SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
__ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OR THE EXCHANGE ACT
For the transition period from _____ to _____
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
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 [ ]
The Company had 5,756,267 shares of common stock, no par value per
share, outstanding as of November 12, 1999.
Transitional Small Business Disclosure Format
(Check One): YES [ ] NO [ X ]
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ACI TELECENTRICS, INCORPORATED
FORM 10-QSB
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements (unaudited)
Balance Sheets
Statements of Operations
Statements of Cash Flows
Notes to Financial Statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
Item 6 Exhibits and Reports on Form 8-K
Signature Page
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ACI TELECENTRICS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 309,441 $ 1,300,681
Trade receivables, less allowance for doubtful
accounts of $116,079 and $140,000, respectively 4,449,349 1,456,431
Deferred income taxes 365,000 365,000
Prepaid expenses 50,340 111,117
</TABLE>
2
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<TABLE>
<S> <C> <C>
Other current assets 61,985 131,667
--------------- ---------------
Total Current Assets 5,236,115 3,364,896
Property and equipment, net of accumulated depreciation 2,269,871 2,824,381
OTHER ASSETS:
Goodwill, less accumulated amortization of
$151,556 and $99,000, respectively 899,302 951,858
Deferred income taxes 137,000 137,000
Other assets 132,746 63,676
--------------- ---------------
Total other assets 1,169,048 1,152,534
--------------- ---------------
TOTAL ASSETS $ 8,675,034 $ 7,341,811
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 250,000 $ --
Trade accounts payable 891,876 482,628
Accrued expenses 545,074 204,728
Income taxes payable 215,837 15,713
Current portion of long-term debt and capital lease obligations 299,224 356,980
--------------- ---------------
Total current liabilities 2,202,011 1,060,049
LONG TERM LIABILITIES:
Long-term debt and capital lease obligations, less current portion 132,851 257,711
Deferred capital lease liabilities, less current portion 314,999 473,201
--------------- ---------------
Total long-term liabilities 447,850 730,912
SHAREHOLDERS' EQUITY:
Common stock, no par value;
Authorized - 15,000,000
Issued and outstanding shares - 5,756,267
and 5,731,471, respectively 6,638,531 6,620,145
Accumulated deficit (613,358) (1,069,295)
--------------- ---------------
Total shareholders' equity 6,025,173 5,550,850
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,675,034 $ 7,341,811
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
ACI TELECENTRICS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
TELEMARKETING REVENUES $ 5,401,413 $ 3,574,772 $ 15,588,828 $ 11,433,674
COST OF SERVICES 3,257,756 1,920,769 9,071,796 6,414,202
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,002,086 1,919,342 5,734,783 6,171,840
------------ ------------ ------------ ------------
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
OPERATING INCOME (LOSS) 141,571 (265,339) 782,249 (1,152,368)
OTHER INCOME (EXPENSE)
Interest income 3,510 7,514 12,999 31,245
Interest expense (26,818) (17,048) (53,890) (43,062)
Other, net -- -- (5,721) 10,133
------------ ------------ ------------- ------------
Total other income (expense) (23,308) (9,534) (46,612) (1,684)
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE TAXES 118,263 (274,873) 735,637 (1,154,052)
INCOME TAX EXPENSE (BENEFIT) 46,000 (103,200) 279,700 (438,200)
------------ ------------- ------------ -------------
NET INCOME (LOSS) $ 72,263 $ (171,673) $ 455,937 $ (715,852)
============ ============ ============ =============
Basic and diluted net income (loss)
per share $ .01 $ (.03) $ .08 $ (.12)
============ ============= ============ ============
Basic shares used in computing net
income (loss) per share 5,756,267 5,720,404 5,747,372 5,718,843
============ ============ ============ ============
Diluted shares used in computing net
income (loss) per share 5,770,017 5,720,404 5,761,055 5,718,843
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
ACI TELECENTRICS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 455,937 $ (715,852)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 765,060 691,992
Provision for losses on accounts receivable (23,921) --
Amortization of deferred capital lease liabilities (193,551) (103,550)
Loss on sale of equipment 5,720 --
Equity-based compensation 10,300 --
Deferred income taxes -- (413,612)
Changes in operating assets and liabilities:
Trade receivables (2,968,997) (157,444)
Prepaid expenses 60,777 --
Other current assets 69,682 (13,248)
Accounts payable and accrued expenses 749,594 (198,068)
Income taxes 200,124 442,507
-------------- -------------
Net cash used in operating activities (869,275) (467,275)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (203,714) (259,849)
Proceeds from sale of assets 40,000 --
Decrease (increase) in other assets (69,070) 11,920
</TABLE>
4
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<TABLE>
<S> <C> <C>
Decrease in restricted investments -- 493,345
------------- -------------
Net cash (used in) provided by investing activities (232,784) 245,416
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit 250,000 --
Net proceeds from issuance of common stock 8,086 27,299
Proceeds from sale and leaseback of equipment -- 93,922
Proceeds from deferred grants -- 250,000
Repayments of long-term debt and capital leases (147,267) (120,437)
------------- --------------
Net cash provided by financing activities 110,819 250,784
------------- -------------
NET (DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS (991,240) 28,925
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,300,681 659,042
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 309,441 $ 687,967
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NON CASH INVESTING AND FINANCING TRANSACTIONS:
Equipment acquired through capital leases $ -- $ 372,773
Deferred grant $ -- $ 76,565
CASH PAID FOR INTEREST AND TAXES:
Income taxes paid (refunds received) $ 79,576 $ (467,095)
Cash paid for interest $ 47,562 $ 43,062
</TABLE>
See accompanying notes to consolidated financial statements.
ACI TELECENTRICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(1) BASIS OF PRESENTATION
The balance sheet of ACI Telecentrics, Incorporated and subsidiary (the
"Company") as of September 30, 1999 and the related statements of
operations and cash flows for the three and nine months ended September
30, 1999 and 1998, have been prepared by the Company without being
audited. In the opinion of management, these statements reflect all
adjustments consisting of all normal recurring entries necessary to
present fairly the financial position of the Company as of September
30, 1999 and the results of operations and cash flows for all periods
presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
Therefore, these financial statements should be read in conjunction
with the financial statements and notes thereto included in the
Company's 1998 Form 10-KSB. The results of operations for interim
periods are not necessarily indicative of results which will be
realized for the full fiscal year.
Effective January 1999, the Company dissolved its only subsidiary ACI
Telecentrics of Illinois, Inc., and merged its operations into ACI
Telecentrics, Inc. These financial statements include the consolidated
balance sheet as of December 31, 1998 and the related consolidated
statements of operations for the three and nine months ended September
30, 1998 and cash flows for the nine months ended September 30, 1998.
The balance sheet at September 30, 1999, the related statements of
operations for the three and nine months ended September 30, 1999 and
cash flows for the nine months ended September 30, 1999 are for the
merged entity.
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(2) EARNINGS (LOSS) PER SHARE (SFAS 128)
Basic earnings per share are computed by dividing earnings available to
common shareholders by the weighted average number of common shares
outstanding during each period. Diluted earnings per share are computed
after giving effect to the exercise of all dilutive outstanding options
and warrants. Both basic and diluted earnings per share for the three
and nine months ending September 30, 1999 were the same. Basic and
diluted earnings per share for the three and nine months ended
September 30, 1998 were the same due to net losses; the impact of the
potential common shares outstanding would have been anti-dilutive. The
following table reconciles the denominators used in computing basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 5,756,267 5,720,404 5,747,372 5,718,843
Effect of dilutive stock options 13,750 -- 13,683 --
------------------------------------------------------
5,770,017 5,720,404 5,761,055 5,718,843
======================================================
</TABLE>
(3) DISCONTINUED OPERATIONS
During May 1998, the Company closed its inbound call center operations
in Lombard, IL. As a result, the Company exited the inbound call center
business. The net loss, on an after tax basis, accounted for $221,000
($.04 per share) of the losses for the nine months ending September 30,
1998.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 1999:
Furniture 950,407
Equipment 4,282,639
Leasehold Improvements 93,816
----------------
5,326,862
Less accumulated depreciation and amortization 3,056,991
----------------
Net property and equipment $ 2,269,871
================
The Company has equipment under capitalized leases totaling $513,615.
(5) LINE OF CREDIT
At September 30, 1999, the Company had outstanding borrowings of
$250,000 under its $2 million revolving line of credit. The loan
agreement contains provisions requiring compliance with certain
financial covenants. As of September 30, 1999, the Company was in
compliance with all covenants and had obtained a waiver from the lender
for the Company's violation of certain loan covenants as of March 31,
1999 and December 31, 1998. Additionally, effective April 30, 1999, the
Company and its lending institution executed an "Amended and Restated
Revolving Credit Loan Agreement" that amended certain covenants and
other loan provisions. Management believes that it will be able to
maintain compliance with all debt covenants during 1999.
(6) FACILITY CLOSING
On May 28, 1999, the Company closed its Devils Lake, North Dakota call
center. A number of factors led to this decision, including a decision
by the City of Devils Lake to facilitate the opening of a call center
by a competing teleservices firm. To meet and maintain increased
capacity demands, a temporary call center has been re-established in
Devils Lake, North Dakota.
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During the second quarter of fiscal 1999, the Company recognized as
income $60,000 associated with the City of Devils Lake waiving the
remaining balance on an unamortized forgivable grant.
(7) FACILITY OPENING
During the third quarter of fiscal 1999, the Company opened a 100 seat
outbound call center in Redding, California. This call center is the
Company's 10th call center and increased the Company's overall call
center capacity by 20%. During October and November 1999 this call
center is being expanded by an additional 40 seats to meet increased
capacity demands.
PART 1 FINANCIAL INFORMATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
ACI Telecentrics, Incorporated (ACI) provides telephone-based sales and
marketing services primarily to the telecommunications, insurance, publishing
and financial services industries. ACI was established in 1987 in Minneapolis,
Minnesota. The Company operates ten outbound call centers; nine of which are
located in five Midwest states and one in the state of California. As of
September 30, 1999, these 10 call centers had 546 calling stations. The Company
had 810 full and part-time employees as of September 30, 1999.
Revenue from telemarketing services is recognized as these services are
performed and is 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, general and
administrative expenses include administrative, sales, marketing, occupancy,
depreciation and other indirect costs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUE. Revenues for the three months ended September 30, 1999
increased $1,826,641, or 51.1% to $5,401,413, compared to third quarter 1998
revenues of $3,574,772. Billable hours increased by 51.9% when compared to the
prior year period, however, revenue per billable hour decreased by approximately
0.6% when compared to the third quarter of 1998. During the period the Company
also utilized other telemarketing companies to perform some of its services,
although to a greater extent than during the same period in 1998. The Company
derived 9.6% of its third quarter 1999 revenues from outsourcing compared to
1.4% during the same period in 1998. The increase in the use of other
telemarketing companies was due to significantly increased client demand and the
unavailability of the additional capacity of the Redding, California call center
which did not open until September 1999. The Company operated an average of 479
call stations during the third quarter of 1999 compared to an average of 454 for
the same period in 1998.
Historically, the telecommunications industry segment has provided the
largest percentage of the Company's revenues. In a shift away from this
historical trend, financial services clients provided approximately 55% of third
quarter 1999 revenues compared to approximately 12% of revenues during the third
quarter of 1998. During the 1999 period the Company's largest client represented
approximately 25% of total revenue. During the prior year period the Company's
largest client represented approximately 36% of total revenue. Other industry
segments and their percentages of revenue in 1999 include publishing (9%),
insurance (15%) and telecommunications (19%).
COST OF SERVICES. Cost of services in the third quarter of 1999
increased $1,336,987, or 69.6% to $3,257,756, compared to $1,920,769 in the
third quarter of 1998. Third quarter 1999 labor and benefit costs increased by
$868,818, or 60.9% when compared to the third quarter of 1998. Long distance
telephone costs for telemarketing operations increased by $54,923, or 12.6% in
the third quarter of 1999 when compared to the 1998
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period. Outsourced telemarketing service costs for the 1999 period increased
$361,541, or 975.7% when compared to the same period of 1998.
As a percentage of revenue, cost of services for the 1999 third quarter
increased by 6.6% to 60.3% compared to 53.7% in the third quarter of 1998. This
increase was primarily the result of outsourced services expenses increasing, as
a percentage of revenue, to 7.4% in 1999 as compared to 1.0 % in 1998.
Outsourcing services are costs associated with the Company's utilization of
other telemarketing companies for telemarketing some of its clients' programs.
During the third quarter of 1999 the outsourced services had a cost of 77.0%
compared to 73.4% during the 1998 period. Third quarter cost of services for
internally generated telemarketing was 58.5% in 1999 and 53.4% in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative expenses for the third quarter of 1999 increased $82,744, or
4.3% to $2,002,086, from $1,919,342 during the third quarter of 1998. As a
percentage of revenue, selling, general and administrative expenses decreased to
37.1% in 1999 period compared to 53.7% during the third quarter of 1998.
Selling, general and administrative expenses for call center operations
increased approximately $22,000 during the third quarter of 1999 when compared
to the same period in 1998. The increase can be attributed to the opening of the
Redding, California call center in September 1999. The increased expenses
associated with the opening of the Redding call center were partially offset by
a decrease in salary and related benefits expenses at the Company's other nine
call centers. Corporate selling, general and administrative expenses increased
approximately $60,000 during the same period. The increase in corporate expenses
was primarily the result of a increase in the use of outside consultants, higher
commissions being paid on increased revenues and an increase in travel as part
of the opening of the Redding call center. These increases were partially offset
by a decrease in salary and related benefits expenses.
OPERATING INCOME (LOSS). As a result of the factors discussed above,
the Company experienced third quarter operating income of $141,571, a $406,910
increase compared to the third quarter 1998 operating loss of $265,339. As a
percentage of revenue, operating income during the quarter was 2.6% compared to
a loss of 7.4% during the third quarter of 1998.
OTHER INCOME AND EXPENSES, NET. Other expenses, consisting entirely of
net interest expense amounts, were $23,308 in 1999 compared to $9,534 in 1998.
The increase in net interest expense was the result of lower cash investment
balances producing lower interest income and an increase in borrowing activity
under the Company's line of credit.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE. Pretax income for
the third quarter of 1999 was $118,263, a $393,136 increase compared to a pretax
loss of $274,873 in the third quarter of 1998. The Company recorded income tax
expense of $46,000, an effective tax rate of 39%, for the third quarter of 1999
compared to an income tax benefit of $103,200, an effective tax rate of 38%, in
the third quarter of 1998. Net income for the third quarter 1999 was $72,263, or
$.01 per share on a basic and fully diluted basis compared to a net loss of
$171,673, or $.03 per basic share in the third quarter of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUE. Revenues for the nine months ended September 30, 1999
increased $4,155,154 or 36.3% to $15,588,828, compared to 1998 revenues of
$11,433,674. Billable hours increased by 40.8% when compared to the prior year
period, however, revenue per billable hour decreased by approximately 3.2% when
compared to the same period of 1998. During the 1999 period the Company utilized
other telemarketing companies, to a slightly greater extent than during the 1998
period, to perform some of its services. However, as a percentage of revenue,
the Company derived a smaller portion of its 1999 revenues (7.7%) from
outsourcing compared to 8.6% during the same period in 1998. The Company
operated an average of 462 call stations during the nine months ended September
30, 1999 compared to 430 during the same period in 1998.
Historically, the telecommunications industry segment has provided the
largest percentage of the Company's revenues. In a shift away from this
historical trend, financial services clients provided approximately 46% of 1999
nine month revenues compared to approximately 17% of 1998 revenues. During the
1999 period the
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Company's largest client represented approximately 20% of total revenue. During
the prior year period the Company's largest client represented approximately 23%
of total revenue. Other industry segments and their percentages of revenue in
1999 include publishing (18%), insurance (10%) and telecommunications (24%).
COST OF SERVICES. Cost of services for the nine months ended September
30, 1999 increased $2,657,594, or 41.4% to $9,071,796, compared to $6,414,202
during the 1998 period. Labor and benefit costs during the nine months ended
September 30, 1999, increased by $2,128,897, or 50.4% when compared to the same
period of 1998. Long distance telephone costs for telemarketing operations
increased by $313,301, or 24.0% in the nine months of 1999 when compared to the
1998 period. During the nine months of 1999, outsourced telemarketing service
costs increased by $109,951, or 13.6%, compared to the same period of 1998.
As a percentage of revenue, cost of services for the nine month period
ended September 30, 1999, increased to 58.2% compared to 56.1% in the same
period of 1998. The 2.1% increase in cost of services, as a percentage of
revenue, was the result of a 3.8% increase in labor and benefit costs which was
partially offset by a 1.0% decrease in long distance telephone costs and a 1.2%
decrease in outsourced services expenses. Outsourcing services are costs
associated with the Company's utilization of other telemarketing companies for
telemarketing some of its client's programs. During the nine months of 1999 the
outsourced services had a cost of 76.7% compared to 82.2% during the 1998
period. Cost of services for internally generated telemarketing was 56.7% in
1999 period and 53.6% in 1998 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $5,734,783 for the nine months ended September 30,
1999 compared to $6,171,840 in 1998, a decrease of $437,057 or 7.1%. As a
percentage of revenue, selling, general and administrative expenses decreased to
36.8% in 1999 compared to 54.0% during 1998. Selling, general and administrative
expenses for call center operations decreased approximately $203,000 during the
first nine months of 1999 when compared to the same period in 1998. The decrease
can primarily be attributed to the closing of the Lombard, Illinois inbound call
center in May of 1998. Corporate selling, general and administrative expenses
decreased approximately $234,000 during the same period. The decrease in
corporate expenses was primarily the result of a decrease in salary and related
benefits. Salary and related benefits, for call center and corporate operations,
accounted for approximately $528,000, or 120.8% of the 1999 expense decrease.
OPERATING INCOME (LOSS). As a result of the factors discussed above,
the operating income for the first nine months of 1999 was $782,249, a
$1,934,617 increase compared to an operating loss of $1,152,368 in 1998. As a
percentage of revenue, operating income during the 1999 period was 5.0% compared
to a loss of 10.1% during 1998. The Company's closed inbound call center in
Lombard, Illinois 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 $46,612 in 1999
compared to $1,684 in 1998. Interest was a net expense amount of $40,891 and
$11,817 in 1999 and 1998, respectively. The increase in net interest expense was
the result of lower cash investment balances producing lower interest income and
an increase in borrowing activity under the Company's line of credit.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE. Pretax income for
the nine months ended September 30, 1999, was $735,637, a $1,889,689 increase
compared to a pretax loss of $1,154,052 in the same period of 1998. The Company
recorded income tax expense of $279,700, an effective tax rate of 38%, for 1999
compared to an income tax benefit of $438,200, an effective tax rate of 38%, in
1998. Net income for 1999 was $455,937, or $.08 per share on a basic and fully
diluted basis compared to a net loss of $715,852, or $.12 per basic share in
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically used cash from operating activities, bank
borrowings, capital leases and public and private sector financing received 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 November 1997 the Company's Board of Directors
authorized a $2 million revolving line of credit which became effective in
January 1998. At September 30, 1999, the Company had outstanding borrowings of
$250,000 under the line of credit.
At September 30, 1999, the Company had cash and cash equivalents of
$309,441 compared to $1,300,681 at December 31, 1998. For the nine months ended
September 30, 1999 cash used by operating activities was
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$869,275 compared to cash used by operating activities of $467,275 in the 1998
period. Cash used in 1999 operating activities was primarily the result of an
increase of $2,968,997 in Accounts Receivable balances. This increase in
Accounts Receivable balances is due to the 36.3% increase in revenue and to
balances of $1,308,000 for new clients with payment terms of sixty days. This
increase was partially offset by cash provided by net income of $455,937,
depreciation and amortization of $765,060, changes in working capital components
of $1,080,177 and non-cash items of $201,452. Cash flows used by operating
activities in the 1998 period included the net loss of $715,852, changes in
working capital components of $73,747 and non-cash items of $517,162. These uses
were partially offset by cash provided by depreciation and amortization of
$691,992.
Net cash used by investing activities in the nine months ended
September 30, 1999 was $232,784 compared to net cash provided by investing
activities of $245,416 in 1998. The purchase of $203,714 of property and
equipment and an increase of $69,070 in other assets was partially offset by
proceeds of $40,000 received from the sale of assets. During the 1998 period the
Company had net purchases of property and equipment of $259,849. The release of
restricted investments in the amount of $493,345 offset the property and
equipment purchases.
Net cash provided by financing activities during the nine months of
1999 was $110,819 compared to $250,784 during 1998. The primary source of this
cash was $250,000 borrowed under the Company's revolving line of credit. In
addition, the Company issued stock from its Employee Stock Purchase Plan for
$7,586 and for the exercise of stock options for $500. Proceeds for 1999 were
partially offset by repayments of long-term debt and capital leases in the
amount of $147,267. Cash flows from financing activities during the first nine
months of 1998 included $250,000 of public sector grants received, $93,922
received from the sale and leaseback of capital equipment leases for equipment
purchased in 1997 and proceeds of $27,299 from the issuance of common stock
under the Company's Employee Stock Purchase Plan. These cash proceeds were
partially offset by repayment of long-term debt and capital leases in the amount
of $120,437.
During the nine months ending September 30, 1999 the Company did not
acquire any assets through capital leases. During the comparable 1998 period the
Company financed $372,773 of asset purchases through capital leases.
As a result, net cash and cash equivalents decreased by $991,240 during
the first nine months of 1999 compared to an increase of $28,925 in 1998. The
Company believes that funds available at September 30, 1999, 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 closed on a $644,820 "Capital Equipment Lease Financing" arrangement in
October 1999 to fund equipment purchases to open the new Redding, CA call
center. The Company has no other material commitments for capital expenditures
during the remainder of 1999.
QUARTERLY RESULTS
The telemarketing industry tends to be slower in the first and third
quarters of the year because client marketing and customer service programs are
typically slower in the post-holiday and summer months. The Company has
experienced, and expects to continue to experience, quarterly fluctuations in
revenues and operating income principally as a result of the timing of clients'
telemarketing campaigns, the commencement of new contracts, changes in the
Company's revenue mix, opening of new call centers, and the additional selling,
general and administrative expenses to acquire and support such new business.
OUTLOOK
Certain of the statements in this section are "forward-looking
statements" within the meaning of the federal securities laws. The following
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed or implied by
such statements.
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. There is no assurance that the Company's marketing efforts will
continue to generate new business or that businesses will continue to outsource
their telemarketing needs. Client demand is extremely volatile in the Company's
business
10
<PAGE>
and may decrease notwithstanding the Company's efforts to diversify and
stabilize its client base. There is no assurance that client demand will fulfill
expectations based on current and anticipated customer orders and that business
will be generated from new customers at anticipated levels. 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 currently has enough capacity in its 10
existing call centers to handle current demand from existing and new clients.
Should demand from existing and/or new clients continue to increase as it has
the Company may need to add additional call centers in the year 2000.
While the Company anticipates an increase in demand for its services
during the remainder of 1999, there is no assurance that the Company, due to the
current low unemployment levels, will be able to hire and train all of the
necessary personnel in the most cost-efficient manner to fully utilize the
currently existing capacity to meet this increased demand.
For the nine months ending September 30, 1999, the Company reduced its
selling, general and administrative expenses by over $400,000 when compared to
the nine months ending September 30, 1999. These reductions are a result of the
Company's effort to improve its processes to reduce costs and increase the
efficiency of the organization. However, if the Company's growth continues, the
Company may not be able to maintain its lower level of SG&A expenses. There is
no assurance that further cost reductions will continue to be realized or that
these costs can be contained.
With the quarter ending September 30, 1999, the Company posted profits
for the third consecutive quarter. During the first quarter of 1999 the Company
returned to profitability for the first time since the second quarter of 1997; a
time span of seven quarters. There is no assurance that the Company will be able
to maintain profitability in 1999.
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.
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 is
currently making necessary software conversion and programming modifications to
comply with the Year 2000 issues and believes that all other appropriate actions
are being taken. 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 and the first
quarter of 1999 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 all nine (9) of its call
centers. Total costs for the equipment and software enhancements, including year
2000 compliance, was approximately $147,500. These costs were capitalized. The
Company has incurred additional Y2K costs of approximately $40,000. These costs
have not been capitalized. Additional costs to upgrade the Company's internal
information systems are expected to cost approximately $100,000. These
additional costs will also not be capitalized and will be treated as expenses as
they are incurred.
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
11
<PAGE>
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.
The Company expects to complete its overall Year 2000 conversions prior
to any impact on its operations. However, should the Company not be able to
complete its Year 2000 conversions prior to an impact on its operations, the
Company has developed a contingency plan to deal with any issues that may arise
as a result of systems that stop processing date related computations or
processes them incorrectly. In addition, the Company has also developed
contingency plans for any failure of the Company's customers and/or suppliers
systems and applications to be Year 2000 compliant.
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.
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) 27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACI TELECENTRICS, INCORPORATED
Registrant
Dated: November 12, 1999 By:/s/RUSSEL JACKSON
----------------------------------------
Russell Jackson
Chief Financial Officer
(Principal Accounting Officer)
Dated: November 12, 1999 By:/s/RICK N. DIAMOND
----------------------------------------
Rick N. Diamond
Chief Executive Officer and Director
12
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
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<ALLOWANCES> 116,079
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