SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
Commission File No.: 000-21557
ACI TELECENTRICS, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1572571
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3100 WEST LAKE STREET, SUITE 300, MINNEAPOLIS, MINNESOTA 55416
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (612) 928-4700
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, no par value per share
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [ ] No [X]
Issuer's revenues for its most recent fiscal year: $30,320,788.
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of June 28, 2002, was approximately $690,743 based upon the
average of the closing bid and asked prices of the Registrant's Common Stock on
such date.
There were 5,781,485 shares of Common Stock, no par value, outstanding as of May
12, 2003.
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DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
Description Page
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PART I
ITEM 1. BUSINESS ....................................................................................1
ITEM 2. PROPERTIES...................................................................................5
ITEM 3. LEGAL PROCEEDINGS............................................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................6
PART II
ITEM 5. MARKET FOR RETISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS..............................................................6
ITEM 6. SELECTED FINANCIAL DATA......................................................................7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................................8
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................................................41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................................42
ITEM 11. EXECUTIVE COMPENSATION......................................................................44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS................................................49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................50
ITEM 14. CONTROLS AND PROCEDURES.....................................................................51
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K......................................................................51
i
PART I
ITEM 1. BUSINESS
GENERAL
ACI Telecentrics, Inc. (ACI) was incorporated under the name Automated
Communications, Incorporated under Minnesota law on January 13, 1987, and
changed its name to ACI Telecentrics, Inc. on July 26, 1996. ACI provides
inbound and outbound outsourced telephone-based sales and marketing services,
broadly defined as teleservices. In 2000, we established a wholly owned
subsidiary, Corporation ACI Telecentrics du Quebec, Inc., to manage and operate
all of our Canadian contact centers. As of December 31, 2002, we operated 801
workstations in 8 call centers located in Minnesota, North Dakota, Nebraska,
Indiana, California, and Quebec, Canada.
We provide telemarketing services primarily in the telecommunications,
financial services and publishing industries. In the telecommunications
industry, we market long distance and a variety of network services to the
customers of Regional Bell Operating Companies (RBOCs) and support customer
service functions for Competitive Local Exchange Carriers (CLECs). In the
financial services industry, we conduct telemarketing projects for banks and
financial services companies in the areas of insurance; credit card customer
acquisition, retention, and renewal; credit card enhancement services; account
generation and retention; and customer service and inbound sales support. In the
publishing industry, our telemarketing programs assist magazine publishers in
acquiring new subscribers and soliciting subscription renewals. For the year
ended December 31, 2002, our revenue and loss from operations were $30,320,788
and $2,370,437, respectively. This represents a decrease in revenue of 8%
compared to 2001. The loss from operations in 2002 compares to an income from
operations of $389,448 in 2001.
Our web address is www.acitel.com. Investors may request a copy of our reports
by requesting a copy through our website.
INDUSTRY AND MARKET
We believe that the telemarketing sector of marketing expenditures will
continue to grow and that the trend toward outsourcing telemarketing programs
will continue. Many companies choose to use telemarketing for customer
retention, customer service, and customer care programs, in addition to the
traditional sales programs. The telecommunications and financial services
industries, which ACI already serves, are undergoing deregulation or
consolidation, which may provide us with additional growth opportunities as
these businesses search for low-cost solutions for their marketing, sales, and
customer support needs. In 2002, businesses within the financial services,
telecommunications, and publishing industries accounted for most of our
revenues. The industries targeted by us, and the principal services provided,
are described below.
FINANCIAL SERVICES. ACI entered the financial services segment of the market in
1988. We provide telemarketing services for the credit card and noncredit card
financial segments, as well as fee-based segments such as membership clubs.
Types of telemarketing services performed for these clients include customer
acquisition, activation and retention, selling of discounted travel and shopping
clubs, debit card acquisition or upgrade, home equity loan lead generation,
mortgage lead generation, and pre-approved lines of credit. We support this
industry with both inbound and outbound services. Inbound programs include
enrollments in mortgage acceleration programs and sales of fee based products.
TELECOMMUNICATIONS. ACI entered the telecommunications segment of the market in
1987. We currently
1
provide telemarketing services for network services, long distance, Caller ID,
and enhanced consumer premise equipment (CPE products). In addition, we support
customer service, repair and billing inquiry functions for CLECs.
PUBLISHING. ACI provides telemarketing services to publishers, including
subscription renewals, subscription sales, and customer services. Our program
managers work closely with publishing clients to develop individually tailored
programs to enhance their marketing and sales efforts.
SALES AND MARKETING
We strive to enhance the sales and service experiences of our client's
customers. Our marketing strategy emphasizes customized marketing solutions
tailored to meet the individual client's needs. We attract clients through
direct prospecting by our sales force, encouraging referrals from existing
clients who are satisfied with our quality service and gaining business through
other divisions of companies who are current clients.
PRINCIPAL CUSTOMERS
We rely on several clients for a significant portion of our revenues. In
2002, three clients accounted for 41% of our total revenue. Two of the three
clients (17% and 14% of total revenue, respectively) are two of the nation's
largest telephone operating companies. The third client (10% of total revenue)
is a marketer of credit card and mortgage loan services. In 2001, five clients
accounted for 66% of total revenue. Two of the five clients (12% and 11% of
total revenue, respectively) are two of the nations top credit card issuers; one
client (16% of total revenue) is one of the nation's largest providers of
consumer membership programs; one client (11% of total revenue) is one of the
nation's largest diversified financial services companies. The fifth client (16%
of total revenue) is one of the nation's largest telephone operating companies.
COMPETITION
The telemarketing industry is highly competitive, but also continues to
be highly fragmented. We compete with both in-house telemarketing organizations
as well as other independent outsource telemarketing operations. In-house
telemarketing organizations provide a variety of services to their organizations
and comprise the majority of the telemarketing industry. Independent
telemarketing organizations range from numerous small, single-facility
operations to large, multifacility operations, such as SITEL Corporation, APAC
Teleservices Inc., Sykes Enterprises, RMH Teleservices, Inc. and West
Telemarketing Corporation. We also compete with other forms of marketing, such
as direct mail, television, and radio. We believe that the primary competitive
factors in the telephone-based marketing industry are reputation for quality
service, marketing results, technological expertise, price, the ability to
support inbound sales efforts, and the ability to design customized marketing
programs that address the needs of our clients. We believe that most of our
competitors are, like us, highly dependent on a small number of clients for a
large percentage of their business.
GOVERNMENT REGULATION
Telemarketing practices are regulated in the United States and Canada as
discussed below.
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UNITED STATES
The telemarketing industry is subject to a significant amount of federal
and state regulation. The federal Telephone Consumer Protection Act of 1991 (the
TCPA) prohibits telemarketers from using automated telephone dialing equipment
to call certain types of telephone numbers, such as hospital emergency room
telephone numbers. In addition, the TCPA prohibits the initiation of telephone
calls to any residential telephone line using an artificial or prerecorded voice
to deliver a message without the prior consent of the called party. The federal
Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 (the TCFAPA)
broadly authorizes the Federal Trade Commission (the FTC) to issue regulations
prohibiting misrepresentation in telemarketing sales. In August 1995, the FTC
issued regulations under the TCFAPA which, among other things, prohibits
initiating an outbound telephone call to a person that has stated that he or she
does not wish to receive an outbound call on behalf of the seller whose goods or
services are being offered, prohibit calls at any time other than between 8:00
A.M. and 9:00 P.M. local time, require a telemarketer to make certain
disclosures to the person receiving the call, and prohibit misrepresentations
regarding the cost, terms, restrictions, or performance of products or services
offered by phone.
The FTC also administers the Fraud Prevention Act under which the FTC
has issued the Telemarketing Sales Rule (TSR) prohibiting a variety of
deceptive, unfair or abusive practices in direct telephone sales. These rules
prohibit misrepresentations of the cost, quality, terms, restrictions,
performance or characteristics of products or services offered by telephone
solicitation or of refund, cancellation or exchange policies. The regulations
also require that a telemarketer identify promptly and clearly the seller on
whose behalf the representative is calling, the purpose of the call, and the
nature of the good or services offered.
In December of 2002, the FTC amended the TSR. Excluding two provisions,
which are addressed below, the amended Rule becomes effective on October 1,
2003. The excluded provisions are as follows:
1. Telemarketers must be able to transmit data that is readable by
caller ID devices. The effective date for full compliance with the
caller identification transmission provision is January 29, 2004.
2. A centralized national Do Not Call (DNC) registry will be
implemented. The effective date for full compliance with the national
DNC list provision has not been announced, but this date may be as early
as September 2003. AT&T has been awarded the contract to create the
national list. A consumer who receives a telemarketing call despite
being on the registry will be able to file a complaint with the FTC.
Violators could be fined up to $11,000 per incident.
The balance of the amended Rule gives the vendor two seconds from the
consumer's completed greeting to connect the call to the sales person.
However, the FTC has provided a safe harbor provision for the "two
second" rule in that no enforcement action will be taken against a client or
vendor for violation if we meet the following standards designed to minimize
call abandonment:
1. Telemarketers must employ technology that ensures no more than a 3%
abandonment rate, measured per day per calling campaign.
2. Telemarketers must allow each call placed to ring for at least 15
seconds or four complete rings before disconnecting.
3
3. Whenever a sales representative is not available within two seconds
to speak to the consumer answering the call, we must promptly play a
recorded message that contains the seller's name and telephone number.
Failure to provide this recorded message will result in the call being
considered abandoned, and it will be counted against the 3% daily
maximum.
4. Records, which prove telemarketers compliance of items one through
three above, must be retained for 24 months.
A number of states have enacted or are considering legislation to
regulate telemarketing. For example, several states impose license or bond
requirements upon telemarketers. There are also several states that publish and
maintain a state run "Do Not Call List." ACI subscribes to these lists. All
telephone numbers to be called by ACI are cross referenced against the "Do Not
Call" lists. "Do Not Call" numbers are then stricken from the lists of telephone
numbers to be called by us. From time to time, bills are introduced in the U.S.
Congress or state legislatures that could further regulate certain aspects of
the telemarketing business. We cannot predict whether any such proposed
legislation will become law or what affect such laws would have on our business.
ACI is currently administering Do Not Call lists from over 24 states and
is technically and procedurally prepared to adhere to the amended Rule. To the
best of our knowledge, our telemarketing procedures comply with all state and
federal rules.
Several of the industries served by us are subject to varying degrees of
government regulation, particularly the financial services industry. Clients in
these industries are obligated to provide us with scripts for our telemarketers,
which comply with applicable industry regulations. Although compliance with
these regulations is generally the responsibility of our clients, we could be
subject to a variety of enforcement or private actions for our failure or the
failure of our clients to comply with such regulations as the same relate to
telemarketing operations.
CANADA
In Canada, the Canadian Radio-Television and Telecommunications
Commission enforces rules regarding unsolicited communications using automatic
dialing and announcing devices, live voice and fax. Companies that violate any
of the restrictions on unsolicited calls may have their telephone service
terminated after two business days' notice from the telephone company.
In 2001, the federal government of Canada enacted the Personal
Information Protection and Electronic Documents Act (Federal Act). Effective
January 1, 2004, the Federal Act requires companies to obtain consent for the
collection, use, and disclosure of an individual's personal information. If the
Federal Act is determined to be applicable to us, it may have an adverse affect
on our current or future operations. The Federal Act permits any Province of
Canada to enact legislation governing the subject matter of the Federal Act, in
which case the legislation of the Province will apply. Our Canadian operations
are located in Quebec. The province of Quebec may enact legislation governing
the subject matter of the Federal Act. If the province of Quebec were to enact
such legislation, there can be no assurance that any such laws will not
adversely affect or limit our current or future operations.
The Federal Competition Act contains a number of provisions that
regulate the conduct of telemarketers in Canada, in particular the manner in
which outbound calls are to be conducted. Failure to comply with such
legislation could adversely affect our business.
4
PERSONNEL
As of December 31, 2002, we had approximately 1,600 full and part-time
employees. None of our employees are subject to a collective bargaining
agreement. We believe our relationship with our employees is good.
AVAILABLE INFORMATION
All reports filed electronically by ACI Telecentrics, Inc., with the
Securities and Exchange Commission ("SEC"), including its annual reports on Form
10-K and Form 10-KSB, quarterly reports on Form 10-Q and Form 10-QSB, current
reports on Form 8-K and proxy statements, and other information and amendments
to those reports filed (if applicable), are accessible on the SEC's web site at
www.sec.gov. The public may read and copy any materials filed by the Company
with the SEC at the SEC's Public Reference Room at 450 Fifth Street NW,
Washington, DC 20549. They may obtain information from the Public Reference Room
by calling the SEC at 1-800-SEC-0330. These filings are also available at no
cost by contacting the Company at rjackson@acitel.com or calling 612-928-4700.
ITEM 2. PROPERTIES
FACILITIES
Our corporate headquarters is located in Minneapolis, Minnesota in a
leased facility consisting of approximately 12,000 square feet of office space.
The lease expires on March 31, 2004.
We also lease 8 contact center facilities in the Midwest, California,
and Quebec, Canada. Information related to those call centers is as follows:
Year Opened/ Number of
Location Acquired Term Expires Workstations
Twin Valley, MN 1993 5 yr 8/03 40
Devils Lake, ND 1996 Month to Month N/A 32
Chadron, NE 1997 10 yr 7/07 60
Schererville, IN 1997 6 yr 3/07 113
Redding, CA 1999 5 yr 8/04 144
Sherbrooke, PQ 2000 7 yr 5/07 194
Vaudreuil, PQ 2001 7 yr 12/07 104
Caplan, PQ 2002 7 yr 5/09 114
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Total workstations at December 31, 2002 801
=====
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ITEM 3. LEGAL PROCEEDINGS
We are periodically involved in legal actions in the ordinary course of
its business. As of December 31, 2002, there are no pending legal
proceedings-against or involving the Company for which the outcome is likely to
have a material adverse effect upon our financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders of the ACI
during the fourth quarter of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since June 11, 1999, our Common Stock has been traded on the
over-the-counter markets of the National Association of Securities Dealer's
Electronic Bulletin Board under the symbol ACIT. On June 10, 1999, Nasdaq
informed us that we were being delisted from the Nasdaq SmallCap Market where
our Common Stock had been traded since October 21, 1996. Prior to October 21,
1996, our Common Stock was not publicly traded. The following table sets forth
the high and low bid prices and the closing sales prices for our Common Stock as
reported by OTC Bulletin Board. The bid quotations represent interdealer prices
without retail mark-ups, mark-downs or commissions and may not necessarily
represent actual transactions.
Year Ended December 31, 2002 High Low Close
First Quarter $ 1.30 $ 0.85 $ 0.85
Second Quarter 0.95 0.50 0.50
Third Quarter 0.51 0.22 0.30
Fourth Quarter 0.38 0.11 0.23
Year Ended December 31, 2001 High Low Close
First Quarter $ 1.56 $ 0.81 $ 0.91
Second Quarter 2.00 0.85 1.60
Third Quarter 2.35 0.80 0.80
Fourth Quarter 1.15 0.80 1.00
On May 8, 2003, the aggregate market value of our Common Stock was
$635,963 based on the average of the closing bid and asked prices on that date.
As of May 8, 2003, we had approximately 150 shareholders of record. We estimate
that an additional 400 stockholders own stock held for their accounts at
brokerage firms and financial institutions (commonly known as "in street name").
We have not paid cash dividends on our Common Stock since our initial
public offering of stock. The Board of Directors presently intends to retain
earnings for use in our business and does not anticipate paying cash dividends
on Common Stock in the foreseeable future. Any future determinations as to the
payment of dividends will depend on our financial condition and such other
factors as are deemed relevant by the Board of Directors. Our credit line
prohibits the payment of cash dividends without the lender's consent.
6
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with our financial statements and notes thereto included
elsewhere in this report. The selected consolidated statements of operations
data for 2002, 2001, and 2000 and the selected consolidated balance sheets data
for 2002 and 2001 are derived from our audited consolidated financial statements
included herein. The selected consolidated statements of operations data for
1999 and 1998 and the selected consolidated balance sheets data for 2000, 1999,
and 1998 are derived from our audited consolidated financial statements not
included herein.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- --------- -------- -------- --------
Consolidated Statements of Operations Data:
(in thousands, except per share data)
Total revenues $ 30,321 $ 32,894 $ 31,495 $ 22,943 $ 15,036
--------- -------- -------- -------- -------
Operating expenses:
Cost of services 17,816 17,342 17,657 13,537 8,396
Selling, general, and administrative 14,281 15,085 11,545 8,486 8,009
Restructuring costs 11 -- -- -- 65
Impairment costs 583 78 847 -- --
-------- -------- -------- -------- --------
Total operating expenses 32,691 32,505 30,049 22,023 16,470
-------- -------- -------- -------- --------
Operating income (loss) (2,370) 389 1,446 920 (1,434)
Interest income 8 25 16 16 39
Interest expense 218 277 194 94 59
Other expense 39 69 10 6 2
-------- -------- -------- -------- --------
Income (loss) before income taxes (2,619) 68 1,258 836 (1,456)
Income tax expense (benefit) 205 27 497 309 (550)
-------- -------- -------- -------- --------
Net income (loss) $ (2,824) $ 41 $ 761 $ 527 $ (906)
======== ======== ======== ======== ========
Basic and diluted income (loss) per share $ (.49) $ .01 $ .13 $ .09 $ (.16)
======== ======== ======== ======== ========
DECEMBER 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Consolidated Balance Sheets Data:
(in thousands)
Working capital $ 505 $ 2,539 $ 3,033 $ 3,581 $ 2,305
Total assets $ 11,846 $ 13,116 $ 14,063 $ 10,021 $ 7,342
Revolving line of credit $ 1,808 -- $ 2,502 $ 850 --
Shareholders' equity $ 4,096 $ 6,921 $ 6,872 $ 6,096 $ 5,551
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
ACI provides telephone-based sales and marketing services primarily to
the telecommunications, publishing, and financial services industries. We
operate eight contact centers. Five of the contact centers are located in the
United States, and three are located in Quebec, Canada. Four of the United
States contact centers are located in Midwest states with one located in
California. The Canadian contact centers are located in Sherbrooke, Vaudreuil
and Caplan, Quebec. As of December 31, 2002, we had 801 outbound and inbound
calling workstations and approximately 1,600 full and part-time employees.
Revenues from telemarketing services are recognized as these services
are performed and are generally based on an hourly rate. Certain telemarketing
service revenues are performance-based. Cost of services includes compensation
and commissions for telephone sales representatives, payroll taxes, and other
benefits associated with such personnel, telephone expenses, and other direct
costs associated with providing services to customers. Selling, general, and
administrative expenses include administrative, sales, marketing, occupancy,
depreciation, and other indirect costs.
One of our strategies is to locate our contact centers in smaller, more
rural communities, because many of these communities offer higher quality labor
and reduced operating expenses, as well as, economic incentives for locating
facilities in their communities. We receive incentive payments from certain
federal, state, local, and provincial governments in the United States and
Canada that help offset payroll and start-up costs associated with opening new
customer contact centers.
CRITICAL ACCOUNTING POLICIES
In preparing our financial statements, we follow accounting principles
generally accepted in the United States of America, which in many cases require
assumptions, estimates and judgments that affect the amounts reported. Many of
these policies are relatively straightforward. There are, however, a few
policies that are critical because they are important in determining the
financial condition and results of operations, and they can be difficult to
apply. The most critical accounting policies applied in the preparation of the
Company's financial statements relate to:
REVENUE RECOGNITION - We provide outbound and inbound telephone-based
sales and marketing services (outsourced services) for a variety of companies in
the telecommunications, financial services, and publishing industries. Outbound
telemarketing services are performed when our customer sales representatives
place a telephone call, from a list supplied by our client company, to a
telephone number at a personal residence or business location. Inbound
telemarketing services are performed when our customer sales representatives
receive a call, on a toll-free telephone number, from an individual or business
that is seeking to obtain information or purchase a product or service from our
client company.
We recognize revenues from outbound and inbound services when those
services are provided. Revenue is recognized based on telemarketing hours
incurred or, if revenue is recognized on performance based criteria, when sales
are verified.
Outbound and inbound services revenue is treated as one segment. Related
costs and expenses are not tracked separately because we do not have dedicated
inbound customer contact centers, we have no dedicated inbound telemarketing
personnel, and employees in our customer contact centers perform both
8
outbound and inbound telemarketing services.
ECONOMIC DEVELOPMENT GRANTS - We receive incentive payments from certain
state, local and provincial governments in the United States and Canada to help
offset payroll and start-up costs associated with opening new customer contact
centers. These various governmental agencies reserve the right to require
repayment of all or a portion of the incentive payments if the Company does not
meet certain performance criteria as defined in the incentive agreements, such
as, creating a certain, or minimum, number of new jobs, maintaining certain
levels of employment over a period of time or paying minimum average salaries.
Incentive payments are recorded as a reduction to payroll and start-up
expenses when performance criteria are satisfied. In the event that performance
criteria have been satisfied prior to receipt of the incentive payment, payroll
and start-up expenses are reduced and a receivable from the governmental agency
is recorded. If an incentive payment is received prior to the satisfaction of
all required performance criteria, the incentive payment is deferred and
recorded as a liability. If an incentive payment is received for which an
incremental portion of the performance criteria is satisfied then the
incremental portion of the incentive payment is recorded as a reduction to
payroll and start-up costs and the incremental portion of the incentive payment
not earned is deferred and recorded as a liability.
LONG-LIVED ASSETS - We review our long-lived assets, such as fixed
assets and goodwill for impairment whenever events or changes in circumstances
indicate the book value of an asset or group of assets may not be recoverable.
We consider a history of operating losses to be a primary indicator of potential
asset impairment. Assets are grouped and evaluated for impairment at the lowest
level for which there are identifiable cash flows. Fixed assets or goodwill is
deemed to be impaired if a forecast of undiscounted future operating cash flows,
directly related to such assets, is less than its carrying amount.
INCOME TAXES - We evaluate a variety of factors in determining the
amount of income tax assets and liabilities to be reported in our consolidated
balance sheets, including our earnings history, the number of years our
operating loss and tax credits can be carried forward, the existence of taxable
temporary differences, and near-term earnings expectations. In assessing our
ability to utilize deferred tax assets, we consider whether it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. We consider the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment.
CONTRACTUAL OBLIGATIONS
We are committed to making cash payments in the future in connection
with operating leases, capital lease obligations (including principal and
interest), and our Revolving Credit and Forbearance Loan Agreement. We have no
off-balance sheet debt or other unrecorded obligations nor do we guarantee the
debt of any party. Below is a schedule of the future payments that we are
obligated to make based on agreements in place as of December 31, 2002 (amounts
in thousands).
Total 2003 2004 2005 2006 2007 Thereafter
------- ------- ------- ------- -------- ------- -------
Minimum lease payments
under capital leases $ 1,247 $ 660 $ 351 $ 187 $ 49 $ -- $ --
Operating leases 4,239 1,096 903 772 766 472 230
Revolving credit and
forbearance agreement 1,808 1,808 -- -- -- -- --
------- ------- ------- ------- -------- ------- -------
Total $ 7,294 $ 3,564 $ 1,254 $ 959 $ 815 $ 472 $ 230
======= ======= ======= ======= ======== ======= =======
9
RESULTS OF OPERATIONS
The following table sets forth items from ACI's Consolidated Statements
of Operations as percentages of total revenues:
Years ended December 31, 2002 2001 2000
----- ----- -----
Telemarketing revenues 100.0% 100.0% 100.0%
Cost of services 58.8 52.7 56.0
Selling, general, and administrative expenses 47.1 45.9 36.7
Impairment cost 1.9 0.2 2.7
Operating income (loss) (7.8) 1.2 4.6
Other expense (0.8) (1.0) (0.6)
Income (loss) before income taxes (8.6) 0.2 4.0
Income tax expense 0.7 0.1 1.6
Net income (loss) (9.3) 0.1 2.4
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUES. Revenues for the year ended December 31, 2002 were
$30,320,788, a decrease of $2,573,128 or 8% when compared to 2001 revenues of
$32,893,916. The decreases in revenues and billable hours can primarily be
attributed to our financial services clients scaling back their marketing
campaigns due to the general instability of the economy during 2002.
Telecommunications clients provided the largest portion of revenues
during 2002, providing approximately 46% of revenues compared to approximately
27% of revenues in 2001. During 2001, financial services clients provided 63% of
revenues compared to approximately 44% during 2002. Other industry segments and
their percentages of revenues in 2002 and 2001 included publishing (4% and 6%)
and other miscellaneous (6% and 4%), respectively. During 2002, the Company's
largest client represented 17% of total revenue. During 2001, the Company's
largest client represented 16% of total revenue.
In 2002, billable telemarketing hours decreased 5% when compared to
2001; however, net revenue per billable telemarketing hour decreased by 3%.
During 2002, the Company opened one contact center in Caplan, Quebec, Canada. As
of December 31, 2002, the Company operated a combined total of 801 inbound and
outbound contact center workstations compared to 887 inbound and outbound call
center workstations at December 31, 2001.
COST OF SERVICES. Cost of services increased 3% to $17,816,607 in 2002
from $17,342,050 in 2001. Telemarketing sales representatives (TSR's) labor and
benefit costs increased by 5% to $14,349,573, or 47% of total revenue in 2002 as
compared to $13,727,502, or 42% of total revenue in 2001. As a percentage of
revenue, long distance telephone costs increased from 10% in 2001 to 11% in
2002. Without the effect of the economic development grant reimbursements earned
(see Note 6 of Notes to Consolidated Financial Statements), cost of services
would have increased another $335,647 in 2002, to $18,152,254 compared to an
additional increase of $1,783,765 to $19,125,815 in 2001. Economic development
grant reimbursements earned are from the governments of Quebec and Canada for
new jobs created at the Company's Sherbrooke, Vaudreuil and Caplan contact
centers.
10
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses for 2002 decreased by $792,316, or 5% to $14,291,900,
compared to $15,084,216 in 2001. As a percentage of revenue, selling, general,
and administrative expenses increased 1% to 47% in 2002 as compared to 46% in
2001. The increase in expenses in 2002, as a percentage of revenue, can
primarily be attributed to expenses associated with the June 2002 opening of our
new customer contact center in Caplan, Quebec; increased travel costs of
corporate personnel associated with the opening of our new customer contact
center; and upgraded technology installed during 2002 and 2001. During 2002,
there was no effect on selling, general and administrative expenses from
economic development grant reimbursements earned. During 2001, without the
effect of the economic development grant reimbursements earned (see Note 6 of
Notes to Consolidated Financial Statements), selling, general and administrative
expenses would have been $15,338,959. For 2001, selling, general and
administrative expenses were reduced by $254,743 for economic development grant
reimbursements earned.
IMPAIRMENT COST. During the fourth quarter of 2002, we recorded a
non-cash impairment charge of $532,743 for the write-down of long-lived assets
related to the reduction of excess production capacity in our call centers.
During the third quarter of 2002, the Company also recorded a non-cash
impairment of asset charge of $49,975 related to the closing of two small call
centers. During the fourth quarter of 2001, the Company recorded a non-cash
impairment of asset charge of $78,202 related to the write-down of long-lived
assets of call centers sold during the first quarter of 2002.
OPERATING INCOME (LOSS). As a result of the factors discussed above, the
Company recorded an operating loss in 2002 of $2,370,437 compared to 2001
operating income of $389,448. Operating losses for 2002 and 2001 would have been
$2,706,084 and $1,649,060, respectively, when the effect of the economic
development grant reimbursements earned is not considered.
OTHER INCOME AND EXPENSES, NET. Other expenses were $248,905 in 2002
compared to $320,968 in 2001. Net interest expense of $210,098 in 2002,
decreased by $41,727 compared to net interest expense of $251,825 in 2001. This
decrease was the result of a decrease in borrowing activity under the Company's
line of credit and a reduction in equipment lease financing as a result of
leases becoming fully paid. Other expenses also decreased as a result of a
decrease in foreign currency translation expense when compared to 2001.
INCOME TAX EXPENSE. The Company recorded income tax expense of $205,000
in 2002 compared to $27,000 in 2001. The 2002 provision is net of a $1,900,000
valuation allowance charge and a $568,000 benefit resulting from a change in
Canadian tax strategy. The 2002 expense was recorded at 7.8%, which is estimated
to be the effective rate for federal and state taxes verses 39.4% used in 2001.
NET INCOME (LOSS). Net loss for 2002 was $2,824,342, or $0.49 per share
on a basic and diluted basis compared to net income of $41,480 or $0.01 per
share in 2001. When the effect of the economic development grants is not
considered, the net loss for 2002 would have been $3,184,989, or $0.55 per share
on a basic and diluted basis as compared to net loss for 2001 of $1,193,294, or
$0.21 per share on a basic and diluted basis.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUES. Revenues for the year ended December 31, 2001 were
$32,893,916, an increase of $1,398,577 or 4% when compared to 2000 revenues of
$31,495,339. The increases in revenues and billable hours can primarily be
attributed to increased internal capacity that was the result of opening a
11
new contact center in January 2001. Because of the increased capacity, revenues
derived from outsourcing in 2001 decreased to less than 1% compared to 13% in
2000.
Financial services clients provided 63% and 51% of total 2001 and 2000
revenues, respectively. Other industry segments for 2001 included
telecommunications (27%) and publishing (6%). During 2001, the Company's largest
client represented 16% of total revenue. During 2000, the Company's largest
client represented 21% of total revenue.
In 2001, billable telemarketing hours increased 9% when compared to
2000; however, net revenue per billable telemarketing hour decreased by 4%.
During 2001, the Company opened one contact center in Vaudreuil, Quebec, Canada.
As of December 31, 2001, the Company operated a combined total of 887 inbound
and outbound contact center workstations compared to 775 inbound and outbound
call center workstations at December 31, 2000.
COST OF SERVICES. Cost of services decreased 2% to $17,342,050 in 2001
from $17,657,512 in 2000. The decrease in costs of services is primarily the
result of the 99% decrease in outsourcing costs. The reduced utilization of
outsourcing was due to the Company's increased internal capacity that was the
result of opening a new contact center in January 2001. Outsourcing costs are
costs associated with the utilization of other telemarketing companies for
telemarketing some of the Company's clients' programs. Outsourcing costs
decreased to less than 1%, as a percentage, of total revenue in 2001 compared to
11% of total 2000 revenue. Increases in TSR's labor and benefit costs and long
distance telephone costs partially offset the decrease in outsourcing costs.
TSR's labor and benefit costs increased by 22% to $13,727,502, or 42% of total
revenue in 2001 as compared to $11,247,055, or 36% of total revenue in 2000. As
a percentage of revenue, long distance telephone costs increased from 8% in 2000
to 10% in 2001. Without the effect of the economic development incentives of
$1,783,765 and $1,151,728 in 2001 and 2000, respectively, (see Note 6 of Notes
to Consolidated Financial Statements), cost of services would have increased
$316,575 or 2% to $19,125,815 from $18,809,240 in 2000. For the year 2001, cost
of services was reduced by $1,783,765 for the economic development grants from
the governments of Quebec and Canada for new jobs created at the Company's
Sherbrooke and Vaudreuil contact centers. For the year 2000, cost of services
was reduced by $1,151,728 for the economic development grant from the government
of Quebec, Canada for new jobs created at the Company's Sherbrooke, Quebec
contact center.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses for 2001 increased by $3,539,641, or 31% to $15,084,216,
compared to $11,544,575 in 2000. As a percentage of revenue, selling, general,
and administrative expenses increased 9% to 46% in 2001 as compared to 37% in
2000. The increase in expenses in 2001 can primarily be attributed to expenses
associated with the contact centers that were opened in April 2000 and January
2001; an increase in costs of corporate personnel hired to handle increased
capacity and expansion of future product lines; and an increase in depreciation
expense associated with the contact centers opened in April 2000 and January
2001, relocation of the Merrillville, IN contact center to Schererville, IN, and
upgraded technology installed during 2001 and 2000. During 2001, without the
effect of the economic development grants (see Note 6 of Notes to Consolidated
Financial Statements), selling, general and administrative expenses would have
been $15,338,959, an increase of $3,567,548, or 30%, as compared to 2000. For
2001 and 2000, selling, general and administrative expenses were reduced by
$254,743 and $226,836, respectively, for the net economic development grants.
IMPAIRMENT COST. During the fourth quarter of 2001, the Company recorded
a non-cash impairment of asset charge of $78,202 related to the write-down of
long-lived assets during the first quarter of 2002. During the third quarter of
2000, the Company recorded an impairment of asset charge of
12
$846,745 related to goodwill recorded from its August 1997 acquisition. See
discussion in Note 1 of Notes to Consolidated Financial Statements.
OPERATING INCOME (LOSS). As a result of the factors discussed above, the
Company recorded operating income of $389,448 compared to 2000 operating income
of $1,446,507. Operating loss for 2001 would have been $1,649,060 and operating
income for 2000 would have been $67,943 when the effect of the economic
development grant is not considered.
OTHER INCOME AND EXPENSES, NET. Other expenses were $320,968 in 2001
compared to $188,226 in 2000. Net interest expense of $251,825 in 2001 compared
to net interest expense of $178,138 in 2000 was the result of an increase in
borrowing activity under the Company's line of credit and an increase in
equipment lease financing. Other expenses increased due to an increase in
foreign currency translation expense as a result of the opening of two contact
centers in Canada; one in April 2000 and the other in January 2001.
INCOME TAX EXPENSE. The Company recorded income tax expense of $27,000
in 2001 compared to $497,000 in 2000. The 2001 expense was recorded at 39.4%,
which is estimated to be the effective rate for federal and state taxes verses
39.5% used in 2000.
NET INCOME (LOSS). Net income for 2001 was $41,480, or $0.01 per share
on a basic and diluted basis compared to net income of $761,281 or $0.13 per
share in 2000. When the effect of the economic development grants is not
considered, net loss for 2001 would have been $1,193,294, or $0.21 per share on
a basic and diluted basis as compared to net loss for 2000 of $72,773 or $0.01
per share on a basic and diluted basis.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had cash and cash equivalents of
$797,626 compared to $1,459,215 and $100,607 at December 31, 2001 and 2000,
respectively. Cash used by operating activities in 2002 was $1,758,740, compared
to cash provided by operating activities of $6,729,210, and $1,725,318,
respectively, in 2001 and 2000. Cash used by operating activities in 2002 was
from the net loss of $2,824,342, and net changes in working capital components
of $1,221,190 (primarily an increase in trade receivables). Cash provided by
depreciation of $2,083,635, and other non-cash charges of $203,157 partially
offset the cash used by operating activities in 2002. Cash provided by operating
activities in 2001 was primarily from $4,384,453 of changes in working capital
components related to the cash received from trade and grant receivable,
depreciation of $2,106,281, net income of $41,480 and other non-cash charges of
$196,996. Cash provided by operating activities in 2000 was primarily from net
income of $761,281, plus depreciation of $1,320,660 and other noncash charges of
$1,081,976. Cash used by operating activities in 2000 was $1,438,599 of changes
in working capital components related to the growth of the Company.
Net cash provided by investing activities in 2002 was $19,915, compared
to cash used by investing activities of $2,449,594 and $3,102,514 in 2001, and
2000, respectively. During 2002, cash provided by investing activities was
primarily from government reimbursements against property and equipment of
$388,645, which was partially offset by purchases of property and equipment of
$355,158 primarily related to the new Caplan contact center opened in June 2002.
The primary use of
13
cash by investing activities in 2001 was expenditures for property and equipment
of $3,056,539 related to the new Vaudreuil contact center opened in January 2001
and upgrades on equipment and technology, which was partially offset by a
decrease of $606,945 in deposits on equipment and technology. The primary use of
cash by investing activities in 2000 was expenditures for property and equipment
of $2,412,643 related to the opening of the Sherbrooke call center in April 2000
and deposits of approximately $544,000 on equipment for the setup of the new
Vaudreuil call center in January 2001 and the expansion of current call centers.
Net cash provided by financing activities in 2002 was $1,077,237
compared to net cash used in 2001 of $2,921,009 and net cash provided by
financing activities in 2000 of $1,278,508. Net cash provided by financing
activities in 2002 consisted of net borrowings from the revolving line of credit
totaling $1,807,571. The primary use of cash by financing activities in 2002 was
repayments on capital leases of $730,334. During 2001, the primary use of cash
by financing activities was net repayments of $2,501,617 on the revolving line
of credit plus capital lease repayments of $628,660. These uses of cash were
offset by proceeds of $202,634 from equipment acquired through capital leases
and proceeds of $6,634 from the issuance of common stock in the Employee Stock
Purchase Plan. Net cash provided by financing activities in 2000 consisted of
net borrowings from the revolving line of credit totaling $1,651,617 plus
proceeds of $14,824 from the issuance of common stock in the Employee Stock
Purchase Plan and exercise of stock options. The primary use of cash by
financing activities in 2000 was the repayments of long-term debt and capital
leases of $387,933. As a result, net cash and cash equivalents decreased
$661,588 in 2002, increased $1,358,607 in 2001 and decreased by $98,688 in 2000.
We have historically used cash from operating activities including
public sector economic development grants, bank borrowings, capital leases, and
private sector financing as our primary sources of liquidity. Over the last
year, we have not generated sufficient cash from operating activities to meet
our liquidity requirements. In 2002, the Company financed its activities with
borrowings against its line of credit, grant monies received from the provincial
government of Quebec, Canada and the federal government of Canada, and the
financing of $414,784 of asset purchases through capital leases. As of December
31, 2002, we operated under a $2,700,000 Revolving Credit and Forbearance Loan
Agreement dated December 2002, that expires on April 30, 2003. The loan accrues
interest at the prime rate plus 3% on outstanding borrowings (prime rate was
4.25% and 4.75% at December 31, 2002 and 2001, respectively). Borrowings are
collateralized by certain trade receivables. In addition, the loan agreement
contains provisions requiring compliance with certain financial covenants based
upon total debt levels, tangible net worth, debt service, capital expenditures,
and working capital, including prohibiting the payment of cash dividends without
the bank's consent. In addition, the loan agreement limits the 2002 net loss.
The agreement further stipulates that during 2003, we will not have a net loss
of more than $400,000 as of January 31, 2003, and a cumulative net loss of more
than $600,000 as of the end of each month thereafter. At December 31, 2002, we
had outstanding borrowings of $1,807,571 under the Revolving Credit and
Forbearance Loan Agreement with an available credit line of $892,429. At
December 31, 2001, we had no outstanding borrowings under our Revolving Credit
Loan Agreement with an available credit line of $4,000,000.
On April 29, 2003, we signed a Financing Agreement with a new lender
that provides a credit line of up to $3,500,000. The agreement expires on
January 29, 2004. Borrowings are limited to 80% of qualifying trade receivables.
Certain trade receivable, contract rights and other rights to payments,
equipment and general intangibles collateralize the note. The loan accrues
interest at the prime rate plus 3.5%. The agreement also requires a minimum
interest charge payable to the lender of $3,500 per month and also includes a 1%
origination fee.
14
We believe that funds generated from future operations, amounts
available under our Financing Agreement, and amounts receivable from economic
development grants for new jobs created will be sufficient to finance our
current and future business operations, including working capital requirements.
OUTLOOK
Certain of the statements contained in this section are "forward-looking
statements." The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for certain forward-looking statements. This report on Form 10-K
and other documents we file with the SEC contain forward-looking statements that
reflect our current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, which could cause future results to differ materially from those
expressed or implied by such statements. Readers are cautioned not to place
undue reliance on these forward-looking statements. Except as required under the
Federal securities laws and rules and regulation of the SEC, we undertake no
obligation to publicly update or revise any forward-looking statements in
connection with new information or future events.
We believe that telemarketing will remain an integral part of our
client's marketing budgets and that revenues will remain relatively stable in
2003. However, there is no assurance that businesses will continue to outsource
their telemarketing needs or that our marketing efforts will generate new
business. As is common in the telemarketing industry, our customer contracts do
not designate us as the client's exclusive service provider, do not assure us of
a specific level of revenue, and are terminable by the client on relatively
short notice and sometimes without penalty.
During the past year, we have not generated sufficient cash flows from
operations to support our liquidity requirements. In 2002, we experienced a
decrease in revenues that was primarily due to our financial services clients
scaling back their marketing campaigns because of the general instability of the
economy. We also incurred a net loss of $2,824,342 in 2002 compared to net
income of $41,480 in 2001 after the effect of $335,647 and $2,038,508 in expense
reductions for economic development incentives earned in years 2002 and 2001,
respectively. Because of these factors, we have had to utilize our credit line
to meet our cash needs. At December 31, 2002, the remaining receivable under the
incentive agreements was $380,562. The various governmental agencies granting
the incentive payments reserve the right to require repayment of all or a
portion of the incentive payments, if we do not meet certain performance
criteria as defined in the incentive agreements, such as creating a certain, or
minimum, number of new jobs, maintaining certain levels of employment over a
period of time, or paying minimum average salaries. As of December 31, 2002, we
had created a total of 1,115 jobs that are subject to certain performance
criteria, for which we had filed financial reimbursement claims. As of December
31, 2002, the actual number of jobs existing was 885. We do not believe that any
economic development incentives received will be refundable. This belief depends
on our ability to meet designated job creation and other requirements, which in
turn depends on general business, economic and competitive conditions. Should we
be required to repay all, or any portion, of the economic incentives received it
could have a material adverse effect on our cash position.
In addition to the risks and uncertainties of ordinary business
operations, the forward-looking statements in this report on Form 10-K are also
subject to the following risks and uncertainties:
CLIENT CONCENTRATION; CONTRACT TERMS
Substantial portions of our revenues are generated from a few key
clients. As noted in Part I, Item 1 "Business-Principal Customers," three
clients accounted for 41% of our 2002 revenues. In 2001, five clients accounted
for 66% of total revenue. As is common in the telemarketing industry, our
customer
15
contracts do not designate us as the client's exclusive service provider, do not
assure us of a specific level of revenue, and are terminable by the client on
relatively short notice and sometimes without penalty. In addition, the amount
of revenue we generate from a particular client is dependent upon the interest
of their customer in, and use of, the client's product or service. There can be
no assurance that we will be able to retain any of our larger clients or that
these clients will not reduce their call volumes due to a downturn in their
industries. A reduction in call volumes, or the loss of one or more significant
clients, could have a material adverse effect on our business, results of
operations and financial condition.
GOVERNMENT REGULATION
We are subject to an increasing amount of Governmental regulation in
both the United States and Canada. For example, several states impose license or
bond requirements upon telemarketers. There are also several states that publish
and maintain a state run "Do Not Call List." In addition, several of the
industries served by the Company are subject to varying degrees of governmental
regulation, particularly the financial services industry. We believe that our
telemarketing procedures comply with all current US and Canadian rules. Future
laws and regulations may require us to modify our operations in order to
effectively meet our clients' service requirements, and there can be no
assurance that additional regulations would not limit our activities or
significantly increase the cost of regulatory compliance. See Part I, Item I for
further discussion of Government Regulations.
COMPETITION; INTERNATIONAL CAPACITY
As noted in Part I, Item 1 "Business-Competition," the telemarketing
industry is highly competitive, but also continues to be highly fragmented. A
number of our competitors have capabilities and resources equal to or greater
than ours, and there can be no assurance that additional competitors with
greater resources will not enter the industry. These include telemarketing firms
of various sizes, in house telemarketing organizations, and other forms of
marketing such as direct mail, television and radio.
We also face competition from offshore locations that provide service
to our markets at reduced costs. The potential movement of business to offshore
locations, at reduced prices, may result in pressure on us to match rates,
thereby eroding gross profit margins, or resulting in the loss of business to
these competitors.
DEPENDENCE ON LABOR FORCE AND TELECOMMUNICATIONS SERVICES
Our most significant operating cost is our labor force. Due to the
traditionally high turnover rates in the telemarketing industry, we are
constantly required to recruit and train new employees. There can be no
assurance that we will be able to recruit, train and retain a sufficient number
of qualified employees within our present wage structure. An increase in hourly
wages, incentives or unemployment taxes could have a material adverse effect on
our financial condition.
Our second largest operating cost is telecommunications. Our business
is dependent on telephone services provided by various local and long distance
companies. To reduce our exposure to rate fluctuations, we enter into contracts
with our telecommunications service providers. All contracts are subject to
renewal negotiations, which may result in increased rates. Any change to the
telecommunications market that would disrupt services or limit our ability to
obtain services at favorable rates could have an adverse impact on the Company.
16
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142 (SFAS 142), GOODWILL
AND OTHER INTANGIBLE ASSETS. This statement requires that goodwill and
intangible assets deemed to have an indefinite life not be amortized. Instead of
amortizing goodwill and intangible assets deemed to have an indefinite life, the
statement requires a test for impairment to be performed annually, or
immediately if conditions indicate that such an impairment could exist. We
adopted the provisions of SFAS 142 on January 1, 2002, which did not have a
material effect on our consolidated results of operations, financial position,
and cash flow.
In June 2001, the FASB issued SFAS No. 143 (SFAS 143), ACCOUNTING FOR
ASSET RETIREMENT OBLIGATIONS. SFAS 143 was effective for the Company on January
1, 2003. SFAS 143 requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. We do not
expect SFAS 143 to have a material effect on the Company's financial position or
results of operations.
In August 2001, the FASB issued SFAS No. 144 (SFAS 144), ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS 144 supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, it retains many
of the fundamental provisions of that statement. SFAS 144 was effective for the
Company on January 1, 2002. During 2002, the Company recognized a non-cash
impairment charge of $49,975 related to the closing of two small call centers
and an additional non-cash impairment charge of $532,743 related to certain
long-lived assets whose carrying value was in excess of expected future cash
flows from the use of those assets.
In June 2002, the FASB issued SFAS No. 146 (SFAS 146), ACCOUNTING FOR
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES, which addresses financial
accounting and reporting for costs associated with exit or disposal activities.
SFAS 146 requires costs associated with the following restructuring activities
to be recognized and measured at fair value (except for one-time termination
benefits) and recorded when such changes occur: one-time termination benefits,
costs to terminate contracts other than capital leases, and costs to consolidate
facilities and/or relocate employees. SFAS 146 is effective for exit or disposal
activities initiated after December 31, 2002, with early application encouraged.
INFLATION
Inflation has not had a material impact on operating results, and the
Company does not expect it to have a significant impact in the future. However,
there can be no assurance that the Company's business will not be affected by
inflation in the future.
QUARTERLY RESULTS
The telemarketing industry tends to be slower in the first and third
quarters of the year because client marketing and customer service programs are
typically slower in the post holiday and summer months. The Company has
experienced and expects to continue to experience quarterly variations in
revenues and operating income principally as a result of the timing of clients'
telemarketing campaigns,
17
the commencement of new contracts, changes in the Company's revenue mix, and the
additional selling, general, and administrative expenses to acquire and support
such new business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK - We have exposure to changing interest rates and are
not currently engaged in hedging activities to mitigate this risk. Interest on
the variable rate debt outstanding on our Revolving Credit and Forbearance Loan
Agreement bears interest at the bank's prime rate plus 3%. As the prime rate
increases or decreases our interest expense, on an annual basis, will also
increase or decrease accordingly. As of December 31, 2002, our indebtedness
under the Revolving Credit and Forbearance Loan Agreement was $1,807,571. Our
capital lease obligations represent fixed rate indebtedness with interest rates
ranging from 8.05% to 11.31%. We had $1,128,398 in capital lease obligations at
December 31, 2002.
FOREIGN CURRENCY EXCHANGE RATE RISK - Transactions with international
customers are entered into in U.S. dollars, precluding the need for foreign
currency hedges. As a result, the exposure to market risk is not material.
DERIVATIVE INSTRUMENTS - We have no history of, and do not anticipate
that in the future, investing in derivative financial instruments, derivative
commodity instruments or other such financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary financial information specified
by this Item, together with the report of our independent public accountants
thereon, are included in this Annual Report on Form 10-K. The following
financial statements of the Company are included herein:
Independent Auditor's Report
Consolidated Balance Sheets - December 31, 2002 and 2001
Consolidated Statements of Operations - December 31, 2002, 2001, and
2000
Consolidated Statements of Shareholders' Equity - December 31, 2002,
2001, and 2000
Consolidated Statements of Cash Flows - December 31, 2002, 2001, and
2000
Notes to Consolidated Financial Statements - December 31, 2002, 2001,
and 2000
18
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
ACI Telecentrics, Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheet of ACI Telecentrics,
Inc. and subsidiary (the Company) as of December 31, 2002, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2002, the results of their operations and their cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ Lurie Besikof Lapidus & Company, LLP
Minneapolis, Minnesota
February 28, 2003, except for Note 13,
as to which the date is April 29, 2003
19
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of ACI Telecentrics, Inc.
We have audited the accompanying consolidated balance sheets of ACI
Telecentrics, Inc. and subsidiary (the Company) as of December 31, 2001, and the
related consolidated statements of operations, shareholders' equity and cash
flow for the years ended December 31, 2001 and 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2001, and the results of its operations and its cash flows for each
of the years ended December 31, 2001 and 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 27, 2002
20
ACI TELECENTRICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 797,626 $ 1,459,214
Trade receivables, less allowance for doubtful accounts of $206,000
and $199,000, respectively 6,299,990 3,691,111
Grant receivables 380,562 677,341
Prepaid expenses and other current assets 232,714 142,230
Deferred income taxes -- 911,000
------------ ------------
Total current assets 7,710,892 6,880,896
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 3,763,545 6,094,392
OTHER ASSETS 371,282 140,360
------------ ------------
$ 11,845,719 $ 13,115,648
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ 1,807,571 $ --
Trade accounts payable 1,386,755 1,481,408
Accrued compensation 1,056,717 746,630
Accrued expenses 299,452 281,266
Income taxes payable 527,376 92,282
Current maturities capital lease obligations 585,223 669,731
Current maturities of deferred grant expense reimbursements 1,543,208 1,070,530
------------ ------------
Total current liabilities 7,206,302 4,341,847
------------ ------------
LONG-TERM LIABILITIES
Capital lease obligations, less current maturities 543,175 774,217
Deferred grant expense reimbursements, less current maturities -- 20,000
Deferred income taxes -- 1,059,000
------------ ------------
Total long-term liabilities 543,175 1,853,217
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, no par value; 15,000,000 shares authorized;
5,781,485 shares issued and outstanding 6,659,989 6,659,989
Retained earnings (accumulated deficit) (2,563,747) 260,595
------------ ------------
Total shareholders' equity 4,096,242 6,920,584
------------ ------------
$ 11,845,719 $ 13,115,648
============ ============
See notes to consolidated financial statements.
21
ACI TELECENTRICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
- --------------------------------------------------------------------------------
2002 2001 2000
------------ ------------ ------------
TELEMARKETING REVENUES
Outbound revenue $ 26,597,970 $ 31,739,390 $ 31,369,848
Inbound revenue 3,722,818 1,154,526 125,491
------------ ------------ ------------
Total revenues 30,320,788 32,893,916 31,495,339
------------ ------------ ------------
OPERATING EXPENSES
Cost of services 17,816,607 17,342,050 17,657,512
Selling, general, and administrative expenses 14,291,900 15,084,216 11,544,575
Impairment costs 582,718 78,202 846,745
------------ ------------ ------------
Total costs 32,691,225 32,504,468 30,048,832
------------ ------------ ------------
OPERATING INCOME (LOSS) (2,370,437) 389,448 1,446,507
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 8,163 25,482 16,353
Interest expense (218,261) (277,307) (194,491)
Other, net (38,807) (69,143) (10,088)
------------ ------------ ------------
Total other expense (248,905) (320,968) (188,226)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (2,619,342) 68,480 1,258,281
INCOME TAX EXPENSE 205,000 27,000 497,000
------------ ------------ ------------
NET INCOME (LOSS) $ (2,824,342) $ 41,480 $ 761,281
============ ============ ============
BASIC AND DILUTED NET INCOME
(LOSS) PER SHARE $ (.49) $ .01 $ .13
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 5,781,485 5,781,468 5,770,910
============ ============ ============
Diluted 5,781,485 5,869,049 5,995,260
============ ============ ============
See notes to consolidated financial statements.
22
ACI TELECENTRICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
RETAINED
COMMON STOCK EARNINGS
-------------------------- (ACCUMULATED
SHARES AMOUNT DEFICIT) TOTAL
----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1999 5,756,267 $ 6,638,531 $ (542,166) $ 6,096,365
Proceeds from stock options exercised 1,000 500 -- 500
Issuance of common stock under the
Employee Stock Purchase Plan 17,974 14,324 -- 14,324
Net income -- -- 761,281 761,281
----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2000 5,775,241 6,653,355 219,115 6,872,470
Issuance of common stock under the
Employee Stock Purchase Plan 6,244 6,634 -- 6,634
Net income -- -- 41,480 41,480
----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2001 5,781,485 6,659,989 260,595 6,920,584
Net loss -- -- (2,824,342) (2,824,342)
----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2002 5,781,485 $ 6,659,989 $(2,563,747) $ 4,096,242
=========== =========== =========== ===========
See notes to consolidated financial statements.
23
ACI TELECENTRICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
- --------------------------------------------------------------------------------
2002 2001 2000
------------ ------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ (2,824,342) $ 41,480 $ 761,281
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation 2,083,635 2,106,281 1,320,660
Provision for losses on accounts receivable 60,000 41,668 200,000
Amortization of deferred grant expense reimbursements (120,002) (140,000) (150,700)
Deferred income taxes (349,000) 178,000 186,000
Noncash impairment cost 582,718 78,202 846,745
Loss (gain) on disposal of assets 29,441 39,126 (69)
Changes in operating assets and liabilities:
Trade receivables (2,668,879) 2,763,467 (1,282,895)
Grant receivables 296,778 335,664 (1,013,005)
Prepaid expenses and other current assets (90,484) 541,807 (475,700)
Accounts payable, accrued compensation
and accrued expenses 233,621 (180,067) 1,193,459
Income taxes 435,094 (26,948) 139,542
Deferred grant expense reimbursements 572,680 950,530 --
------------ ------------ ------------
Net cash provided by (used in) operating activities (1,758,740) 6,729,210 1,725,318
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of property and equipment (355,158) (3,056,539) (2,412,643)
Government reimbursements against property and equipment 388,645 -- --
Proceeds from sale of assets 16,350 -- --
Decrease (increase) in deposits (29,922) 606,945 (689,871)
------------ ------------ ------------
Net cash provided by (used in) investing activities 19,915 (2,449,594) (3,102,514)
------------ ------------ ------------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock -- 6,634 14,824
Proceeds from revolving line of credit 18,033,631 13,106,221 19,015,556
Payments on revolving line of credit (16,226,060) (15,607,838) (17,363,939)
Payments on capital leases (730,334) (628,660) (387,933)
Proceeds from equipment acquired through capital leases -- 202,634 --
------------ ------------ ------------
Net cash provided by (used in) financing activities 1,077,237 (2,921,009) 1,278,508
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (661,588) 1,358,607 (98,688)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,459,214 100,607 199,295
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 797,626 $ 1,459,214 $ 100,607
============ ============ ============
See notes to consolidated financial statements.
24
ACI TELECENTRICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS - ACI Telecentrics, Incorporated (ACI)
provides telephone-based sales and marketing services primarily to the
telecommunications, publishing and financial services industries. ACI was
established in 1987 in Minneapolis, Minnesota. Since that time, the Company
has opened additional contact center locations in Twin Valley, Minnesota;
Valley City and Devils Lake, North Dakota; Redfield and Pierre, South
Dakota; Chadron, Valentine, and Ogallala, Nebraska; Redding, California;
Sherbrooke, Vaudreuil and Caplan, Quebec. The Company's contact center in
Schererville, Indiana was acquired as a result of an acquisition in 1997.
During 2002, ACI transferred certain assets and operations of the Valley
City, Pierre and Ogallala contact centers to new owners. In addition, ACI
closed contact centers in Redfield and Valentine because all five contact
centers were outside of ACI's long-term operational strategy. In 2000, ACI
established the wholly owned subsidiary Corporation ACI Telecentrics du
Quebec, Inc.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of ACI and its wholly owned subsidiary after elimination of
intercompany transactions.
REVENUE RECOGNITION - Revenues from telemarketing services are recognized
as services are provided, primarily based on hours incurred. Performance
based revenues are recognized when sales are verified.
Outbound telemarketing services are performed when our customer sales
representatives place a telephone call, from a list supplied by our client
company, to a telephone number at a personal residence or business
location. Inbound telemarketing services are performed when our customer
sales representatives receive a call, on a toll-free telephone number, from
an individual or business that is seeking to obtain information or purchase
a product or service from our client company.
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant management
estimates relate to grant agreements accounting and the valuation allowance
against net deferred income tax assets.
CASH AND CASH EQUIVALENTS - Short-term investments, generally with an
original maturity of three months or less from the date of purchase, are
classified as cash equivalents.
The Company maintains cash accounts that, at times, may exceed federally
insured limits. The Company has not experienced any losses from maintaining
cash accounts in excess of such limits. The Company does not believe that
it is exposes to any significant credit risks on its cash accounts.
TRADE RECEIVABLES AND CREDIT RISK - The Company generally does not require
collateral or other security from clients. The Company reports receivables
net of an allowance for doubtful accounts,
25
which represents the Company's estimate of the amount of receivables that
may not be collectible. The Company conducts periodic reviews of its
clients' financial condition and payment practices, and uses various
remedies where appropriate to minimize collection risks.
The Company is dependent on several large clients for a significant portion
of its revenue. The inability to collect amounts owed by one or more of
these clients could have a material adverse effect on the financial
position of the Company.
ECONOMIC DEVELOPMENT GRANTS - The Company receives incentive payments from
certain state, local and provincial governments in the United States and
Canada to help offset payroll and start-up costs associated with opening
new customer contact centers. These various governmental agencies reserve
the right to require repayment of all or a portion of the incentive
payments if the Company does not meet certain performance criteria as
defined in the incentive agreements, such as, creating a certain, or
minimum, number of new jobs, maintaining certain levels of employment over
a period of time or paying minimum average salaries.
Incentive payments are recorded as a reduction to payroll and start-up
expenses when performance criteria are satisfied. In the event that
performance criteria have been satisfied prior to receipt of the incentive
payment, payroll and start-up expenses are reduced and a receivable from
the governmental agency is recorded. If an incentive payment is received
prior to the satisfaction of all required performance criteria, the
incentive payment is deferred and recorded as a liability. If an incentive
payment is received for which an incremental portion of the performance
criteria is satisfied, then the incremental portion of the incentive
payment is recorded as a reduction to payroll and start-up costs, and the
incremental portion of the incentive payment not earned is deferred and
recorded as a liability.
PROPERTY AND EQUIPMENT - Property and equipment are carried at cost.
Depreciation is based on the straight-line method over estimated useful
lives of the assets, generally three to seven years for furniture and
equipment and from three to ten years for leasehold improvements.
GOODWILL - Goodwill represents the difference between the purchase price of
an acquired business and the fair value of its net assets when accounted
for by the purchase method. Goodwill was amortized on a straight-line basis
over 15 years. An impairment loss of $846,745 was recognized during 2000
related to goodwill recorded from a 1997 acquisition.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company periodically reviews property
and equipment to determine potential impairment by comparing the carrying
values with estimated future cash flows expected to result from the use of
assets. Should the sum of the expected future cash flows be less than the
carrying value, the Company would recognize an impairment loss.
During 2002, the Company recorded a non-cash impairment charge of $532,743
for the write-down of long-lived assets related to the reduction of excess
production capacity in our call centers. In addition, the Company also
recorded in 2002, a non-cash impairment of asset charge of $49,975 related
to the closing of two small call centers.
In 2001, the Company transferred certain assets and the operations of three
of its smaller contact centers to new owners because the facilities were
outside of the Company's long-term operational strategy, and, as a result,
the Company recorded a non-cash impairment charge of $78,202 in 2001 based
on projected future cash flows on the assets to be transferred.
26
FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS - The fair value of capital
lease obligations approximates carrying value due to interest rates that
approximate current market rates. The fair value of other financial
instruments approximates the carrying value due to their short-term nature.
INCOME TAXES - Deferred income tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
financial statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Income tax expense is the tax payable for the year and the change in
deferred income tax assets and liabilities during the year.
SEGMENT INFORMATION - The Company manages its business as one operating
segment and does not separately track sources of costs and expenses related
to outbound and inbound revenue.
FOREIGN CURRENCY TRANSACTIONS - Transactions with Canadian vendors and
employees are recorded in U.S. dollars at the time of settlement.
Accordingly, the Company has no foreign currency translation adjustments.
NEW ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 142 (SFAS 142), GOODWILL AND OTHER INTANGIBLE ASSETS. This
statement requires that goodwill and intangible assets deemed to have an
indefinite life not be amortized. Instead of amortizing goodwill and
intangible assets deemed to have an indefinite life, the statement requires
a test for impairment to be performed annually, or immediately if
conditions indicate that such an impairment could exist. SFAS 142 did not
have a material impact on the Company's financial position or results of
operations.
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. SFAS 143 is effective on January 1, 2003. SFAS 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. The Company does not
expect SFAS 143 to have a material effect on the Company's financial
position or results of operations.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS
144 supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, it retains many of the
fundamental provisions of that statement. SFAS 144 was effective on January
1, 2002 (see impairment of long-lived assets).
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES, which addresses financial accounting and
reporting for costs associated with exit or disposal activities. SFAS 146
requires costs associated with the following restructuring activities to be
recognized and measured at fair value (except for one-time termination
benefits) and recorded when such changes occur: one-time termination
benefits, costs to terminate contracts other than capital leases, and costs
to consolidate facilities and/or relocate employees. SFAS 146 is effective
for exit or disposal activities initiated after December 31, 2002, with
early application encouraged.
27
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2002 2001
------------ ------------
Furniture $ 1,639,545 $ 1,862,921
Equipment 8,166,396 8,988,406
Leasehold improvements 292,809 415,340
------------ ------------
10,098,750 11,266,667
Less accumulated depreciation 6,335,205 5,172,275
------------ ------------
Net property and equipment $ 3,763,545 $ 6,094,392
============ ============
CAPITALIZED LEASES - At December 31, 2002 and 2001, the Company had
equipment under capitalized leases totaling $2,888,107 and $2,534,748,
respectively. Related accumulated depreciation of the equipment under
capitalized leases totaled $1,512,868 and $936,093 at December 31, 2002 and
2001, respectively.
CAPITALIZED SOFTWARE - The Company capitalizes certain costs related to
purchased and developed computer software for internal use. At December 31,
2002 and 2001, the Company had capitalized software of $623,807. Related
accumulated depreciation totaled $348,226 and $140,291, respectively.
3. CAPITAL LEASE OBLIGATIONS
Capitalized lease obligations consist of the following at December 31:
2002 2001
----------- -----------
Capitalized leases $ 1,128,398 $ 1,443,948
Less current maturities 585,223 669,731
----------- -----------
$ 543,175 $ 774,217
=========== ===========
Maturities of capitalized lease obligations are as follows:
Year
----
2003 $ 660,130
2004 351,487
2005 186,531
2006 48,566
-----------
Total 1,246,714
Less amounts representing interest 118,316
-----------
Present value of net minimum lease payments $ 1,128,398
===========
28
Capital lease obligations represent fixed rate indebtedness with interest
rates ranging from 8.05% to 11.31%.
4. REVOLVING CREDIT AND FORBEARANCE LOAN AGREEMENT
The Company has a $2,700,000 Revolving Credit and Forbearance Loan
Agreement dated December 2002, that expires on April 30, 2003. The loan
accrues interest at the prime rate plus 3% on outstanding borrowings (prime
rate was 4.25% and 4.75% at December 31, 2002 and 2001, respectively).
Borrowings are collateralized by certain trade receivables. In addition,
the loan agreement contains provisions requiring compliance with certain
financial covenants based upon total debt levels, tangible net worth, debt
service, capital expenditures, and working capital, including prohibiting
the payment of cash dividends without the bank's consent. In addition, the
loan agreement limits the 2002 net loss. The agreement further stipulates
that during 2003, the Company will maintain a net loss of not more than
$400,000 as of January 31, 2003, and a cumulative net loss of not more than
$600,000 as of the end of each month thereafter. The Company has not
obtained waivers for covenants for which it was not in compliance. At
December 31, 2002, the Company had outstanding borrowings of $1,807,571
under the Revolving Credit and Forbearance Loan Agreement with an available
credit line of $892,429. As a result, the Company is seeking an alternative
lender to replace the current credit facility, and provide additional
capital to meet current liquidity needs; however, there is no assurance
that the Company can reach an agreement.
Maximum borrowings on the credit facility were $2,540,899 and $3,494,375 in
2002, and 2001, respectively. Average borrowings and the weighted average
interest rate were $1,249,842 and $1,063,977, and 4.92% and 6.92% in 2002,
and 2001, respectively.
See Note 13 - SUBSEQUENT EVENTS.
5. OPERATING LEASES
The Company has various operating leases for our corporate office and eight
contact centers. Several of the operating leases contain renewal
provisions.
Future minimum lease payments under operating and capital leases that have
initial noncancelable lease terms in excess of one year, not including
shared operating costs, are as follows:
Year
----
2003 $ 1,095,655
2004 902,646
2005 771,973
2006 766,132
2007 472,277
Thereafter 230,525
-----------
$ 4,239,208
===========
Rent expense on all operating leases was approximately $1,214,000,
$1,339,000, and $832,000 for the years ended December 31, 2002, 2001, and
2000, respectively.
29
6. GRANT AGREEMENTS
One of the Company's strategies is to locate its call centers in smaller,
more rural communities because many of these communities offer higher
quality labor and reduced operating expenses, as well as, economic
incentives for locating facilities in their communities. The Company
receives incentive payments from certain state, local, and provincial
governments in the United States and Canada to help offset payroll and
start-up costs associated with opening new customer contact centers. These
various governmental agencies reserve the right to require repayment of all
or a portion of the incentive payments if the Company does not meet certain
performance criteria as defined in the incentive agreements, such as
creating a certain, or minimum, number of new jobs, maintaining certain
levels of employment over a period of time, or paying minimum average
salaries.
Incentive payments are recorded as a reduction to payroll and start-up
expenses when performance criteria are satisfied. In the event that
performance criteria have been satisfied prior to receipt of the incentive
payment, payroll and start-up expenses are reduced and a receivable from
the governmental agency is recorded. If an incentive payment is received
prior to the satisfaction of all required performance criteria, the
incentive payment is deferred and recorded as a liability. If an incentive
payment is received for which a portion of the performance criteria is
satisfied, then the payment is recorded as a reduction to payroll and
start-up costs for the year, and the portion of the payment not earned is
deferred and recorded as a liability.
To this extent, the Company undertakes a rigorous analysis of each
government grant, which it receives. Each grant has its own distinct terms
because of the different government jurisdictions involved. Each grant is
accounted for separately in accordance with the preceding criteria and its
grant terms so as to appropriately match all incentive payments with the
respective payroll and start-up expenses.
CAPLAN, QUEBEC CANADA
PROVINCIAL GOVERNMENT OF QUEBEC - During the second quarter of 2002, the
Company entered into a financial incentives agreement with the Government
of Quebec, Canada. Under the agreement the Company agreed to open a contact
center in Caplan, Quebec for certain financial incentives. To receive
financial incentives the Company must create a minimum of 50 jobs by April
30, 2004, but can create up to 500 jobs for which it will receive incentive
payments. These incentives are based on maintaining certain eligibility
requirements for each job created, including a minimum number of hours
worked per week and maintaining minimum average annual salaries. In
addition, for each job that the Company receives a financial contribution,
the agreement requires that the job be maintained for a minimum period of
two years from the date of its creation.
As of December 31, 2002, the Company created 180 jobs and received
reimbursement for 164 of those jobs created. At December 31, 2002, the
receivable under the agreement was $56,732. Should future employment levels
fall below the 180, the provincial government reserves the right to apply a
proportionate amount of the financial contribution already paid toward the
replacement of each new job once employment levels exceed 180. The
proportionate amount is defined as the number of months remaining in the
24-month job existence requirement at the time employment levels fell below
180, divided by 24 months. Due to this provision, the Company is reducing
payroll costs for each of the 180 jobs created evenly over 24 months from
the date that each job is created. During 2002, the Company reduced payroll
costs by a total of $102,669 for the portion of the financial incentives
earned. The Company recorded a deferred grant expense reimbursements
liability of $463,468 as of December 31, 2002, for the portion of the
financial incentives not earned.
30
EMPLOI QUEBEC - During the second quarter of 2002, the Company entered into
a financial incentive agreement, which under the terms of the agreement,
Emploi Quebec agreed to subsidize up to 50% of wages for the first 40 weeks
of employment for each new employee, training costs and human resources
management costs for two years. The financial incentive is linked to the
creation of up to 500 jobs at the Company's new customer contact center
located in Caplan, Quebec. During 2002, the Company recorded $184,676 as a
reduction to payroll costs. At December 31, 2002, the receivable under this
agreement was $54,636.
VAUDREUIL, QUEBEC CANADA
PROVINCIAL GOVERNMENT OF QUEBEC - During the first quarter of 2001, the
Company entered into a financial incentive agreement with the Government of
Quebec, Canada. Under the agreement the Company agreed to open a contact
center in Vaudreuil, Quebec, for certain financial incentives. To receive
financial incentives the Company must create a minimum of 50 jobs by
October 15, 2002, but can create up to 626 jobs for which it will receive
incentive payments. These incentives are based on maintaining certain
eligibility requirements for each job created, including a minimum number
of hours worked per week and maintaining minimum average annual salaries.
In addition, for each job that the Company receives a financial incentive,
the agreement requires that the job be maintained for a minimum period of
three years from the date of its creation.
As of December 31, 2002, the Company filed financial reimbursement claims
for 389 jobs created for which it has received reimbursement for 348 of
those jobs. At December 31, 2002, $186,891 in incentives is receivable
under the agreement. As of December 31, 2002, the actual number of jobs
existing at the contact center was 291. According to the terms of the
agreement, the provincial government reserves the right to apply financial
incentives already paid toward new jobs should employment levels fall below
the total number of jobs for which it has already reimbursed the Company.
As a result of current employment levels being lower than the number of
jobs for which the Company has received financial incentives, the Company
has a deferred grant expense reimbursements liability of $527,939 as of
December 31, 2002. Increases in future employment levels will allow the
Company to reduce additional payroll costs and reduce the deferred grant
expense reimbursements liability. During 2002, the Company did not record
any reduction in payroll costs under this agreement. This compares to a
reduction in payroll costs of $1,085,278 during 2001.
SHERBROOKE, QUEBEC CANADA
FEDERAL GOVERNMENT OF CANADA - During the first quarter of 2001, the
Company entered into a financial incentives agreement with the Federal
Government of Canada. Under the agreement, the Company agreed to create 437
fulltime equivalent jobs by March 31, 2002. During 2002, the Company
recorded $48,302 in reductions to payroll costs compared to $781,714 during
2001. Payment of all incentive amounts have been received.
PROVINCIAL GOVERNMENT OF QUEBEC TRAINING GRANT -During the first quarter of
2001, the Company entered into a financial incentive agreement, which under
the terms of the agreement, the Provincial Government of Quebec agreed to
subsidize up to 50% of certain training costs associated with the opening
of the Sherbrooke contact center. Reductions in startup expenses were $0
and $107,780 in 2002 and 2001, respectively.
PROVINCIAL GOVERNMENT OF QUEBEC - During the year ended 2000, the Company
entered into a financial incentives agreement with the Government of
Quebec, Canada. Under the agreement the Company agreed to open a contact
center in Sherbrooke, Quebec, for certain financial incentives.
31
To receive financial incentives the Company must create a minimum of 50
jobs by March 14, 2002, but can create up to 600 jobs for which it will
receive incentive payments. These incentives are based on maintaining
certain eligibility requirements for each job created, including a minimum
number of hours worked per week and maintaining minimum average annual
salaries. In addition, for each job that the Company receives a financial
incentive, the agreement requires that the job be maintained for a minimum
of two years from the date of its creation.
As of December 31, 2002, the Company filed financial reimbursement claims
for 546 jobs created for which it received reimbursement for 526 of those
jobs. At December 31, 2002, the receivable under the agreement was $82,303.
As of December 31, 2002, the actual number of jobs existing at the contact
center was 414. According to the terms of the agreement, the provincial
government reserves the right to apply financial incentives already paid
toward new jobs should employment levels fall below the total number of
jobs for which it has already reimbursed the Company. As a result of
current employment levels being lower than the number of jobs for which the
Company has received financial incentives, the Company has a deferred grant
expense reimbursements liability of $531,803 as of December 31, 2002.
Increases in future employment levels will allow the Company to reduce
additional payroll costs and reduce the deferred grant expense
reimbursements liability. During 2002, the Company did not record any
reduction in payroll costs under this agreement. This compares to a
reduction in payroll costs of $63,736 during 2001.
7. SIGNIFICANT CUSTOMERS AND CREDIT CONCENTRATIONS
Revenues and year-end accounts receivable from major customers were as
follows as of and for the years ended December 31:
2002 2001 2000
-------------------- -------------------- --------------------
Revenues Receivables Revenues Receivables Revenues Receivables
-------- ----------- -------- ----------- -------- -----------
Customer A 17% 22% 0% 0% 0% 1%
Customer B 14 6 16 17 13 8
Customer C 10 18 5 13 1 2
Customer D 7 12 11 7 13 14
Customer E 6 4 11 11 4 6
Customer F 4 3 16 13 21 20
Customer G 1 0 12 0 3 7
Historically, the Company has not experienced write-offs related to these
major customers.
8. SHAREHOLDERS' EQUITY
EMPLOYEE STOCK PURCHASE PLAN - The Company adopted the 1996 Employee Stock
Purchase Plan (Stock Purchase Plan), which allows participants to purchase
common stock at 85% of the common stock's fair market value at the
commencement or termination of two six-month phases each year. Employees
must have six months of service to be eligible to participate in the Stock
Purchase Plan. The Board of Directors has reserved 100,000 shares of common
stock for issuance under the Stock Purchase Plan. The Company did not issue
any shares under the plan in 2002. The Company issued 6,244 and 17,974
shares under the plan in 2001 and 2000, respectively. In November 2000, the
Board of Directors authorized a change to the Plan allowing for the
purchase of shares on the open market. The Company purchased 45,761 and
20,343 shares on the open market for individual participants during 2002
and 2001, respectively. The cost to the Company was $16,251 and $16,857 in
2002 and 2001, respectively, which included the difference between the
employee
32
purchase price and the open market price of the shares plus broker fees
which were charged to operations.
STOCK OPTION PLAN - The Company has a Stock Option Plan (Stock Option
Plan), which reserved 1,000,000 shares of the Company's common stock in the
form of incentive stock options and nonqualified stock options for
employees and investors. The Stock Option Plan requires that the exercise
price of all options granted be the fair market value of the Company's
common stock on the date of grant. Vesting and exercise periods for
individual options vary by grant.
The following table summarizes stock option activity:
Shares Under Weighted Average
Option Price per Share
------------ ---------------
Balance at December 31, 1999 292,500 $ 1.34
Granted in 2000 515,000 1.07
Exercised in 2000 (1,000) .50
Canceled in 2000 (6,000) .67
-------- --------
Balance at December 31, 2000 800,500 1.17
Granted in 2001 22,000 1.50
Canceled in 2001 (56,500) .82
-------- --------
Balance at December 31, 2001 766,000 1.21
Granted in 2002 118,000 0.38
Canceled in 2002 (72,500) 1.05
-------- --------
Balance at December 31, 2002 811,500 $ 1.10
======== ========
Shares exercisable at December 31, 2000 541,834 $ 1.21
======== ========
Shares exercisable at December 31, 2001 737,667 $ 1.22
======== ========
Shares exercisable at December 31, 2002 713,500 $ 1.21
======== ========
33
The following table summarizes information about stock options outstanding
at December 31, 2002:
Outstanding Exercisable
-------------------------------------------------------------- --------------------------
Weighted Average
Range of Number --------------------------------- Weighted
Exercise of Shares Remaining Number Average
Prices Outstanding Exercise Price Contractual Life of Shares Exercise Price
------------ ----------- -------------- ---------------- --------- --------------
$0.00 - 0.50 96,250 $ 0.24 7.0 8,250 $ 0.50
$0.51 - 0.81 2,500 0.81 7.9 2,500 0.81
$0.82 - 0.88 95,000 0.87 8.8 85,000 0.87
$0.89 - 1.00 2,500 1.00 7.2 2,500 1.00
$1.01 - 1.06 152,500 1.06 8.1 152,500 1.06
$1.07 - 1.17 220,000 1.17 3.5 220,000 1.17
$1.18 - 1.50 242,750 1.50 6.7 242,750 1.50
----------- ---------
811,500 1.10 6.4 713,500 1.21
=========== =========
The Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
and elected to continue following the accounting guidance of Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
for measurement and recognition of stock-based transactions with employees.
No compensation cost was recognized for options issued under the Stock
Option Plan because the exercise price of all options granted was at least
equal to the fair value of the common stock on the grant date. Had
compensation cost for the stock options been determined based on the fair
value at the grant date, consistent with the provisions of SFAS No. 123,
the Company's pro forma net income (loss) and per share amounts would have
been as indicated below:
2002 2001 2000
------------ ------------ ------------
Net income (loss) applicable to common stock:
As reported $ (2,824,342) $ 41,480 $ 761,281
============ ============ ============
Pro forma $ (2,805,490) $ (77,364) $ 581,531
============ ============= ============
Basic and diluted net income (loss) per share:
As reported $ (.49) $ .01 $ .13
============ ============ ============
Pro forma $ (.49) $ (.01) $ .10
============= ============ ============
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes Option-Pricing Model with the following weighted-average
assumptions and results:
2002 2001 2000
--------- --------- ---------
Dividend yield 0% 0% 0%
Expected volatility 93% 105% 109%
Risk free interest rate 3.58% 4.73% 6.05%
Expected life of options 6.4 Years 6.4 Years 7.2 Years
Fair value of options on grant dates $ 0.30 $ 1.26 $ 1.01
34
STOCK WARRANTS - On October 21, 1996, warrants to purchase 140,000 shares
of common stock were issued in connection with the initial public offering.
The warrants expired on October 21, 2001. The warrants had an exercise
price of $6.00 per share. No warrants were exercised.
9. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS - Each of the two majority shareholders entered into
an employment agreement with the Company providing a minimum annual base
salary of $175,000. These agreements have automatic one-year extensions,
unless terminated in writing. The agreements require the Company to pay
premiums for life insurance intended to fund the buy/sell agreements to
which the two majority shareholders are parties. If employment is
terminated by either party, the two majority shareholders will receive 12
months' salary and health benefits. These agreements require each of the
two majority shareholders to vote his shares for election of the other to
serve on the Company's Board of Directors. Each of these agreements include
confidentiality protections and prohibits each of the two majority
shareholders from competing with the Company for a period equal to the
period during which the Company is obligated to make severance payments.
BUY/SELL AGREEMENTS - Each of the two majority shareholders has entered
into a Buy/Sell Agreement with the Company and each other. Under this
agreement, the Company has the option to purchase shares from the two
shareholders.
CONTINGENCIES - The Company is also involved in legal actions in the
ordinary course of its business. Although the outcomes of any such legal
actions cannot be predicted, management believes that there is no pending
legal proceeding against or involving the Company for which the outcome is
likely to have a material adverse effect upon the Company's financial
position or results of operations.
10. INCOME TAXES
The provision for income taxes consists of the following for the year ended
December 31:
2002 2001 2000
---------- ---------- ----------
Current:
Federal $ -- $ 172,000 $ 285,000
State 3,000 33,000 26,000
Foreign 551,000 -- --
---------- ---------- ----------
554,000 205,000 311,000
Deferred (349,000) (178,000) 186,000
---------- ---------- ----------
Total income tax expense $ 205,000 $ 27,000 $ 497,000
========== ========== ==========
Differences between the provisions for income taxes at the federal
statutory rate and the recorded provision are summarized as follows for the
year ended December 31:
35
2002 2001 2000
------ ------ ------
Income tax expense (benefit) at
federal statutory rate (34.0)% 34.0% 34.0%
State income tax, net of
federal benefit (cost) (4.8) 4.0 4.0
Change in Canadian tax strategy (21.7) -- --
Change in valuation allowance, net of net
operating loss carryforwards not utilized 69.8 -- --
Other (1.5) 1.4 1.5
------ ------ ------
Effective income tax rate 7.8% 39.4% 39.5%
====== ====== ======
Net deferred tax assets (liabilities) at December 31, are comprised of the
following:
2002 2001
------------ ------------
Current deferred tax assets (liabilities):
Allowance for doubtful accounts $ 80,000 $ 77,000
Benefit of net operating loss carryforwards and credits -- 885,000
Other, net (31,000) (51,000)
------------ ------------
Net current deferred tax assets 49,000 911,000
------------ ------------
Noncurrent deferred tax assets (liabilities):
Benefit of net operating loss carryforwards and credits 1,874,000 --
Excess of tax over book depreciation (42,000) (117,000)
Canadian basis differences 201,000 (942,000)
Other 19,000 --
------------ ------------
Net noncurrent deferred tax assets (liabilities) 2,052,000 (1,059,000)
------------ ------------
Valuation allowance (1,900,000) --
------------ ------------
Net deferred tax assets (liabilities) $ 201,000 $ (148,000)
============ ============
The 2002 net deferred tax assets are included with other assets on the
balance sheet.
During 2002, the Company changed its strategy regarding Canadian income
taxes resulting in approximately $568,000 in reduced income taxes. Since
realization of deferred tax assets associated with the net operating loss
carryforwards is dependent upon generating sufficient taxable income prior
to their expiration, management has provided a valuation allowance at
December 31, 2002, against all US federal and state net deferred tax
assets, which was a $1,900,000 increase over December 31, 2001.
As of December 31, 2002, the Company had net operating loss carryforwards
for federal and state tax purposes of approximately $3,000,000. The net
operating loss carryforwards will expire beginning in 2018. In addition, at
December 31, 2002, the Company had tax credits of approximately $698,000,
which will expire beginning in 2017.
State tax effects are deemed insignificant and are not separately disclosed
in most areas.
11. RETIREMENT PLAN
The Company has a 401(k) pension plan covering substantially all of its
employees who are at least 21 years of age and have completed at least nine
months continuous employment. Participants may elect to defer from 1% to
15% of their salary and are 100% vested in their own contributions. The
36
plan allows for the Company to make discretionary matching contributions.
These contributions, if any, vest to the employee at 20% per year of
employment so that the employee will be fully vested in the Company's
discretionary contribution upon attaining five years of employment of
greater than 1000 hours per year. The Board of Directors determines the
Company's discretionary contributions to the plan annually. Discretionary
contributions were $15,318 for the year ended December 31, 2000. There were
no discretionary contributions made in 2002 or 2001.
12. NET INCOME (LOSS) PER SHARE
Basic earnings per share are computed by dividing earnings available to
common shareholders by the weighted average number of shares outstanding
during the year. Diluted earnings per share are computed after giving
effect to the exercise of all dilutive outstanding options and warrants.
Both basic and diluted earnings per share for 2001 and 2000 were the same
because the exercise price of substantially all options and warrants was in
excess of the weighted average market price during the year. Because of the
net loss in 2002, all options were antidilutive and excluded from the
calculation. For the reasons discussed above, options and warrants of
811,500, 243,750, and 140,000 were excluded from the calculation of diluted
shares outstanding in 2002, 2001, and 2000, respectively. The following
table reconciles the denominators used in computing basic and diluted
earnings per share for the years ended December 31:
2002 2001 2000
--------- --------- ---------
Weighted average common shares outstanding 5,781,485 5,781,468 5,770,910
Effect of dilutive stock options and warrants -- 87,581 224,350
--------- --------- ---------
5,781,485 5,869,049 5,995,260
========= ========= =========
13. SUBSEQUENT EVENTS
On April 29, 2003, the Company signed a Financing Agreement with a new
lender that provides a credit line of up to $3,500,000. The agreement
expires on January 29, 2004. Borrowings are limited to 80% of qualifying
trade receivables. Certain trade receivables, contract rights and other
rights to payments, equipment and general intangibles collateralize the
note. The loan accrues interest at the prime rate plus 3.5%. The agreement
also requires a minimum interest charge payable to the lender of $3,500 per
month and also includes a 1% origination fee.
On April 7, 2003, the Company announced that it is negotiating an agreement
to transfer its Redding, California contact center to another company. The
Company expects to continue its operations at the site over next few months
until the transfer is completed. As a result of the transfer, the Company
expects to incur a loss of $250,000 related to the disposal of assets.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures on cash flow information for the years ended
December 31 are as follows:
2002 2001 2000
--------- --------- ---------
Interest paid $ 218,261 $ 277,307 $ 194,491
Income taxes paid (refunds received) 168,202 (87,371) 190,583
Noncash investing and financing activities included:
Equipment acquired through capital leases 414,784 826,193 602,745
37
15. FOREIGN OPERATIONS
The following table summarizes selected financial information related to
the Company's foreign operations. The Company's foreign subsidiary manages
and operates all of the Company's Canadian contact centers. All client
contracts are with the parent company. Revenue is recognized by the foreign
subsidiary at 105% of the foreign expenses. The accounting policies of the
foreign subsidiary are the same as those of the consolidated company.
Years Ended December 31,
--------------------------------------------
2002 2001 2000
------------- ------------ ------------
Revenues $ 13,419,214 $ 8,887,033 $ 1,696,085
Expenses 12,780,204 8,463,841 1,615,319
------------ ------------ ------------
Net income $ 434,010 $ 423,192 $ 80,766
============ ============ ============
Net property and equipment $ 1,439,807 $ 2,469,775 $ 1,884,751
============ ============ ============
16. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (unaudited)
Summarized, unaudited quarterly financial data is summarized in the tables
below for the years ended December 31, 2002, and 2001 (amounts in
thousands, except per share data):
MAR 31, JUNE 30, SEPT 30, DEC 31,
2002 2002 2002 2002
-------- -------- -------- --------
Total revenues $ 7,245 $ 7,728 $ 7,048 $ 8,300
-------- -------- -------- --------
Operating expenses:
Cost of services 4,358 4,501 4,389 4,569
Selling, general, and
administrative 3,661 3,559 3,799 3,273
Impairment costs -- -- 50 532
-------- -------- -------- --------
Total operating expenses 8,019 8,060 8,238 8,374
-------- -------- -------- --------
Operating income (loss) (774) (332) (1,190) (74)
Interest income 2 4 -- 1
Interest expense 45 46 58 69
Other expense (income) 23 34 (58) 39
-------- -------- -------- --------
Income (loss) before income taxes (840) (408) (1,190) (181)
Income tax expense (benefit) (322) (728) 1,245 10
-------- -------- -------- --------
Net income (loss) $ (518) $ 320 $ (2,435) $ (191)
======== ======== ======== ========
Basic and diluted income (loss)
per share $ (.09) $ .06 $ (.42) $ (.04)
======== ======== ======== ========
38
MAR 31, JUNE 30, SEPT 30, DEC 31,
2001 2001 2001 2001
-------- -------- -------- --------
Total revenues $ 8,336 $ 9,132 $ 8,267 $ 7,159
-------- -------- -------- --------
Operating expenses:
Cost of services 4,161 4,604 4,390 4,187
Selling, general, and
administrative 3,520 3,941 3,946 3,677
Impairment costs -- -- -- 78
-------- -------- -------- --------
Total operating expenses 7,681 8,545 8,336 7,942
-------- -------- -------- --------
Operating income (loss) 655 586 (69) (783)
Interest income 3 12 3 7
Interest expense 95 75 59 48
Other expense (income) 51 21 64 (66)
-------- -------- -------- --------
Income (loss) before income taxes 512 502 (188) (758)
Income tax expense (benefit) 200 196 (72) (297)
-------- -------- -------- --------
Net income (loss) $ 312 $ 306 $ (116) $ (461)
======== ======== ======== ========
Basic and diluted income (loss)
per share $ .05 $ .05 $ (.02) $ (.07)
======== ======== ======== ========
39
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
Board of Directors and Shareholders
ACI Telecentrics, Inc.
Minneapolis, Minnesota
Our report on our audit of the basic consolidated financial statements of ACI
Telecentrics, Inc. and subsidiary for the year ended December 31, 2002, appears
on page 19. The audit was made for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The supplementary
information on page 41 is presented for purposes of additional analysis and is
not a required part of the basic consolidated financial statements. Such
information has been subjected to the auditing procedures applied in the audits
of the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
/s/ Lurie Besikof Lapidus & Company, LLP
Minneapolis, Minnesota
February 28, 2003, except for Note 13,
as to which the date is April 29, 2003
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
Board of Directors and Shareholders of ACI Telecentrics, Inc.
Our report on our audit of the basic consolidated financial statements of ACI
Telecentrics, Inc. and subsidiary for the year ended December 31, 2001 and 2000,
appears on page 20. The audit was made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole. The supplementary
information on page 41 is presented for purposes of additional analysis and is
not a required part of the basic consolidated financial statements. Such
information has been subjected to the auditing procedures applied in the audits
of the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 27, 2002
40
ACI TELECENTRICS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
BALANCE AT BALANCE AT
BEGINNING CHARGED TO (A) END OF
YEARS ENDED DECEMBER 31, OF YEAR EXPENSE DEDUCTIONS YEAR
- ------------------------ ---------- ---------- ----------- ----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
2002 $ 198,874 $ 60,000 $ 53,002 $ 205,872
2001 230,726 41,668 73,520 198,874
2000 140,000 200,000 109,274 230,726
(A) Represents accounts written off.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 9, 2002, Deloitte & Touche LLP resigned as ACI's independent
accountant. We had engaged Deloitte & Touche LLP as our independent accountant
for prior fiscal years.
There were not, in connection with the audits of the two most recent fiscal
years and any subsequent interim period preceding the resignation of Deloitte &
Touche LLP, any disagreements between the Registrant and Deloitte & Touche LLP,
on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to Deloitte &
Touche LLP's satisfaction, would have caused it to make reference to the subject
matter of the disagreement in connection with its report. Deloitte & Touche
LLP's audit reports on the financial statements of ACI for the two years ended
December 31, 2001, did not contain an adverse opinion or disclaimer of opinion
or been qualified as to uncertainty, audit scope or accounting principles, nor
were there any other events requiring disclosure.
Effective December 23, 2002, our Board of Directors, upon recommendation of our
Audit Committee, engaged Lurie Besikof Lapidus & Company, LLP as the
Registrant's independent auditors for the year ending December 31, 2002.
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE COMPANY
The name and ages of all our executive officers and the positions held by
them are listed below.
Name Age Position
Rick N. Diamond 40 Chairman of the Board, Chief Executive Officer,
Secretary, and Director
Gary B. Cohen 41 President and Director
Lois J. Dirksen 47 Executive Vice President of Client Services
Jill Hackenmueller 34 Executive Vice President of Operations
RICK N. DIAMOND is cofounder of ACI and has served as our Chief Executive
Officer and as a director since we were founded in 1987. Mr. Diamond holds a
B.A. degree from the University of Wisconsin and J.D. degree from Washington
University in St. Louis, Missouri. Prior to and since founding ACI, he has been
active in community and business affairs.
GARY B. COHEN is cofounder of ACI and has served as our President and as a
director since we were founded in 1987. Mr. Cohen holds a B.S. degree from the
University of Minnesota. Prior to and since founding ACI, he has been active in
community and business affairs.
LOIS J. DIRKSEN joined ACI as a Vice President in May 1995 and became
Executive Vice President of Client Services in August 2001. Prior to joining
ACI, Ms. Dirksen was Vice President of Sales for Rezound International, a
publisher of audio books, from April 1994 to May 1995 and Director of Direct
Response for Minnesota Mutual from March 1990 to April 1994. Ms. Dirksen holds a
B.S. degree in Political Science from Arizona State University.
JILL HACKENMUELLER joined ACI in February 1994, serving as Program Manager
before becoming Minneapolis Facility Manager in June 1995, Operations Manager in
April 1997 and Executive Vice President of Operations in August 2001. Ms.
Hackenmueller attended the University of Minnesota, where she received her
degree in Business Administration.
DIRECTORS OF THE COMPANY
The Company's Board of Directors consists of six directors. Each director
serves on the Board until his successor is duly elected and qualified.
Name of Current Position Director
Director/Nominee Age with the Company Since
- ---------------- --- ---------------- -----
Rick N. Diamond 40 Chairman of the Board, Chief
Executive Officer 1987
42
Gary B. Cohen 41 President and Director 1987
Seymour Levy 79 Director 1996
Douglas W. Franchot 57 Director 1996
Phillip T. Levin 59 Director 1996
Gary S. Kohler 47 Director 2003
The Bylaws of the Company provide that the number of directors, which shall
be not less than one, shall be the number set by the shareholders.
BUSINESS EXPERIENCE OF THE DIRECTORS
RICK N. DIAMOND is co-founder of the Company and has served as the Chief
Executive Officer and a director of the Company since its inception in 1987. Mr.
Diamond holds a B.A. degree from the University of Wisconsin-Madison and J.D.
degree from Washington University-School of Law in St. Louis, Missouri. Prior to
and since founding the Company, he has been active in community and business
affairs.
GARY B. COHEN is co-founder of the Company and has served as the Company's
President and as a director since its inception in 1987. Mr. Cohen holds a B.S.
degree from the University of Minnesota. Prior to and since founding the
Company, he has been active in community and business affairs.
SEYMOUR LEVY has served as President of Sy Levy & Associates, Inc., a
management and organizational consulting firm since 1974.
DOUGLAS W. FRANCHOT has served as President of Franchot, Cohen &
Associates, an executive search consulting company since August 1999. Prior to
this time Mr. Franchot had served as President of Wood, Franchot Inc., a
management and organizational consulting firm since 1974.
PHILLIP T. LEVIN has served as a director and officer of Metacom, a
distributor of audio cassettes, since he co-founded it in 1970. Mr. Levin has
also served as Chairman of the Board of Directors of Zomax, Incorporated, a
manufacturer of compact discs, since April 1996.
GARY S. KOHLER has served as a director of Sontra Medical, Inc., a medical
technology company in Boston, MA since June 2002. Since December 1999, Mr.
Kohler has been a partner of Pyramid Trading, LLC, an investment partnership
that invests in publicly traded micro-cap companies. Mr. Kohler holds an M.B.A.
degree from Cornell University.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10 percent of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the SEC. Officers, directors and greater than
ten-percent shareholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file. Based solely on its review,
the Company believes that, during fiscal year 2002, officers Lois Dirksen and
Jill Hackenmueller and all directors of the Company did not file required forms
for options granted to them during the year.
43
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid or accrued during each of the Company's last three fiscal years to the
Chief Executive Officer, and the four other most highly compensated executive
officers of the company whose salary and bonus exceeded $100,000 in the last
fiscal year.
Annual Compensation Long Term Compensation
---------------------------------- ----------------------
Name And Principal Position Fiscal Year Salary($) Bonus($) Other($)(1) Options
- -------------------------------- ----------- ---------- -------- ----------- -------
Rick N. Diamond, 2002 300,000 -- 25,712(1)
Chief Executive Officer 2001 287,308 -- 28,434 --
2000 249,135 14,653 24,260 100,000
Gary B. Cohen, 2002 300,000 -- 19,472(1) --
President 2001 287,308 -- 27,613 --
2000 249,135 14,653 22,432 100,000
Dana A. Olson, 2002 200,000(2) -- 6,500(1) --
Former Chief Operating Officer 2001 187,462 -- 6,500 --
2000 179,417 14,653 5,500 45,000
Lois J. Dirksen, 2002 150,000 -- -- --
Executive Vice President of 2001 150,000 -- -- --
Client Services 2000 147,538 14,653 -- 30,000
William E. Sorenson, 2002 116,442(3) -- -- --
Chief Information Officer 2001 175,000 -- -- --
2000 159,120 -- -- 40,000
(1) Other compensation reported represents (a) the premiums paid by the company
for life and disability insurance for the benefit of such officer, (b)
value of personal use portion of company provided automobile, (c) auto
allowance, and (d) personal expenses paid for by the Company. The dollar
value of each such benefit for the year ended December 31, 2002 is R.
Diamond (a) $18,382, (b) $7,330, (c) $0; and (d) $0; G. Cohen (a) $11,963,
(b) $7,509, (c) $0, and (d) $0; and D. Olson (a) $0, (b) $0, (c) $6,500,
and (d) $0.
(2) Mr. Olsen's employment the Company terminated during October 2002.
(3) Mr. Sorenson's employment with the Company terminated in July 2002.
OPTION GRANTS DURING 2002 FISCAL YEAR
The following table provides information regarding stock options granted
during fiscal 2002 to the named executive officers in the Summary Compensation
Table. The Company has not granted any stock appreciation rights.
44
Individual Grants
--------------------------------------------------------------------
Percent of Total Exercise or
Options Options Granted Base Price Expiration
Name Granted in Fiscal Year per Share($)(1) Date
- ---- ------- -------------- --------------- ----
Rick N. Diamond -- -- -- --
Gary B. Cohen -- -- -- --
Dana A. Olson 20,000 16.9 0.22 August 6, 2012
Lois J. Dirksen 20,000 16.9 0.22 August 6, 2012
William E. Sorenson -- -- -- --
(1) All of these options were granted pursuant to the Company's 1996 Stock
Option Plan.
These options become exercisable over a five year vesting period. Each year
one-fifth of the options becomes exercisable, beginning on the first year
anniversary of the stock grant date.
OPTION EXERCISES DURING 2002 FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
No options were exercised during fiscal 2002 by the named executive
officers in the Summary Compensation Table. The following table provides
information as to the number and value of options held by such persons at
December 31, 2002. The Company does not have any outstanding stock appreciation
rights.
Value of
Unexercised
Number of Unexercised in-the-Money
Options at Options as of
December 31, 2002 December 31, 2002(1)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
Rick N. Diamond 100,000 -- $ -- $ --
Gary B. Cohen 100,000 -- -- --
Dana A. Olson 182,000 28,000 -- 200
Lois J. Dirksen 68,500 22,000 -- 200
(1) The closing price of the Common Stock on December 31, 2002 was $.23 per
share.
COMPENSATION TO DIRECTORS
Non-employee members of the Board of Directors receive a per-meeting
payment of $750 for formal meetings. In addition, the Board of Directors has
granted nonqualified options to purchase shares of Common Stock. Mr. Franchot
was granted 8,000 shares and Mr. Levin and Mr. Levy were each granted 6,000
shares. All these options became exercisable immediately.
EMPLOYMENT AGREEMENTS AND BUY/SELL ARRANGEMENTS
Each of Mr. Diamond and Mr. Cohen has entered into an employment agreement
dated June 30, 1996, with the Company. These agreements have an initial term of
two years with automatic one year extensions, unless terminated in writing
within sixty (60) days prior to the renewal date. The agreements provide for a
minimum annual base salary, currently at $300,000. If employment is terminated
by either party following the initial two-year term, Mr. Diamond and Mr. Cohen
will receive 12 months salary and health benefits. These agreements require each
of Mr. Diamond and Mr. Cohen to vote his shares for election of the other to
serve on the Company's Board of Directors. Each of these agreements includes
strict confidentiality protections and prohibits each of Mr. Diamond and Mr.
Cohen from competing with
45
the Company for a period equal to the period during which the Company is
obligated to make severance payments.
Each of Mr. Diamond and Mr. Cohen has entered into a Buy/Sell Agreement
with the Company and each other. These Agreements give each of Mr. Diamond and
Mr. Cohen the option to purchase shares of the Company's stock from the other in
the event the other dies, attempts a voluntary sale of stock, or is subject to a
possible involuntary transfer of the stock. In addition, these Agreements
require each of Mr. Diamond and Mr. Cohen to maintain life insurance on each
other and to use the proceeds thereof to purchase shares from the decedent's
estate at fair market value. The Company has an option to purchase any shares
not purchased by Mr. Diamond or Mr. Cohen, as the case may be. In all instances,
purchase options are at fair market value, as measured by the average market
price of the Company's publicly traded common stock over a period of 90 days
prior to the event giving rise to an option.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board of Directors consists of
directors who are not employees of the Company. The Committee is currently
comprised of Douglas W. Franchot, Seymour Levy and Phillip T. Levin. This
Committee is responsible for reviewing and approving the Company's compensation
policies and recommends to the Board of Directors the salaries to be paid to
executive officers of the Company and any plan for additional compensation it
deems appropriate. In addition, this Committee is vested with the same authority
as the Board of Directors with respect to the granting of options and the
administration of the Company's 1996 Stock Option Plan.
SALARY
Mr. Diamond's compensation for serving as Chief Executive Officer of the
Company, including salary and benefit, is and will generally be governed by the
terms of his employment agreement with the Company. See "Employment Agreements
and Buy/Sell Agreements" set forth above. The Compensation Committee determined,
after consideration of competitive levels of compensation for chief executive
officers of industry competitors, knowledge and experience of the telemarketing
industry, his contribution to the Company's growth and success and as one of its
two founding members, the financial performance of the Company during the prior
year and the financial condition of the Company, to maintain his base salary at
the same level as at the end of the previous year. In determining Mr. Diamond's
bonus potential for the year 2002, the Committee established that Mr. Diamond
would receive a bonus equal to 5 percent (5%) of the Company's 2002 EBITDA that
was in excess of year 2001 EBITDA.
Mr. Cohen's compensation for serving as President of the Company,
including salary and benefit, is and will generally be governed by the terms of
his employment agreement with the Company. See "Employment Agreements and
Buy/Sell Agreements" set forth above. The Compensation Committee determined,
after consideration of competitive levels of compensation for presidents of
industry competitors, knowledge and experience of the telemarketing industry,
his contribution to the Company's growth and success and as one of its two
founding members, the financial performance of the Company during the prior year
and the financial condition of the Company, to maintain his base salary at the
same level as at the end of the previous year. In determining Mr. Cohen's bonus
potential for the year 2002, the Committee established that Mr. Cohen would
receive a bonus equal to 5 percent (5%) of the Company's 2002 EBITDA that was in
excess of year 2001 EBITDA.
The Compensation Committee determined that salaries for remaining
executive officers of the Company will continue to be set at levels that are
intended to reward achievement of individual and Company goals and to motivate
and retain highly qualified executives whom the Committee believes are
46
important to the success of the Company. While these compensation decisions are
not based on strict formulas, the Committee considers various measures of
individual and Company performance and financial condition in establishing these
salaries. Bonuses are typically calculated at a certain percentage of each
executive's base salary only when the Company's actual performance exceeds
budgetary goals.
INCENTIVE COMPENSATION
As with salary and bonuses, decisions regarding incentive compensation, in the
form of grants of stock options, are not based on strict formulas but are based
on several factors including individual and Company performance. The
Compensation Committee awarded stock options totaling 40,000 shares to two of
the named executive officers in 2002.
STOCK PERFORMANCE GRAPH
The following performance graph compares the cumulative shareholder
return on our Common Stock with the cumulative total return of the Standard &
Poor's 500 Index and an index of peer group companies consisting of teleservices
companies for the period from December 31, 1997 to December 31, 2002. This graph
assumes that $100 was invested in the Common Stock, the S&P 500 Index and the
peer group index on December 31, 1997 and that any dividends were reinvested.
This peer group is one with which our management believes ACI to be
most aligned and consists of the following: APAC Teleservices, Inc.; ICT Group,
Inc.; RMH Teleservices, Inc.; Sitel Corp; Teletech Holdings, Inc.; and West
Teleservices Corp.
COMPARISON OF TOTAL CUMULATIVE RETURN
AMONG ACI TELECENTRICS, INC.,
THE S&P 500 INDEX AND A PEER GROUP INDEX
[PLOT POINTS GRAPH]
- ---------------------------------------------------------------------------------------
12/31/97 12/98 12/99 12/00 12/01 12/02
- ---------------------------------------------------------------------------------------
ACI TELECENTRICS, INC. $100.00 $ 10.70 $ 26.80 $ 35.70 $ 28.60 $ 6.60
S&P 500 STOCKS $100.00 $183.80 $162.00 $149.20 $131.60 $100.80
SELF-DETERMINED PEER GROUP $100.00 $ 54.30 $171.90 $126.50 $144.10 $ 87.00
- ---------------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table shows information concerning the beneficial ownership
of the outstanding shares of Common Stock as of April 4, 2003 by (i) the persons
known by the Company to own more than 5% of the Company's outstanding Common
Stock, (ii) each director of the Company, (iii) the named executive officers in
the Summary Compensation Table, and (iv) all directors and executive officers as
a group. Except as otherwise indicated, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock owned by
them.
Name (and Address of 5% Number of Shares Percent
Owner) or Identity of Group Beneficially Owned(1) of Class
- --------------------------- --------------------- --------
Rick N. Diamond 2,200,000(2) 35.3%
3100 West Lake Street. Suite 300
Minneapolis, MN 55416
Gary B. Cohen 2,200,000(3) 35.3%
3100 West Lake Street, Suite 300
Minneapolis, MN 55416
Lois J. Dirksen 72,908(4) 1.2%
Phillip T. Levin 82,000(5) 1.3%
Douglas W. Franchot 43,000(6) *
Seymour Levy 42,000(7) *
Gary S. Kohler -- *
All Executive Officers and Directors 4,639,908 72.4%
as a Group (7 Individuals)
47
* Less than 1%.
(1) Under the rules of the Securities and Exchange Commission (SEC), shares not
actually outstanding are nevertheless deemed to be beneficially owned by a
person if such person has the right to acquire the shares within 60 days.
Pursuant to such SEC rules, shares deemed beneficially owned by virtue of a
person's right to acquire them are also treated as outstanding when
calculating the percent of class owned by such person and when determining
the percentage owned by a group.
(2) Includes 100,000 shares which may be purchased by Mr. Diamond upon exercise
of currently exercisable options.
(3) Includes 40,000 shares held by the Cohen Family Trust U/A dated 6/11/99 and
100,000 shares which may be purchased by Mr. Cohen upon exercise of
currently exercisable options.
(4) Includes 68,500 shares which may be purchased by Ms. Dirksen upon exercise
of currently exercisable options.
(5) Includes 41,000 shares which may be purchased by Mr. Levin upon exercise of
currently exercisable options.
(6) Includes 43,000 shares which may be purchased by Mr. Franchot upon exercise
of currently exercisable options.
(7) Includes 41,000 shares which may be purchased by Mr. Levy upon exercise of
currently exercisable options.
INFORMATION REGARDING EQUITY COMPENSATION PLANS
The following table provides information concerning the Company's equity
compensation plans as of December 31, 2002.
Number of securities remaining
Number of securities to Weighted-average available for future issuance
be issued upon exercise exercise price of under equity compensation
of outstanding options, outstanding options plans (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
- ------------- ------------------- ------------------- ------------------------
(a) (b) (c)
Equity compensation
plans approved
by security holders 811,500 $1.21 214,015(1)
Equity compensation
plans not approved
by security holders -- -- --
Total 811,500 $1.21 214,015
48
(1) Includes 25,515 shares of common stock available for issuance under the
Company's Employee Stock Purchase Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCK OPTION VOTING AGREEMENT. Each holder of stock options under the
Company's 1996 Stock Option Plan has entered into a voting agreement which
grants to Mr. Diamond and Mr. Cohen (acting jointly) the voting rights for all
shares acquired pursuant to exercise of such options, until the earlier of five
years from date of exercise or until the holder sells such shares in the public
market. Shares sold into the public market will not thereafter be subject to the
voting agreement.
Franchot Cohen & Associates, an executive search firm, billed the
Company $0, $0, and $59,000 for services provided to the Company in 2002, 2001
and 2000, respectively. Douglas W. Franchot, a director of the Company, is
President of Franchot, Cohen & Associates.
ITEM 14. CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer and Principal
Financial and Accounting Officer, have evaluated our disclosure controls and
procedures within the 90 days preceding the date of this filing. Under rules
promulgated by the SEC, disclosure controls and procedures are defined as those
"controls or other procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the reports filed or
submitted by it under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and
forms." Based on the evaluation of our disclosure controls and procedures,
management determined that such controls and procedures were effective as of the
evaluation date.
Since the evaluation date there have not been any significant changes in
the internal controls or in other factors that could significantly affect these
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
ITEM 15. EXHIBITS, FINANCIAL SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits. Exhibits are numbered in accordance with Item 601 of Regulation
S-K. See "Exhibit Index" immediately following Section 302 Certifications
of this Form 10-K.
(b) Reports on Form 8-K. We filed the following reports on Form 8-K during the
fourth quarter of the year ended December 31, 2002:
1. Change in ACI's Certifying Accountant filed on December 13, 2002.
2. Form 8-K/A filed on December 17, 2002, amending Current Report on Form 8-K,
which was originally filed on December 13, 2002.
3. Engagement of Lurie Besikof Lapidus & Company, LLP as ACI's certifying
Accountant filed on December 30, 2002.
49
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACI TELECENTRICS, INC.
Dated: June 2, 2003 By: /s/ RICK N. DIAMOND
----------------------------------------
Rick N. Diamond, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act 1934, this
Report has been signed by the following persons on behalf of the Company, in the
capacities, and on the dates, indicated.
POWER OF ATTORNEY
- -----------------
Each person whose signature appears below constitutes and appoints RICK
N. DIAMOND and GARY B. COHEN as true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any or all
amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Signature and Title Date
/s/ RICK N. DIAMOND June 2, 2003
- --------------------------------------------
Rick N. Diamond, Chief Executive Officer and
Director (principal executive officer)
/s/ GARY B. COHEN June 2, 2003
- --------------------------------------------
Gary B. Cohen, President and Director
/s/ RUSSELL JACKSON June 2, 2003
- --------------------------------------------
Russell Jackson, Controller
(principal financial and accounting officer)
/s/ DOUGLAS W. FRANCHOT June 2, 2003
- --------------------------------------------
Douglas W. Franchot, Director
/s/ PHILLIP T. LEVIN June 2, 2003
- --------------------------------------------
Phillip T. Levin, Director
/s/ SEYMOUR LEVY June 2, 2003
- --------------------------------------------
Seymour Levy, Director
/s/ GARY S. KOHLER June 2, 2003
- --------------------------------------------
Gary S. Kohler, Director
50
SECTION 302 CERTIFICATION
- -------------------------
I, Rick N. Diamond, the Chief Executive Officer of ACI Telecentrics, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of ACI Telecentrics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: /s/ June 2, 2003 By: /s/ RICK N. DIAMOND
------------------- -----------------------
Rick N. Diamond
Chief Executive Officer
51
SECTION 302 CERTIFICATION
- -------------------------
I, Russell Jackson, Principal Financial and Accounting Officer of ACI
Telecentrics, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of ACI Telecentrics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: /s/ June 2, 2003 By: /s/ Russell Jackson
------------------- --------------------------------
Russell Jackson
Principal Financial and Accounting Officer
52
EXHIBIT INDEX
ACI TELECENTRICS, INC.
FORM 10-K FOR YEAR ENDED DECEMBER 31, 2002
EXHIBIT
NUMBER DESCRIPTION
3.1 Restated Articles of Incorporation (Incorporated by reference to
Exhibit 3.1 to Registration Statement on Form SB-2, SEC File No.
333-05370)
3.2 Restated Bylaws (Incorporated by reference to Exhibit 3.2 to
Registration Statement on Form SB-2, SEC File No. 333-05370)
4.1 Form of Stock Certificate (Incorporated by reference to Exhibit 4.1 to
Registration Statement on Form SB-2, SEC File No. 333-05370)
4.2 Articles of Incorporation (filed as Exhibit 3.1)
4.3 Bylaws (filed as Exhibit 3.2)
10.1 1996 Stock Option Plan (Incorporated by reference to Exhibit 10.1 to
Registration Statement on Form SB-2, SEC File No. 333-05370)**
10.2 1996 Employee Stock Purchase Plan (Incorporated by reference to Exhibit
10.2 to Registration Statement on Form SB-2, SEC File No. 333-05370)**
10.3 Employment Agreement with Rick N. Diamond, dated June 30, 1996
(Incorporated by reference to Exhibit 10.3 to Registration Statement on
Form SB-2, SEC File No. 333-05370)**
10.4 Employment Agreement with Gary B. Cohen, dated June 30, 1996
(Incorporated by reference to Exhibit 10.4 to Registration Statement on
Form SB-2, SEC File No. 333-05370)**
10.5 Buy/Sell Agreement by and among Automated Communications, Incorporated,
Rick N. Diamond and Gary B. Cohen, dated June 30, 1996 (Incorporated by
reference to Exhibit 10.5 to Registration Statement on Form SB-2, SEC
File No. 333-05370)**
10.6 Lease Agreement by and between ACKY-3100 Lake Limited Partnership and
Automated Communications, Incorporated, dated June 13, 1995
(Incorporated by reference to Exhibit 10.12 to Registration Statement
on Form SB-2, SEC File No. 333-05370)
10.7 Sublease by and between Valley City-Barnes County Development
Corporation and Valley City Communications, Incorporated, dated April
24, 1995 (Incorporated by reference to Exhibit 10.13 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.8 Lease by and between Twin Valley-Ulen Telephone Company, Inc. and Twin
Valley Communications, Incorporated, dated September 1, 1993
(Incorporated by reference to Exhibit 10.15 to Registration Statement
on Form SB-2, SEC File No. 333-05370)
10.9 Lease Agreement by and between Kay Barth and ACI Telecentrics,
Incorporated dated April 13, 1997. (Incorporated by reference to
Exhibit 10.31 to Form 10-KSB for the year ended December 31, 1998)
53
EXHIBIT
NUMBER DESCRIPTION
10.10 Lease Agreement by and between C. H. Young, Trustee, and Mary M. Young,
Trustee and ACI Telecentrics dated September 5, l997. (Incorporated by
reference to Exhibit 10.32 to Form 10-KSB for the year ended December
31, 1998)
10.11 Lease Agreement by and between Wilkinson Development, Inc. and ACI
Telecentrics, Incorporated dated September 9, 1997. (Incorporated by
reference to Exhibit 10.33 to Form 10-KSB for the year ended December
31, 1998)
10.12 Memorandum of Understanding for Project #97-ED-008 between the Nebraska
Department of Economic Development, the City of Chadron Nebraska, Dawes
County Nebraska and ACI Telecentrics, Incorporated. (Incorporated by
reference to Exhibit 10.34 to Form 10-KSB for the year ended December
31, 1998)
10.13 Memorandum of Understanding for Project # 97-ED-014 between Nebraska
Department of Economic Development, the City of Ogallala Nebraska and
ACI Telecentrics, Incorporated. (Incorporated by reference to Exhibit
10.35 to Form 10-KSB for the year ended December 31, 1998)
10.14 Memorandum of Understanding for project # 97-ED-015 between Nebraska
Department of Economic Development, the City of Valentine Nebraska and
ACI Telecentrics, Incorporated. (Incorporated by reference to Exhibit
10.36 to Form 10-KSB for the year ended December 31, 1998)
10.15 Lease Agreement by and between Lease Finance Group, Inc. and ACI
Telecentrics, Inc. dated October 19, 1999 (Incorporated by reference to
Exhibit 10.32 to Form 10-KSB for the year ended December 31,1999)
10.16 Lease Agreement by and between DNS Investments, Inc. and ACI
Telecentrics, Inc. dated August 3, 1999 (Incorporated by reference to
Exhibit 10.33 to Form 10-KSB for the year ended December 31,1999)
10.17 Lease Agreement by and between Lease Finance Group, Inc. and ACI
Telecentrics, Inc. dated March 20, 2000. (Incorporated by reference to
Exhibit 10.34 to Form 10-QSB for the quarter ended March 31, 2000)
10.18 Lease Agreement by and between Investissements Rene St-Pierre Ltee and
ACI Telecentrics, Inc. dated April 13, 2000. (Incorporated by reference
to Exhibit 10.35 to Form 10-QSB for the quarter ended June 30, 2000)
10.19 Financial Contribution Agreement by and between Investissement Quebec
and ACI Telecentrics, Inc. dated April 20, 2000. (Incorporated by
reference to Exhibit 10.36 to Form 10-QSB for the quarter ended June
30, 2000)
10.20 Lease Agreement by and between Lease Finance Group, Inc. and ACI
Telecentrics, Inc. dated May 15, 2000. (Incorporated by reference to
Exhibit 10.1 to Form 10-QSB for the quarter ended September 30, 2000)
10.21 Lease Agreement by and between CIT Financial LTD. and ACI Telecentrics,
Inc. dated December 13, 2000 (Incorporated by reference to Exhibit
10.39 to Form 10-KSB for the year ended December 31, 2000)
54
EXHIBIT
NUMBER DESCRIPTION
10.23 Lease Agreement by and between 9G's+, Inc. and ACI Telecentrics, Inc.
dated November 23, 2000 (Incorporated by reference to Exhibit 10.40 to
Form 10-KSB for the year ended December 31, 2000)
10.23 Financial Contribution Agreement by and between Investissement Quebec
and ACI Telecentrics, Inc. dated December 18, 2000 (Incorporated by
reference to Exhibit 10.41 to Form 10-KSB for the year ended December
31, 2000)
21 Subsidiaries: Corporation ACI Telecentrics Du Quebec, Inc.
23.1* Consent of Lurie Besikof Lapidus & Company, LLP, independent public
accountants
23.2* Consent of Deloitte & Touche LLP, independent public accountants
24* Power of Attorney (included on signature page of this Report)
99.1* Section 906 Certification by Chief Executive Officer
99.2* Section 906 Certification by Principal Financial and Accounting Officer
- ---------------------
* Filed herewith
** Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to the Form 10-K
55