SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
_X_ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ________
Commission File No.: 000-21557
ACI TELECENTRICS, INC.
(Name of 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
Check whether the Issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The Company had 5,781,485 shares of common stock, no par value per
share, outstanding as of August 6, 2002.
ACI TELECENTRICS, INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
PAGE #
------
PART I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements (unaudited)
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II OTHER INFORMATION
Items 1 through Item 3 and Item 5 have been omitted since all items are
inapplicable or answers negative.
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 6 Exhibits and reports on Form 8-K 16
Signature Page 17
2
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ACI TELECENTRICS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,076,826 $ 1,459,214
Trade receivables, less allowance for doubtful
accounts of $228,874 and $199,000, respectively 5,494,909 3,691,111
Deferred income taxes 911,000 911,000
Prepaid expenses 171,408 141,120
Grant receivable 509,758 677,341
Income taxes receivable 389,966
Other current assets 763 1,110
------------ ------------
Total current assets 8,554,630 6,880,896
Property and equipment, net of accumulated depreciation 4,903,986 6,094,392
Other assets 356,675 140,360
------------ ------------
TOTAL ASSETS 13,815,291 $ 13,115,648
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 1,848,927
Trade accounts payable 1,228,913 $ 1,481,408
Accrued compensation 952,375 746,630
Accrued expenses 174,338 281,266
Income taxes payable 92,282
Current portion capital lease obligations 570,027 669,731
Current portion deferred grants 1,315,218 1,070,530
------------ ------------
Total current liabilities 6,089,798 4,341,847
LONG-TERM LIABILITIES:
Capital lease obligations, less current portion 512,668 774,217
Deferred grants, less current portion 20,000
Deferred income taxes 1,059,000 1,059,000
------------ ------------
Total long-term liabilities 1,571,668 1,853,217
SHAREHOLDERS' EQUITY:
Common stock, no par value;
Authorized - 15,000,000
Issued and outstanding shares - 5,781,485 6,659,989 6,659,989
Retained earnings (deficit) (506,164) 260,595
------------ ------------
Total shareholders' equity 6,153,825 6,920,584
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,815,291 $ 13,115,648
============ ============
See accompanying notes to consolidated financial statements.
3
ACI TELECENTRICS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
TELEMARKETING REVENUES
Outbound revenue $ 6,738,785 $ 8,958,062 $ 13,330,977 $ 17,113,356
Inbound revenue 989,776 173,900 1,642,951 354,220
------------ ------------ ------------ ------------
Total revenue 7,728,561 9,131,962 14,973,928 17,467,576
------------ ------------ ------------ ------------
COST OF SERVICES 4,501,287 4,604,040 8,859,734 8,764,460
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 3,559,000 3,941,414 7,220,355 7,461,365
------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (331,726) 586,508 (1,106,161) 1,241,751
OTHER INCOME (EXPENSE)
Interest income 3,703 12,173 5,197 15,227
Interest expense (45,911) (75,432) (90,461) (170,330)
Other, net (34,337) (20,915) (57,336) (72,197)
------------ ------------ ------------ ------------
Total other expense (76,545) (84,174) (142,600) (227,300)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE TAXES (408,271) 502,334 (1,248,761) 1,014,451
INCOME TAX (BENEFIT) EXPENSE (160,000) 196,000 (482,000) 396,000
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (248,271) $ 306,334 $ (766,761) $ 618,451
============ ============ ============ ============
(LOSS) EARNINGS PER SHARE:
Basic $ (.04) $ .05 $ (.13) $ .11
============ ============ ============ ============
Diluted $ (.04) $ .05 $ (.13) $ .11
============ ============ ============ ============
WEIGHTED AVERAGE COMMOM
SHARES OUTSTANDING:
Basic 5,781,485 5,781,416 5,781,485 5,781,450
============ ============ ============ ============
Diluted 5,781,485 5,924,994 5,781,485 5,869,573
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
ACI TELECENTRICS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
-----------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (766,761) $ 618,451
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 1,210,502 1,096,188
Provision for losses on accounts receivable 30,000 41,668
Amortization of deferred grant revenue (70,000) (70,000)
Loss on disposal of equipment 36,642 3,511
Changes in operating assets and liabilities:
Trade receivables (1,833,798) 1,966,808
Prepaid expenses (30,288) (26,167)
Grant receivable 167,583 (1,737,296)
Other current assets 347 430,154
Deferred grants 294,688 1,026,094
Trade accounts payable, accrued compensation
and accrued expenses (153, 678) 153,974
Income tax (receivable) payable (482,248) 399,196
------------ ------------
Net cash (used in) provided by operating activities (1,597,011) 3,902,581
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (56,736) (1,888,274)
Increase in deposits (216,315) (214,668)
------------ ------------
Net cash used in investing activities (273,051) (2,102,942)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit 7,581,767 10,635,150
Payments on revolving line of credit (5,732,840) (13,119,156)
Proceeds from term note 763,000
Net proceeds from issuance of common stock 6,634
Proceeds from equipment acquired through
capital leases 260,276
Repayments of capital leases (361,253) (292,824)
------------ ------------
Net cash provided by (used in) financing activities 1,487,674 (1,746,920)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (382,388) 52,719
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,459,214 100,607
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,076,826 $ 153,326
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NON CASH INVESTING AND FINANCING TRANSACTIONS:
Equipment acquired through capital leases -- $ 536,432
Deposits funded through capital leases $ 177,688 $ 232,119
CASH PAID FOR INTEREST AND TAXES:
Income taxes paid net of refunds received $ 19,050 $ 16,850
Cash paid for interest $ 90,461 $ 170,330
See accompanying notes to consolidated financial statements.
5
ACI TELECENTRICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(1) BASIS OF PRESENTATION AND RESPONSIBILITY OF INTERIM FINANCIAL STATEMENTS
ACI Telecentrics, Incorporated and subsidiary (the Company) prepared
the unaudited consolidated financial statements for the three and six
months ended June 30, 2002 and 2001 following the requirements of the
Securities and Exchange Commission (SEC) for interim reporting. As
permitted under those rules, certain footnotes or other financial
information that are normally required by accounting principles
generally accepted in the United States can be condensed or omitted.
Therefore, these financial statements should be read in conjunction
with the Company's 2001 Form 10-KSB.
The Company is responsible for the unaudited financial statements
included in this document. The financial statements include all normal
recurring adjustments that are considered necessary for the fair
presentation of the Company's financial position and operating results.
Revenues, expenses, cash flows, assets and liabilities can and do vary
during each quarter of the year. Therefore, the results and trends in
these interim financial statements may not be the same as those for the
full year.
(2) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142 (SFAS142), 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 effective
January 1, 2002, which did not have an effect on our historical
consolidated results of operations, financial position, and cash flow.
In August 2001, the FASB issued SFAS No. 143 (SFAS 143), ACCOUNTING FOR
ASSET RETIREMENT OBLIGATIONs, which is effective 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
are currently in the process of evaluating the effect the adoption of
this standard will have on our consolidated results of operations,
financial position and cash flows.
In September 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. The adoption of this standard on January 1, 2002 did not
have an effect on our historical consolidated results of operations,
financial position and cash flows.
6
(3) EARNINGS PER SHARE (SFAS 128)
Basic earnings per share are computed by dividing earnings available to
common shareholders by the weighted average number of common shares
outstanding during each period. Diluted earnings per share are computed
after giving effect to the exercise of all dilutive outstanding options
and warrants. The following table reconciles the denominators used in
computing basic and diluted earnings per share:
Three Months Ended Six Months Ended
June 30, June 31,
2002 2001 2002 2001
---- ---- ---- ----
Weighted average common shares outstanding 5,781,485 5,781,416 5,781,485 5,781,450
Effect of dilutive stock options -- 143,578 -- 88,123
---------- ---------- ---------- ----------
5,781,485 5,924,994 5,781,485 5,869,573
========== ========== ========== ==========
Due to the net loss in the second quarter of 2002 there was no effect
on diluted earnings per share.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
June 30, 2002 December 31, 2001
------------- -----------------
Furniture $ 1,873,319 $ 1,862,921
Equipment 8,350,736 8,364,599
Capitalized software costs 623,807 623,807
Leasehold improvements 419,040 415,340
------------ ------------
11,266,902 11,266,667
Less accumulated depreciation and amortization 6,362,916 5,172,275
------------ ------------
Net property and equipment $ 4,903,986 $ 6,094,392
============ ============
At June 30, 2002 and December 31, 2001, the Company had furniture and
equipment under capitalized leases totaling $2,534,748 with accumulated
depreciation of $1,241,600 and $936,093, respectively, which are
included in the table above.
(5) LINE OF CREDIT
The Company currently operates under a $4,000,000 Revolving Credit Loan
Agreement dated August 16, 2001. The loan accrues interest at the prime
rate on outstanding borrowings. The prime rate was 4.75% at June 30,
2002. The borrowing base is secured by certain accounts receivable. The
loan agreement also contains provisions requiring compliance with
certain financial covenants including prohibiting the payment of cash
dividends without the bank's consent. The Revolving Credit Loan
Agreement expires on April 30, 2003. At June 30, 2002, the Company had
outstanding borrowings of $1,848,927 under the Revolving Credit Loan
Agreement with an available credit line of $2,151,073.
The Revolving Credit Loan Agreement requires the Company to meet
certain financial covenants, which are calculated based upon total debt
levels, tangible net worth, debt service, capital expenditures, and
working capital. The Company was in violation of one of their debt
covenants at June 30, 2002. The lender subsequently waived this
covenant violation on August 13, 2002.
7
(6) GRANT AGREEMENTS
During the second quarter of 2002, the Company entered into a financial
contribution agreement with the Government of Quebec, Canada. Under the
agreement the Company agreed to open a contact center in Caplan,
Quebec, Canada for certain financial incentives. These incentives are
based on maintaining certain eligibility requirements for two years
from the date that the jobs are created. The Company must create a
minimum of 50 jobs by April 30, 2004, but can create up to 500 for
which it will receive financial contributions. No assistance from the
Government of Quebec was recorded in the second quarter of 2002. At
June 30, 2002, $272,882 was receivable under this agreement. As of June
30, 2002, the Company had current and non-current deferred recognition
of grant income totaling $245,594 as required to conform to the terms
of the grant. Payment for jobs created during the second quarter of
this agreement is due within 30 days after submission and acceptance of
claim.
During the second quarter of 2002, the Company entered into a financial
contribution agreement with Emploi Quebec. Under the terms of the
agreement, Emploi Quebec agreed to subsidize wages, training and Human
Resources management costs for two years. The financial contribution is
linked to the creation of up to 500 jobs at the Company's new customer
contact center located in Caplan, Quebec. During the second quarter of
2002, the Company recorded $13,726 in assistance from Emploi Quebec. At
June 30, 2002, $16,183 was receivable under this agreement. Payment for
jobs created during the second quarter of this agreement is due within
30 days after submission and acceptance of claim.
During the first quarter of 2001, the Company entered into a financial
contribution agreement with the Government of Quebec, Canada. Under the
agreement the Company agreed to open a contact center in Vaudreuil,
Quebec, Canada for certain financial incentives. These incentives are
based upon providing sustained employment for three years and are
awarded based on each job created. The Company must maintain a minimum
of 50 ongoing jobs but can create up to 626 for which it will receive
financial contributions. If there is a decrease in cumulative jobs
created, future reimbursement is limited until the Company exceeds
previously reimbursed employment levels. No assistance from the
Government of Quebec was recorded in the second quarter of 2002. The
Company recorded $399,887 in assistance during the second quarter
ending June 30, 2001. At June 30, 2002, $161,201 was receivable under
this agreement compared to $153,710 at December 31, 2001. As of June
30, 2002, the Company had current and noncurrent deferred recognition
of grant income totaling $519,251 compared to $493,799 as of December
31, 2001, as required to conform to the terms of the grant. Payment of
the grants receivable as of June 30, 2002, will be received at various
dates over the next nine months.
During the first quarter of 2001, the Company entered into a financial
contribution agreement with the Federal Government of Canada. Under the
agreement, the Company agreed to create 437 fulltime equivalent jobs by
the end of March 31, 2002 at its Sherbrooke, Quebec contact center.
During the second quarter of 2002, $32 in assistance was recorded from
the Government of Canada. The Company recorded $182,266 in assistance
in the second quarter of 2001. At June 30, 2002, $42,371 was receivable
under this agreement compared to $180,798 at December 31, 2001.
Payments of the grants receivable as of June 30, 2002, will be received
within 90 days.
During the year ended 2000, the Company entered into a financial
contribution agreement with the Government of Quebec, Canada to open a
contact center in Sherbrooke, Quebec, Canada. During the second quarter
ended June 30, 2002, there was no assistance recorded from the
8
Government of Canada. During the second quarter of 2001, $22,157 in
total assistance was recorded. At June 30, 2002, $17,121 was receivable
under this agreement compared to $342,833 at December 31, 2001. As of
June 30, 2002, the Company had current and noncurrent deferred
recognition of grant income totaling $480,375 compared to $456,731 at
December 31, 2001, as required to conform to the terms of the grant.
Payments of the grants receivable as of June 30, 2002, will be received
within ninety days.
A repayment of the above discussed grants may be required if the
Company does not meet certain minimum job creation requirements.
However, the management of the Company continues to monitor this
situation and believes that grants actually received are consistent
with the Company's ability to meet applicable minimum requirements for
such grants at the same are in effect at the time of receipt. Therefore
management does not believe that any grant assistance received will be
refundable.
(7) TRANSFER OF FACILITIES
During the first quarter of 2002, the Company completed a contractual
agreement to transfer operations and certain assets of three small
operational facilities to new ownership. The Company has shifted the
workflow to its larger facilities in order to maximize operating
efficiencies.
9
PART I FINANCIAL INFORMATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
ACI Telecentrics, Incorporated (ACI) provides telephone-based sales and
marketing services, and internet-based customer servicing, primarily to the
telecommunications, financial services and publishing industries. ACI was
established in 1987 in Minneapolis, Minnesota. The Company operates eight
outbound contact centers and two inbound/outbound/internet services contact
centers; six of which are located in five Midwest states, one in the state of
California and three in the province of Quebec, Canada. The Company's corporate,
administrative and sales functions are headquartered in Minneapolis, Minnesota.
As of June 30, 2002, these 10 contact centers had 834 contacting stations, and
the Company had approximately 1,700 full and part-time employees.
Revenue from telemarketing services is recognized as these services are
performed and is generally based on an hourly rate. Certain telemarketing
service revenues are performance-based. Cost of services includes compensation
and commissions for telephone sales representatives, payroll taxes and other
benefits associated with such personnel, telephone expenses and other direct
costs associated with providing services to customers. Selling, general and
administrative expenses include administrative, sales, marketing, occupancy,
depreciation and other indirect costs.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 1
to the Consolidated Financial Statements included in the 2001 Form 10-KSB. The
accounting policies used in preparing the interim 2002 consolidated financial
statements are the same as those described in the 2001 Form 10-KSB, except as
described in Note 2 of this report "New Accounting Pronouncements".
In preparing the financial statements, the Company follows accounting
principles generally accepted in the United States of America, which in many
cases requires 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:
* accounting for contingencies, under which the Company accrues an
expense when it is probable that a liability has been incurred and the
amount can be reasonably estimated;
* measuring impairment of long-lived assets
* accounting for economic development grants
The difficulty in applying these policies arises from the assumptions,
estimates and judgments that have to be made currently about matters that are
inherently uncertain, such as future economic conditions, operating results and
valuations as well as management intentions. As the difficulty increases, the
level of precision decreases, meaning that actual results can and probably will
be different from those currently estimated. The Company bases its assumptions,
estimates and judgments on a combination of historical experiences and other
reasonable factors.
Contingencies, by their nature, relate to uncertainties that require
management to exercise judgment both in assessing the likelihood that a
liability has been incurred as well as in estimating the amount of potential
expense.
10
We review our long-lived assets, such as fixed assets and goodwill for
impairment whenever events or changes in circumstances indicate the carrying
value amount 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 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.
As discussed in Note 6 of Notes to Consolidated Financial Statements,
the Company has many grant agreements, which have various terms and
requirements. Most of the agreements require the Company to maintain a minimum
number of ongoing jobs and salary levels for a specific time period. The Company
believes that it has conformed with such agreements to date, however,
significant economic changes or the availability of labor in a call center
market could adversely affect the Company's ability to meet the agreement terms
and requirements in the future.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002, COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
REVENUE. Revenues for the second quarter ended June 30, 2002 decreased
$1,403,401, or 15% to $7,728,561 compared to second quarter 2001 revenues of
$9,131,962. Billable hours decreased by 12% when compared to the prior year
period. The decreases in revenues and billable hours can primarily be attributed
to the Company's financial services clients scaling back their marketing
campaigns due to the general instability of the economy. The Company operated an
average of 760 contact stations during the second quarter of 2002 compared to an
average of 829 for the same period in 2001.
Telecommunications clients became the largest segment of revenues
during the second quarter 2002 by providing approximately 52% of second quarter
2002 revenues compared to approximately 26% of revenues during the second
quarter of 2001. In the previous year's second quarter of 2001, financial
services clients provide approximately 67% of revenues compared to approximately
38% of revenues during the second quarter of 2002. During the second quarter of
2002 and 2001, the Company's largest client represented approximately 21% and
18%, respectively, of total revenue. Other industry segments and their
percentages of revenue in 2002 include publishing (5%) and other miscellaneous
(5%). In 2001, other industry segments and their percentage of revenue included
publishing (6%) and other miscellaneous (1%).
COST OF SERVICES. Cost of services decreased by $102,753 for the second
quarter of 2002, or 2% to $4,501,287, when compared to $4,604,040 in the second
quarter of 2001. As percentage of revenue, cost of services for the second
quarter of 2002 increased by 8% to 58% compared to 50% in the second quarter of
2001. This increase as a percentage of revenue was primarily the result of the
effect of the reduction of economic development grants reducing cost of services
in the second quarter of 2001 versus the second quarter of 2002. During the
second quarter of 2002 and 2001 economic development grant reduced cost of
services by $13,758 and $604,310. respectively. In addition, as a percentage of
revenue, long distance telephone costs were reduced by 10% when comparing the
second quarters of 2002 and 2001 as an offset to the increase in cost of
services when comparing second quarter 2002 versus second quarter 2001 with
economic development grants.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative expenses for the three months ended June 30, 2002 decreased
$382,414, or 10% to $3,559,000 from $3,941,414 during the same period of 2001.
As a percentage of revenue, selling, general and administrative expenses
increased 3% to 46% in 2002 compared to 43% during the second quarter of 2001.
The increase in expenses, as a percentage of revenue, is primarily the result of
depreciation expense associated with the contact center opened in January 2001,
relocation of one contact center and upgraded technology installed during 2001.
11
OPERATING (LOSS) INCOME. Due to the factors listed above, the Company
recorded second quarter 2002 operating loss of $331,726, a $918,234 decrease
compared to the second quarter 2001 operating income of $586,508. As a
percentage of revenue, the operating loss was 4% during the 2002 quarter and the
operating income was 6% during the 2001 quarter. Operating loss for the second
quarter of 2002 and 2001 would have been $345,484 and $17,802, respectively, if
the effect of economic development grants is not considered.
OTHER INCOME AND EXPENSES, NET. Other expenses were $76,545 in 2002 and
$84,174 in 2001. Net interest expense was $42,208 in the second quarter of 2002
compared to $63,259 in the same period of 2001. The decrease in net interest
expense was the result of decreases in borrowing activity under the Company's
line of credit. Other expenses increased due to an increase in foreign currency
translation expense.
NET (LOSS) INCOME AND NET (LOSS) INCOME PER SHARE. Pretax loss for the
three months ended June 30, 2002 was $408,271, a $910,605 decrease compared to
pretax income of $502,334 in the same period of 2001. The Company recorded
income tax benefit of $160,000 for the second quarter of 2002 and income tax
expense of $196,000 in the second quarter of 2001. The effective tax rate was
39% for the second quarters of 2002 and 2001. During the second quarters of 2002
and 2001, economic development grants of $13,758 and $604,310, respectively,
were recorded as a reduction in expenses. The pretax loss for the second quarter
of 2002 and 2001 would have been $422,029 and $101,976 respectively, if the
economic development grants were not considered. The net loss for the second
quarter of 2002 was $248,271, or $.04 per share on a basic and diluted basis
compared to net income of $306,334, or $.05 per share on a basic and diluted
basis in the second quarter of 2001. When the effect of the economic development
grants is not considered, the net loss for the second quarter of 2002 and 2001
would have been $257,029 and $61,976, or $.04 and $.01 per share on a basic and
diluted basis, respectively.
SIX MONTHS ENDED JUNE 30, 2002, COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
REVENUE. Revenues for the six months ended June 30, 2002 decreased
$2,493,648 or 14% to $14,973,928, compared to 2001 revenues of $17,467,576.
Billable hours decreased 10% when compared to the prior year period. The
decreases in revenues and billable hours can primarily be attributed to the
Company's financial services clients scaling back their marketing campaigns and
competitive selling price due to the general instability of the economy. The
Company operated an average of 794 contact stations during the first six months
of 2002 compared to 829 during the first six months of 2001.
Financial services clients provided approximately 45% of the 2002 six
month revenues compared to approximately 65% of 2001 revenues. During the six
months ended June 30, 2002 and 2001, the Company's largest client represented
approximately 16% and 18%, respectively, of total revenue. Other industry
segments and their percentages of revenue in 2002 include telecommunications
(42%) and publishing (6%).
COST OF SERVICES. Cost of services for the six months ended June 30,
2002 increased $ 95,274, or 1% to $8,859,734 compared to $8,764,460 during the
2001 period. As percentage of revenue, cost of services for the six months ended
of 2002 increased by 9% to 59% compared to 50% in the second quarter of 2001.
This increase as a percentage of revenue was primarily the result of the effect
of the reduction of economic development grants reducing cost of services for
the six months of 2001 versus the six months of 2002. During the six months
ended 2002 and 2001 economic development grant reduced cost of services by
$13,758 and $1,270,567, respectively. In addition, as a percentage of revenue,
long distance telephone costs were reduced by 4% when comparing the six months
ended 2002 and 2001 as a offset to the increase in cost of services when
comparing six months ended 2002 versus second quarter 2001 with economic
development grants.
12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative expenses for the first six months of 2002 decreased $241,010,
or 3% to $7,220,355, from $7,461,365 during 2001. During the six months ended
2001 economic development grant reduced selling, general, and administrative
expenses by $254,753. Without the taking into effect the reduction by economic
development grants when comparing the six months of 2002 to 2001, selling
general, and administrative expenses were reduced by $495,753 or 6%. This
reduction in corporate expenses resulted primarily from reduced personnel costs.
As a percentage of revenue, selling, general and administrative expenses,
without the reduced effect of $254,753 in economic development grants in 2001,
increased by 4% to 48% in 2002 compared to 44% during the same period of 2001.
The increase in selling, general and administrative expenses as a percentage of
revenues when comparing 2002 to 2001 also reflect reduced revenues for the six
months of 2002.
OPERATING INCOME. As a result of the factors listed above, operating
loss for the first six months of 2002 was $1,106,161, a $2,347,912 decrease
compared to 2001 operating income of $1,241,751. As a percentage of revenue,
operating loss was 7% for the six months ended June 30, 2002 and operating
income was 7% for the six months ended June 30, 2002. The Company would have had
an operating loss for 2002 and 2001 of $1,119,919 and $28,816, respectively, if
the effect of the economic development grants were not considered.
OTHER INCOME AND EXPENSES, NET. Net interest expense was $85,264 in
2002 compared to $155,103 in 2001. The decrease in net interest expense was the
result of decreased borrowing activity under the Company's line of credit and
equipment lease financing.
NET INCOME AND NET INCOME PER SHARE. Pretax loss for the first six
months of 2002 was $1,248,761, a $2,263,212 decrease compared to pretax income
of $1,014,451 in the same period of 2001. The Company recorded an income tax
benefit of $482,000 in 2002 and an income tax expense of $396,000 in 2001. The
effective tax rate for both periods was 39%. The pretax loss for the first six
months of 2002 and 2001 would have been $1,262,519 and $510,859, respectively,
if the effect of the economic development grants were not considered. The income
tax benefit for 2002 and 2001 would have been $492,000 and $199,000,
respectively, when the effect of the economic development grants is not
considered. Net loss for the first six months of 2002 was $766,761 or $.13 per
share on a basic and diluted share basis compared to net income of $618,451, or
$.11 per basic and diluted share basis in 2001. When the effect of the economic
development grants is not considered, net loss for 2002 and 2001 would have been
$770,519 or $.13 and $311,859, or $.05 per share on a basic and diluted share
basis, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically used cash from operating activities, bank
borrowings, capital leases and public and private sector financing received in
connection with the opening of contact centers as its primary sources of
liquidity. The public and private sector (grants/financings) have included
outright grants, low interest rate loans, forgivable loan arrangements, and
reimbursement for certain expenses and leasehold improvements. The Company
currently operates under a $4,000,000 Revolving Credit Loan Agreement dated
August 16, 2001. The loan accrues interest at the prime rate on outstanding
borrowings. The prime rate was 4.75% at June 30, 2002. The borrowing base is
secured by certain accounts receivable. The Revolving Credit Loan Agreement
requires the Company to meet certain financial covenants, which are calculated
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. The Company was in violation of one of
their debt covenants at June 30, 2002. The lender subsequently waived this
covenant violation on August 13, 2002. The Company anticipates that it may be in
violation of the debt service covenant by the end of the third quarter of 2002.
The Revolving Credit Loan Agreement expires on April 30, 2003. At June 30, 2002,
the Company had outstanding borrowings of $1,848,927 under the Revolving Credit
Loan Agreement with an available credit line of $2,151,073.
13
At June 30, 2002, the Company had cash and cash equivalents of
$1,076,826 compared to $1,459,214 at December 31, 2001. For the six months ended
June 30, 2002, cash used by operating activities was $1,597,011 compared to cash
provided by operating activities of $3,902,581 in the 2001 period. Included in
cash used by operating activities in the 2002 period is $2,037,394 of net
changes in working capital components (primarily an increase in receivable) ,
non-cash net charges of $3,358, and a net loss of $766,761. Depreciation of
$1,210,502 partially offsets this decrease in cash. For the six months ended
June 30, 2001, cash provided by operating activities was $3,902,581 of changes
in working capital components related to the growth of the Company, depreciation
of $1,096,188 and net income of $618,451. Cash used by non-cash net charges of
$24,821 partially offset this increase in cash.
Net cash used by investing activities in the six months of 2002 and
2001 was $273,051 and $2,102,942, respectively. The primary use of cash by
investing activities during 2002 was an increase in deposits on building rent
and equipment. During the 2001 period, the primary uses of cash by investing
activities included expenditures for property and equipment of $1,888,274 and
deposits of $214,668 on equipment and technology.
Net cash used by financing activities during the six months ended June
30, 2002 was $1,487,674 and cash provided by financing activities during the six
months ended June 30, 2001 was $1,746,920. The primary source of cash from
financing activities during the first six months of 2002 was $1,848,927 of net
borrowings under the Company's revolving line of credit. Cash provided by
financing activities in 2002 was partially offset by repayments of $361,253 of
capital leases. The primary uses of cash during the first six months ended June
2001 were $2,564,006 of net payments under the Company's revolving line of
credit and repayment of $292,824 in capital leases. The primary sources of cash
from financing activities were proceeds from a term note of $763,000, sale and
leaseback of equipment proceeds of $260,276, and the issuance of common stock of
$6,634 under the Company's Employee Stock Purchase Plan.
During the six months ending June 30, 2002 and 2001, the Company did
not acquire any assets through capital leases. During the six months ended June
30, 2001, the company acquired $536,432 of assets through capital leases.
As a result, net cash and cash equivalents decreased by $382,388 during
the six months ended June 30 of 2002 and increased by $52,719 during the six
months ended June 30 of 2001. The Company believes that funds which should be
generated from future operations, amounts available under the revolving line of
credit agreement, amounts receivable from economic development grants for new
jobs created and funds obtained through equipment financing leases will be
sufficient to finance its current and future business operations, including
working capital requirements, although there can be no guarantee that these
funds will be available at terms acceptable to the Company, if at all.
QUARTERLY RESULTS
The telemarketing industry tends to be slower in the first and third
quarters of the year because client marketing and customer service programs are
typically slower in the post-holiday and summer months. The Company has
experienced, and expects to continue to experience, quarterly fluctuations in
revenues and operating income principally as a result of the timing of clients'
telemarketing campaigns, the commencement of new contracts, changes in the
Company's revenue mix, opening of new contact centers, and the additional
selling, general and administrative expenses to acquire and support such new
business.
14
OUTLOOK
Certain statements made in this Form 10-Q, including those made in the
second paragraph of this "Outlook" section are "forward-looking statements" made
under the safe harbor provision of the Securities Litigation Reform Act. Such
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed or implied by
such statements.
Management's belief that any grant assistance received will not be
refundable depends on the Company's ability to continue to meet designated job
creation and other requirements, which in turn depends on general business,
economic and competitive conditions largely out of the Company's control.
The Company's ability to continue to finance its business depends on
revenues from future operations, which depend in part on economic, competitive
and regulatory conditions, on its ability to meet covenants related to its line
of credit, as well as new grants received.
Management believes that total marketing expenditures by U.S. companies
directed towards multi-channel customer contacts will continue to grow and that
the trend for these companies will be towards outsourcing their marketing
programs to companies like ACI. In addition, the Company believes that
Internet-based online customer service support is the next step in consumer
contact, and the Company has positioned itself to take advantage of the growth
in that market segment. The Company opened in June 2002 a new 150-seat contact
center in Caplan, Quebec, Canada. In 2002, the Company expects to spend
approximately $600,000 on capital expenditures to equip the new Caplan contact
center and for other minor business applications. The Company intends to finance
the majority of its capital expenditure needs through equipment financing
leases; however, there is no assurance that equipment finance leases will be
available at terms acceptable to the Company.
There is no assurance that the Company's marketing efforts will
generate new business or that businesses will continue to outsource their
telemarketing needs. As is common in the telemarketing industry, the Company's
projects are often not subject to formal contracts, the agreements with its
clients do not assure that ACI will generate a specific level of revenue, do not
designate ACI as the client's exclusive service provider, and are terminable by
the client on relatively short notice and without penalty. In addition, the
amount of revenues ACI generates from a particular client generally is dependent
upon the interest of the client's customer in, and use of, the client's products
or services. While the Company anticipates an increase in demand for its
services in 2002, there is no assurance that the Company, due to the current low
unemployment levels in communities where the Company has its older contact
centers, will be able to hire and train sufficient telemarketing sales
representatives to fully utilize the capacity to meet anticipated increased
demands for the Company's services. In addition, 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." The
Company 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 ACI. 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. The Company
cannot predict whether any such proposed legislation will become law or what
affect such laws would have on the business of the Company.
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.
ITEM 3 NOT APPLICABLE
15
PART II OTHER INFORMATION
ITEM 1 - 3 NOT APPLICABLE
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2002 Annual Meeting of Shareholders on
May 23, 2002. At the Annual Meeting, the shareholders voted upon proposals to
(a) set the number of members of the Board of Directors at six (6); (b) elect
directors as contained in the Registrant's Proxy Statement dated April 15, 2002
and (c) approve Deloitte & Touche LLP as independent auditors for the fiscal
year ending December 31, 2002.
(a) Set the number of members of the Board of Directors at six
(6):
For Against Abstain
--- ------- -------
5,693,696 13,411 2,337
(b) The board nominees were elected as directors with the
following votes:
Shares Voted
------------
For Withheld
--- --------
Rick N. Diamond 5,658,604 50,840
Gary B. Cohen 5,658,604 50,840
Seymour Levy 5,671,404 38,040
Douglas W. Franchot 5,671,404 38,040
Phillip T. Levin 5,671,404 38,040
Thomas F. Madison 5,671,404 38,040
(c) Approve Deloitte & Touche LLP as independent auditors for the
fiscal year ending December 31, 2002.
For Against Abstain
--- ------- -------
5,701,996 7,411 37
No other matters were submitted to a vote of the security
holders.
ITEM 5 NOT APPLICABLE
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
for which this report is filed.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACI TELECENTRICS, INCORPORATED
Registrant
Dated: /s/ Aug 14, 2002 By: /s/ WILLIAM NOLTE
--------------------- ------------------------------------
William Nolte
Chief Financial Officer
(Principal Accounting Officer)
Dated: /s/ Aug 14, 2002 By: /s/ RICK N. DIAMOND
--------------------- ------------------------------------
Rick N. Diamond
Chief Executive Officer and Director
17
EXHIBIT INDEX
ACI TELECENTRICS, INC.
FORM 10-Q FOR QUARTER ENDED JUNE 30, 2002
EXHIBIT NO. DESCRIPTION
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
18