10-Q 1 aci033440_10q.txt ACI TELECENTRICS 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

See notes to condensed consolidated financial statements. 3 ACI TELECENTRICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See notes to condensed consolidated financial statements. 4 ACI TELECENTRICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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:

(3) PROPERTY AND EQUIPMENT Property and equipment consists of the following at:

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. 16 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. 17 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 18 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

ACI TELECENTRICS INC 10-Q