PAGE>
ACI TELECENTRICS, INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,869,766 $ 5,005,813
Restricted investment 486,990 --
Trade receivables, less allowance for
doubtful accounts of $114,000 and $73,000
respectively 1,807,742 1,130,451
Other current assets 202,726 149,064
----------- -----------
Total Current Assets 4,367,224 6,285,328
PROPERTY AND EQUIPMENT, NET 2,983,256 1,900,843
GOODWILL, NET OF AMORTIZATION
OF $29,000 2,507,635 --
OTHER ASSETS 49,583 9,449
----------- -----------
$ 9,907,698 $ 8,195,620
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 276,762 $ 520,318
Accrued expenses 669,655 176,975
Income taxes payable (156,178) 144,200
Current portion of long-term debt and
capital lease obligations 857,177 104,384
----------- -----------
Total current liabilities 1,647,416 945,877
LONG TERM LIABILITIES:
Long-term debt and capital lease obligations,
less current portion 829,246 121,757
Deferred capital lease liabilities 117,451 156,000
Deferred income taxes 223,290 206,412
----------- -----------
Total long-term liabilities 1,169,987 484,169
SHAREHOLDERS' EQUITY:
Common stock, no par value 6,592,846 6,577,563
Retained earnings 497,449 188,011
----------- -----------
Total shareholders' equity 7,090,295 6,765,574
----------- -----------
$ 9,907,698 $ 8,195,620
=========== ===========
</TABLE>
See notes to consolidated financial statements
<PAGE>
ACI TELECENTRICS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 309,438 $ 208,413
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation and amortization 436,921 250,857
Amortization of deferred capital leases (38,549) (7,500)
Deferred income taxes 16,878 --
Changes in operating assets and liabilities:
Trade receivables (677,291) (496,168)
Other current assets (53,662) (201,268)
Accounts payable and accrued expenses 249,124 639,031
Income taxes (300,378) --
----------- -----------
Net cash used in operating activities (57,519) 393,365
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted investment (486,990) --
Purchase of property and equipment (1,109,189) (297,202)
Payments for business acquired (1,417,780)
Proceeds from sale of restricted investment 300,000
(Increase) Decrease in other assets (40,134) (20,766)
----------- -----------
Net cash used in investing activities (3,054,093) (17,968)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds from revolving line of credit -- 100,000
Net proceeds from issuance of common stock 15,283 --
Payments on notes payable to officers -- (300,000)
Repayments of long term debt and capital leases (39,718) (219,177)
----------- -----------
Net cash used in financing activities (24,435) (419,177)
----------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (3,136,047) (43,780)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 5,005,813 67,483
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,869,766 $ 23,703
=========== ===========
</TABLE>
See notes to consolidated financial statements
<PAGE>
ACI TELECENTRICS, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1. The consolidated balance sheet of ACI Telecentrics, Incorporated and
Subsidiary ("Company") as of September 30, 1997 and the related
statements of earnings and cash flows for the three months and nine
months periods ended September 30, 1997 and 1996, have been prepared by
the Company without being audited. In the opinion of management, these
statements reflect all adjustments consisting of all normal recurring
adjustments necessary to present fairly the consolidated financial
position of ACI Telecentrics, Incorporated as of September 30, 1997 and
the results of operations and cash flows for all periods presented. As
described in note 4 below, the Company acquired all of the outstanding
common stock of Encyclopaedia Britannica Communication Corporation
("EBCC") on August 1, 1997. Accordingly the consolidated financial
statements include the results of operations of this subsidiary from
that date. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
Therefore, these financial statements should be read in conjunction
with the financial statements and notes thereto included in the
Company's 1996 Form 10-KSB. The results of operations for interim
periods are not necessarily indicative of results which will be
realized for the full fiscal year.
2. Prior to October 21, 1996, the effective date of the Company's 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. Therefore, no provision for income taxes or
income tax liability was recorded in the financial statements for the
three and nine months ended September 30, 1996.
On 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 three and nine months ended September
30, 1996 include pro forma information for income taxes which would
have been recorded if the Company had been a C Corporation for the
three and nine months ended September 30, 1996 based on the tax laws in
effect at that time.
3. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share". This Statement specifies the computation, presentation, and
disclosure requirements for earnings per share. This Statement is
effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Adoption by the Company
in 1997 is not expected to have a material impact on the earnings per
share computation.
4. On August 1, 1997 the Company acquired all of the outstanding common
stock of EBCC. The acquisition was accounted for using the purchase
method of accounting. The purchase price consists of (i) $1,250,000
cash paid at closing; and (ii) four quarterly payments (each an
"Earn-Out Payment," cumulatively the "Total Earn-Out Payment"). The
amount of the Total Earn-Out Payment will depend on the amount of
revenues generated by certain EBCC clients and prospective clients
during the period from January 1, 1998 through December 31, 1998 (the
"Earn-Out Revenues"). For financial statements and presentation the
aggregate purchase price of EBCC is estimated to be approximately
$2,750,000. The excess of Purchase Price over Net Assets Acquired is
being amortized over 15 years using the straightline method. The
Company
<PAGE>
has provided the seller with a $500,000 security interest in a Treasury
Bill owned by the Company as a guaranty of payment of the remaining
installments of purchase price.
The following unaudited pro forma financial information for the Company gives
effect to the EBCC acquisition as if it had occurred at the beginning of periods
reported:
Nine Months Ended September 30th
------------------------------------
1997 1996
---------------- -----------
Net Revenues $ 14,065,802 $11,829,437
================ ===========
Net (Loss) Income $ (111,502) $ 400,047
================ ===========
Net (Loss) Income per share $ (.02) $ .09
================ ===========
Shares used in computing
pro forma net income per share 5,716,000 4,288,000
================ ===========
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Revenues from telemarketing services are recognized as these services
are performed and are generally based either on an hourly rate or sales
performance. Cost of services includes salary and commissions for telephone
sales representatives ("TSR's"), 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.
As of September 30, 1997 the telemarketing services provided by the
Company are performed in eight leased call centers located at Twin Valley,
Minnesota; Valley City and Devils Lake, North Dakota; Redfield and Pierre, South
Dakota; Chadron, Nebraska; Lombard, Illinois; and Merrillville, Indiana. These
eight call centers collectively have 482 workstations, where over 750 TSR's are
employed as of September 30, 1997.
On August 1, 1997. the Company acquired all of the common stock of
Encylcopaedia Britannica Communications Corporation ("EBCC"). The transaction
was recorded under purchase accounting and results of operations of EBCC
subsequent to the acquisition are included in the consolidated financial
statements. The acquisition included two call centers, 230 work stations, and
290 TSR's which are included in the amounts reported above for September 30,
1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Revenues for the three months ended September 30, 1997 were $3,427,756
a 59% increase over the 1996 third quarter revenues of $2,159,375. Billable TSR
hours also increased by 59%, primarily as a result of eight call centers
operating in third quarter 1997 compared to five in the third quarter 1996. The
Company operated 482 call stations in the third quarter 1997 compared to 280
call stations in the third quarter of 1996.
One client represented 56.9% of 1997 third quarter revenues and is
expected to represent a significant portion of the Company's business during the
balance of 1997.
Cost of services in the third quarter of 1997 was $1,986,911 or 58% of
revenues compared to $1,286,135 or 59.6% of revenues in the third quarter of
1996. The decrease in cost of service as a percentage of revenues in 1997
compared to 1996 was the result of the Company reducing the amount of
outsourcing to other qualified telemarketing companies by 6.8% in the third
Quarter of 1997 compared to third Quarter 1996. The cost of services as a
percentage of revenue was negatively impacted by several contracts which were
billed to customers on a per item or sales performance basis rather than the
more standard hourly basis. These contracts had the effect of lowering the
average hourly rate for the quarter significantly below normal rates thus
reducing gross margin.
Selling, general and administrative expenses were $1,853,454 in 1997
compared to $1,047,252 in 1996. This 77% increase was primarily related to the
new call centers which were not open in the third quarter of 1996 and the
additional personnel required by revenue growth. In addition, the Company had
additional operating costs associated with the acquisition of EBCC in the third
quarter as it dedicated resources to integrating customers and technologies. The
time and resources devoted to the integration of EBCC should decrease in the
fourth quarter and are expected to be completed by year-end. The Company also
had some costs associated with closing its Minneapolis call center in the
quarter
<PAGE>
simultaneous with the opening of a new center in Chadron, Nebraska. The Company
closed its Minneapolis center to concentrate on its stated commitment to
locating call centers in smaller communities. Minneapolis was one of the
smallest of the Company's call centers with a total of 42 stations. As a
percentage of revenues, selling, general and administrative expenses were 54.1%
in the third quarter of 1997 compared to 48.5% in the third quarter of 1996.
As a result of these factors, an operations loss of $412,609 (12% of
revenues) was reported in third quarter 1997, versus an operating loss of
$174,012 (8.1% of revenue) in third quarter 1996. Other income and expense
improved $92,382 in the third quarter of 1997 over the third quarter of 1996.
The Company was favorably impacted by interest earnings on cash generated from
the initial public offering ("IPO") which reduced debt and added interest
bearing investments to the balance sheet. The net change in interest
income/expense was $89,002 in the third quarter of 1997 versus the third quarter
of 1996. The net loss in 1997 was $226,860 ($0.04 per share) versus $131,745
($0.03 per share) in 1996.
Prior to October 21, 1996, the date of the 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 periods ended September 30, 1996 include pro forma
information for income taxes which would have been recorded if the Company had
been a C Corporation for the period, based on the tax laws in effect during
those periods. Pro forma net income includes an estimated federal and state tax
provision of 40%.
NINE MONTHS ENDED SEPTEMBER 30, 1997, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenues for the nine months ended September 30, 1997 were $10,680,423,
a 72.5% increase over the nine months ended September 30, 1996 of $6,191,437.
Billable TRS hours increased by 79%, primarily as a result of eight call centers
operating for a portion of the nine months ending September 30, 1997 compared to
five for a portion of the nine months ending September 30, 1996. The Company
operated an average of 335 call stations during the nine months ending September
30, 1997, compared to an average of 195 call stations in the nine months ending
September 30, 1996. The average hourly billing rate for the nine months of 1997
was approximately 3.7% less than the 1996 rate as the Company adjusted its
pricing to compete for large volume accounts, and as a result of the 1997 third
quarter negative impact of several sales contracts that were billed on a per
item or performance basis rather than the more standard hourly basis.
Approximately 64.2% of the 1997 nine month revenues were generated by one
client.
Cost of services for the nine months ended September 30, 1997 were
$5,629,825 or 52.7% of revenues compared to $3,233,829 or 52.2% of revenues for
the nine months ended September 30, 1996. The .5% increase in the cost of
services as a percentage of revenue in 1997 compared to 1996 was primarily the
result of a 3.7% reduction in the average hourly billing rate and rising labor
costs for the nine months ending September 30, 1997.
Selling, general and administrative expenses were $4,723,463 for the
nine months ending September 30, 1997 compared to $2,630,240 in 1996. The
increase of 79.6% was primarily related to the call centers that were not yet
open in the first nine months of 1996, and additional expenses associated with
the acquisition of the EBCC and the additional personnel required by revenue
growth. Primary components of the increase were an increase in salaries, payroll
taxes and related benefits of $1,171,875, depreciation of $167,738, and rent of
123,496, generally attributable to the additional call centers.
As a result of these factors, operating income was $327,135 (3.1% of
revenues) versus $327,368 (5.3% of revenue). Other income and expense improved
$290,858 in the nine months of 1997 over 1996. The Company was favorably
impacted by interest earnings on cash generated from the IPO which
<PAGE>
reduced debt and added interest bearing investments to the balance sheet. The
net change in interest income/expense was $265,848. As a result, net income was
$309,438 ($0.05 per share) in 1997 compared to $125,413 ($0.03 per share) in
1996.
Prior to October 21, 1996, the date of the 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 periods ended September 30, 1996, include pro forma
information for income taxes which would have been recorded if the Company had
been a C Corporation for the period, based on the tax laws in effect during
those periods. Pro forma net income includes an estimated federal and state tax
provision of 40%.
LIQUIDITY AND CAPITAL RESOURCES
The balance sheet of the Company continues to be strong, however, the
cash and cash equivalents position of the Company has declined to $1,869,766,
compared to $5,005,813 at December 31, 1996. This decrease at September 30, 1997
is primarily the result of the Company investing $1,109,189 in equipment and
technologies, making payments of $1,417,780 in connection with the acquisition
of EBCC, and providing a security interest in a treasury bill valued at $486,990
for future payments anticipated to be made in connection with the acquisition of
EBCC.
For the nine months ended September 30, 1996, cash and cash equivalents
position declined $43,780 reflecting cash provided by operating activities of
$393,365 offset by cash used by investing activities of $17,968 and cash used in
financing activities of $419,177.
The Company has historically received private and government sector
economic development grants in connection with the opening of call centers. The
Company has entered into an agreement with the State of Nebraska and certain
Nebraska communities to provide for grants of approximately $1.2 million in
connection with the opening of 3 call centers by April 1998.
The Company believes that funds available at September 30, 1997
together with funds which should be generated from future operations, economic
development grants, equipment and finance leases, and revolving credit
arrangements will be sufficient to finance its current operations and planned
capital expenditures.
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 fluctuations 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, opening of new call centers, and the additional selling,
general and administrative expenses to acquire and support such new business.
OUTLOOK
Certain of the statements 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.
<PAGE>
Management expects that its major client in the telecommunications
industry will continue to account for a significant portion of the Company's
revenues in 1997 and 1998. There is no assurance that this client, together with
other major clients, will continue to generate sufficient new business to meet
expectations or to fully utilize the Company's current call center capacity or
the additional call center capacity that is being added in 1998.
<PAGE>
ITEM 6 - OTHER INFORMATION
B. On August 1, 1997, the Company acquired all the common stock of
Encylcopaedia Britannica Communication Corporation as more fully
described in Form 8K which was filed on August 12, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACI TELECENTRICS, INCORPORATED
Registrant
Dated November 13, 1997 By: /S/ STEVEN A KAHN
------------------------------
Steven A. Kahn
Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Dated November 13, 1997 By: /R/ RICK N. DIAMOND
------------------------------
Rick N. Diamond
Chief Executive Officer and
Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,869,766
<SECURITIES> 0
<RECEIVABLES> 1,921,742
<ALLOWANCES> 114,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,367,224
<PP&E> 4,319,624
<DEPRECIATION> 1,336,368
<TOTAL-ASSETS> 9,907,698
<CURRENT-LIABILITIES> 1,647,416
<BONDS> 946,697
0
0
<COMMON> 6,592,846
<OTHER-SE> 497,449
<TOTAL-LIABILITY-AND-EQUITY> 9,907,698
<SALES> 0
<TOTAL-REVENUES> 10,680,423
<CGS> 5,629,825
<TOTAL-COSTS> 10,353,288
<OTHER-EXPENSES> (22,618)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (149,285)
<INCOME-PRETAX> 499,038
<INCOME-TAX> 189,600
<INCOME-CONTINUING> 309,438
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 309,438
<EPS-PRIMARY> .05
<EPS-DILUTED> 0
</TABLE>
