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 June 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 5,767,121 shares of common stock, no par value per
share, outstanding as of August 8, 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 4 Submission of Matters to a Vote of Security Holders
Item 6 Exhibits and Reports on Form 8-K
Signature Page
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ACI TELECENTRICS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 415,419 $ 199,295
Trade receivables, less allowance for doubtful
accounts of $170,000 and $140,000, respectively 5,168,450 5,413,351
Income tax receivable -- 20,312
Deferred income taxes 539,000 539,000
Prepaid expenses 173,852 141,742
Grant Receivable 562,465 --
Other current assets 54,083 66,595
------------ ------------
Total current assets 6,913,269 6,380,295
Property and equipment, net of accumulated depreciation 2,664,895 2,701,923
OTHER ASSETS:
Goodwill, less accumulated amortization of
$204,000 and $169,000, respectively 846,745 881,783
Deposits 1,046,922 57,434
------------ ------------
Total other assets 1,893,667 939,217
------------ ------------
TOTAL ASSETS $ 11,471,831 $ 10,021,435
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 431,972 $ 850,000
Trade accounts payable 1,459,768 872,542
Accrued compensation 900,771 461,584
Accrued expenses 71,329 161,786
Income taxes payable 365,923 --
Current portion of long-term debt and capital lease obligations 469,810 452,998
------------ ------------
Total current liabilities 3,699,573 2,798,910
LONG-TERM LIABILITIES:
Long-term debt and capital lease obligations, less current portion 520,267 523,160
Deferred capital lease liabilities, less current portion 210,000 280,000
Deferred income taxes 323,000 323,000
------------ ------------
Total long-term liabilities 1,053,267 1,126,160
SHAREHOLDERS' EQUITY:
Common stock, no par value;
Authorized - 15,000,000
Issued and outstanding shares - 5,767,121
and 5,756,267, respectively 6,646,889 6,638,531
Accumulated earnings (deficit) 72,102 (542,166)
------------ ------------
Total shareholders' equity 6,718,991 6,096,365
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,471,831 $ 10,021,435
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ACI TELECENTRICS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
TELEMARKETING REVENUES $ 7,226,251 $ 5,498,648 $ 15,060,779 $ 10,187,415
COST OF SERVICES 4,258,658 3,136,027 9,085,399 5,814,040
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,412,586 1,923,383 4,893,184 3,732,697
------------ ------------ ------------ ------------
OPERATING INCOME 555,007 439,238 1,082,196 640,678
OTHER INCOME (EXPENSE)
Interest income 1,629 2,892 3,340 9,489
Interest expense (44,413) (15,953) (76,595) (27,072)
Other, net (673) (5,721) (673) (5,721)
------------ ------------ ------------ ------------
Total other income (expense) (43,457) (18,782) (73,928) (23,304)
------------ ------------ ------------ ------------
INCOME BEFORE TAXES 511,550 420,456 1,008,268 617,374
INCOME TAX EXPENSE 200,000 158,900 394,000 233,700
------------ ------------ ------------ ------------
NET INCOME $ 311,550 $ 261,556 $ 614,268 $ 383,674
============ ============ ============ ============
Basic net income per share $ .05 $ .05 $ .11 $ .07
============ ============ ============ ============
Diluted net income per share $ .05 $ .05 $ .10 $ .07
============ ============ ============ ============
Basic shares used in computing net
income per share 5,767,121 5,743,263 5,766,749 5,742,851
============ ============ ============ ============
Diluted shares used in computing net
income per share 6,002,360 5,761,970 5,965,241 5,760,994
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ACI TELECENTRICS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 614,268 $ 383,674
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 624,155 506,312
Provision for losses on accounts receivable 100,000 (12,303)
Amortization of deferred capital lease liabilities (80,701) (153,201)
Loss on sale of equipment -- 5,721
Deferred income taxes -- 233,700
Changes in operating assets and liabilities:
Trade receivables 144,901 (3,139,530)
Prepaid expenses (32,110) 73,138
Grant Receivable (562,465) --
Other current assets 12,512 104,101
Trade accounts payable, accrued compensation
and accrued expenses 935,958 977,558
Income taxes 386,235 (10,000)
----------- -----------
Net cash provided by (used in) operating activities 2,142,753 (1,030,830)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (349,783) (175,070)
Proceeds from sale of assets -- 40,000
Deposits (989,488) 11,576
Decrease in other assets -- 17,865
----------- -----------
Net cash used in investing activities (1,339,271) (105,629)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit 6,552,756 1,250,000
Payments on revolving line of credit (6,970,784) (900,000)
Net proceeds from issuance of common stock 8,358 4,116
Repayments of long-term debt and capital leases (177,688) (112,879)
----------- -----------
Net cash (used in) provided by financing activities (587,358) 241,237
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 216,124 (895,222)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 199,295 1,300,681
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 415,419 $ 405,459
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NON CASH INVESTING AND FINANCING TRANSACTIONS:
Equipment acquired through capital leases $ 202,307 $ --
Accelerated forgiveness of deferred grant $ -- $ 60,000
CASH PAID FOR INTEREST AND TAXES:
Income taxes paid (refunds received), net $ 20,625 $ 10,000
Cash paid for interest $ 70,868 $ 17,101
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ACI TELECENTRICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(1) BASIS OF PRESENTATION
The balance sheet of ACI Telecentrics, Incorporated and subsidiary (the
"Company") as of June 30, 2000 and the related statements of operations
and cash flows for the three and six months ended June 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 necessary to present fairly
the financial position of the Company as of June 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 June 30, 2000 and the
related consolidated statements of operations for the three and six
months ended June 30, 2000 and the consolidated statement cash flows
for the six months ended June 30, 2000 after elimination of any
intercompany transactions.
(2) 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
months ending June 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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 5,767,121 5,743,263 5,766,749 5,742,851
Effect of dilutive stock options 235,239 18,707 198,492 18,143
--------- --------- --------- ---------
6,002,360 5,761,970 5,965,241 5,760,994
========= ========= ========= =========
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Furniture $1,179,370 $1,161,088
Equipment 4,776,284 4,469,976
Leasehold improvements 114,476 109,313
---------- ----------
6,070,130 5,740,377
Less accumulated depreciation and amortization 3,405,235 3,038,454
---------- ----------
Net property and equipment $2,664,895 $2,701,923
========== ==========
</TABLE>
At June 30, 2000 and December 31, 1999, the Company has
equipment under capitalized leases totaling $1,364,409 and $1,162,102,
respectively.
<PAGE>
(4) 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 June 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. The loan was extended on April 13, 2000 and expires on
April 30, 2001. As of June 30, 2000, the Company was in compliance with
all covenants. At June 30, 2000, the Company had outstanding borrowings
of $431,972 under the revolving line of credit with an available credit
line of $1,568,028.
(5) 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, the Company is currently expanding this call center
by another 100 seats, for a total of 200 seats. All 200 seats are
anticipated to be fully operational by September 2000.
(6) 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. During the
second quarter of 2000, the Company recorded an approximately $562,000
(US dollars) receivable from the province of Quebec for new jobs
created pursuant to the terms of the Economic Development Agreement.
For the quarter, cost of services were reduced by $236,000; the
remaining $326,000 was used to reduce selling, general and
administrative expenses.
(7) 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.
<PAGE>
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, financial services,
publishing, insurance 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
June 30, 2000, these 11 call centers had 596 calling stations. The Company had
1,075 full and part-time employees as of June 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 JUNE 30, 2000, COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
REVENUE. Revenues for the second quarter ended June 30, 2000 increased
$1,727,603, or 31.4% to a record $7,226,251, compared to second quarter 1999
revenues of $5,498,648. Billable hours increased by 32.6% when compared to the
prior year period, however, revenue per billable hour decreased by approximately
0.9% when compared to the second quarter of 1999. 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
14.1% of its second quarter 2000 revenues from outsourcing compared to 7.6%
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 579 call stations during the second quarter of 2000 compared to an
average of 451 for the same period in 1999.
Financial services clients provided approximately 55% of second quarter
2000 revenues compared to approximately 57% of revenues during the second
quarter of 1999. During the 2000 period the Company's largest client represented
approximately 25% of total revenue. During the prior year period the Company's
largest client represented approximately 28% of total revenue. Other industry
segments and their percentages of revenue in 2000 include publishing (15%),
insurance (6%) and telecommunications (24%).
COST OF SERVICES. Cost of services for the second quarter of 2000
increased $1,122,631, or 35.8% to $4,258,658, compared to $3,136,027 in the
second quarter of 1999. Second quarter 2000 labor and benefit costs increased by
$543,402, or 25.0% when compared to the second quarter of 1999. For the second
quarter, cost of services were reduced by approximately $236,000 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 $236,000,
approximately $193,000 related to labor and benefit cost reductions. Without the
effect of the economic development grant cost of services would have increased
$1,358,279, or 43.3% to $4,494,306. Outsourced telemarketing service costs for
the 2000 period increased $568,131, or 177.2% when compared to the same period
of 1999. Long distance telephone costs for telemarketing operations decreased by
$48,702 or 8.1% in the second quarter of 2000 when compared to the 1999 period.
<PAGE>
As a percentage of revenue, cost of services for the second quarter of
2000 increased by 1.9% to 58.9% compared to 57.0% in the second quarter of 1999.
Without the effect of the economic development grant, cost of services, as a
percentage of revenue, would have increased 5.2% to 62.2% compared to 57.0% in
the second quarter of 1999. This increase was primarily the result of outsourced
services expenses increasing, as a percentage of revenue, to 12.3% in 2000 as
compared to 5.8% in 1999. Outsourcing services are costs associated with the
Company's utilization of other telemarketing companies for telemarketing some of
its clients' programs. During the second quarter of 2000 the outsourced services
had a cost of 87.1% compared to 76.9% during the 1999 period. Second quarter of
2000 cost of services for internally generated telemarketing was 54.3% in 2000
and 55.4% in 1999. Without the effect of the economic development grant, cost of
services for internally generated telemarketing was 58.1%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative expenses for the second quarter of 2000 increased $489,203,
or 25.4% to $2,412,586, from $1,923,383 during the second quarter of 1999. For
the second quarter, selling, general and administrative expenses were reduced by
approximately $326,000 for the economic development grant receivable from the
province of Quebec for new jobs created at the Company's Sherbrooke, Quebec call
center. As a percentage of revenue, selling, general and administrative expenses
decreased to 33.4% in 2000 compared to 35.0% during the second quarter of 1999.
The absolute dollar increase in expenses for call center operations was
approximately $230,000 during the second quarter of 2000 when compared to the
same period in 1999. The increase can be primarily attributed to the expenses
associated with the Redding, California call center which was opened in
September 1999. Corporate selling, general and administrative expenses increased
by approximately $260,000 during the same period. During the period, corporate
expenses were offset by approximately $146,000 of economic development grants
associated with the opening of the Sherbrooke, Quebec call center in April 2000.
Actual corporate selling, general and administrative expense increased by
approximately $306,000 when the effect of the economic development grant is not
considered. The increase in corporate expenses was primarily the result of an
increase in personnel costs, an increase in travel associated with new business
opportunities, additions to the bad debt reserve, and a reduction in the
amortization of deferred grants due to a one time gain associated with an
unamortized grant during the second quarter of 1999.
OPERATING INCOME. As a result of the factors discussed above, the
Company experienced second quarter operating income of $555,007, a $115,769
increase compared to the second quarter 1999 operating income of $439,238. As a
percentage of revenue, operating income during the quarter was 7.7% compared to
8.0% during the second quarter of 1999. Operating income for the second quarter
of 2000 would have been $92,523 or 1.3% as a percentage of revenue when the
effect of the economic development grant is not considered.
OTHER INCOME AND EXPENSES, NET. Other expenses were $43,457 in the
second quarter of 2000 compared to $18,782 in the same period of 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 second
quarter of 2000 was $511,550, a $91,094 increase compared to a pretax income of
$420,456 in the second quarter of 1999. The Company recorded income tax expense
of $200,000, an effective tax rate of 39%, for the second quarter of 2000
compared to an income tax expense of $158,900, an effective tax rate of 38%, in
the second quarter of 1999. Pretax income for the second quarter would have been
$49,066 and income tax expense would have been $19,000 when the effect of the
economic development grant is not considered. Net income for the second quarter
2000 was $311,550, or $.05 per share on a basic and fully diluted basis compared
to a net income of $261,556, or $.05 per basic and fully diluted share basis in
the second quarter of 1999. When the effect of the economic development grant is
not considered, net income for the second quarter 2000 would have been $30,066,
or $.01 per share on a basic and fully diluted share basis.
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUE. Revenues for the six months ended June 30, 2000 increased
$4,873,364, or 47.8% to $15,060,779, compared to 1999 revenues of $10,187,415.
Billable hours increased by 50.8% when compared to the prior year period,
however, revenue per billable hour decreased by approximately 1.9% when compared
to the 1999 six month period. 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 18.0% of its 2000
revenues from outsourcing compared to 6.7% 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 556 call stations
during the six months ended June 30, 2000 compared to an average of 453 for the
same period in 1999.
Financial services clients provided approximately 51% of the 2000 six
month revenues compared to approximately 41% of 1999 revenues. During the six
months ended June 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 19% of total revenue. Other industry
segments and their percentages of revenue in 2000 include publishing (16%),
insurance (7%) and telecommunications (24%).
COST OF SERVICES. Cost of services for the six months ended June 30,
2000 increased $3,271,359, or 56.3% to $9,085,399, compared to $5,814,040 during
the 1999 period. Labor and benefit costs during the first six months of 2000
increased by $1,425,451, or 35.1% when compared to the same period of 1999. For
the six months, cost of services were reduced by approximately $236,000 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 $236,000,
approximately $193,000 related to labor and benefit cost reductions. Without the
effect of the economic development grant cost of services would have increased
$3,507,007, or 60.3% to $9,321,047. Long distance telephone costs for
telemarketing operations decreased by $10,676, or 0.9% in the first six months
of 2000 when compared to the 1999 period. Outsourced telemarketing service costs
for the 2000 period increased $1,835,124, or 352.4% when compared to the same
period of 1999.
As a percentage of revenue, cost of services for the six month period
ended June 30, 2000 increased by 3.2% to 60.3% compared to 57.1% in the same
period of 1999. Without the effect of the economic development grant, cost of
services, as a percentage of revenue, would have increased 4.8% to 61.9%
compared to 57.1% in the same period of 1999. This increase was primarily the
result of outsourced services expenses increasing, as a percentage of revenue,
to 15.6% in 2000 as compared to 5.1% in 1999. Outsourcing services are costs
associated with the Company's utilization of other telemarketing companies for
telemarketing some of its clients' programs. This increase in outsourcing
services costs was partially offset by a decrease in labor and benefits costs of
3.4%, as a percentage of revenue, during the 2000 period when compared to the
1999 period. During the first six months of 2000 the outsourced services had a
cost of 86.9% compared to 76.5% during the 1999 period. Cost of services for
internally generated telemarketing was 54.5% in 2000 and 55.7% in 1999. Without
the effect of the economic development grant, cost of services for internally
generated telemarketing was 56.4%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative expenses were $4,893,184 for the six months ended June 30,
2000 compared to $3,732,697 in 1999, an increase of $1,160,487 or 31.1%. For the
six month period, selling, general and administrative expenses were reduced by
approximately $326,000 for economic development grants receivable from the
province of Quebec for new jobs created at the Company's Sherbrooke, Quebec call
center. As a percentage of revenue, selling, general and administrative expenses
decreased to 32.5% in 2000 compared to 36.6% during 1999. The absolute dollar
increase in expenses for call center operations was approximately $471,000
during the first six months of 2000 when compared to the same period in 1999.
The increase can be primarily attributed to the expenses associated with the
Redding, California call center which was opened in September 1999. Corporate
selling, general and administrative expenses increased by approximately $689,000
during the same period. Actual corporate selling, general and administrative
expenses increased by approximately $735,000 when the effect of the $146,000 of
economic development grants receivable is not considered. The increase in
corporate expenses was primarily the result of an increase in personnel costs
and additions to the bad debt reserve.
<PAGE>
OPERATING INCOME. As a result of the factors discussed above, the
operating income for the first six months of 2000 was $1,082,196, a $441,518
increase compared to 1999 operating income of $640,678. As a percentage of
revenue, operating income during the six months ended June 30, 2000 was 7.2%
compared to 6.3% during the same period of 1999. Operating income for the first
six months of 2000 would have been $619,712 or 4.1% as a percentage of revenue
when the effect of the economic development grant is not considered.
OTHER INCOME AND EXPENSES, NET. Other expenses were $73,928 in 2000
compared to $23,304 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 six
months of 2000 was $1,008,268, a $390,894 increase compared to a pretax income
of $617,374 in the same period of 1999. The Company recorded income tax expense
of $394,000, an effective tax rate of 39%, for the first six months of 2000
compared to an income tax expense of $233,700, an effective tax rate of 38%, in
the first six months of 1999. Pretax income for first six months of 2000 would
have been $545,784 and income tax expense would have been $212,000 when the
effect of the economic development grant is not considered. Net income for the
six months ended June 30, 2000 was $614,268 or $.11 per basic share and $.10 per
share on a fully diluted share basis compared to a net income of $383,674, or
$.07 per basic and fully diluted share basis in the same period of 1999. When
the effect of the economic development grant is not considered, net income for
the first six months of 2000 would have been $333,784, or $.06 per share on a
basic and fully 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, 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 June 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. The loan was extended on April 13, 2000 and
expires on April 30, 2001. As of June 30, 2000, the Company was in compliance
with all covenants. At June 30, 2000, the Company had outstanding borrowings of
$431,972 under the revolving line of credit with an available credit line of
$1,568,028.
At June 30, 2000, the Company had cash and cash equivalents to $415,419
compared to $199,295 at December 31, 1999. For the six months ended June 30,
2000 cash provided by operating activities was $2,142,753 compared to cash used
by operating activities of $1,030,830 in the 1999 period. Included in cash
provided by operating activities in the 2000 period is $885,031 of net changes
in working capital components related to the growth of the Company, depreciation
and amortization of $624,155, net income of $614,268 and other non-cash net
charges of $19,299. Cash used in 1999 operating activities was primarily the
result of an increase of $3,139,530 in Accounts Receivable balances which
resulted from the 29.6% increase in revenue. This increase was partially offset
by cash provided by net income of $383,674, depreciation and amortization of
$506,312, changes in other working capital components of $1,144,797 and non-cash
items of $73,917.
Net cash used by investing activities in the six months ended June 30,
2000 was $1,339,271 compared to net cash used of $105,629 in 1999. The primary
uses of cash by investing activities included a down payment of approximately
$938,000 for equipment for the new Quebec, Canada call center and expenditures
for property and equipment of $349,783. During the 1999 period the Company had
net purchases of property and equipment of $175,070 which were offset by
proceeds of $40,000 received from the sale of assets combined with a decrease of
$29,441 in other assets.
Net cash used by financing activities during the six months ended June
30, 2000 was $587,358 compared to net cash provided by investing activities of
$241,237 during 1999. The primary uses of cash during the first six months of
2000 were $418,028 of net repayments under the Company's revolving line of
credit and repayment of
<PAGE>
$177,688 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 $7,858 and for the exercise of stock options for $500.
Cash flows from financing activities during the first six months of 1999
included a net of $350,000 borrowed under the revolving line of credit. In
addition, the Company issued stock under the Company's Employee Stock Purchase
Plan for $3,616 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 $112,879.
During the six months ending June 30, 2000, the Company acquired
assets, at a cost of $202,307 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 increased by $216,124 during
the first six months of 2000 compared to a decrease of $895,222 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 $1,250,000 for
capital expenditures of which $938,000 was paid as of June 30, 2000 for computer
equipment related to the opening of the Sherbrooke call center.
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 telemarketing will continue to grow and that the trend for
these companies will be towards outsourcing their telemarketing 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 may be a
growth opportunity in 2000. The Company anticipates that the demand for its
traditional telemarketing services will continue to grow in 2000 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 new 100 seat call center in Sherbrooke, Quebec, Canada. The Company is
currently expanding this call center by an additional 100 seats which are
expected to be fully operational by September 2000. In addition, the Company may
open one additional call center with 100 to 200 seats to meet anticipated
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 $4,000,000, 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 financing leases will be available
at terms acceptable to the Company.
<PAGE>
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.
During the six months of 2000, the Company reduced its selling, general
and administrative expenses to 32.5% of revenue compared to 36.6% in 1999. These
reductions are a result of the Company's sales effort, an effort to improve its
processes to contain costs and increase the efficiency of the organization, and
economic development grants receivable of approximately $326,000. However, there
can be no assurance that containment of these costs can be continued or that
further efficiencies can be realized.
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 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2000 Annual Meeting of Shareholders on
May 26, 2000. At the Annual Meeting, the stockholders voted upon (a) set the
number of members of the Board of Directors at six (6), (b) the election of
directors as contained in the Registrant's Proxy Statement dated April 28, 2000
and (c) a request to increase the number of shares reserved under the Company's
1996 Stock Option Plan from 430,000 to 1,000,000.
(a) Set the number of members of the Board of Directors at six
(6).
For Against Abstain
--- ------- -------
5,644,393 2,000 1,400
(b) The board nominees were elected as directors with the
following votes:
Shares Voted
------------
For Withheld
--- --------
Rick N. Diamond 5,645,084 2,709
Gary B. Cohen 5,645,084 2,709
Seymour Levy 5,645,084 2,709
Douglas W. Franchot 5,645,084 2,709
Phillip T. Levin 5,645,084 2,709
Thomas F. Madison 5,645,084 2,709
(c) Increase the number of shares reserved under the Company's
1996 Stock Option Plan from 430,000 to 1,000,000.
For Against Abstain Broker Non-vote
--- ------- ------- ---------------
4,528,546 95,806 1,000 1,022,441
<PAGE>
No other matters were submitted to a vote of the security holders.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number Description
10.35 Lease Agreement by and between Investissements
Rene St-Pierre Ltee and ACI Telecentrics, Inc.
dated April 13, 2000
10.36 Financial Contribution Agreement by and
between Investissement Quebec and ACI
Telecentrics, Inc. dated April 20, 2000
21 Subsidiaries: Corporation ACI Telecentrics
Du Quebec, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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/August 14, 2000 By:/s/RUSSELL JACKSON
------------------ ----------------------
Russell Jackson
Chief Financial Officer
(Principal Accounting Officer)
Dated: /s/August 14, 2000 By:/s/RICK N. DIAMOND
------------------ ---------------------
Rick N. Diamond
Chief Executive Officer and
Director
