<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 June 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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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 July 31, 1998, there were outstanding 2,008,949 shares of Class A common
stock and 499,998 shares of Class B common stock. The Class B common stock,
87.9% 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 JUNE 30, 1998
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
PART I Financial Information
<S> <C>
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
June 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
(Unaudited)
June 30 December 31
1998 1997
--------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 359,323 $ 489,573
Trade accounts receivable, net 1,815,444 1,090,776
Inventories (Note 2) 1,949,647 1,842,940
Net investment in sales-type leases 116,000 77,123
Refundable income taxes 273,765 212,859
Deferred income tax benefits 39,000 78,000
Prepaid expenses and other current assets 129,611 143,393
--------------------------------------
Total current assets 4,682,790 3,934,664
PROPERTY, PLANT AND EQUIPMENT, NET 1,703,875 1,721,026
NET INVESTMENT IN SALES-TYPE LEASES 604,395 389,778
EXCESS COST OVER NET ASSETS ACQUIRED 1,032,982 1,052,041
--------------------------------------
Total Assets $ 8,024,042 $ 7,097,509
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility $ 1,225,000 $ 225,000
Accounts payable 187,155 84,964
Accrued expenses 787,944 637,927
Deferred revenue 119,489 132,328
--------------------------------------
Total current liabilities 2,319,588 1,080,219
LONG-TERM LIABILITIES 86,335 126,760
--------------------------------------
Total liabilities 2,405,923 1,206,979
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 2,008,949 shares 20,089 20,089
Class B common stock, authorized 10,000,000
shares, par value $.01, issued and outstanding
499,998 shares in 1998 and 500,000 shares in 1997 5,000 5,000
Additional paid-in capital 3,335,349 3,335,353
Retained earnings 2,257,681 2,530,088
--------------------------------------
Total stockholders' equity 5,618,119 5,890,530
--------------------------------------
Total Liabilities and Stockholders' Equity $ 8,024,042 $ 7,097,509
======================================
</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 Six-Month Periods Ended June 30, 1998 and 1997 - (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------- -------------------------------
1998 1997 1998 1997
---------------------------------- -------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 3,209,765 $ 3,052,554 $ 5,856,182 $ 6,552,433
COST OF PRODUCTS SOLD 1,629,995 1,585,219 3,143,594 3,536,128
---------------------------------- -------------------------------
GROSS PROFIT 1,579,770 1,467,335 2,712,588 3,016,305
OPERATING EXPENSES:
General and administrative 353,148 417,373 742,469 844,595
Marketing and selling 635,349 581,385 1,240,724 1,132,635
Research and development 438,554 431,732 894,756 885,130
---------------------------------- -------------------------------
1,427,051 1,430,490 2,877,949 2,862,360
---------------------------------- -------------------------------
EARNINGS (LOSS) FROM OPERATIONS 152,719 36,845 (165,361) 153,945
OTHER INCOME (EXPENSE):
Interest expense (18,906) (7,795) (24,896) (7,815)
Interest and dividend income 50 1,885 117 7,308
Miscellaneous (9,529) (8,414) (19,209) (17,987)
---------------------------------- -------------------------------
(28,385) (14,324) (43,988) (18,494)
---------------------------------- -------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES 124,334 22,521 (209,349) 135,451
Income taxes (benefit) 72,300 7,900 (17,300) 42,900
---------------------------------- -------------------------------
NET EARNINGS (LOSS) $ 52,034 $ 14,621 $ (192,049) $ 92,551
================================== ===============================
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE:
Class A common $ 0.02 $ 0.01 $ (0.07) $ 0.05
Class B common $ 0.02 $ 0.01 $ (0.11) $ (0.01)
</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
Six-Month Periods Ended June 30, 1998 and 1997 - (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
-----------------------------------
1998 1997
-----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (192,049) $ 92,551
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 192,287 203,707
Retirement of common stock (4) -
Deferred income taxes 39,000 (138,383)
Loss from sale of equipment - 1,158
Changes in operating assets and liabilities:
Accounts receivable (724,668) (1,024,180)
Inventories (106,707) 462,733
Net investment in sales-type leases (253,494) (196,041)
Prepaid expenses and other assets 13,782 53,951
Accounts payable and accrued expenses 211,783 102,200
Income taxes (60,906) 173,864
Deferred revenue (12,839) (86,432)
-----------------------------------
Total adjustments (701,766) (447,423)
-----------------------------------
Net cash provided by (used in) operating activities (893,815) (354,872)
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (156,077) (143,737)
-----------------------------------
Net cash used in investing activities (156,077) (143,737)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving credit facility, net 1,000,000 -
Dividends paid (80,358) (120,237)
-----------------------------------
Net cash provided by (used in) financing activities 919,642 (120,237)
-----------------------------------
Net decrease in cash and cash equivalents (130,250) (618,846)
Cash and cash equivalents at beginning of year 489,573 1,001,976
-----------------------------------
Cash and cash equivalents at end of period $ 359,323 $ 383,130
===================================
Supplemental disclosures of cash flow information:
Cash received from income tax refunds $ - $ -
Cash paid for income taxes 5,027 7,423
Cash paid for interest expense 18,876 7,815
</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
JUNE 30, 1998 - (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 six-month periods ended June 30, 1998, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998.
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 1997 Annual Report to
Shareholders.
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30 December 31
1998 1997
------------- --------------
<S> <C> <C>
Raw materials and supplies $ 568,709 $ 611,561
Work-in-process and finished goods 988,256 784,518
Maintenance and demo parts 576,126 620,133
Reserve for obsolescence (183,444) (173,272)
------------ ------------
Total inventories $ 1,949,647 $ 1,842,940
============ ============
</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
JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997 - (UNAUDITED)
RESULTS OF OPERATIONS
Net sales were $3,209,765 and $3,052,554 for the three-month periods ended June
30, 1998 and 1997, respectively. Net sales for the six-month period ended June
30, 1998, were $5,856,182, compared to $6,552,433 for the corresponding period
of 1997. For the three-month period ended June 30, 1998, the 5% increase in net
sales was due to increased sales of the Company's interactive voice information
systems. The decrease in sales for the 1998 six-month period was due primarily
to the inclusion of a $980,000 sale of interactive voice information systems to
an international customer in the 1997 first quarter. Revenues from sales of the
Company's interactive voice information systems were $3,261,689 or 56% of net
sales, and $3,738,605 or 57% of net sales, for the six-month periods ended June
30, 1998 and 1997, respectively. Revenues from operating leases, sales-type
leases, and services were $1,797,617 or 31% of net sales for the 1998 six-month
period, compared to $1,827,795 or 28% of net sales for the corresponding 1997
period. Product pricing for the Company's equipment remained relatively constant
between periods, and inflation did not have a material impact on revenues.
For the three-month periods ended June 30, 1998 and 1997, the gross profit
percentage was 49% and 48%, respectively. Gross profit as a percentage of net
sales for the six-month periods ended June 30, 1998 and 1997, was 46%. The
slight increase in gross profit percentage between three-month periods was due
to spreading fixed manufacturing costs over higher sales volume in the 1998
quarter.
For the three-month periods ended June 30, 1998 and 1997, total operating
expenses were $1,427,051, or 44% of net sales, and $1,430,490, or 47% of net
sales, respectively. Total operating expenses were $2,877,499 or 49% of net
sales for the six-month period ended June 30, 1998, compared to $2,862,360 or
44% for the corresponding period of 1997. General and administrative expenses
were lower for the 1998 periods as a result of lower staffing and decreased
legal expenses. Marketing and selling expenses increased in 1998 over 1997 due
primarily to salary and benefit expenses related to previously open sales and
marketing positions which were fully staffed during the 1998 period, together
with higher convention and advertising expenses. Research and development
expenses were relatively constant between periods.
Net other expenses were $43,988 for the six-month period ended June 30, 1998,
compared to $18,494 for the corresponding period of 1997. The difference between
periods was primarily due to interest expense incurred for bank borrowings
during the 1998 period compared with interest income earned from investing
Company funds during the 1997 period.
For the three-month periods ended June 30, 1998 and 1997, net earnings were
$52,034 and $14,621, respectively. Higher earnings in the 1998 quarter
were attributable to slightly higher sales for the quarter. Net loss for the
six-month period ended June 30, 1998, was $192,049 versus net earnings of
$92,551 for the same period of 1997. The net loss for the 1998 six-month period
was primarily the result of lower sales volume.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $2,363,202 as of June 30, 1998, compared to $2,854,445 at
December 31, 1997. The decrease in working capital was due primarily to the net
loss, payment of dividends, and expenditures made for capital equipment. Cash
used in operating activities was $893,815 for the six-month period ended June
30, 1998, compared to $354,872 for the corresponding 1997 period. The cash used
in operating activities in the 1998 period was due primarily to the net loss, an
increase in accounts receivable, and investment in sales-type leases. Cash used
in operating activities in the 1997 period was due primarily to an increase in
accounts
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<PAGE> 8
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997 - (UNAUDITED)
(CONTINUED)
receivable related to the large international shipment and investment in
sales-type leases, partially offset by net earnings and a reduction of
inventories.
For the six-month periods ended June 30, 1998 and 1997, cash was used for
capital expenditures and payment of dividends. For the 1998 period, cash was
provided by bank borrowings.
As of June 30, 1998, the Company had borrowed $1,225,000 on its available
$3,500,000 revolving credit facility. The revolving credit facility expires on
June 30, 2000.
At anticipated operating levels, management believes that future cash generated
from operations, together with the available revolving credit facility, will
provide adequate funds to meet the Company's operating 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: July 31, 1998
-8-
<PAGE> 1
EXHIBIT 11
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
Three-Month and Six-Month Periods Ended June 30, 1998 and 1997
Earnings (loss) net of dividends paid (undistributed earnings) are allocated
equally per share to weighted average Class A shares, as adjusted for the
dilutive effect of stock options using the treasury stock method, and weighted
average Class B shares outstanding during the year. Earnings (loss) per Class
A and Class B common share were computed, as shown in the table below, by
adding dividends paid per Class A and Class B common share (distributed
earnings) to undistributed earnings.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Net earnings (loss) $ 52,034 $ 14,621 $ (192,049) $ 92,551
Less dividends paid:
Class A common - - 80,358 120,237
Class B common - - - -
----------------------------- ------------------------------
Undistributed earnings (loss) $ 52,034 $ 14,621 $ (272,407) $ (27,686)
Denominator for basic and diluted earnings per share:
Weighted average shares:
Class A common 2,008,949 2,003,949 2,008,949 2,003,949
Class B common 499,998 500,000 499,999 500,000
----------------------------- ------------------------------
Total 2,508,947 2,503,949 2,508,948 2,503,949
Calculation of basic and diluted earnings (loss) per share:
Class A common:
Distributed earnings $ - $ - $ 0.04 $ 0.06
Undistributed earnings (loss) 0.02 0.01 (0.11) (0.01)
----------------------------- ------------------------------
Basic and diluted earnings (loss) per share $ 0.02 $ 0.01 $ (0.07) $ 0.05
============================= ==============================
Class B common:
Distributed earnings $ - $ - $ - $ -
Undistributed earnings (loss) 0.02 0.01 (0.11) (0.01)
----------------------------- ------------------------------
Basic and diluted earnings (loss) per share $ 0.02 $ 0.01 $ (0.11) $ (0.01)
============================= ==============================
</TABLE>
Options to purchase shares of Class A common stock under the Company's
Nonqualified Stock Option Plan were outstanding during the three-month and
six-month periods ended June 30, 1998 and 1997. However, these shares were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares
and, therefore, the effect would be antidilutive.
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Condensed Balance Sheet at June 30, 1998 (Unaudited) and the
Consolidated Condensed Statement of Operations for the Six Months Ended June 30,
1998 (Unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 359,323
<SECURITIES> 0
<RECEIVABLES> 1,929,256
<ALLOWANCES> 113,812
<INVENTORY> 1,949,647
<CURRENT-ASSETS> 4,682,790
<PP&E> 5,833,459
<DEPRECIATION> 4,129,584
<TOTAL-ASSETS> 8,024,042
<CURRENT-LIABILITIES> 2,319,588
<BONDS> 0
0
0
<COMMON> 25,089
<OTHER-SE> 5,593,030
<TOTAL-LIABILITY-AND-EQUITY> 8,024,042
<SALES> 5,856,182
<TOTAL-REVENUES> 5,856,182
<CGS> 3,143,594
<TOTAL-COSTS> 3,143,594
<OTHER-EXPENSES> 2,900,241
<LOSS-PROVISION> (3,200)
<INTEREST-EXPENSE> 24,896
<INCOME-PRETAX> (209,349)
<INCOME-TAX> (17,300)
<INCOME-CONTINUING> (192,049)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (192,049)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
