10-Q 1 aci032405_10q.txt ACI TELECENTRICS, INC. FORM 10-Q 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

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)

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

ACI TELECENTRICS INC 10-Q