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, 2000
___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF 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 5,775,241 shares of common stock, no par value per share,
outstanding as of October 25, 2000.
Transitional Small Business Disclosure Format (Check One): YES [ ] NO [X]
<PAGE>
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 6 Exhibits and Reports on Form 8-K
Signature Page
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ACI TELECENTRICS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 120,987 $ 199,295
Trade receivables, less allowance for doubtful
accounts of $214,000 and $140,000, respectively 4,987,639 5,413,351
Income tax receivable -- 20,312
Deferred income taxes 539,000 539,000
Prepaid expenses 183,886 141,742
Grant receivable 571,463 --
Other current assets 63,079 66,595
------------ ------------
Total current assets 6,466,054 6,380,295
Property and equipment, net of accumulated depreciation 3,156,179 2,701,923
OTHER ASSETS:
Goodwill, less accumulated amortization of
$169,000 -- 881,783
Deposits 1,447,440 57,434
------------ ------------
Total other assets 1,447,440 939,217
------------ ------------
TOTAL ASSETS $ 11,069,673 $ 10,021,435
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 630,692 $ 850,000
Trade accounts payable 1,607,881 872,542
Accrued compensation 524,271 461,584
Accrued expenses 60,165 161,786
Income taxes payable 182,091 --
Current portion of long-term debt and capital lease obligations 478,349 452,998
------------ ------------
Total current liabilities 3,483,449 2,798,910
LONG-TERM LIABILITIES:
Long-term debt and capital lease obligations, less current portion 575,745 523,160
Deferred capital lease liabilities, less current portion 175,000 280,000
Deferred income taxes 323,000 323,000
------------ ------------
Total long-term liabilities 1,073,745 1,126,160
SHAREHOLDERS' EQUITY:
Common stock, no par value;
Authorized - 15,000,000
Issued and outstanding shares - 5,775,241
and 5,756,267, respectively 6,653,355 6,638,531
Accumulated deficit (140,876) (542,166)
------------ ------------
Total shareholders' equity 6,512,479 6,096,365
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,069,673 $ 10,021,435
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
ACI TELECENTRICS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
TELEMARKETING REVENUES $ 6,999,754 $ 5,401,413 $ 22,060,533 $ 15,588,828
COST OF SERVICES 3,503,831 3,257,756 12,589,230 9,071,796
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,939,319 2,002,086 7,832,504 5,734,783
IMPAIRMENT COST (Note 2) 846,745 -- 846,745 --
------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (290,141) 141,571 792,054 782,249
OTHER INCOME (EXPENSE)
Interest income 2,179 3,510 5,519 12,999
Interest expense (50,173) (26,818) (126,767) (53,890)
Other, net (9,843) -- (10,516) (5,721)
------------ ------------ ------------ ------------
Total other income (expense) (57,837) (23,308) (131,764) (46,612)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE TAXES (347,978) 118,263 660,290 735,637
INCOME TAX (BENEFIT) EXPENSE (135,000) 46,000 259,000 279,700
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (212,978) $ 72,263 $ 401,290 $ 455,937
============ ============ ============ ============
(LOSS) EARNINGS PER SHARE:
Basic $ (.04) $ .01 $ .07 $ .08
============ ============ ============ ============
Diluted $ (.04) $ .01 $ .07 $ .08
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES ASSUMED OUTSTANDING:
Basic 5,775,064 5,756,267 5,769,541 5,747,372
Diluted 6,014,090 5,770,017 6,087,484 5,761,055
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ACI TELECENTRICS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 401,290 $ 455,937
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 950,020 765,060
Provision for losses on accounts receivable 150,000 (23,921)
Amortization of deferred capital lease liabilities (115,701) (193,551)
Noncash impairment cost 846,745 --
(Gain) loss on sale of equipment (69) 5,720
Equity-based compensation -- 10,300
Changes in operating assets and liabilities:
Trade receivables 275,712 (2,968,997)
Prepaid expenses (42,144) 60,777
Grant receivable (571,463) --
Other current assets 3,516 69,682
Trade accounts payable, accrued compensation
and accrued expenses 696,406 749,594
Income taxes 202,403 200,124
------------ ------------
Net cash provided by (used in) operating activities 2,796,715 (869,275)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (990,176) (203,714)
Proceeds from sale of assets -- 40,000
Increase in deposits (1,390,006) (86,935)
Decrease in other assets -- 17,865
------------ ------------
Net cash used in investing activities (2,380,182) (232,784)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit 11,651,892 1,850,000
Payments on revolving line of credit (11,871,200) (1,600,000)
Net proceeds from issuance of common stock 14,824 8,086
Repayments of long-term debt and capital leases (290,357) (147,267)
------------ ------------
Net cash (used in) provided by financing activities (494,841) 110,819
------------ ------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (78,308) (991,240)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 199,295 1,300,681
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 120,987 $ 309,441
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NON CASH INVESTING AND FINANCING TRANSACTIONS:
Equipment acquired through capital leases $ 378,993 $ --
CASH PAID FOR INTEREST AND TAXES:
Income taxes paid, net $ 69,456 $ 79,576
Cash paid for interest $ 116,653 $ 47,562
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
ACI TELECENTRICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(1) BASIS OF PRESENTATION
The balance sheet of ACI Telecentrics, Incorporated and subsidiary (the
"Company") as of September 30, 2000 and the related statements of
operations and cash flows for the three and nine months ended September
30, 2000 and 1999, 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 (except for the
impairment charge as discussed in Note 2) necessary to present fairly
the financial position of the Company as of September 30, 2000 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 1999 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 April 7, 2000, the Company established its only subsidiary,
Corporation ACI Telecentrics Du Quebec, Inc. These financial statements
include the consolidated balance sheet as of September 30, 2000 and the
related consolidated statements of operations for the three and nine
months ended September 30, 2000 and the consolidated statement of cash
flows for the nine months ended September 30, 2000 after elimination of
any intercompany transactions.
(2) IMPAIRMENT COST
During the quarter ended September 30, 2000, the company recorded an
impairment of asset charge of $846,745, based on the requirements under
the Statement of Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets", related to goodwill recorded from its
Britcom acquisition of August 1, 1997. The company concluded an
impairment charge was required based on discounted historical results
and current projections of future cash flow to which the Britcom
goodwill relates. In the three months ended September 30, 2000, the
company elected to exit the license insurance industry and to expand to
more profitable industries after the loss of a significant customer.
(3) EARNINGS 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, 2000 and 1999 were the same. 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,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 5,775,064 5,756,267 5,769,541 5,747,372
Effect of dilutive stock options 239,026 13,750 317,943 13,683
--------- --------- --------- ---------
6,014,090 5,770,017 6,087,484 5,761,055
========= ========= ========= =========
</TABLE>
6
<PAGE>
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Furniture $1,542,875 $1,161,088
Equipment 4,843,643 4,469,976
Leasehold improvements 110,243 109,313
---------- ----------
6,496,761 5,740,377
Less accumulated depreciation and amortization 3,340,582 3,038,454
---------- ----------
Net property and equipment $3,156,179 $2,701,923
========== ==========
</TABLE>
At September 30, 2000 and December 31, 1999, the Company has
equipment under capitalized leases totaling $1,541,095 and $1,162,102,
respectively.
(5) LINE OF CREDIT
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 (9.5% at September 30,
2000). The borrowing base includes, and is secured by, certain accounts
receivable and furniture and equipment. The loan agreement also
contains provisions requiring compliance with certain financial
covenants including prohibiting the payment of cash dividends without
the bank's consent. Effective April 30, 1999, the Company and its
lending institution executed an "Amended and Restated Revolving Credit
Loan Agreement" that amended certain loan covenants and other loan
provisions. On August 21, 2000, the Company and its lending institution
executed a Second Amendment to the revolving line of credit agreement.
In addition to increasing the line of credit to $4,000,000, the Second
Amendment amended certain loan covenants and other loan provisions. The
loan expires on July 31, 2001. As of September 30, 2000, the Company
was in compliance with all covenants. At September 30, 2000, the
Company had outstanding borrowings of $630,692 under the revolving line
of credit with an available credit line of $3,369,308.
(6) FACILITY OPENING
During the second quarter of fiscal 2000, the Company opened a 100 seat
call center in Sherbrooke, Quebec, Canada. This call center is the
Company's 11th call center and increased the Company's overall call
center capacity by approximately 18%. This call center is equipped with
a new technology that will enable the Company to provide outbound,
inbound and Internet-based consumer contact services from the same
teleservices equipment. Because of increased client demand for the
Company's services, during the third quarter the Company expanded this
call center by another 100 seats, for a total of 200 seats.
(7) ECONOMIC DEVELOPMENT GRANT
During April 2000, the Company entered into a financial contribution
agreement with the Government of Quebec, Canada. Under this agreement
the Company agreed to open a call center in Sherbrooke, Quebec, Canada.
Grants received from the Government of Quebec will be based in part on
the number of jobs created by the new call center. The grant has a two
year term. The Company paid an application fee of approximately $15,000
US dollars to the province of Quebec to secure this grant. A finders
fee of approximately $168,000 (US dollars) was paid to an outside
consulting firm for their assistance in securing the grant. During the
year 2000, the Company recorded as a reduction of costs approximately
$1,120,000 (US dollars) from the province of Quebec for new jobs
created pursuant to the terms of the Economic Development Agreement.
For the year, cost of services were reduced by $710,000; the remaining
$227,000 was used to reduce selling, general and administrative
expenses.
7
<PAGE>
(8) REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in
Financial Statement". SAB No. 101 summarizes certain of the SEC staff's
views in applying generally accepted accounting principles to selected
revenue recognition issues. SAB No. 101 is to be implemented by the
Company no later than the fourth quarter of fiscal 2000. The Company is
currently reviewing SAB No. 101 and its effects on the financial
statements, but does not expect it to have a significant effect on its
financial positions or results of its operations.
8
<PAGE>
PART I 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, financial services,
publishing and utilities industries. ACI was established in 1987 in Minneapolis,
Minnesota. The Company operates ten outbound call centers and one
inbound/outbound call center; nine of which are located in five Midwest states,
one in the state of California and one in the province of Quebec, Canada. As of
September 30, 2000, these 11 call centers had 686 calling stations. The Company
had 1,250 full and part-time employees as of September 30, 2000.
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, 2000, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
REVENUE. Revenues for the third quarter ended September 30, 2000
increased $1,598,341, or 30% to a record $6,999,754, compared to third quarter
1999 revenues of $5,401,413. Billable hours increased by 33% when compared to
the prior year period. The increases in revenues and billable hours can
primarily be attributed to increased internal capacity due to the opening of two
new call centers; one in September 1999 and the other in April 2000. The Company
operated an average of 643 call stations during the third quarter of 2000
compared to an average of 479 for the same period in 1999.
Financial services clients provided approximately 50% of third quarter
2000 revenues compared to approximately 55% of revenues during the third quarter
of 1999. During the third quarter of 2000, the Company's largest client
represented approximately 21% of total revenue. During the third quarter of
1999, the Company's largest client represented approximately 24% of total
revenue. Other industry segments and their percentages of revenue in 2000
include publishing (12%) and telecommunications (34%).
COST OF SERVICES. Cost of services for the third quarter of 2000
increased $246,075, or 8% to $3,503,831, compared to $3,257,756 in the third
quarter of 1999. The increase in cost of services is primarily the result of the
30% increase in revenues. Third quarter 2000 labor and benefit costs and long
distance telephone costs increased when compared to the third quarter of 1999.
These increases were partially offset by a decrease, in the 2000 period, of
outsourced telemarketing service costs as compared to the 1999 period. During
the third quarter, without the effect of the economic development grant from the
province of Quebec for new jobs created at the Company's Sherbrooke, Quebec call
center, cost of services would have increased $720,614, or 22% to $3,978,369.
For the third quarter, cost of services, specifically labor and benefits costs,
were reduced by approximately $474,000 for the net economic development grant.
As a percentage of revenue, cost of services for the third quarter of
2000 decreased by 10% to 50% compared to 60% in the third quarter of 1999. This
decrease was primarily the result of the effect of the economic development
grant reducing cost of services in the third quarter of 2000. Labor and benefits
costs and outsourced services expenses decreased, as a percentage of revenue, in
the third quarter of 2000 when compared to the same period of 1999. Outsourcing
services are costs associated with the Company's utilization of other
telemarketing companies for telemarketing some of its clients' programs. Third
quarter of 2000 cost of services for internally generated telemarketing was 49%
in 2000 and 59% in 1999. Without the effect of the economic development grant,
cost of services, as a percentage of revenue, would have decreased 3% to 57%
compared to 60% in the third quarter of 1999. Without the effect of the economic
development grant, cost of services for internally generated telemarketing was
56%.
9
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative expenses for the third quarter of 2000 increased $937,233, or
47% to $2,939,319, from $2,002,086 during the third quarter of 1999. However, as
a percentage of revenue, selling, general and administrative expenses increased
by only 5% to 42% in 2000 compared to 37% during the third quarter of 1999. The
absolute dollar increase in expenses for call center operations during the third
quarter of 2000 when compared to the same period in 1999 can be primarily
attributed to the expenses associated with the Redding, California and the
Sherbrooke, Quebec call centers which were opened in September 1999 and April
2000, respectively. Corporate selling, general and administrative expenses
increased in the third quarter of 2000 as compared to the same period in 1999.
The increase in corporate expenses was primarily the result of an increase in
costs of personnel hired to handle current and future business.
IMPAIRMENT COST. During the third quarter of 2000, the Company recorded
an impairment of asset charge of $846,745 related to goodwill recorded from its
August 1997 acquisition of Britcom. See prior discussion in Note 2 of Notes to
Consolidated Financial Statements.
OPERATING (LOSS) INCOME. Due to the factors listed above, the Company
recorded a third quarter operating loss of $290,141, a $431,712 decrease
compared to the third quarter 1999 operating income of $141,571. As a percentage
of revenue, the operating loss during the quarter was 4%. Operating income
during the third quarter of 1999 as a percentage of revenue was 3%. Operating
loss for the third quarter of 2000 would have been $764,678 or 11% as a
percentage of revenue when the effect of the economic development grant is not
considered.
OTHER INCOME AND EXPENSES, NET. Other expenses were $57,837 in the
third quarter of 2000 compared to $23,308 in the same period of 1999. The
increase in other net expenses was the result of increases in borrowing activity
under the Company's line of credit, equipment lease financing and losses on
foreign currency exchanges.
NET (LOSS) INCOME AND NET (LOSS) INCOME PER SHARE. Pretax loss for the
third quarter of 2000 was $347,978, a $466,241 decrease compared to a pretax
income of $118,263 in the third quarter of 1999. The Company recorded an income
tax benefit of $135,000, an effective tax rate of 39%, for the third quarter of
2000 compared to an income tax expense of $46,000, an effective tax rate of 39%,
in the third quarter of 1999. The pretax loss for the third quarter would have
been $822,516 and the income tax benefit would have been $321,000 when the
effect of the economic development grant is not considered. Net loss for the
third quarter of 2000 was $212,978, or $.04 per share on a basic and diluted
share basis compared to a net income of $72,263, or $.01 per basic and diluted
share basis in the third quarter of 1999. When the effect of the economic
development grant is not considered, net loss for the third quarter of 2000
would have been $501,516, or $.09 per share on a basic and $.08 on a diluted
share basis.
NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1999
REVENUE. Revenues for the nine months ended September 30, 2000
increased $6,471,705, or 42% to $22,060,533, compared to 1999 revenues of
$15,588,828. Billable hours increased by 45% when compared to the prior year
period. The increases in revenues and billable hours can primarily be attributed
to increased internal capacity due to the opening of two new call centers; one
in September 1999 and the other in April 2000. During the period the Company
also utilized other telemarketing companies to perform some of its services but
to a greater extent than during the same period in 1999. The Company derived 14%
of its 2000 revenues from outsourcing compared to 8% during the same period in
1999. The increase in the use of other telemarketing companies was due to
significantly increased client demand. The Company operated an average of 589
call stations during the nine months ended September 30, 2000 compared to an
average of 462 for the same period in 1999.
Financial services clients provided approximately 51% of the 2000 nine
month revenues compared to approximately 46% of 1999 revenues. During the nine
months ended September 30, 2000 period the Company's largest client represented
approximately 22% of total revenue. During the prior year period the Company's
largest client represented approximately 21% of total revenue. Other industry
segments and their percentages of revenue in 2000 include publishing (15%) and
telecommunications (27%).
COST OF SERVICES. Cost of services for the nine months ended September
30, 2000 increased $3,517,434, or 39% to $12,589,230, compared to $9,071,796
during the 1999 period. The increase in cost of services is primarily the result
of the 39% increase in revenues. Labor and benefit costs, long distance
telephone costs and outsourced telemarketing service costs during the first nine
months of 2000 increased when compared to the same period of 1999. Without the
effect of the economic development grant, cost of services would have increased
$4,227,621, or
10
<PAGE>
47% to $13,299,416. For the nine months, cost of services were reduced by
approximately $710,000 for the economic development grant receivable from the
province of Quebec for new jobs created at the Company's Sherbrooke, Quebec call
center. Of the $710,000, approximately $688,000 related to labor and benefit
cost reductions.
As a percentage of revenue, cost of services for the nine month period
ended September 30, 2000 decreased by 1% to 57% compared to 58% in the same
period of 1999. This decrease was primarily the result of the effect of the
economic development grant reducing cost of services in 2000. Cost of services
for internally generated telemarketing was 53% in 2000 and 57% in 1999. During
the first nine months of 2000 the outsourced services had a cost of 85% compared
to 77% during the 1999 period. Without the effect of the economic development
grant, cost of services, as a percentage of revenue, would have increased 2% to
60% compared to 58% in the same period of 1999. Without the effect of the
economic development grant, cost of services for internally generated
telemarketing was 56%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative expenses were $7,832,504 for the nine months ended September
30, 2000 compared to $5,734,783 in 1999, an increase of $2,097,721 or 37%.
However, as a percentage of revenue, selling, general and administrative
expenses have remained stable in 2000 as compared to 1999. The absolute dollar
increase in expenses for call center operations during the first nine months of
2000 when compared to the same period in 1999 can be primarily attributed to the
expenses associated with the Redding, California and the Sherbrooke, Quebec call
centers which were opened in September 1999 and April 2000, respectively.
Corporate selling, general and administrative expenses increased during the same
period as a result of an increase in costs of personnel hired to handle current
and future business . For the nine month period, selling, general and
administrative expenses were reduced by approximately $227,000 for net economic
development grants receivable from the province of Quebec for new jobs created
at the Company's Sherbrooke, Quebec call center.
IMPAIRMENT COST. During the third quarter of 2000, the Company recorded
an impairment of asset charge of $846,745 related to goodwill recorded from its
August 1997 acquisition of Britcom. See prior discussion in Note 2 of Notes to
Consolidated Financial Statements.
OPERATING INCOME. As a result of the factors discussed above, the
operating income for the first nine months of 2000 was $792,054, a $9,805
increase compared to 1999 operating income of $782,249. As a percentage of
revenue, operating income during the nine months ended September 30, 2000 was 4%
compared to 5% during the same period of 1999. Operating loss for the first nine
months of 2000 would have been $144,968 or 1% as a percentage of revenue when
the effect of the economic development grant is not considered.
OTHER INCOME AND EXPENSES, NET. Other expenses were $131,764 in 2000
compared to $46,612 in 1999. The increase in net interest expense was the result
of an increase in borrowing activity under the Company's line of credit, an
increase in equipment lease financing and lower cash investment balances
producing lower interest income.
NET INCOME AND NET INCOME PER SHARE. Pretax income for the first nine
months of 2000 was $660,290, a $75,347 decrease compared to a pretax income of
$735,637 in the same period of 1999. The Company recorded income tax expense of
$259,000, an effective tax rate of 39%, for the first nine months of 2000
compared to an income tax expense of $279,700, an effective tax rate of 38%, in
the first nine months of 1999. Pretax loss for the first nine months of 2000
would have been $276,732 and the income tax benefit would have been $108,000
when the effect of the economic development grant is not considered. Net income
for the nine months ended September 30, 2000 was $401,290 or $.07 per basic and
diluted share basis compared to net income of $455,937, or $.08 per basic and
diluted share basis in the same period of 1999. When the effect of the economic
development grant is not considered, net loss for the first nine months of 2000
would have been $168,732, or $.03 per share on a basic and diluted basis.
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) have included outright grants,
low interest rate loans, forgivable loan arrangements, and reimbursement for
certain expenses and leasehold improvements. On January 30,
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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 (9.5% at September 30, 2000). The borrowing base
includes, and is secured by, certain accounts receivable and furniture and
equipment. The loan agreement also contains provisions requiring compliance with
certain financial covenants including prohibiting the payment of cash dividends
without the bank's consent. Effective April 30, 1999, the Company and its
lending institution executed an "Amended and Restated Revolving Credit Loan
Agreement" that amended certain loan covenants and other loan provisions. On
August 21, 2000, the Company and its lending institution executed a Second
Amendment to the revolving line of credit agreement. In addition to increasing
the line of credit to $4,000,000, the Second Amendment amended certain loan
covenants and other loan provisions. The loan expires on July 31, 2001. As of
September 30, 2000, the Company was in compliance with all covenants. At
September 30, 2000, the Company had outstanding borrowings of $630,692 under the
revolving line of credit with an available credit line of $3,369,308.
At September 30, 2000, the Company had cash and cash equivalents of
$120,987 compared to $199,295 at December 31, 1999. For the nine months ended
September 30, 2000 cash provided by operating activities was $2,796,715 compared
to cash used by operating activities of $869,275 in the 1999 period. Included in
cash provided by operating activities in the 2000 period is $564,430 of net
changes in working capital components related to the growth of the Company,
depreciation and amortization of $950,020, net income of $401,290 and other
non-cash net charges of $880,975. Cash used in 1999 operating activities was
primarily the result of an increase of $2,968,997 in Accounts Receivable
balances. This increase was partially offset by cash provided by net income of
$455,937, depreciation and amortization of $765,060, changes in other working
capital components of $1,080,177 and non-cash items of $201,452.
Net cash used by investing activities in the nine months ended
September 30, 2000 was $2,380,182 compared to net cash used of $232,784 in 1999.
The primary uses of cash by investing activities included deposits of
approximately $1,250,000 on equipment for the setup and expansion of the Quebec,
Canada call center and expenditures for property and equipment of $990,176.
During the 1999 period the Company had net purchases of property and equipment
of $203,714 and an increase of $86,935 in deposits which were offset by proceeds
of $40,000 received from the sale of assets combined with a decrease of $17,865
in other assets.
Net cash used by financing activities during the nine months ended
September 30, 2000 was $494,841 compared to net cash provided of $110,819 during
1999. The primary uses of cash during the first nine months of 2000 were
$219,308 of net repayments under the Company's revolving line of credit and
repayment of $290,357 of capital leases and long term debt. Cash used in
financing activities for 2000 were partially offset by proceeds from stock
issued under its Employee Stock Purchase Plan for $14,324 and for the exercise
of stock options for $500. Cash flows from financing activities during the first
nine months of 1999 included a net of $250,000 borrowed under the revolving line
of credit. In addition, the Company issued stock under the Company's Employee
Stock Purchase Plan for $7,586 and for the exercise of stock options in the
amount of $500. These cash proceeds were partially offset by repayment of
long-term debt and capital leases in the amount of $147,267.
During the nine months ending September 30, 2000, the Company acquired
assets, at a cost of $378,993 through capital leases. During the comparable 1999
period the Company did not acquire any assets through capital leases.
As a result, net cash and cash equivalents decreased by $78,308 during
the first nine months of 2000 compared to a decrease of $991,240 in 1999. The
Company believes that funds which should be generated from future operations,
amounts available under the renegotiated revolving line of credit arrangement,
amounts receivable from province of Quebec economic development grants for new
jobs created and funds obtained through equipment financing leases will be
sufficient to finance its current and future business operations including,
working capital requirements, although there can be no guarantee that these
funds will be available at terms acceptable to the Company, if at all.
In connection with the opening of the new call center in Sherbrooke,
Quebec, Canada in April 2000, the Company has entered into a seven year building
lease commitment totaling $180,000 per year. This lease is cancelable after four
years. In addition, the Company has a commitment of approximately $1,500,000 for
capital expenditures of which $1,250,000 was paid as of September 30, 2000 for
computer equipment related to the expansion of the Sherbrooke call center.
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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 made in this "Outlook" 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 multi-channel customer contacts will continue to grow and that
the trend for these companies will be towards outsourcing their multi-channel
marketing programs to companies like ACI. In addition, the Company believes that
Internet-based online customer service support is the next step in consumer
contact, and the company has positioned itself to take advantage of the growth
in that market segment. The Company anticipates that the demand for its
traditional telemarketing services will continue to grow through 2001 along with
growth resulting from the Company's expansion into the Internet customer service
business. In order to meet this increased demand for traditional telemarketing
services and Internet-based customer service, the Company opened during April
2000 a 100 seat call center in Sherbrooke, Quebec, Canada. The Company has
expanded this call center by an additional 100 seats. In addition, the Company
plans to open by the end of year 2000 an additional call center with 100 to 200
seats to meet customer demand. Should the Company open an additional call center
there can be no assurance that the Company would be able to locate in a
community that will provide economic development grants that could be used to
offset operating expenses and provide working capital. The Company plans to
equip these call centers with a new technology that will enable the Company to
provide outbound, inbound and Internet-based consumer contact services from the
same teleservices equipment. In 2000, the Company expects to spend approximately
$3,000,000 on capital expenditures to equip these call centers and develop the
Internet customer service business applications. The Company intends to finance
the majority of its capital expenditure needs through equipment financing
leases, however, there is no assurance that equipment finance leases will be
available at terms acceptable to the Company.
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. While the Company anticipates an increase in demand for its services
in 2000, 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 capacity to meet anticipated
increased demands for the Company's services.
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.
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PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number Description
-------------- -----------
10.1 Lease Agreement by and between Lease Finance
Group, Inc. and ACI Telecentrics, Inc. dated
May 15, 2000
10.2 Second Amendment to Amended and Restated
Revolving Credit Loan Agreement by and
between ACI Telecentrics, Inc. and National
City Bank of Minneapolis dated August 21,
2000.
21 Subsidiaries: Corporation ACI Telecentrics
Du Quebec, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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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: /s/November 10, 2000 By:/s/WILLIAM NOLTE
------------------------ ---------------------------------
William Nolte
Vice President of Finance and Chief
Financial Officer (Principal Accounting
Officer)
Dated: /s/November 10, 2000 By:/s/RICK N. DIAMOND
------------------------ ---------------------------------
Rick N. Diamond
Chief Executive Officer and Director
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