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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 June 30, 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 [ ]
Indicate by checkmark whether the Registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The Company had 5,781,485 shares of common stock, no par value per share,
outstanding as of July 31, 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
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Item 4 Controls and Procedures
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
Exhibit Index
2
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ACI TELECENTRICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2003 2002
------------ ------------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ -- $ 797,626
Trade receivables, less allowance for doubtful
accounts of $236,000 and $206,000, respectively 4,686,009 6,299,990
Grant receivables 390,376 380,562
Prepaid expenses and other current assets 254,593 232,714
------------ ------------
Total current assets 5,330,978 7,710,892
PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION 2,680,104 3,763,545
DEFERRED INCOME TAXES 201,000 201,000
OTHER ASSETS 218,100 170,282
------------ ------------
$ 8,430,182 $ 11,845,719
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Borrowings on financing agreements $ 596,770 $ 1,807,571
Trade accounts payable 1,042,226 1,386,755
Accrued compensation 1,145,683 1,056,717
Accrued expenses 349,594 299,452
Income taxes payable 234,810 527,376
Current maturities of capital lease obligations 505,339 585,223
Deferred grant expense reimbursements 1,617,522 1,543,208
------------ ------------
Total current liabilities 5,491,944 7,206,302
------------ ------------
CAPITAL LEASE OBLIGATIONS,
LESS CURRENT MATURITIES 381,059 543,175
------------ ------------
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 (4,102,810) (2,563,747)
------------ ------------
Total shareholders' equity 2,557,179 4,096,242
------------ ------------
$ 8,430,182 $ 11,845,719
============ ============
See notes to condensed consolidated financial statements.
3
ACI TELECENTRICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
TELEMARKETING REVENUES
Outbound revenue $ 6,056,105 $ 6,738,785 $12,345,946 $ 13,330,977
Inbound revenue 993,617 989,776 1,499,859 1,642,951
------------ ------------ ------------ ------------
Total revenues 7,049,722 7,728,561 13,845,805 14,973,928
------------ ------------ ------------ ------------
OPERATING EXPENSES
Cost of services 4,066,386 4,501,287 7,888,998 8,859,734
Selling, general and administrative
expenses 3,203,779 3,559,000 6,668,550 7,220,355
Impairment costs -- -- 256,236 --
------------ ------------ ------------ ------------
Total costs 7,270,165 8,060,287 14,813,784 16,080,089
------------ ------------ ------------ ------------
OPERATING LOSS (220,443) (331,726) (967,979) (1,106,161)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 1,986 3,703 2,965 5,197
Interest expense (68,886) (45,911) (142,002) (90,461)
Other, net (173,842) (34,337) (303,047) (57,336)
------------ ------------ ------------ ------------
Total other expense (240,742) (76,545) (442,084) (142,600)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (461,185) (408,271) (1,410,063) (1,248,761)
INCOME TAX EXPENSE (BENEFIT) 70,000 (728,000) 129,000 (1,050,000)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (531,185) $ 319,729 $ (1,539,063) $ (198,761)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE
Basic $ (.09) $ .06 $ (.27) $ (.03)
============ ============ ============ ============
Diluted $ (.09) $ .06 $ (.27) $ (.03)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic 5,781,485 5,781,485 5,781,485 5,781,485
============ ============ ============ ============
Diluted 5,781,485 5,789,735 5,781,485 5,781,485
============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
ACI TELECENTRICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
----------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net loss $ (1,539,063) $ (198,761)
Adjustments to reconcile net loss to net cash provided
(used) in operating activities:
Depreciation 911,793 1,210,502
Provision for losses on trade receivables 30,000 30,000
Amortization of deferred grant expense reimbursements (19,999) (70,000)
Noncash impairment charge 256,236 --
Deferred income taxes -- (568,000)
Loss on disposal of equipment -- 36,642
Changes in operating assets and liabilities:
Trade receivables 1,583,981 (1,833,798)
Prepaid expenses and other current assets (21,879) (29,941)
Grant receivables (9,814) 167,583
Accounts payable, accrued compensation
and accrued expenses (205,421) (153,678)
Income taxes payable (292,566) (482,248)
Deferred grant expense reimbursements 94,313 294,688
------------ ------------
Net cash provided (used) by operating activities 787,581 (1,597,011)
------------ ------------
INVESTING ACTIVITIES
Purchases of property and equipment (84,588) (56,736)
Increase in deposits (47,818) (216,315)
------------ ------------
Net cash used by investing activities (132,406) (273,051)
------------ ------------
FINANCING ACTIVITIES
Proceeds from financing agreements borrowings 12,110,513 7,581,767
Payments on financing agreements borrowings (13,321,314) (5,732,840)
Payments on capital lease obligations (242,000) (361,253)
------------ ------------
Net cash provided (used) by financing activities (1,452,801) 1,487,674
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (797,626) (382,388)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 797,626 1,459,214
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ 1,076,826
============ ============
SUPPLEMENTAL DISCLOSURES ON CASH FLOW INFORMATION
Cash paid for:
Income taxes $ 458,216 $ 19,050
Interest $ 142,341 $ 90,461
Noncash investing and financing transactions:
Deposits funded through capital leases $ -- $ 177,688
See notes to condensed consolidated financial statements.
5
ACI TELECENTRICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 and
six months ended June 30, 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) INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed by dividing the net income
(loss) to common shareholders by the weighted average number of common
shares outstanding during each period. Diluted income (loss) per share
is computed after giving effect to the exercise of all dilutive
outstanding options and warrants. Both basic and diluted income (loss)
per share for the three and six months ending June 30, 2003 and 2002
were the same. The following table reconciles the denominators used in
computing basic and diluted income (loss) per share:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Weighted average common shares outstanding 5,781,485 5,781,485 5,781,485 5,781,485
Effect of dilutive stock options -- 8,250 -- --
--------- --------- --------- ---------
5,781,485 5,789,735 5,781,485 5,781,485
========= ========= ========= =========
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
June 30, 2003 December 31, 2002
------------- -----------------
Furniture $1,391,483 $ 1,639,545
Equipment 7,644,614 8,166,396
Leasehold improvements 252,412 292,809
---------- -----------
9,288,509 10,098,750
Less accumulated depreciation 6,608,405 6,335,205
---------- -----------
Net property and equipment $2,680,104 $ 3,763,545
========== ===========
6
At June 30, 2003 and December 31, 2002, the Company had furniture and
equipment under capitalized leases totaling $2,050,755 and $2,888,107
respectively. Related accumulated depreciation of the equipment under
capitalized leases totaled $1,199,670 and $1,512,868, respectively
(4) FINANCING AGREEMENT
The Company currently operates under a Financing Agreement, dated April
29, 2003 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 June 30, 2003, the Company had outstanding
borrowings of $596,770 under the Financing Agreement. Under the terms
of the Financing Agreement, the amount available for borrowing at
June 30, 2003 was $2,446,000.
(5) 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 June 30, 2003, the Company created a total of 180 jobs and
received reimbursement for 164 of those jobs created. At June 30, 2003,
$58,235 in incentives is receivable under the agreement compared to
$56,732 at December 31, 2002. As of June 30, 2003, the actual number of
jobs existing at the contact center was 178. 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 half of 2003, the Company reduced payroll costs
by a total of $151,915 for the incremental portion of the financial
incentives earned. The Company has recorded current deferred grant
expense reimbursements liability of $374,321 as of June 30, 2003,
compared to $463,468 as of December 31, 2002, for the incremental
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 contribution is
7
linked to the creation of up to 500 jobs at the Company's new customer
contact center located in Caplan, Quebec. In the first half of 2003,
the Company recorded $351,369 as a reduction to payroll costs. At June
30, 2003, $16,345 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 contribution, the agreement
requires that the job be maintained for a minimum period of three years
from the date of its creation.
As of June 30, 2003, the Company filed financial reimbursement claims
for a total of 389 jobs created for which it received reimbursement for
348 of those jobs. At June 30, 2003, $219,245 in incentives is
receivable under the agreement compared to $186,891 at December 31,
2002. As of June 30, 2003, the actual number of jobs existing at the
contact center was 163. 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
$619,334 as of June 30, 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 half of 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
half of 2003 and 2002 the Company did not record any reduction in
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 contribution, the agreement requires that
the job be maintained for a minimum period of two years from the date
of its creation.
As of June 30, 2003, the Company filed financial reimbursement claims
for a total of 546 jobs created for which it received reimbursement for
526 of those jobs. At June 30, 2003, $96,551 in incentives is
receivable under the agreement compared to $82,303 at December 31,
2002. As of June 30, 2003, the actual number of jobs existing at the
contact center was 401. According to the
8
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 $623,867 as of June 30, 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 half ended June 30, 2003 and 2002, the Company did not
record any reduction in payroll costs.
(6) INCOME TAXES
During the second quarter of 2003, the Company recorded $70,000 in
income tax expense related to its Canadian operations, which compares
to an income tax benefit of $728,000 recorded during the second quarter
of 2002.
(7) SUBSEQUENT EVENT
On July 29, 2003, the Company transferred its Vaudreuil, Quebec contact
center to another company. All costs related to the transfer of this
center (including an impairment charge recorded in 2002 for long-lived
assets) have been previously recorded. Management estimates that there
will be no additional closing costs in excess of those previously
recorded.
9
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
five outbound contact centers and two inbound/outbound/internet services contact
centers; four of which are located in Midwest states, and three in the province
of Quebec, Canada with 683 contacting stations. Our corporate, administrative
and sales functions are headquartered in Minneapolis, Minnesota. As of June 30,
2003, we had approximately 1,300 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.
10
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 other intangibles 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.
On July 29, 2003, the Company transferred its Vaudreuil, Quebec contact
center to another company. All costs related to the transfer of this center
(including an impairment charge of $532,000 recorded in 2002 for long-lived
assets) have been previously recorded.
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 JUNE 30, 2003, COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
REVENUES. Revenues for the second quarter ended June 30, 2003 decreased
$678,839, or 9% to $7,049,722 compared to second quarter 2002 revenues of
$7,728,561. Billable hours decreased by 10% when compared to the prior year
period. The decreases in revenues and billable hours can be primarily attributed
to the Company's telecommunications and publishing clients scaling back their
marketing campaigns due to the uncertainty of the economy. The Company operated
an average of 762 contact stations during the second quarter of 2003 compared to
an average of 760 for the same period in 2002.
Telecommunications clients provided 52% of revenues during the second
quarter of 2003 and 2002. Other industry segments and their percentages of
second quarter revenue in 2003 and 2002
11
included financial services (40% and 38%), publishing (3% and 5%), and other
miscellaneous (5% and 5%), respectively.
COST OF SERVICES. Cost of services decreased by $434,901 for the second
quarter of 2003, to $4,066,386, when compared to $4,501,287 in the second
quarter of 2002. As a percentage of revenues, (approximately 58% in both
periods), cost of services for the second quarter of 2003 decreased by less than
1% in 2003 as compared to the second quarter of 2002. As a percentage of
revenues, long distance telephone costs decreased by 10% when comparing the
second quarters of 2003 and 2002. During the second quarter of 2003 and 2002
economic development grants reduced cost of services by $93,771 and $13,758
respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative expenses for the three months ended June 30, 2003 decreased
$355,221, or 10% to $3,203,779 from $3,559,000 during the same period of 2002.
As a percentage of revenues, selling, general and administrative expenses
decreased less than 1% in 2003 as compared to 2002.
OPERATING LOSS. Due to the factors listed above, the Company incurred a
second quarter 2003 operating loss of $220,443, a $111,283 decrease compared to
the second quarter 2002 operating loss of $331,726. As a percentage of revenues,
the operating loss was 3% in the second quarter of 2003 and 4% in the second
quarter of 2002. Operating loss for the second quarter of 2003 and 2002 would
have been $314,214 and $345,484, respectively, if the effect of economic
development grants is not considered.
OTHER INCOME AND EXPENSES, NET. Net interest expense was $66,900 in the
second quarter of 2003 compared to $42,208 in the same period of 2002. Other
expense, consisting of foreign currency transaction expense, was $173,842 in the
second quarter of 2003 compared to $34,337 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.
INCOME TAXES. We recorded income tax expense of $70,000 for the second
quarter of 2003 compared to a $728,000 benefit ($568,000 of which was due to a
revision in the Company's Canadian tax strategy), in the second quarter of 2002.
The second quarter 2003 income tax expense is related to our Canadian
operations.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE. The net loss for the
second quarter of 2003 was $531,185, or $.09 per share on a basic and diluted
basis compared to net income of $319,729, or $.06 per share on a basic and
diluted basis in the second quarter of 2002. When the effect of the economic
development grants is not considered, the net income (loss) for the second
quarter of 2003 and 2002 would have been $(624,956) and $305,971, or $(.11) and
$.05 per share on a basic and diluted basis, respectively.
SIX MONTHS ENDED JUNE 30, 2003, COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
REVENUE. Revenues for the six months ended June 30, 2003 decreased
$1,128,123 or 8% to $13,845,805, compared to 2002 revenues of $14,973,928.
Billable hours decreased 9% when compared to the prior year period. The
decreases in revenues and billable hours can primarily be attributed to the
Company's telecommunications, publishing and other clients scaling back their
marketing campaigns due to the uncertainty of the economy. The Company operated
an average of 781 contact stations during the first six months of 2003 compared
to 794 during the first six months of 2002.
Financial services clients provided 50% of the 2003 six month revenues
compared to approximately 45% of 2002 revenues. Other industry segments and
their percentages of first half
12
revenues in 2003 and 2002 included telecommunications (42% and 42%), publishing
(4% and 6%), and other miscellaneous (4% and 7%), respectively.
COST OF SERVICES. Cost of services for the six months ended June 30,
2003 decreased $ 970,736, or 11% to $7,888,998 compared to $8,859,734 during the
2002 period. As a percentage of revenue, cost of services for the six months
ended June 30, 2003 decreased by 2% to 57% compared to 59% in the same period in
2002. This decrease as a percentage of revenue was primarily the result of the
effect of the economic development grants reducing cost of services for the six
months of 2003 versus the six months of 2002. During the six months ended 2003
and 2002 economic development grants reduced cost of services by $503,284 and
$13,758, respectively. In addition, as a percentage of revenue, long distance
telephone costs were reduced by 5% when comparing the six months ended June 30,
2003 and 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative expenses for the first six months of 2003 decreased $551,805,
or 8% to $6,668,550, from $7,220,355 during 2002. This reduction in corporate
expenses resulted primarily from reduced personnel costs, travel and
depreciation expense. As a percentage of revenue, selling, general and
administrative expenses remained unchanged at 48% in 2003 compared to the same
period of 2002.
OPERATING LOSS. As a result of the factors listed above, operating loss
for the first six months of 2003 was $967,979, a $138,182 decrease compared to
2002 operating loss of $1,106,161. As a percentage of revenue, operating loss
remained unchanged at 7% for the six months ended June 30, 2003 compared to the
six months ended June 30, 2002. The Company would have had an operating loss for
2003 and 2002 of $1,471,263 and $1,119,919, respectively, if the effect of the
economic development grants were not considered.
OTHER INCOME AND EXPENSES, NET. Net interest expense was $139,037 in
2003 compared to $85,264 in 2002. Other expense, consisting of foreign currency
transaction expense, was $303,047 for the first six months of 2003 compared to
$57,336 for 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.
INCOME TAXES. During the first half of 2003, the Company recorded
$129,000 in income tax expense related to its Canadian operations. The Company
recorded income tax expense of $129,000 in 2003 and an income tax benefit of
$1,050,000 in 2002. During the first half of 2002, the Company revised its
strategy related to its Canadian income taxes, which resulted in a $568,000
reduction of deferred tax liabilities.
NET LOSS AND NET LOSS PER SHARE. Net loss for the first six months of
2003 was $1,539,063 or $.27 per share on a basic and diluted share basis
compared to a net loss of $198,761, or $.03 on a basic and diluted share basis
in 2002. When the effect of the economic development grants is not considered,
net loss for 2003 and 2002 would have been $ 2,042,347 and $212,519, or $.35 and
$.04 per share on a basic and diluted share 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. During the six
months ended June 30, 2003 the company generated cash from operating activities
of $787,581 compared to cash used by operating activities of $1,597,011 for the
six months ended June 30, 2002. The Company currently operates under a Financing
Agreement dated April 29,
13
2003 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 requires a minimum monthly
interest charge payable to the lender of $3,500 and also includes a 1%
origination fee. At June 30, 2003, the Company had outstanding borrowings of
$596,770 under the Financing Agreement. Under the terms of the Financing
Agreement, the amount available for borrowing at June 30, 2003 was $2,446,000.
At June 30, 2003, the Company had cash and cash equivalents of $0
compared to $797,626 at December 31, 2002. For the six months ended June 30,
2003, cash provided by operating activities was $785,149 compared to cash used
by operating activities of $1,597,011 in the 2002 period. Included in cash used
by operating activities in the 2003 period is $1,146,182 of net changes in
operating assets and liabilities (primarily a decrease in trade receivables),
non-cash net charges of $1,178,030 (including depreciation of $911,793) and a
net loss of $1,539,063. For the six months ended June 30, 2002, cash used by
operating activities was $1,597,011. Included in cash used by operating
activities was $2,037,394 of changes in operating assets and liabilities
(primarily an increase in trade receivables), non-cash net charges of $639,144
(including depreciation of $1,210,502), and a net loss of $198,761.
Net cash used by investing activities in the six months of 2003 and
2002 was $132,406 and $273,051, respectively. The primary uses of cash by
investing activities during 2003 and 2002 were purchases of equipment and an
increase in deposits.
Net cash used by financing activities during the six months ended June
30, 2003, was $1,450,369 and cash provided by financing activities during the
six months ended June 30, 2002 was $1,487,674. Cash used by financing activities
during the first six months of 2003 consisted primarily of $1,201,801 of net
payments under the Company's financing agreements and repayment of $242,000 on
capital leases. Cash provided by financing activities during the first six
months of 2002 was $1,848,927 of net borrowings under the Company's financing
agreements offset by $361,253 in repayments on capital leases.
During the six months ended June 30, 2003, the Company did not acquire
assets, through capital leases. In the six months ended June 30, 2002, the
Company funded $177,688 of property and equipment deposits through capital
leases.
As a result, net cash and cash equivalents decreased by $797,626 and
$382,388 during the six months ended June 30 of 2003 and 2002, respectively. We
believe that funds generated from future operations and amounts available under
our Financing Agreement, 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-Q 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
14
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.
15
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
Chief Financial Officer, Norbert F. Nicpon, have evaluated our disclosure
controls and procedures as of the end of the period covered by this report.
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 are
effective as of the end of the period covered by this report.
Further, there were no changes in the Company's internal controls over financial
reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect the Company's
internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 1 - 5 NOT APPLICABLE
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial and Accounting Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Financial and Accounting Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed two reports on Form 8-K during the quarter
ended June 30, 2003. The first report, filed April 15, 2003, gave
notice that the Company would not file its Form 10-K for the year
ended December 31, 2002 within the extension granted under a
previously filed Form 12B-25. The second report filed May 20,
2003, gave notice that the Company would not file its Form 10-Q
for the quarter ended March 31, 2003 within the extension granted
under a previously filed Form 12B-25.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACI TELECENTRICS, INCORPORATED
Registrant
Dated: /s/ August 14, 2003 By: /s/ NORBERT F. NICPON
-------------------------- ---------------------------------------
Norbert F. Nicpon
(Principal Financial and Accounting Officer)
Dated: /s/ August 14, 2003 By: /s/ RICK N. DIAMOND
-------------------------- ---------------------------------------
Rick N. Diamond
Chief Executive Officer and Director
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EXHIBIT INDEX
ACI TELECENTRICS, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003
EXHIBIT NO. DESCRIPTION
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial and Accounting Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Financial and Accounting Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
19