<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Period ended September 30, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
---------------
Commission File Number 0-13981
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ELECTRONIC TELE-COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1357760
(State of incorporation) (IRS Employer Identification No.)
1915 MacArthur Road Waukesha, Wisconsin 53188
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(414) 542-5600
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
--- ---
---------------
As of November 3, 1997, there were outstanding 2,003,949 shares of Class A
common stock and 500,000 shares of Class B common stock. The Class B common
stock, 79.5% of which is owned by affiliates, is the only voting stock. There
is no market for the Class B common stock.
<PAGE> 2
FORM 10-Q QUARTERLY REPORT
FOR THE PERIOD ENDED SEPTEMBER 30, 1997
In this report, Electronic Tele-Communications, Inc. is also referred
to as Electronic Tele-Communications, ETC, and the Company.
---------------
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
PART I Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets . . . . . . . . . . . . . . . . . 2
Consolidated Condensed Statements of Operations . . . . . . . . . . . . 3
Consolidated Condensed Statements of Cash Flows . . . . . . . . . . . . 4
Notes to Consolidated Condensed Financial Statements . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . 6
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 8
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
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<PAGE> 3
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30 December 31
1997 1996
------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 376,296 $1,001,976
Trade accounts receivable, net 1,842,549 1,313,075
Inventories (Note 2) 2,076,446 2,434,372
Net investment in sales-type leases 68,931 16,805
Deferred income tax benefits 385,405 268,350
Prepaid expenses and other current assets 95,480 153,442
---------------------------------------------
Total current assets 4,845,107 5,188,020
PROPERTY, PLANT AND EQUIPMENT, NET 1,777,856 1,847,340
NET INVESTMENT IN SALES-TYPE LEASES 311,262 21,332
DEFERRED INCOME TAX BENEFITS 48,591 52,850
EXCESS COST OVER NET ASSETS ACQUIRED 1,060,456 1,005,514
---------------------------------------------
Total Assets $8,043,272 $8,115,056
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 150,865 $ 127,562
Accrued expenses 896,511 627,808
Income taxes payable 42,637 120,139
Deferred revenue 148,742 196,379
Revolving credit facility 400,000 -
---------------------------------------------
Total current liabilities 1,638,755 1,071,888
LONG-TERM LIABILITIES 153,564 226,700
---------------------------------------------
Total liabilities 1,792,319 1,298,588
---------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, authorized 5,000,000
shares, none issued - -
Class A common stock, authorized 10,000,000
shares, par value $.01, issued and
outstanding 2,003,949 shares 20,039 20,039
Class B common stock, authorized 10,000,000
shares, par value $.01, issued and
outstanding 500,000 shares 5,000 5,000
Additional paid-in capital 3,323,528 3,323,528
Retained earnings 2,902,386 3,467,901
---------------------------------------------
Total stockholders' equity 6,250,953 6,816,468
---------------------------------------------
Total Liabilities and Stockholders' Equity $8,043,272 $8,115,056
=============================================
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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<PAGE> 4
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 -
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------ ---------------------------------
1997 1996 1997 1996
------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
NET SALES $2,544,378 $3,217,381 $9,096,811 $8,861,420
COST OF PRODUCTS SOLD 1,645,995 1,676,219 5,182,123 4,550,350
-------------------------------- --------------------------------
GROSS PROFIT 898,383 1,541,162 3,914,688 4,311,070
OPERATING EXPENSES:
General and administrative 448,256 391,340 1,292,851 1,210,056
Marketing and selling 574,857 550,191 1,707,492 1,786,381
Research and development 488,996 489,767 1,374,126 1,572,607
-------------------------------- --------------------------------
1,512,109 1,431,298 4,374,469 4,569,044
-------------------------------- --------------------------------
EARNINGS (LOSS) FROM OPERATIONS (613,726) 109,864 (459,781) (257,974)
OTHER INCOME (EXPENSE):
Interest expense (1,221) 81 (9,036) (1,076)
Interest and dividend income 51 12,775 7,359 12,877
Miscellaneous (10,096) (10,330) (28,083) (15,596)
-------------------------------- --------------------------------
(11,266) 2,526 (29,760) (3,795)
-------------------------------- --------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES (624,992) 112,390 (489,541) (261,769)
Income taxes (benefit) (227,400) 4,800 (184,500) (80,100)
-------------------------------- --------------------------------
NET EARNINGS (LOSS) $ (397,592) $ 107,590 $ (305,041) $ (181,669)
================================ ================================
EARNINGS (LOSS) PER SHARE:
Class A common $ (0.15) $ 0.05 $ (0.11) $ (0.06)
Class B common $ (0.17) $ 0.03 $ (0.19) $ (0.14)
Weighted average common
shares outstanding 2,503,949 2,503,949 2,503,949 2,503,949
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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<PAGE> 5
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 - (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
---------------------------------
1997 1996
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (305,041) $ (181,669)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 291,052 334,964
Deferred income taxes (192,983) 15,036
(Gain) loss from sale of equipment 2,838 (14,843)
Changes in operating assets and liabilities:
Accounts receivable (529,474) 82,435
Inventories 357,926 123,461
Net investment in sales-type leases (342,056) -
Prepaid expenses and other assets 57,962 (41,660)
Accounts payable and accrued expenses 218,870 146,845
Income taxes (77,502) (138,980)
Deferred revenue (47,637) 1,169,903
---------------------------------
Total adjustments (261,004) 1,677,161
---------------------------------
Net cash provided (used) by operating activities (566,045) 1,495,492
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (199,161) (110,815)
Proceeds from sale of equipment - 14,843
---------------------------------
Net cash used by investing activities (199,161) (95,972)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving credit facility 400,000 -
Dividends paid (260,474) (260,474)
---------------------------------
Net cash provided (used) by financing activities 139,526 (260,474)
---------------------------------
Net increase (decrease) in cash and cash equivalents (625,680) 1,139,046
Cash and cash equivalents at beginning of year 1,001,976 497,971
---------------------------------
Cash and cash equivalents at end of period $ 376,296 $1,637,017
=================================
Supplemental disclosures of cash flow information:
Cash received from income tax refunds $ - $ -
Cash paid for income taxes 87,439 43,783
Cash paid for interest expense 9,036 1,076
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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<PAGE> 6
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 - (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Company, such
consolidated condensed financial statements reflect all adjustments, which
consist only of normal recurring adjustments, necessary for a fair
presentation. Operating results for the three-month and nine-month periods
ended September 30, 1997, are not necessarily indicative of the results that
may be expected for the year ended December 31, 1997.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the SEC rules and regulations
dealing with interim financial statements. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's 1996 Annual
Report to Shareholders.
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30 December 31
1997 1996
------------ -----------
<S> <C> <C>
Raw materials and supplies $ 612,756 $ 714,249
Work-in-process and finished goods 1,028,681 1,278,059
Maintenance and demo parts 723,396 684,646
Reserve for obsolescence (288,387) (242,582)
---------- ----------
Total inventories $2,076,446 $2,434,372
========== ==========
</TABLE>
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<PAGE> 7
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1997 AND 1996, AND DECEMBER 31, 1996 - (UNAUDITED)
RESULTS OF OPERATIONS
Net sales for the nine-month period ended September 30, 1997, were $9,096,811,
compared to $8,861,420 for the corresponding period of 1996. Net sales were
$2,544,378 and $3,217,381 for the three-month periods ended September 30, 1997
and 1996, respectively. The increase in sales for the 1997 nine-month period
was due primarily to a $980,000 sale of interactive voice information systems
to an international customer in the first quarter of 1997. This represented
the last of three shipments to this international customer, the first two of
which occurred in the fourth quarter of 1996. Lower sales in the quarter ended
September 30, 1997, was due primarily to fewer shipments of the Company's voice
information systems to its OEM and operating telephone company customers.
Service revenue dollars remained relatively constant between years and
represented 28% of net sales in the 1997 nine-month period and 31% in the 1996
period. Product pricing for the Company's equipment also remained relatively
constant between periods, and inflation did not have a material impact on
revenues.
Gross profit as a percentage of net sales for the nine-month periods ended
September 30, 1997 and 1996, was 43% and 49%, respectively. For the quarters
ended September 30, 1997 and 1996, gross profit percentage was 35% and 48%,
respectively. The decrease in gross profit percentage between nine-month
periods was due to the first quarter of 1997 sale to the international customer
of older technology equipment which had a lower profit margin than the normal
product mix, together with providing approximately $240,000 of additional
reserves for the anticipated write-off of a portion of the international
receivable related to the sale. For the quarters, the decrease in gross profit
percentage was due to the additional reserve provided for the international
receivable, together with lower sales revenue over which to spread fixed
manufacturing costs.
Total operating expenses were $4,374,469, or 48% of net sales for the
nine-month period ended September 30, 1997, compared to $4,569,044, or 52% for
the corresponding period of 1996. For the three-month periods ended September
30, 1997 and 1996, total operating expenses were $1,512,109 (59%) and
$1,431,298 (44%), respectively. General and administrative expenses were up
slightly for the 1997 three-month and nine-month periods as a result of
increased legal expenses. Marketing and selling expenses were $1,707,492 and
$1,786,381 for the nine-month periods ended September 30, 1997 and 1996,
respectively. The decrease was due primarily to lower staffing levels and
lower marketing expenses related to conventions and dues. For the quarter
however, marketing and selling expenses were up slightly due to recent filling
of most of the open sales positions. Research and development expenses were
$1,374,126 and $1,572,607 for the nine-month periods ended September 30, 1997
and 1996, respectively. The decrease in research and development expenses
between periods was due to lower staffing levels in the 1997 period and
elimination of the product development function in the Pleasanton, California
office. Most of the open research positions were filled in the quarter ended
September 30, 1997, resulting in expenses returning to prior year levels for
the quarter.
Net other expenses were $29,760 for the nine-month period ended September 30,
1997, compared to $3,795 for the corresponding period of 1996. The difference
between periods was primarily due to one-time gains from sales of plant
equipment in the 1996 period, together with higher interest expense related to
bank borrowings and lower interest income related to lower cash available for
investment in the 1997 periods.
Net loss for the nine-month period ended September 30, 1997, was $305,041
versus $181,669 for the same period of 1996. For the three-month periods ended
September 30, 1997 and 1996, net loss was $397,592 versus net earnings of
$107,590, respectively. The net loss for the 1997 periods was the result of
the additional reserve provided for the international receivable, lower profit
margins on sales of equipment to the international customer, and increased
expenses related to filling open sales and research positions in the 1997
quarter.
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<PAGE> 8
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1997 AND 1996, AND DECEMBER 31, 1996 - (UNAUDITED)
(CONTINUED)
LIQUIDITY AND FINANCIAL RESOURCES
Working capital was $3,206,352 as of September 30, 1997, compared to $4,116,132
at December 31, 1996. Cash used by operating activities was $566,045 for the
nine-month period ended September 30, 1997, compared to cash provided of
$1,495,492 for the corresponding 1996 period. The cash used by operating
activities in the 1997 period was due primarily to the net loss and an increase
in accounts receivable related to the sale of equipment to an international
customer, partially offset by a decrease in inventories. Cash provided by
operating activities in the 1996 period was due primarily to the large
downpayment received from the international customer.
For the nine-month periods ended September 30, 1997 and 1996, cash was used for
capital expenditures and payment of dividends. For the 1997 period, cash was
provided by bank borrowings.
As of September 30, 1997, the Company had borrowed $400,000 on its available
$3,500,000 revolving credit facility. The revolving credit facility was
renewed during the quarter and expires on June 30, 2000.
Currently, the Company has a receivable for the remaining balance due from an
international customer related to the shipments of equipment in the fourth
quarter of 1996 and the first quarter of 1997. The customer paid 50% down on
the order, or $1,189,957.50. The remaining balance of $1,189,957.50 is overdue
and unpaid at this time. The Company fully expects to collect the balance less
the additional reserve provided in the third quarter of 1997 for an anticipated
partial write-off. However, if any remaining amount, less the reserve that has
been establised, cannot be collected, any such uncollected amount could have a
material impact on the Company's financial statements in future periods.
At current operating levels, management believes that cash generated from
operations, together with the available revolving credit facility, will provide
adequate funds to meet the Company's needs for the foreseeable future.
-7-
<PAGE> 9
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11. Computation of Earnings Per Share
Exhibit 27. Financial Data Schedule
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.
ELECTRONIC TELE-COMMUNICATIONS, INC.
/s/ Dean W. Danner
------------------------
Dean W. Danner
President and
Chief Executive Officer
/s/ Jeffrey M. Nigl
-----------------------------------
Jeffrey M. Nigl
Vice President, Chief Financial
Officer, Treasurer and Principal
Accounting Officer
Date: November 7, 1997
-8-
<PAGE> 1
Exhibit 11
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1996 1997 1996
------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Weighted average common
shares outstanding:
Class A common 2,003,949 2,003,949
Class B common 500,000 500,000
Net effect of dilutive stock options -
based on the treasury stock method
using averaged market price:
Class A common - -
-------------------------------
Total shares:*
Class A common 2,003,949 2,003,949 2,003,949 2,003,949
=============================== =================================
Class B common 500,000 500,000 500,000 500,000
=============================== =================================
Net earnings (loss) $ (397,592) $ 107,590 $ (305,041) $ (181,669)
Less dividends paid:
Class A common 120,237 120,237 240,474 240,474
Class B common 20,000 20,000 20,000 20,000
------------------------------- ---------------------------------
Undistributed earnings (loss) $ (537,829) $ (32,647) $ (565,515) $ (442,143)
=============================== =================================
Allocation of undistributed
earnings (loss):
Class A common $ (430,433) $ (26,128) $ (452,590) $ (353,854)
Class B common (107,396) (6,519) (112,925) (88,289)
Calculation of earnings (loss) per share:
Class A common:
Dividends paid $ 0.06 $ 0.06 $ 0.12 $ 0.12
Allocation of undistributed
earnings (loss) (0.21) (0.01) (0.23) (0.18)
------------------------------- ---------------------------------
Earnings (loss) per Class A common share $ (0.15) $ 0.05 $ (0.11) $ (0.06)
=============================== =================================
Class B common:
Dividends paid $ 0.04 $ 0.04 $ 0.04 $ 0.04
Allocation of undistributed
earnings (loss) (0.21) (0.01) (0.23) (0.18)
------------------------------- ---------------------------------
Earnings (loss) per Class B common share $ (0.17) $ 0.03 $ (0.19) $ (0.14)
=============================== =================================
</TABLE>
* Total shares of Class A common and Class B common for the Nine-Month
Periods Ended September 30, 1997 and 1996, are calculated as the weighted
average of the quarters included.
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Condensed Balance Sheet at September 30, 1997 (Unaudited) and the
Consolidated Condensed Statement of Operations for the Nine Months Ended
September 30, 1997 (Unaudited) and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 376,296
<SECURITIES> 0
<RECEIVABLES> 2,173,335
<ALLOWANCES> 330,786
<INVENTORY> 2,076,446
<CURRENT-ASSETS> 4,845,107
<PP&E> 5,815,895
<DEPRECIATION> 4,038,039
<TOTAL-ASSETS> 8,043,272
<CURRENT-LIABILITIES> 1,638,755
<BONDS> 0
0
0
<COMMON> 25,039
<OTHER-SE> 6,225,914
<TOTAL-LIABILITY-AND-EQUITY> 8,043,272
<SALES> 9,096,811
<TOTAL-REVENUES> 9,096,811
<CGS> 5,182,123
<TOTAL-COSTS> 5,182,123
<OTHER-EXPENSES> 4,188,493
<LOSS-PROVISION> 206,700
<INTEREST-EXPENSE> 9,036
<INCOME-PRETAX> (489,541)
<INCOME-TAX> (184,500)
<INCOME-CONTINUING> (305,041)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (305,041)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
