UNITED STATES
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 March 31, 2003
__ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission File No.: 000-21557
ACI TELECENTRICS, INC.
(Name of Small Business Issuer as specified in its charter)
MINNESOTA 41-1572571
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3100 WEST LAKE STREET, SUITE 300, MINNEAPOLIS, MINNESOTA 55416
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (612) 928-4700
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The Company had 5,781,485 shares of common stock, no par value per share,
outstanding as of May 28, 2003.
ACI TELECENTRICS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Balance Sheets
Statements of Operations
Statements of Cash Flows
Notes to Financial Statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Items 1 through Item 5 have been omitted since all items are inapplicable or
answers negative.
Item 6 Exhibits and reports on Form 8-K
Signature Page
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ACI TELECENTRICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
------------ ------------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 514,442 $ 797,626
Trade receivables, less allowance for doubtful
accounts of $221,000 and $206,000, respectively 5,947,644 6,299,990
Grant receivables 697,986 380,562
Prepaid expenses and other current assets 289,798 232,714
------------ ------------
Total current assets 7,449,870 7,710,892
PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION 3,082,889 3,763,545
DEFERRED INCOME TAXES 201,000 201,000
OTHER ASSETS 251,479 170,282
------------ ------------
$ 10,985,238 $ 11,845,719
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ 1,946,485 $ 1,807,571
Trade accounts payable 1,140,866 1,386,755
Accrued compensation 1,277,065 1,056,717
Accrued expenses 385,221 299,452
Income taxes payable 601,794 527,376
Current maturities of capital lease obligations 516,863 585,223
Deferred grant expense reimbursements 1,542,921 1,543,208
------------ ------------
Total current liabilities 7,411,215 7,206,302
------------ ------------
CAPITAL LEASE OBLIGATIONS,
LESS CURRENT MATURITIES 485,659 543,175
------------ ------------
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
Accumulated deficit (3,571,625) (2,563,747)
------------ ------------
Total shareholders' equity 3,088,364 4,096,242
------------ ------------
$ 10,985,238 $ 11,845,719
============ ============
See notes to condensed consolidated financial statements.
ACI TELECENTRICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
---------------------------
2003 2002
----------- -----------
TELEMARKETING REVENUES
Outbound revenue $ 6,289,841 $ 6,592,192
Inbound revenue 506,242 653,175
----------- -----------
Total revenues 6,796,083 7,245,367
----------- -----------
OPERATING EXPENSES
Cost of services 3,822,612 4,358,447
Selling, general and administrative expenses 3,464,771 3,661,355
Impairment costs 256,236 --
----------- -----------
Total costs 7,543,619 8,019,802
----------- -----------
OPERATING LOSS (747,536) (774,435)
----------- -----------
OTHER INCOME (EXPENSE)
Interest income 979 1,494
Interest expense (73,116) (44,550)
Other, net (129,205) (22,999)
----------- -----------
Total other expense (201,342) (66,055)
----------- -----------
LOSS BEFORE INCOME TAXES (948,878) (840,490)
INCOME TAX EXPENSE (BENEFIT) 59,000 (322,000)
----------- -----------
NET LOSS $(1,007,878) $ (518,490)
============ ===========
LOSS PER SHARE
Basic and Diluted $ (.17) $ (.09)
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic and Diluted 5,781,485 5,781,485
=========== ===========
See notes to condensed consolidated financial statements.
ACI TELECENTRICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2003 2002
----------- -----------
OPERATING ACTIVITIES
Net (loss) $(1,007,878) $ (518,490)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 472,404 607,487
Provision for losses on trade receivables 15,000 15,000
Amortization of deferred grant expense reimbursements (16,666) (35,000)
Noncash impairment cost 256,236 --
Loss on disposal of equipment -- 36,640
Changes in operating assets and liabilities:
Trade receivables 337,346 (1,525,214)
Grant receivables (317,424) 144,415
Prepaid expenses and other current assets (57,084) 7,908
Accounts payable, accrued compensation
and accrued expenses 60,228 529,050
Income taxes 74,418 (321,164)
Deferred grant expense reimbursements 16,379 (4,457)
----------- -----------
Net cash used in operating activities (167,041) (1,063,825)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (47,984) (76,405)
Increase in deposits (81,197) --
----------- -----------
Net cash used in investing activities (129,181) (76,405)
----------- -----------
FINANCING ACTIVITIES
Proceeds from revolving line of credit 5,599,367 1,377,049
Payments on revolving line of credit (5,460,453) (795,107)
Repayments of capital leases (125,876) (207,779)
----------- -----------
Net cash provided by financing activities 13,038 374,163
----------- -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (283,184) (766,067)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 797,626 1,459,214
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 514,442 $ 693,147
=========== ===========
SUPPLEMENTAL DISCLOSURE ON CASH FLOW INFORMATION
Cash paid for:
Income taxes $ -- $ 8,050
Interest $ 73,116 $ 38,228
See notes to condensed consolidated financial statements.
ACI TELECENTRICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
(1) BASIS OF PRESENTATION AND RESPONSIBILITY OF INTERIM FINANCIAL STATEMENTS
ACI Telecentrics, Inc. and subsidiary (the Company) prepared the
unaudited condensed consolidated financial statements for the three
months ended March 31, 2003 and 2002 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 condensed financial statements should be read in
conjunction with the Company's 2002 Form 10-K.
The Company is responsible for the unaudited condensed consolidated
financial statements included in this document. The condensed
consolidated financial statements include all adjustments, including
normal recurring adjustments, which, in the opinion of management, are
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 (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 impact on our consolidated financial position or results of
operations.
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. SFAS 143 does not 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.
In the first quarter of 2003, the Company recognized a non-cash
impairment charge of $256,236 related to the write-down of assets
related to a California contact center.
In July 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. The Company adopted SFAS 146 during the third quarter of 2002.
There were no restructuring charges in the first quarter of 2003 or
2002.
(3) LOSS PER SHARE
Basic loss per share is computed by dividing the net loss to common
shareholders by the weighted average number of common shares
outstanding during each period. Diluted loss per share is computed
after giving effect to the exercise of all dilutive outstanding
options and warrants. Both basic and diluted loss per share for the
three months ending March 31, 2003 and 2002 were the same as all
options outstanding were antidilutive. The following table reconciles
the denominators used in computing basic and diluted loss per share:
Three Months Ended
March 31,
2003 2002
---- ----
Weighted average common shares outstanding 5,781,485 5,781,485
Effect of dilutive stock options ----------
-- --
---------- ----------
5,781,485 5,781,485
========== ==========
A total of 811,500 and 766,000 stock options have been excluded from
the calculation of diluted loss per share for the three months ended
March 31, 2003 and 2002, respectively.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
March 31, 2003 December 31, 2002
-------------- -----------------
Furniture $ 1,391,483 $ 1,639,545
Equipment 7,608,010 8,166,396
Leasehold improvements 252,412 292,809
------------ ------------
9,251,905 10,098,750
Less accumulated depreciation 6,169,016 6,335,205
------------ ------------
Net property and equipment $ 3,082,889 $ 3,763,545
============ ============
At March 31, 2003 and December 31, 2002, the Company had furniture and
equipment under capitalized leases totaling $2,888,107. Related
accumulated depreciation of the equipment under capitalized leases
totaled $1,686,655 and $1,512,868, respectively.
(5) REVOLVING CREDIT AND FORBEARANCE LOAN AGREEMENT
During the first quarter of 2003, the Company financed operations
using the $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. The prime rate was 4.25% and 4.75% at March
31, 2003 and 2002, 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 limited the allowable 2002 net loss without being in default
on the loan agreement. 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
March 31, 2003 the Company had outstanding borrowings of $1,946,485
under the Revolving Credit and Forbearance Loan Agreement with an
available credit line of $753,515.
See Note 8 - SUBSEQUENT EVENTS
(6) GRANT AGREEMENTS
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 March 31, 2003, the Company had created a total of 180 jobs and
had received reimbursement for 164 of those jobs created. At March 31,
2003 $34,309 in incentives is receivable under the agreement compared
to $56,732 at December 31, 2002. As of March 31, 2003, the actual
number of jobs existing at the contact center was 173. Should future
employment levels fall below the 164 jobs for which the Company has
already received incentives, 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 164. 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 164, 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. In the first quarter of 2003, the Company reduced payroll
costs by a total of $72,655 for the portion of the financial
incentives earned. The Company has recorded a current deferred grant
expense reimbursements liability of $400,336 as of March 31, 2003,
compared to $463,468 as of December 31, 2002, for the portion of the
financial incentives not earned.
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 a period of 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.
In the first quarter of 2003, the Company recorded $336,858 as a
reduction to payroll costs. At March 31, 2003, $374,286 in incentives
was receivable under this agreement compared to $54,636 at December
31,2002.
VAUDREUIL, QUEBEC CANADA
PROVINCIAL GOVERNMENT OF QUEBEC - During the first quarter of 2001,
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 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 March 31, 2003, the Company had filed financial reimbursement
claims for 389 jobs created for which it has received reimbursement
for 348 of those jobs. At March 31, 2003, $200,913 in incentives is
receivable under the agreement compared to $186,891 at December 31,
2002. As of March 31, 2003, the actual number of jobs existing at the
contact center was 261. 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
$567,549 as of March 31, 2003 compared to $527,939 at 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. In the first quarter ended March 31, 2003
and 2002, the Company did not record any reduction in payroll costs
under this agreement.
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 the end of March 31, 2002. In
the first quarter ended March 31, 2003 and 2002 the Company did not
record any in reduction to payroll costs. Payment of all incentive
amounts has been received.
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. 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 period of two years
from the date of its creation.
As of March 31, 2003, the Company had filed financial reimbursement
claims for a total of 546 jobs created for which it has received
reimbursement for 526 of those jobs. At March 31, 2003, $88,478 in
incentives is receivable under the agreement compared to $82,303 at
December 31, 2002.
As of March 31, 2003, the actual number of jobs existing at the
contact center was 407. 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
$571,703 as of March 31, 2003 compared to $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. In the first quarter ended March 31, 2003
and 2002 the Company did not record any in reduction to payroll costs.
(7) INCOME TAXES
During the first quarter of 2003, the Company recorded $59,000 in
income tax expense related to its Canadian operations, which compares
to an income tax benefit of $322,000 recorded during the first quarter
of 2002.
(8) 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 the 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.
PART 1 FINANCIAL INFORMATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
ACI Telecentrics, Inc. (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 currently operates
six outbound contact centers and two inbound/outbound/internet services contact
centers; four of which are located in Midwest states, one in the state of
California and three in the province of Quebec, Canada with 801 contacting
stations. Our corporate, administrative and sales functions are headquartered in
Minneapolis, Minnesota. As of March 31, 2003, we had approximately 1,500 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 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003, COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
REVENUES. Revenues for the first quarter ended March 31, 2003 decreased
$449,284, or 6% to $6,796,083 compared to first quarter 2002 revenues of
$7,245,367. Approximately $270,000 of the decrease was due to the eruption of
the war with Iraq. Many of the Company's clients suspended their campaigns
during the initial days of the war. Billable hours decreased by 7% when compared
to the prior year period. The Company operated an average of 801 contact
stations during the first quarter of 2003 compared to an average of 812 for the
same period in 2002.
Financial services clients provided the largest portion of revenues
during the first quarter of 2003 and 2002, providing 61% of revenues in the
current quarter compared to 53% of revenues during the first quarter of 2002.
Other industry segments and their percentages of first quarter revenue in 2003
and 2002 included telecommunications (32% and 31%), publishing (5% and 7%), and
other miscellaneous (2% and 9%), respectively.
COST OF SERVICES. Cost of services decreased by $535,835 for the first
quarter of 2003, to $3,822,612, when compared to $4,358,447 in the first quarter
of 2002. As a percentage of revenues, cost of services for the first quarter of
2003 decreased by 4% to 56% compared to 60% in the first quarter of 2002. This
decrease, as a percentage of revenues, was primarily the result of the effect of
economic development grant expense reimbursements reducing cost of services in
the first quarter of 2003 compared to 2002. During the first quarter of 2003 and
2002, economic development grant expense reimbursements reduced cost of services
by $409,513 and $0 respectively. In addition, as a percentage of revenues, long
distance telephone costs decreased by 16% when comparing the first quarters of
2003 and 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative expenses for the three months ended March 31, 2003 decreased
$196,584, or 5% to $3,464,771 from $3,661,355 during the same period of 2002. As
a percentage of revenues, selling, general and administrative expenses increased
less than 1% in 2003 as compared to 2002. The increase in expenses, as a
percentage of revenues, is primarily the result of an increase in maintenance
expenses, rent and supplies associated with the Caplan contact center opened in
June 2002.
IMPAIRMENT COST. During the first quarter of 2003, we recorded a
non-cash impairment charge of $256,236 related to the write-down of long-lived
assets related to a California contact center.
OPERATING LOSS. Due to the factors listed above, the Company incurred
a first quarter 2003 operating loss of $747,536, a $26,899 decrease compared to
the first quarter 2002 operating loss of $774,435. As a percentage of revenues,
the operating loss was 11% in the first quarter of each 2003 and 2002. Operating
loss for the first quarter of 2003 and 2002 would have been $1,157,049 and
$774,435, respectively, if the effect of economic development grant expense
reimbursements is not considered.
OTHER INCOME AND EXPENSES, NET. Net interest expense was $72,137 in the
first quarter of 2003 compared to $43,056 in the same period of 2002. Other
expense, consisting of foreign currency transaction expense, was $129,205 in the
first quarter of 2003 compared to $22,999 in the same period in 2002. Foreign
currency transaction expense was significantly higher in 2003 compared to 2002
as the Canadian dollar strengthened against the US dollar affecting the deferred
portion of economic development grant incentives.
NET LOSS AND NET LOSS PER SHARE. Pretax loss for the three months
ended March 31, 2003 was $948,878, a $108,388 increase compared to pretax losses
of $840,490 in the same period of 2002. We recorded income tax expense of
$59,000 for the first quarter of 2003 compared to a $322,000 benefit in the
first quarter of 2002. The first quarter 2003 income tax expense is related to
our Canadian operations. During the first quarters of 2003 and 2002, economic
development grant expense reimbursements of $409,513 and $0, respectively, were
recorded as a reduction in expenses. The pretax loss for the first quarter of
2003 and 2002 would have been $1,358,391 and $840,490 respectively, if the
economic development grant expense reimbursements were not considered. The net
loss for the first quarter of 2003 was $1,007,878, or $.17 per share on a basic
and diluted basis compared to a net loss of $518,490, or $.09 per share on a
basic and diluted basis in the first quarter of 2002. When the effect of the
economic development grant expense reimbursements is not considered, the net
loss for the first quarter of 2003 and 2002 would have been $1,417,391 and
$518,490, or $.25 and $.09 per share on a basic and diluted basis, respectively.
LIQUIDITY AND CAPITAL RESOURCES
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 the first quarter of 2003, the Company operated
under a $2,700,000 Revolving Credit and Forbearance Loan Agreement dated
December 2002 that expires on April 30, 2003.
The loan accrued interest at the prime rate plus 3% on outstanding
borrowings. Prime rate was 4.25% at March 31, 2003. 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 of the payment of cash dividends
without the bank's consent. In addition, the loan agreement limited the
allowable 2002 net loss without being in default on the loan agreement. 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
March 31, 2003 the Company had outstanding borrowings of $1,946,485 under the
Revolving Credit and Forbearance Loan Agreement with an available credit line of
$753,515.
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
monthly interest charge payable to the lender of $3,500 and also includes a 1%
origination fee.
At March 31, 2003, the Company had cash and cash equivalents of
$514,442 compared to $797,626 at December 31, 2002. For the three months ended
March 31, 2003, and 2002, cash used by operating activities was $167,041 and
$1,063,825 respectively. Included in cash used by operating activities in the
2003 period is $113,863 of net changes in working capital components (primarily
an increase in trade receivables and a reduction in grant receivables), non-cash
net charges of $726,974 and a net loss of $1,007,878. For the three months ended
March 31, 2002, cash used by operating activities was $1,063,825. Included in
cash used by operating activities was $1,169,462 of changes in working capital
components and net loss of $518,490. Cash provided by non-cash net charges of
$16,640 and depreciation of $607,487 partially offset this decrease in cash.
Net cash used by investing activities in the three months of 2003 and
2002 was $129,181 and $76,405, respectively. The primary use of cash by
investing activities during 2003 was purchases of equipment and an increase in
deposits. During the 2002 period, the primary uses of cash by investing
activities included expenditures for property and equipment.
Net cash provided by financing activities during the three months ended
March 31, 2003 and 2002, was $13,038 and $374,163 respectively. Cash provided by
financing activities during the first three months of 2003 consisted primarily
of $138,914 of net borrowings under the Company's revolving line of credit
offset by $125,876 in repayments on capital leases. Cash provided by financing
activities during the first three months of 2002 was $581,942 of net borrowings
under the Company's revolving line of credit offset by $207,779 in repayments on
capital leases
During the three months ending March 31, 2003 and 2002, the Company did
not acquire assets, through capital leases.
As a result, net cash and cash equivalents decreased by $283,184 and
$766,067 during the three months ended March 31 of 2003 and 2002, respectively.
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.
In addition to the risks and uncertainties of ordinary business
operations, the forward-looking statements in this report on Form 10-Q 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 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. 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.
COMPETITION; INTERNATIONAL CAPACITY
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 ACI.
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 QUALITATIVE AND QUANTITATIVE DISCLOSURES ON MARKET RISK
The Company has no history of, and does not anticipate in the future,
investing in derivative financial instruments, derivative commodity instruments
or other such financial instruments. 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.
ITEM 4 CONTROLS AND PROCEDURES
Our management, including Chief Executive Officer Rick N. Diamond and
Controller Russell Jackson, have evaluated our disclosure controls and
procedures within the 90 days proceeding 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 are 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
March 7, 2003, the date of the conclusion of the evaluation.
Further, there were no significant changes in the internal controls or
in other factors that could significantly affect these controls after March 7,
2003, the date of the conclusion of the evaluation of disclosure controls and
procedures.
PART II OTHER INFORMATION
ITEM 1-5 NOT APPLICABLE
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
99.1 Certification of Chief Executive Officer
99.2 Certification of Principal Financial and Accounting
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.
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/ June 3, 2003 By: /s/ RUSSELL JACKSON
------------------- ---------------------------------------
Russell Jackson
(Principal Financial and Accounting Officer)
Dated: /s/ June 3, 2003 By: /s/ RICK N. DIAMOND
------------------- ---------------------------------------
Rick N. Diamond
Chief Executive Officer and Director
CERTIFICATION
I, Rick N. Diamond, the Chief Executive Officer of ACI Telecentrics, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 3, 2003 By: /s/ RICK N. DIAMOND
------------------- ------------------------
Rick N. Diamond
Chief Executive Officer
CERTIFICATION
I, Russell Jackson, Principal Accounting Officer of ACI Telecentrics, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 3, 2003 By: /s/ RUSSELL JACKSON
------------------- -------------------------------
Russell Jackson
Principal Financial and Accounting Officer
EXHIBIT INDEX
-------------
ACI TELECENTRICS, INC.
FORM 10-Q FOR QUARTER ENDED MARCH 31, 2003
EXHIBIT NO. DESCRIPTION
99.1 Certification of Chief Executive Officer
99.2 Certification of Principal Financial and Accounting Officer