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, 1998
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. [ ]
Issuer's revenues for its most recent fiscal year: $15,035,522.
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of March 9, 1999 was approximately $1,350,000 based upon the
average of the closing bid and asked prices of the Registrant's Common Stock on
such date.
There were 5,742,812 shares of Common Stock, no par value, outstanding as of
March 9, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference pursuant to Rule 12b-23: Portions of the
Registrant's Proxy Statement for its 1999 Annual Meeting of Shareholders are
incorporated by reference into Items 9, 10, 11 and 12 of Part III, respectively.
Transitional Small Business Disclosure Format (check one). Yes [ ] No [ X ]
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I N D E X
Description
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PART I
ITEM 1. DESCRIPTION OF BUSINESS...........................................................................1
ITEM 2. DESCRIPTION OF PROPERTY...........................................................................3
ITEM 3. LEGAL PROCEEDINGS.................................................................................3
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................................4
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................................4
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............5
ITEM 7. FINANCIAL STATEMENTS..............................................................................6
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............27
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT................................................................................27
ITEM 10. EXECUTIVE COMPENSATION..........................................................................27
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................27
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................27
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................................................27
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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. As of December 31, 1998, the Company operated 482 outbound
workstations in nine call centers located in Minnesota, North Dakota, South
Dakota, Nebraska and Indiana.
Prior to August 1, 1997, the Company had focused primarily on the
telecommunications, publishing and financial services industries. On August 1,
1997, the Company acquired all of the outstanding common stock of Encyclopaedia
Britannica Communications Corporation ("EBCC"), which operated call centers in
Lombard, Illinois and Merrillville, Indiana. With the acquisition of EBCC, the
Company began to offer services to the insurance industry. In the
telecommunications industry, the Company markets caller ID services to the
customers of Regional Bell Operating Companies. In 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. In the insurance industry, the Company markets specified insurance
products for its insurance company clients.
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. Many companies are choosing to use telemarketing for
customer retention, customer service and customer care programs in addition to
the traditional sales programs. 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 1998, businesses within the telecommunications,
publishing, financial services and insurance 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 1987. ACI has leveraged its expertise in this market to secure
programs in 1998 with US West and GTE. The Company's principal
telecommunications customer in 1998 was GTE.
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, Intertec Publishing and Cowles Creative Media, Incorporated.
FINANCIAL SERVICES. The Company entered the financial services segment of the
market in 1988. ACI provides telemarketing services for the credit card and non
credit card financial segments as well as fee-based segments such as membership
clubs. Types of telemarketing services performed for these clients include
customer acquisition, activation and retention, selling of discounted travel and
shopping clubs, debit card acquisition or upgrade, home equity loan lead
generation and pre-approved lines of credit. The Company has conducted
telemarketing services for such companies as Novus Services, Cendant and
Comcepts Group.
INSURANCE. ACI provides insurance companies with a wide range of telemarketing
services, including upgrading current policies, acquiring new customers and
retaining current customers. The Company has conducted telemarketing
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services for such companies as Providian and Union Fidelity.
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 directors. The Company attracts clients through its sales force 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) direct prospecting by our sales force.
PRINCIPAL CUSTOMERS
In 1998, the Company's three largest clients and the percentage of 1998
revenues attributable to such clients were GTE, one of the nations largest
telephone operating companies (19.1%), Cahners Publishing, a publisher of trade
publications (15.2%) and Kipany Productions, a marketer of caller ID systems and
other services for Regional Bell Operating Companies (11%).
COMPETITION
The telemarketing industry is highly competitive, but also continues to
be 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., Aegis Communications
Group 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.
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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. In addition, the Company is required to employ licensed insurance
agents to make sales of insurance products in the states where such employees
are licensed, and the Company is required to be licensed as an insurance agency
in certain states.
PERSONNEL
The Company had approximately 463 full and part time employees as of
December 31, 1998. 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 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 nine call center facilities in the Midwest.
Information related to those call centers is as follows:
YEAR OPENED/ NUMBER OF
LOCATION ACQUIRED TERM EXPIRES WORKSTATIONS
- -------- --------- ---- ------- ------------
Twin Valley, MN 1993 5 yr 8/03 40
Valley City, ND 1995 5 yr 6/00 48
Devils Lake, ND 1996 5 yr 4/01 60
Redfield, SD 1997 5 yr 8/01 48
Pierre, SD 1997 5 yr 4/02 40
Chadron, NE 1997 10 yr 7/07 60
Valentine, NE 1998 10 yr 11/07 48
Ogallala, NE 1998 10 yr 1/08 48
Merrillville, IN 1997 Month to Month N/A 90
-------
Total outbound workstations at December 31, 1998 482
=======
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is its property the subject of, any
material pending legal proceeding.
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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 1998.
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 36 Chairman of the Board, Chief Executive Officer,
Secretary, and Director
Gary B. Cohen 37 President, Chief Financial Officer and Director
Dana A. Olson 37 Chief Operating Officer
Lois J. Dirksen 43 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 has
held the position of Chief Financial Officer since November 1998. 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.
DANA A. OLSON joined ACI in September 1990, serving as shift manager
before becoming Operations Manager in April 1991 and Vice President of
Operations in March 1994. Mr. Olson was named Chief Operating Officer June 1,
1998. Mr. Olson attended Mankato State University, majoring in Business
Administration.
LOIS J. DIRKSEN joined ACI as a Vice President in May 1995 and became
Vice President of Sales 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.
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
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sets forth the high and low bid prices for the Company's Common Stock as
reported by Nasdaq. The bid quotations represent interdealer prices without
retail mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions.
Year Ended December 31, 1998 High Low
- ---------------------------- ---- ---
First Quarter $ 3.125 $ 2.063
Second Quarter 2.375 0.500
Third Quarter 1.375 0.250
Fourth Quarter 0.594 0.250
Year Ended December 31, 1997 High Low
- ---------------------------- ---- ---
First Quarter $ 6.500 $ 5.500
Second Quarter 6.500 5.750
Third Quarter 6.000 5.000
Fourth Quarter 5.375 3.000
On March 9, 1999, the fair market value of the Company's Common Stock
was $6,563,214 based on the average of the closing bid and asked prices on that
date. As of March 9, 1999, the Company had approximately 142 shareholders of
record. The Company estimates that an additional 380 stockholders own stock held
for their accounts at brokerage firms and financial institutions (commonly known
as "in street name").
The Company has not 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.
The effective date of the Company's Registration Statement, Commission file
number 3-33053-70, was October 21, 1996. On January 1, 1998, the Company had a
balance of $493,345 remaining from this offering invested in short term
securities. During 1998, the Company used these funds in operating activities.
All of the proceeds from this offering have now been used.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
ACI provides telephone-based sales and marketing services primarily to
the telecommunications, publishing, insurance and financial services industries.
The Company operates nine call centers in five Midwest states, which as of
December 31, 1998 had 482 outbound calling workstations. The Company had 463
full and part-time employees as of December 31, 1998.
On August 1, 1997, the Company acquired all of the outstanding common
stock of Encyclopaedia Britannica Communications Corporation ("EBCC"), which had
call centers in Lombard, Illinois and Merrillville, Indiana. Operations of EBCC
are included from August 1, 1997.
Revenues from telemarketing services are recognized as these services
are performed and are generally based on an hourly rate. Certain telemarketing
service revenues are performance based. 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,
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general and administrative expenses include administrative, sales, marketing,
occupancy, depreciation and other indirect costs.
RESULTS OF OPERATIONS
The following table sets forth items from the Company's Statements of
Operations as percentages of net revenue:
YEARS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Net telemarketing revenue 100.0% 100.0% 100.0%
Cost of services 55.8 55.0 53.1
Selling, general and administrative expenses 53.3 47.3 38.6
Restructuring costs 0.4 2.5 ----
Operating income (loss) (9.5) (4.8) 8.3
Other income (expense) (0.2) 1.1 0.2
Income (loss) before income taxes (9.7) (3.7) 8.5
Income tax expense (benefit) (3.7) (1.4) 3.5
Net income (loss) (6.0) (2.3) 5.0
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE. Revenues for the year ended December 31, 1998, were
$15,035,522, a decrease of $218,371 or 1.4% when compared to 1997 revenue of
$15,253,893. The Company derived 7.2% of its 1998 revenues from outsourcing
compared to 4.2% in 1997. Revenues for 1998 were adversely impacted by a loss in
volume from the Company's largest client from the prior year. During 1997 this
client represented over $9 million in revenue compared to less than $1 million
in 1998.
Telecommunications clients provided 43.2% of total 1998 revenue
compared to 65.2% of revenues during 1997. Other industry segments for 1998
included publishing (22.2%), insurance (11.2%) and financial services (16.5%).
During 1998, the Company's largest client represented 19.1% of total revenue
compared to 60.8% of total revenues in 1997. This decrease in reliance on any
one client is primarily the result of the Company's effort to diversify its
customer base so that no one client represents more than 20% of total revenue.
In 1998, billable telemarketing hours decreased 7.3% when compared to
1997, however, net revenue per billable telemarketing hour increased by 6.3%
from 1997. During 1998, the Company opened call centers in Valentine and
Ogallala, Nebraska and closed its Lombard, Illinois inbound call center. As of
December 31, 1998, the Company operated 482 outbound call center workstations
compared to 361 outbound and 27 inbound call center workstations at December 31,
1997.
COST OF SERVICES. Cost of services increased 0.1% to $8,395,597 in 1998
from $8,388,921 in 1997. The increase in the cost of services percentage is
primarily attributable to the increase in use of outsourcing services during
1998. Outsourcing costs, which are primarily costs associated with the
utilization of other telemarketing companies for telemarketing, increased by
78.1% to $883,762 from $496,298 and were 5.9% of revenue in 1998 compared to
3.3% in 1997. Outsourced telemarketing services had a cost of 81.5% compared to
53.8% for internally generated telemarketing. Long distance telephone costs for
telemarketing operations in 1998 increased by 4.9% to $1,782,713 from
$1,699,819. These increased costs were partially offset by an 8.2% decline in
telemarketing service representative ("TSR") labor and benefit costs. As a
percentage of revenue, TSR labor and benefit cost decreased from 40.2% of
revenue in 1997 to 37.4% in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling general and
administrative expenses for 1998 increased by $798,092, or 11.1% to $8,009,380,
compared to $7,211,288 in 1997. As a percentage of revenue, selling, general,
and administrative expenses increased to 53.3% in 1998 compared to 47.3% in
1997.
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Approximately $408,000 or 51.1% of the increase is related to call center
expenses, the majority of which was related to two new call centers opened in
1998 and the full year effect of the Company's Indiana call center acquired in
August 1997. The balance relates primarily to the effect of increased personnel
costs added during the third and fourth quarters of 1997 which had full year
effect in 1998.
OPERATING LOSS. As a result of the factors discussed above, the Company
experienced an operating loss of $1,434,455 compared to an operating loss of
$734,879 in 1997. The Company's closed inbound call center in Lombard, IL
accounted for approximately $356,000 ($221,000 on an after tax basis) of the
1998 operating loss.
OTHER INCOME AND EXPENSES, NET. Other expenses were $21,516 in 1998
compared to an income of $167,834 in 1997. Interest was a net expense amount of
$20,264 compared to a net income amount of $167,834 in 1997. 1997 net interest
income was the result of the earnings from cash raised in the company's initial
public offering ("IPO") in October 1996.
INCOME TAX BENEFIT. The Company recorded an income tax benefit of
$550,210 in 1998 compared to an income tax benefit of $215,500 in 1997. The 1998
benefit was recorded at 38.1%, which is estimated to be the effective rate for
federal and state taxes verses 38% in 1997.
NET LOSS. The net loss for 1998 was $905,761, or $.16 per share
compared to $351,545 or $.06 per share in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUE. Revenues for the year were $15,253,893, an increase of
$5,262,466 or 52.7% over 1996 and represented the seventh consecutive year of
record revenues for the Company. The acquisition of EBCC clients contributed
$1,824,901 to the increase.
Client revenues for the year were heavily weighted to the
telecommunications industry, which represented 65.2% of total revenues in 1997
compared to 42.6% in 1996. One telecommunications client represented 60.8% of
the total revenues. Other industry groups such as publishing, insurance and
financial services accounted for 18.8%, 7.9% and 5.8% of revenue respectively in
1997.
In 1997, billable telemarketing service representative hours increased
58.7%. During 1997, the Company opened call centers in Pierre, South Dakota and
Chadron, Nebraska, acquired centers through the acquisition of EBCC in Lombard,
Illinois and Merrillville, Indiana and closed a call center in Minneapolis,
Minnesota. As of December 31, 1997, the Company operated 361 outbound and 27
inbound call center workstations compared with 289 outbound at December 31,
1996.
COST OF SERVICES. Cost of services increased 58% to $8,388,921 in 1997
from $5,309,753 in 1996. Cost of services was 55% in 1997 compared to 53% in
1996. The increase in the cost of services percentage is primarily attributable
to the call centers acquired from EBCC, which had higher labor and operating
costs than existing ACI call centers. A decline of 3.8% in the average hourly
billing rate from 1996 to 1997 also contributed to the cost of services
percentage increase.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling general and
administrative expenses were $7,211,288, which is a $3,362,558 or 87.4% increase
over 1996. As a percentage of revenues, selling, general, and administrative
expenses increased to 47.3% in 1997 compared to 38.5% in 1996. The full year
effect of personnel and facilities added in 1996 and the personnel and
facilities added in 1997 were primarily responsible for this increase.
In December 1997, in connection with management's plans to reduce costs
and improve operating efficiencies, the Company transferred the outbound calling
services performed at its Lombard call center to various other call centers. As
a result, the company recorded a restructuring charge of $388,563. The principal
actions in
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the plan involve the consolidation of the outbound call center operation in
Lombard, Illinois into existing ACI call centers in Merrillville, Indiana and
Pierre, South Dakota. The major components of the restructuring charges are
occupancy costs of $178,700, write down of furniture and equipment costs of
$128,200, severance and related costs of $41,700 and other costs of $39,963.
OPERATING INCOME (LOSS). As a result of the factors discussed above,
the Company experienced an operating loss of $734,879 compared to operating
income of $832,944 in 1996.
OTHER INCOME AND EXPENSES, NET. Other income and expenses were $167,834
in 1997 compared to $21,121 in 1996. Interest was a net income amount of
$167,834 in 1997 compared to an expense of $88,841 in 1996. Interest income was
the result of the earnings from excess cash raised in the company's initial
public offering ("IPO") in October 1996. In addition, 1996 included income of
approximately $101,000 related to the settlement of a contract dispute.
INCOME TAX (BENEFIT). The Company recorded an income tax benefit of
$215,500 compared to a pro forma expense in 1996 of $354,300. The 1997 benefit
was recorded at 38%, which is estimated to be the effective rate for federal and
state taxes verses 40% in 1996.
NET INCOME (LOSS). As a result, the net loss was $351,545 or $.06 per
share compared to pro forma net income of $504,665 or $.11 per share in 1996.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has historically used cash from operating activities, bank
borrowings, capital leases and public and private sector financing in connection
with the opening of call centers as its primary sources of liquidity. The public
and private sector (grants/financings) included low interest rate loans,
forgivable loan arrangements, and reimbursement for certain expenses and
leasehold improvements. In 1998, the Company financed its activities with the
remaining proceeds of $493,345 from the October, 1996, IPO, $450,000 in public
sector grants received from the City of Chadron, Valentine and Ogallala,
Nebraska and the financing of $372,773 of asset purchases through capital
leases. In November 1997 the Company's Board of Directors authorized a $2
million revolving line of credit which became effective in January 1998. At
December 31, 1998, the Company had no outstanding borrowings under the line of
credit.
At December 31, 1998, the Company had cash and cash equivalents of
$1,300,681 compared to $659,042 and $5,005,813 at December 31, 1997 and 1996,
respectively. Cash generated by operating activities was $88,010 in 1998,
compared to cash used by operating activities of $730,130 in 1997 and cash
generated by operating activities of $1,121,698 in 1996. Cash used by 1998
operating activities include the net loss of $905,761 and other non-cash items
of $775,061. In 1998 cash provided by depreciation and amortization of $940,911
and cash provided by changes in working capital components of $907,023 offset
cash used by the net loss and non-cash items. Cash flows used in operating
activities in 1997 were accounted for by the net loss of $351,545 and changes in
working capital components of $1,269,483. These were offset by depreciation and
amortization of $696,937 and other non-cash items of $193,961.
Net cash provided by investing activities in 1998 was $160,514 compared
to net cash used by investing activities of $3,578,914 and $308,768 in 1997 and
1996, respectively. The primary source of cash from investing activities in 1998
was $493,345 in proceeds from previously restricted investments. During 1998,
the proceeds from previously restricted investments were partially offset by
purchases of property and equipment of $355,264. The primary uses of cash in
1997 were expenditures for property and equipment of $1,626,180 related to new
call centers, upgrading the technology in current call centers, and the
acquisition of fixed assets in the EBCC acquisition totaling $1,429,845. In
addition, $493,345 was escrowed as restricted cash related to the EBCC
acquisition. Cash utilized in investing activities in 1996 was $308,768.
Expenditures for property and equipment of $623,155 were partially offset by
proceeds from restricted investments of $300,000 and a decrease in other assets
of $14,387.
Net cash provided by financing activities in 1998 was $393,115,
compared to cash used by financing activities of $37,727 in 1997 and cash
provided by financing activities of $4,125,400 in 1996. Sources of cash provided
by financing activities during 1998 were the receipt of $450,000 of public
sector grants, $80,952 proceeds from the sale and leaseback of property and
equipment and $27,299 related to the issuance of common stock in the Employee
Stock Purchase Plan. Proceeds for 1998 were partially offset by repayments of
long-term debt and capital leases of $165,136. Financing activities in 1997 were
limited to $53,010 in repayments of long-term debt
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partially offset by $15,283 related to the issuance of common stock in the
Employee Stock Purchase Plan. Cash from financing activities in 1996 were
$4,125,400. Proceeds from the IPO of $6,378,258 and increases in long-term debt
of $200,000 were offset by $1,818,422 of various debt instrument reductions and
the payment of $634,436 of dividends in conjunction with the change from Sub S
to C Corporation. As a result, net cash and cash equivalents increased $641,639
in 1998, decreased $4,346,771 in 1997 and increased $4,938,330 in 1996.
The Company believes that funds available at December 31, 1998 together
with funds which should be generated from future operations and amounts
available under its revolving line of credit arrangement will be sufficient to
finance its current and future business operations including working capital
requirements. The Company has no material commitments for capital expenditures
for 1999.
OUTLOOK
Certain of the statements contained in the 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.
As of December 31, 1998, the Company failed to comply with certain loan
covenants. The Company expects to obtain a waiver to the loan convenant
violations for December 31, 1998. While the Company expects to obtain a waiver
from the loan covenant violations, no assurance can be given that the lending
institution will grant these waivers. Additionally, the Company and its lending
institution are currently in the process of amending the appropriate convenants
and management believes that it will be able to maintain compliance with the
expected debt covenants during 1999. In the event that the Company would not
maintain compliance with the amended covenants it expects that cash flows from
operations will be sufficient to continue funding ongoing operations.
Management believes that total marketing expenditures by US companies
directed towards telemarketing will continue to grow and that the trend for
these companies will be towards outsourcing their telemarketing programs to
companies like ACI, which should result in an increase in the Company's calling
revenue in 1999. Management further believes that it will continue to diversify
its client base so that no one client represents more than 20% of its overall
business. There is no assurance that the Company's marketing efforts will
generate new business or that businesses will continue to outsource their
telemarketing needs. As is common in the telemarketing industry, the Company's
projects are often not subject to formal contracts, the agreements with its
clients do not assure that ACI will generate a specific level of revenue, do not
designate ACI as the client's exclusive service provider, and are terminable by
the client on relatively short notice and without penalty. In addition, the
amount of revenues ACI generates from a particular client generally is dependent
upon their customers' interest in, and use of, the client's products or
services.
The Company believes that it has enough capacity in its nine existing
call centers to handle the anticipated increases in calling hours from existing
and new clients. While the Company anticipates an increase in demand for its
services in 1999, there is no assurance that the Company, due to the current low
unemployment levels, will be able to hire and train sufficient telemarketing
sales representatives to fully utilize the currently existing capacity to meet
this increased demand.
During the fourth quarter of 1998, the Company reduced its selling,
general and administrative expenses by over $500,000, when compared to the
fourth quarter of 1997 and to the lowest total expense of any quarter in 1998.
These reductions are a result of the Company's effort to improve its processes
to reduce costs and increase the efficiency of the organization. The Company
believes that it will be able to contain the growth of its selling, general and
expenses in 1999. However, there can be no assurance that these costs can be
contained or that further cost reductions will be realized.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. When year 2000
begins, these computers may interpret "00" as the year 1900 and could either
stop processing date related computations or could process them incorrectly.
Beginning in the year 2000, these date code fields may need to accept four-digit
entries to distinguish 21st century dates from 20th century dates to be year
compliant.
10
<PAGE>
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. The Company has completed an
assessment of its internal information systems and has determined that its
financial and operational systems (1) are year 2000 compliant; (2) can be
upgraded to be year 2000 compliant without significant cost or effort; or (3) do
not pose a significant issue to the Company if left uncorrected. The Company has
already begun necessary software conversion and programming modifications to
comply with the Year 2000 issues and believes that all other appropriate actions
are being taken. The Company expects to complete its overall Year 2000
conversions prior to any impact on its operations. Total costs to upgrade the
Company's internal information systems are not material to the operations of the
Company and are not expected to materially impact earnings. During the fourth
quarter of 1998 the Company, as part of equipment and software enhancements to
its call processing technology and capabilities, also upgraded its call
processing software to be year 2000 compliant in six (6) of its nine (9) call
centers. Total costs for the equipment and software enhancements, including year
2000 compliance, was approximately $87,300. During the first quarter of 1999 the
remaining three (3) call centers will receive equipment and enhanced software,
including year 2000 compliance, with a total cost of approximately $52,000.
These costs, totaling approximately $139,300 were or will be capitalized.
Additional costs to upgrade the Company's internal information systems are
expected to cost approximately $125,000.
The Year 2000 issue may also affect the systems and applications of the
Company's customers and/or suppliers. The Company is reviewing its systems as it
relates to interfacing with customers and suppliers to determine if the
Company's interface systems may be vulnerable to a third parties failure to
correct their own Year 2000 issues. Although the Company does not currently
anticipate any material adverse impact or costs associated with client or
supplier failure to correct their Year 2000 issues in a timely manner, no
assurance can be given that the failure by one or more of the Company's major
clients to become Year 2000 compliant, will not have a material adverse impact
on the Company's operations.
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 and the additional selling, general and administrative
expenses to acquire and support such new business.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Company are included herein:
Independent Auditors' Report
Consolidated Balance Sheets -December 31, 1998 and 1997
Consolidated Statements of Operations - December 31, 1998, 1997
and 1996
Consolidated Statements of Cash Flows - December 31, 1998, 1997
and 1996
Consolidated Statements of Shareholders' Equity - December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements - December 31, 1998, 1997
and 1996
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of ACI Telecentrics, Inc.
We have audited the accompanying consolidated balance sheets of ACI
Telecentrics, Inc. and subsidiary as of December 31, 1998 and 1997 and the
related consolidated statements of operations, shareholders' equity and cash
flow for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998 and 1997 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, MN
February 12, 1999
12
<PAGE>
ACI TELECENTRICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,300,681 $ 659,042
Restricted investment (Note 2) -- 493,345
Trade receivables, less allowance for doubtful accounts of
$140,000 and $195,000, respectively 1,456,431 2,369,323
Income tax receivable (Note 11) -- 586,498
Deferred income taxes 365,000 32,000
Prepaid expenses 111,117 21,778
Other current assets 131,667 67,374
----------- -----------
TOTAL CURRENT ASSETS 3,364,896 4,229,360
Property and equipment, net of accumulated depreciation (Note 3) 2,824,381 3,243,205
OTHER ASSETS:
Goodwill, less accumulated amortization of $99,000
and $29,000, respectively (Note 2) 951,858 1,016,726
Deferred Taxes 137,000 --
Other 63,676 38,993
----------- -----------
TOTAL OTHER ASSETS 1,152,534 1,055,719
----------- -----------
TOTAL ASSETS $ 7,341,811 $ 8,528,284
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 482,628 $ 811,568
Accrued expenses 204,728 764,463
Income taxes payable (Note 11) 15,713 --
Current portion of long-term debt and capital lease obligations (Notes 4, 5 and 6) 356,980 138,481
----------- -----------
TOTAL CURRENT LIABILITIES 1,060,049 1,714,512
LONG-TERM LIABILITIES:
Long-term debt and capital lease obligations, less current portion (Notes 4, 5 and 6) 257,711 64,650
Deferred capital lease liabilities, less current portion (Note 6) 473,201 214,600
Deferred income taxes (Note 11) -- 105,210
----------- -----------
TOTAL LONG-TERM LIABILITIES 730,912 384,460
COMMITMENTS AND CONTINGENCIES (NOTES 2, 5 AND 9)
SHAREHOLDERS' EQUITY (NOTE 8):
Common stock, no par value; 15,000,000 shares authorized;
5,731,471 and 5,708,583 shares issued and outstanding, respectively 6,620,145 6,592,846
Undesignated stock, no par value; 5,000,000 shares authorized;
none issued and outstanding -- --
Accumulated deficit (1,069,295) (163,534)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 5,550,850 6,429,312
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,341,811 $ 8,528,284
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
13
<PAGE>
ACI TELECENTRICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TELEMARKETING REVENUES $ 15,035,522 $ 15,253,893 $ 9,991,427
COST OF SERVICES 8,395,597 8,388,921 5,309,753
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 8,009,380 7,211,288 3,848,730
RESTRUCTURING COSTS (Note 12) 65,000 388,563 --
------------ ------------ ------------
Total costs 16,469,977 15,988,772 9,158,483
------------ ------------ ------------
OPERATING INCOME (LOSS) (1,434,455) (734,879) 832,944
OTHER INCOME (EXPENSE):
Interest income 39,012 181,604 62,090
Interest expense (59,276) (13,770) (150,931)
Other, net (Note 10) (1,252) -- 109,962
------------ ------------ ------------
Total other income (expense) (21,516) 167,834 21,121
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (1,455,971) (567,045) 854,065
INCOME TAX EXPENSE (BENEFIT):
Income taxes - C Corp (550,210) (215,500) 132,600
Income taxes - S Corp to C Corp conversion -- -- 221,700
------------ ------------ ------------
Total income taxes (benefit) (550,210) (215,500) 354,300
------------ ------------ ------------
NET INCOME (LOSS) $ (905,761) $ (351,545) $ 499,765
============ ============ ============
PRO FORMA DATA (Note 1):
Historical income (loss) before income tax expense (benefit) -- -- $ 854,065
Pro forma income tax expense (benefit) -- -- 349,400
------------ ------------ ------------
PRO FORMA NET INCOME (LOSS) -- -- $ 504,665
============ ============ ============
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
(PRO FORMA AMOUNTS FOR 1996) $ (.16) $ (.06) $ .11
============ ============ ============
SHARES USED IN COMPUTING
NET INCOME (LOSS) PER SHARE 5,723,176 5,707,500 4,566,600
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
<PAGE>
ACI TELECENTRICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (905,761) $ (351,545) $ 499,765
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 940,911 696,937 365,904
Provision for losses on accounts receivable (54,964) 121,964 3,000
Amortization of deferred capital lease liabilities (181,400) (61,400) (49,600)
Deferred income taxes (575,210) (133,202) 206,412
Restructuring costs -- 388,563 --
Loss on disposal of assets 36,513 -- 12,970
Changes in operating assets and liabilities:
Trade receivables 967,856 (1,210,836) (160,663)
Prepaid expenses (89,339) 67,001 (69,244)
Other current assets (3,439) (7,089) (5,002)
Accounts payable and accrued expenses (649,368) 490,175 173,956
Income taxes 602,211 (730,698) 144,200
----------- ----------- -----------
Net cash provided by (used in) operating activities 88,010 (730,130) 1,121,698
CASH FLOWS UTILIZED IN INVESTING ACTIVITIES:
Purchases of property and equipment (355,264) (1,626,180) (623,155)
Decrease (increase) in other assets 22,433 (29,544) 14,387
Proceeds from (purchase of) restricted investments 493,345 (493,345) 300,000
Payments for business acquired -- (1,429,845) --
----------- ----------- -----------
Net cash provided by (used in) investing activities 160,514 (3,578,914) (308,768)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 27,299 15,283 6,378,258
Proceeds from revolving line of credit 2,100,000 -- --
Payments on revolving line of credit (2,100,000) -- (300,000)
Proceeds from deferred grants 450,000 -- --
Proceeds from issuance of long-term debt -- -- 200,000
Repayments on long-term debt and capital leases (165,136) (53,010) (1,218,422)
Proceeds from sale and leaseback of equipment 80,952 -- --
Payments to officers -- -- (300,000)
Dividends (Note 8) -- -- (634,436)
----------- ----------- -----------
Net cash provided by (used in) financing activities 393,115 (37,727) 4,125,400
----------- ----------- -----------
NET INCREASE (DECREASE) CASH AND
CASH EQUIVALENTS 641,639 (4,346,771) 4,938,330
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 659,042 5,005,813 67,483
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,300,681 $ 659,042 $ 5,005,813
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15
<PAGE>
ACI TELECENTRICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 11) -- -- -- 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 8) -- -- -- (634,436) (634,436)
----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1996 5,705,000 6,577,563 -- 188,011 6,765,574
Issuance of common stock under the
Employee Stock Purchase Plan 3,583 15,283 -- -- 15,283
Net loss -- -- -- (351,545) (351,545)
----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1997 5,708,583 6,592,846 -- (163,534) 6,429,312
Issuance of common stock under the
Employee Stock Purchase Plan 22,888 27,299 -- -- 27,299
Net loss -- -- -- (905,761) (905,761)
----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1998 5,731,471 $ 6,620,145 -- $(1,069,295) $ 5,550,850
=========== =========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
16
<PAGE>
ACI TELECENTRICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS - ACI Telecentrics, Incorporated
(ACI) provides telephone-based sales and marketing services primarily to
the telecommunications, publishing, insurance, 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; Valley City and Devils Lake, North Dakota;
Redfield and Pierre, South Dakota and Chadron, Valentine and Ogallala,
Nebraska. 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. These financial
statements include the results of operations of all companies for all
periods presented. As described in Note 2, on August 1, 1997, the
Company acquired all of the outstanding common stock of Encyclopaedia
Britannica Communications Corporation (EBCC), which had call centers in
Lombard, Illinois and Merrillville, Indiana. As described in Note 12,
the Lombard, Illinois operations have subsequently been closed.
Operations of EBCC are included from August 1, 1997. The acquisition was
accounted for as a purchase.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary, ACI
Telecentrics of Illinois, Inc. (formerly EBCC) after elimination of
intercompany transactions.
REVENUE RECOGNITION - Revenues from telemarketing services are
recognized as services are provided, primarily based on hours incurred.
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 generally with a maturity of
three months or less from the date of purchase are classified as cash
equivalents.
GOODWILL - Goodwill is amortized on a straight-line basis over 15 years.
The Company periodically assesses the recoverability of the cost of its
goodwill based on a review of projected undiscounted cash flows of the
related assets acquired.
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 three to ten years.
RESTRICTED INVESTMENTS - Restricted investments at December 31, 1997,
consisted of U.S. Treasury Bills carried at amortized cost. The carrying
value approximated fair value due to the short-term maturities and the
market rate of interest. (See Note 2)
FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS - The estimated fair
value of long-term debt and capital lease obligations 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.
EARNINGS (LOSS) PER COMMON SHARE - Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share" was issued in February
1997 and requires the presentation of earnings per share on a
17
<PAGE>
basic and diluted basis. Basic earnings per share are computed by
dividing earnings available to common shareholders by the weighted
average number of shares outstanding during the year. Diluted earnings
per share are computed after giving effect to the exercise of all
dilutive outstanding options and warrants. The Company adopted SFAS No.
128 in 1997. Both basic and diluted 1996 earnings per share were the
same as there was no material common equivalent shares outstanding at
December 31, 1996. Both basic and diluted earnings per share for 1998
and 1997 were the same due to net losses; the impact of the potential
common shares outstanding would have been anti-dilutive.
Pro forma net income per common share for the year ended December 31,
1996 is computed using the weighted average number of shares of common
stock 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
distributions to S Corporation shareholders (using the $5.00 per share
initial public offering price), were deemed to be outstanding for all of
1996.
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.
Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. Income tax expense (benefit) is the tax payable (receivable)
for the period and the change in deferred income tax assets and
liabilities during the period.
SEGMENT INFORMATION - In 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for reporting operating segment information based
upon how the Company manages its operations. The Company manages its
business as one operating segment.
COMPREHENSIVE INCOME - In 1998, the Company also adopted Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income", which establishes standards for the reporting of comprehensive
income and its components. Comprehensive income is defined as the change
in equity during the period of a business enterprise resulting from
transactions and other events and circumstances from non-owner sources.
Implementation of SFAS 130 did not have an effect on the Company's
financial statements because comprehensive income (loss) is the same as
the Company's net income (loss).
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS - In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", the Company periodically reviews its
intangibles and property and equipment to determine potential impairment
by comparing the carrying value of the assets with estimated future cash
flows expected to result from the use of assets. Should the sum of the
expected future cash flows be less than the carrying value, the Company
would recognize an impairment loss. To date, management has determined
that no impairment of long-lived assets exists.
PRO FORMA DATA - 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 consolidated statements of operations for the year ended
December 31, 1996 include
18
<PAGE>
unaudited pro forma information for income taxes which would have been
recorded if the Company had been a C Corporation for all of 1996, based
on the tax laws in effect during the respective periods.
2. BRITCOM ACQUISITION
On August 1, 1997, the Company acquired all of the outstanding common
stock of EBCC, a provider of inbound and outbound telemarketing
services. The acquisition was accounted for using the purchase method of
accounting, and accordingly, the consolidated financial statements
include results of operations from the date of acquisition. The initial
purchase price consisted 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 total amount of the "Earn-Out
Payment" depended 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"). In accordance with
the purchase agreement, the Company placed in escrow, and provided the
seller with a $500,000 security interest in, a Treasury Bill owned by
the Company as a guaranty of payment for any "Earn-Out Payment"
installments required pursuant to the original purchase agreement.
Revenues generated by certain EBCC clients did not reach the minimum
threshold in 1998, and no additional payments under the Stock Purchase
Agreement were made. The aggregate purchase price and related costs was
approximately $1,430,000. The excess of purchase price over net assets
acquired is being amortized over 15 years using the straightline method.
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 1997. This pro forma summary does not necessarily reflect
the results of operations that would have been achieved if the
businesses had constituted a single entity during such periods and is
not necessarily indicative of results which may be obtained in the
future.
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------
Net revenues $ 18,639,272
Net income (loss) (772,485)
Basic and diluted income (loss) per share $ (.14)
Shares used in computing
pro forma net income (loss) per share 5,707,500
============
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
<S> <C> <C>
Furniture 985,915 912,062
Equipment 4,093,395 3,787,565
Leasehold Improvements 129,122 129,295
---------------- ----------------
5,208,432 4,828,922
Less accumulated depreciation and amortization 2,384,051 1,585,717
---------------- ----------------
Net property and equipment $ 2,824,381 $ 3,243,205
================ ================
</TABLE>
For the years ended December 31, 1998 and 1997, the Company had
equipment under capitalized leases totaling $513,615 and $46,920,
respectively.
19
<PAGE>
4. LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND REVOLVING LINE OF CREDIT
Long-term debt and capitalized lease obligations consists of the
following at December 31:
<TABLE>
<CAPTION>
1998 1997
----------------------
<S> <C> <C>
Promissory Notes - 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 $ 19,718 $ 57,433
Promissory Note (Note 6) - monthly payments of
$967, including interest at 6%, due May 1, 2001 25,198 34,987
Capitalized leases 378,375 29,311
--------- --------
423,291 21,731
Less current portion 165,580 57,081
--------- --------
Long-term debt and capitalized lease obligations $ 257,711 $ 64,650
========= ========
</TABLE>
Maturities of long-term debt and capitalized lease obligations are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31: LONG-TERM DEBT CAPITALIZED LEASE OBLIGATIONS
-------------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 29,200 $ 136,380
2000 10,955 141,620
2001 4,762 49,944
2002 ---- 44,924
Thereafter ---- 5,506
------------- ------------
Total $ 44,917 $ 378,374
============= ============
</TABLE>
On January 30, 1998, the Company entered into a $2,000,000 revolving
line of credit agreement, which accrues interest at the prime rate or
LIBOR rate plus 2 3/4% on outstanding borrowings and expires in
January, 2000. The borrowing base includes certain accounts receivable
and furniture and equipment. The loan agreement also contains
provisions requiring compliance with certain financial covenants. As of
December 31, 1998, the Company failed to comply with certain loan
covenants. The Company expects to obtain a waiver to the loan covenant
violations for December 31, 1998. Additionally, the Company and its
lending institution are currently in the process of amending the
appropriate covenants and management believes that it will be able to
maintain compliance with the expected debt covenants during 1999. No
amounts were outstanding under the revolving line of credit at December
31, 1998.
5. LEASES
The Company has various operating leases for its corporate office and
nine call centers. The Company also leases, under capital lease
arrangements, certain computer equipment and office fixtures utilized in
its corporate office and call centers. Several of the operating leases
contain renewal provisions.
At December 31, 1998, future minimum lease payments under operating and
capital lease's that have initial noncancelable lease terms in excess of
one year, not including shared operating costs, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31: OPERATING LEASES CAPITALIZED LEASE OBLIGATIONS
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 399,889 $ 161,666
2000 332,524 156,486
2001 219,171 57,010
2002 160,695 47,896
2003 143,200 5,603
Thereafter 478,100 ----
------------ ------------
Total $ 1,733,579 428,663
Less amounts representing interest 50,289
------------
Present value of net minimum lease payments $ 378,374
===========
</TABLE>
Rent expense incurred on all operating leases was approximately
$541,000, $454,000 and $280,000 for the years ended December 31, 1998,
1997and 1996, respectively.
20
<PAGE>
6. GRANT AGREEMENTS
One of the Company's strategies is to locate its call centers in small,
rural communities in the 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.
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.
During 1997, the Company executed three Memoranda of Understandings with
the Nebraska Department of Economic Development and three Nebraska
communities. Under the agreements, the Company agreed to open call
centers in the three communities (Chadron, Valentine and Ogallala) in
1997 and 1998. The aggregate amount of the grants received from the
three communities and state was $700,000. All grants are forgivable over
a five year period from the date of the grant. Grant amounts received
are as follows: Valentine $200,000, Ogallala $200,000 and Chadron
$300,000 of which the Company received $200,000 cash ($150,000 in 1997
and $50,000 in 1998) and received a 8 1/2%, two year $100,000 note
receivable that requires the City of Chadron to make monthly principal
and interest payments.
Reimbursement of start-up costs for the Valley City and Devils Lake call
centers was offset against the corresponding expense. Payments received
by the Valley City, Devils Lake call centers for leasehold improvements
and by the Redfield call center for equipment reduced the values of the
recorded assets. The Devils Lake and Valley City equipment leases and
the $700,000 Nebraska grants are recorded as deferred liabilities in the
consolidated balance sheets, and are being amortized as a reduction of
administrative expenses when amounts are forgiven. Amortization of
deferred grant liabilities was approximately $181,000, $61,000 and
$50,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
The schedule of future grant forgiveness amounts are as follows:
1999 $ 191,400
2000 180,700
2001 152,500
2002 120,000
2003 20,001
In most cases, the Company is obligated to continue operating the call
center for a period of five years from when the call center was opened.
Certain loans and leases are guaranteed by the two majority shareholders
of the Company.
21
<PAGE>
7. SIGNIFICANT CUSTOMERS AND CREDIT CONCERTRATIONS
The Company earned the following percentages of its total revenue from
major customers during the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- --------------------- --------------------
Revenue Receivable Revenue Receivable Revenue Receivable
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Customer A 19% 0% 1% 0% 0% 0%
Customer B 15% 20% 7% 1% 10% 3%
Customer C 5% 2% 61% 42% 39% 45%
Customer D 11% 0% 0% 0% 0% 0%
Customer E 0% 1% 7% 1% 15% 19%
</TABLE>
The Company does not require collateral to support customer receivables.
Historically, the Company has not experienced write-offs related to
these major customers.
8. SHAREHOLDER'S EQUITY
DIVIDENDS: No dividends were paid in 1998 or 1997. During 1996,
dividends of $634,436 were paid to the two majority shareholders related
to operations of the Company prior to its conversion to a C Corporation.
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. During 1998, the Company issued 22,888 shares
under the plan. During 1997, the Company issued 3,583 shares under the
plan. As of December 31, 1998, the total number of shares issued under
the plan, since the date of inception, is 27,324 shares.
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 to employees and
investors. On April 30, 1997, the shareholders approved an increase to
430,000 shares available for grant under the Stock Option Plan. The
Stock Option Plan requires that the exercise price of all options
granted be the fair market value of the Company's common stock on the
date of grant.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
SHARES UNDER WEIGHTED AVERAGE
OPTION PRICE PER SHARE
-------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1995 -- --
Granted in 1996 266,000 $ 4.67
-------------- -------------
Balance at December 31, 1996 266,000 4.67
Granted in 1997 51,250 5.31
Canceled in 1997 (37,375) 5.05
--------------- -------------
Balance December 31, 1997 279,875 4.74
Granted in 1998 332,500 1.53
Canceled in 1998 (338,125) 4.26
-------------- -------------
Balance at December 31, 1998 274,250 $ 1.45
============== =============
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Shares exercisable at December 31, 1996 123,500 $ 4.24
============== =============
Shares exercisable at December 31, 1997 166,475 $ 4.46
============== =============
Shares exercisable at December 31, 1998 12,500 $ 0.31
============== =============
</TABLE>
On May 12, 1998, the Company's Board of Directors approved the repricing
of all outstanding incentive and nonqualified stock options, totaling
300,000 shares, to the then current fair market value of $1.50.
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
RANGE OF NUMBER WEIGHTED WEIGHTED AVERAGE NUMBER WEIGHTED
EXERCISE OF SHARES AVERAGE REMAINING OF SHARES AVERAGE
PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.50 261,750 $ 1.50 10 -- --
0.31 12,500 0.3125 3 12,500 0.3125
--------------------------------------------------------------------------------------
274,250 $ 1.45 9.1 12,500 0.3125
=====================================================================================
</TABLE>
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 been
determined based on the fair value at the grant date, consistent with
the provisions of SFAS No. 123, the Company's 1998, 1997 and 1996 pro
forma net (loss) income and per share amounts would have been as
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) (pro forma in 1996) applicable
to Common Stock, as reported $ (905,761) $ (351,545) $ 499,765
=============== =============== ===============
Net income (loss) applicable to Common
Stock, pro forma $ (1,025,974) $ (406,770) $ 366,107
=============== =============== ===============
Basic and diluted earnings (loss) (pro forma
in 1996) per share, as reported $ (.16) $ (.06) $ .11
=============== =============== ===============
Basic and diluted earnings (loss) per share,
pro forma $ (.18) $ (.07) $ .08
=============== =============== ===============
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 102% 39% 5%
Risk free interest rate 4.7% 5.8% 6%
Expected life of options 9.1 Years 10 Years 10 Years
Fair value of options on grant dates $1.30 $3.27 $2.06
</TABLE>
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 through October 20, 2001, at an
exercise price of $6.00 per share. No warrants were exercised in 1998,
1997 or 1996.
23
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS Each of the two majority shareholders has entered
into an employment agreement dated June 30, 1996, with the Company
providing for a minimum annual base salary of $175,000. The agreements
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
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 include 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.
10. 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.
11. 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 (benefit) for income taxes for the years ended December
31, 1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ (82,298) $ 116,500
State 25,000 -- 31,400
--------- --------- ---------
25,000 (82,298) 147,900
Deferred (575,210) (133,202) (15,300)
--------- --------- ---------
Income tax expense (benefit) C Corporation (550,210) (215,500) 132,600
Conversion from S Corporation to C Corporation -- -- 221,700
--------- --------- ---------
Total income tax expense (benefit) $(550,210) $(215,500) $ 354,300
========= ========= =========
</TABLE>
24
<PAGE>
Differences between the provisions for income taxes at the federal
statutory rate and the recorded provision are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) at federal
statutory rate (34.0%) (34.0%) 34.0%
State income tax (benefit), net of
federal benefit (cost) (4.5%) (4.4%) 5.0%
S Corporation tax (benefit) -- -- (25.4%)
Conversion from S Corporation to C Corporation -- -- 26.0%
Other 0.7% 0.4% 1.9%
---- ---- ----
Effective income tax expense (benefit) (37.8%) (38.0%) 41.5%
==== ==== ====
</TABLE>
Net deferred tax assets (liabilities) at December 31, 1998, 1997 and
1996 are comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current deferred tax assets (liabilities):
Allowance for doubtful accounts $ 55,000 $ 59,000 $ 29,200
Contributions carryover 8,000 -- --
Benefit of NOL carryforwards 336,000 -- --
Other, net (34,000) (27,000) (56,612)
--------- --------- ---------
Income tax expense (benefit) C Corporation 365,000 32,000 (27,412)
Non-current deferred tax assets (liabilities):
Excess of tax over book depreciation (341,000) (282,000) (179,000)
Benefit of NOL carryforwards 478,000 130,000 --
Other, net -- 46,790 --
--------- --------- ---------
Total income tax expense (benefit) 137,000 (105,210) (179,000)
--------- --------- ---------
Total deferred tax assets (liabilities) $ 502,000 $ (73,210) $(206,412)
========= ========= =========
</TABLE>
Realization of deferred tax assets associated with the net operating
loss carryforwards is dependent upon generating sufficient taxable
income prior to their expiration. Management believes that it is more
likely than not that all of these net operating loss carryforwards will
be used, thus no valuation allowance has been established.
As of December 31, 1998 and 1997, the Company had federal net operating
loss carryforwards of approximately $1,581,000 and $290,000,
respectively. The net operating loss carryforwards will expire beginning
in 2012.
12. RESTRUCTURING COSTS
In December 1997, in connection with management's plans to reduce costs
and improve operating efficiencies, the Company transferred the outbound
calling services performed at its Lombard call center to various other
call centers. As a result, the Company recorded a restructuring charge
of $388,563, as detailed below, all charges of which remained in accrued
liabilities at December 31, 1997. During 1998, $379,281 of these amounts
were paid and $9,282 remained in accrued liabilities at December 31,
1998. The principal actions in the plan involve the consolidation of the
outbound call center operations in Lombard, Illinois into existing ACI
call centers in Merrillville, Indiana and Pierre, South Dakota.
25
<PAGE>
The major components of the restructuring charges are as follows:
Occupancy costs $ 178,700
Write down of furniture and equipment 128,200
Severance and related costs 41,700
Other 39,963
--------------
$ 388,563
==============
In June 1998, the Company recorded an additional restructuring charge of
$65,000, all of which has been paid at December 31, 1998, to cover
various expenses associated with the closing of its Lombard inbound call
center operations.
13. RETIREMENT PLAN
Effective January 1, 1998, the Company established a 401(k) pension plan
covering substantially all of its employees who are at least 21 years of
age, have completed at least six months continuous employment and work
more than 1,000 hours per year. Participants may elect to defer from 1%
to 15% of their salary and are 100% vested in their own contributions.
The plan allows for the Company to make discretionary matched
contributions. These contributions, if any, vest to the employee at the
rate of 20% per year of employment so that the employee would be fully
vested in the Company's discretionary contribution upon attaining five
years of employment of greater than 1000 hours per year. The Company's
discretionary contributions to the plan are determined annually by the
Board of Directors. Total discretionary contributions contributed by the
Company were $0 for the year ended December 31, 1998.
14. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Company paid cash for interest and income taxes as follows:
Interest $ 59,300 $ 13,800 $ 151,000
Income taxes (refunds received) (575,301) 648,400 3,700
Non-cash investing and financing activities included:
Equipment acquired through capital leases 372,774 -- 546,551
Deferred grants receivable $ 100,000 $ 150,000 $ --
</TABLE>
26
<PAGE>
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 1999 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 1999 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 1999 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 1999 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 1999 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.
27
<PAGE>
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K during
the fourth quarter of the year ending December 31, 1998.
28
<PAGE>
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 30, 1999 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 30, 1999
- ---------------------------------------------
Rick N. Diamond, Chief Executive Officer
and Director......(principal executive officer)
/s/ GARY B. COHEN. March 30, 1999
- --------------------------------------------
Gary B. Cohen, President, Chief Financial Officer
and Director (principal financial and accounting officer)
/s/ DOUGLAS W. FRANCHOT March 30, 1999
- --------------------------------------------
Douglas W. Franchot, Director
/s/ PHILLIP T. LEVIN March 30, 1999
- --------------------------------------------
Phillip T. Levin, Director
/s/ SEYMOUR LEVY March 30, 1999
- --------------------------------------------
Seymour Levy, Director
/s/ JAMES W. LUPIENT March 30, 1999
- --------------------------------------------
James W. Lupient, Director
/s/ THOMAS F. MADISON March 30, 1999
- --------------------------------------------
Thomas F. Madison, Director
29
<PAGE>
ACI TELECENTRICS, INC.
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 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)
10.7 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)
10.8 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)
10.9 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)
10.10 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)
<PAGE>
10.11 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)
10.12 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)
10.13 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)
10.14 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
10.15 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)**
10.16 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)
10.17 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)
10.18 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)
10.19 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)
10.20 Lease Agreement by and between Redfield Industrial Development
Corporation and ACI Telecentrics, Incorporated, dated November 26, 1996
10.21 Stock Purchase Agreement dated August 1, 1997, by and among ACI
Telecentrics Incorporated and Encyclopaedia Britannica, Inc.
(Incorporated by reference to Exhibit 2.1 to Form 8-K, SEC File No.
000-21557)
10.22 Lease Agreement by and between Kay Barth and ACI Telecentrics,
Incorporated dated April 13, 1997. (Incorporated by reference to Exhibit
10.31 to Form 10-KSB for the year ended December 31, 1998)
10.23 Lease Agreement by and between C. H. Young, Trustee, and Mary M. Young,
Trustee and ACI Telecentrics dated September 5, l997. (Incorporated by
reference to Exhibit 10.32 to Form 10-KSB for the year ended December
31, 1998)
10.24 Lease Agreement by and between Wilkinson Development, Inc. and ACI
Telecentrics, Incorporated dated September 9, 1997. (Incorporated by
reference to Exhibit 10.33 to Form 10-KSB for the year ended December
31, 1998)
10.25 Memorandum of Understanding for Project #97-ED-008 between the Nebraska
Department of Economic Development, the City of Chadron Nebraska, Dawes
County Nebraska and ACI Telecentrics, Incorporated. (Incorporated by
reference to Exhibit 10.34 to Form 10-KSB for the year ended December
31, 1998)
<PAGE>
10.26 Memorandum of Understanding for Project # 97-ED-014 between Nebraska
Department of Economic Development, the City of Ogallala Nebraska and
ACI Telecentrics, Incorporated. (Incorporated by reference to Exhibit
10.35 to Form 10-KSB for the year ended December 31, 1998)
10.27 Memorandum of Understanding for project # 97-ED-015 between Nebraska
Department of Economic Development, the City of Valentine Nebraska and
ACI Telecentrics, Incorporated. (Incorporated by reference to Exhibit
10.36 to Form 10-KSB for the year ended December 31, 1998)
10.28 Lease Agreement by and between Pierre Economic Development Corporation
and ACI Telecentrics, Incorporated originally dated May 5, 1997 and
amended March 4, 1998. (Incorporated by reference to Exhibit 10.37 to
Form 10-KSB for the year ended December 31, 1998)
10.29 $2 million revolving line of credit loan between National City Bank and
ACI Telecentrics, Inc. (Incorporated by reference to Exhibit 10.38 to
Form 10-QSB for the quarter ended March 31, 1998)
23* Consent of Deloitte & Touche LLP, independent public accountants
24* Power of Attorney (included on signature page of this Report)
27* Financial Data Schedule
- ---------------------
* Filed herewith
** Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to the Form 10-KSB
We consent to the incorporation by reference in Registration Statements No.
333-17281, No. 333-17283, and 333-44249 of ACI Telecentrics Incorporated on Form
S-8 of our report dated February 12, 1999 appearing in this Annual Report on
Form 10-KSB of ACI Telecentrics, Incorporated for the year ended December 31,
1998.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, MN
March 30, 1999
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