<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section
13 or 15(d) of the Securities
Exchange Act of 1934
For the Period ended March 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 0-13981
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)
(414) 542-5600
(Registrant's telephone number, including area code)
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 April 30, 1999, 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. The Class B
common stock is not traded on an exchange.
<PAGE> 2
ELECTRONIC TELE-COMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
Page
PART I Financial Information
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . 4
Notes to Condensed Consolidated 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
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<PAGE> 3
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
(Unaudited) (Note 1)
March 31 December 31
1999 1998
-----------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 284,778 $ 848,087
Trade accounts receivable, net 1,708,580 2,600,229
Inventories (Note 2) 1,650,048 1,384,265
Net investment in installment sales contracts 181,746 157,579
Prepaid expenses and other current assets 180,309 166,051
------------------------------
Total current assets 4,005,461 5,156,211
PROPERTY, PLANT AND EQUIPMENT, NET 1,588,652 1,628,448
NET INVESTMENT IN INSTALLMENT SALES CONTRACTS 809,830 772,685
EXCESS COST OVER NET ASSETS ACQUIRED 862,438 881,422
------------------------------
Total Assets $ 7,266,381 $ 8,438,766
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility $ - $ 1,300,000
Accounts payable 136,862 173,958
Accrued expenses 701,319 704,105
Income taxes payable 117,539 50,750
Deferred revenue 187,338 168,068
------------------------------
Total current liabilities 1,143,058 2,396,881
LONG-TERM LIABILITIES 36,331 52,393
------------------------------
Total liabilities 1,179,389 2,449,274
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 5,000 5,000
Additional paid-in capital 3,335,349 3,335,349
Retained earnings 2,726,554 2,629,054
------------------------------
Total stockholders' equity 6,086,992 5,989,492
------------------------------
Total Liabilities and Stockholders' Equity $ 7,266,381 $ 8,438,766
==============================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE> 4
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Month Periods Ended March 31, 1999 and 1998 - (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
NET SALES $ 3,269,107 $ 2,646,417
COST OF PRODUCTS SOLD 1,583,745 1,513,599
----------------------------------
GROSS PROFIT 1,685,362 1,132,818
OPERATING EXPENSES:
General and administrative 346,740 389,321
Marketing and selling 641,027 605,375
Research and development 434,117 456,202
----------------------------------
1,421,884 1,450,898
----------------------------------
EARNINGS (LOSS) FROM OPERATIONS 263,478 (318,080)
OTHER INCOME (EXPENSE):
Interest expense (1,283) (5,990)
Interest and dividend income 2,234 67
Miscellaneous (7,571) (9,680)
----------------------------------
(6,620) (15,603)
----------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES 256,858 (333,683)
Income taxes (benefit) 79,000 (89,600)
==================================
NET EARNINGS (LOSS) $ 177,858 $ (244,083)
==================================
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE:
Class A common $ 0.08 $ (0.09)
Class B common $ 0.04 $ (0.13)
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE> 5
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Month Periods Ended March 31, 1999 and 1998 - (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
----------------------------------
1999 1998
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings (loss) $ 177,858 $ (244,083)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 103,329 94,783
Deferred income taxes 11,413 19,500
Changes in operating assets and liabilities:
Accounts receivable 891,649 (199,912)
Inventories (265,783) 154,535
Net investment in installment sales contracts (61,312) (141,319)
Prepaid expenses and other assets (14,258) (5,032)
Accounts payable and accrued expenses (55,944) 51,173
Income taxes 66,789 (113,774)
Deferred revenue 19,270 35,409
--------------------------------
Total adjustments 695,153 (104,637)
--------------------------------
Net cash provided by (used in) operating activities 873,011 (348,720)
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (55,962) (65,854)
Purchase and retirement of common stock - (4)
--------------------------------
Net cash provided by (used in) investing activities (55,962) (65,858)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings on revolving credit facility, net (1,300,000) 350,000
Dividends paid (80,358) (80,358)
--------------------------------
Net cash provided by (used in) financing activities (1,380,358) 269,642
--------------------------------
Net decrease in cash and cash equivalents (563,309) (144,936)
Cash and cash equivalents at beginning of year 848,087 489,573
================================
Cash and cash equivalents at end of period $ 284,778 $ 344,637
================================
Supplemental disclosures of cash flow information:
Cash received from income tax refunds $ - $ -
Cash paid for income taxes 3,587 5,027
Cash paid for interest expense 8,027 5,560
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE> 6
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 - (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, which consist only of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for the
three-month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's 1998 Annual Report to Shareholders.
2. INVENTORIES
Inventories consisted of the following:
MARCH 31 December 31
1999 1998
------------ -----------
Raw materials and supplies $ 581,431 $ 437,349
Work-in-process and finished goods 694,061 559,674
Maintenance and demo parts 548,450 532,502
Reserve for obsolescence (173,894) (145,260)
------------ -----------
Total inventories $ 1,650,048 $ 1,384,265
============ ===========
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. Because the
Company has not used derivatives in the past and does not expect to do so in the
future, the Company does not anticipate that adoption of SFAS No. 133 will have
an effect on it results of operations or financial position.
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<PAGE> 7
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the three-month period ended March 31, 1999 were $3,269,107,
compared to $2,646,417 for the corresponding period of 1998. The increase in net
sales was due to increased sales of the Company's interactive voice information
systems to operating telephone companies, original equipment manufacturers, and
competitive local exchange carriers (CLEC's). Revenues from sales of the
Company's interactive voice information systems were $2,071,527 or 63% of net
sales, and $1,266,319 or 48% of net sales, for the three-month periods ended
March 31, 1999 and 1998, respectively. Revenues from operating leases,
installment sales contracts, and services were $968,623 or 30% of net sales for
the 1999 three-month period, compared to $897,313 or 34% of net sales for the
corresponding 1998 period. The dollar increase between years was primarily due
to increased revenues from new installment sales contracts, and increased
revenue from installation of the Company's interactive voice information
systems. 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 March 31, 1999 and 1998, the gross profit
percentage was 52% and 43%, respectively. The increase in gross profit
percentage in the 1999 period was due to spreading fixed manufacturing costs
over higher sales volume, and sales of various Y2K upgrades which have a higher
profit margin than the Company's normal product mix.
Total operating expenses were $1,421,884 or 43% of net sales for the three-month
period ended March 31, 1999, compared to $1,450,898 or 55% for the corresponding
period of 1998. General and administrative expenses were lower for the 1999
period as a result of lower staffing. Marketing and selling expenses increased
in 1999 over 1998 due primarily to salary and benefit expenses related to
previously open sales and marketing positions that were more fully staffed
during the 1999 period. Research and development expenses were slightly lower in
the 1999 quarter due to open engineering positions.
Net other expenses were $6,620 for the three-month period ended March 31, 1999,
compared to $15,603 for the corresponding period of 1998. The decrease between
periods was primarily due to less interest expense incurred for bank borrowings
during the 1999 quarter and higher interest income earned from investing Company
funds.
Net earnings for the three-month period ended March 31, 1999 were $177,858
versus a net loss of $244,083 for the corresponding 1998 period. Higher earnings
in the 1999 quarter were attributable to higher sales for the quarter, higher
gross profit margin on products sold, and lower operating expenses.
LIQUIDITY AND SOURCES OF CAPITAL
Working capital was $2,862,403 as of March 31, 1999, compared to $2,759,330 at
December 31, 1998. The slight increase in working capital was due primarily to
net earnings, partially offset by payment of dividends and expenditures made for
capital equipment. Cash provided by operating activities was $873,011 for the
three-month period ended March 31, 1999, compared to cash used of $348,720 for
the corresponding 1998 period. The cash provided by operating activities in the
1999 period was due primarily to net earnings and a decrease in accounts
receivable, partially offset by an increase in inventories. Cash used in
operating activities in the 1998 period was due primarily to the net loss, an
increase in accounts receivable, and investment in installment sales contracts,
partially offset by a reduction of inventories.
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<PAGE> 8
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
For the three-month period ended March 31, 1999, cash provided by net earnings
and reduction of accounts receivable was used for repayment of bank borrowings,
payment of dividends, and purchases of capital equipment. For the 1998 first
quarter, cash provided by bank borrowings was used for payment of dividends,
purchases of capital equipment, and to fund the net loss.
As of March 31, 1999, the Company had no borrowings on its available $3,500,000
revolving credit facility. The revolving credit facility expires on June 30,
2000.
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 operating needs for the foreseeable future.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Some of ETC's internal
computer programs have time-sensitive software that recognizes a date using "00"
as the year 1900 rather than the year 2000. This could cause system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. In addition, ETC's products contain
computer programs that may be impacted by the Year 2000 Issue. The Company also
deals with third parties that may be affected by the Year 2000 Issue and may
subsequently affect ETC.
ETC has completed its assessment of the Year 2000 Issue in regard to its
internal computer systems and will have to modify or replace minor portions of
its software so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. The project is estimated to be completed
not later than June 30, 1999, which is prior to any anticipated impact on its
operating systems. The Company believes that with these modifications to
existing software and conversions to new software, the Year 2000 Issue will not
pose significant operational problems for its computer systems.
The Company has completed evaluation of its products and has determined that all
of its current systems are Year 2000 compliant. For any customers that possess
ETC equipment that is currently not Year 2000 compliant, the Company will
provide upgrades or migration paths to new equipment to address the Year 2000
needs of its customers.
ETC is continuing to evaluate the Year 2000 readiness of its critical third
party suppliers. If it is determined that any suppliers are not Year 2000 ready,
ETC will continue to monitor the situation and take appropriate action. Based on
current progress, ETC does not anticipate any adverse consequences due to
supplier Year 2000 readiness.
The total year 2000 project cost is expected to be minimal and all costs will be
expensed as incurred and are included within the Company's normal operating
budget. Computer system software upgrades are included under normal maintenance
contracts.
ETC believes, based on an overall analysis of the Year 2000 Issue, that it will
be able to manage its total Year 2000 transition without any adverse effect on
its business operations, products or financial prospects. However, the actual
results could differ and if such modifications and conversions are not made or
are not completed timely, the Year 2000 Issue could have a material impact on
the operations of the Company.
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<PAGE> 9
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
FORWARD LOOKING INFORMATION
From time to time, information provided by the Company, statements made by its
employees, and information included in its filings with the Securities and
Exchange Commission which are not historical facts are forward-looking in nature
and relate to trends and events that may affect the Company's future financial
position and operating results. Such forward-looking information is provided
pursuant to the Safe Harbor provision of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are not guarantees of future
performance and involve a number of risks and uncertainties including, but not
limited to, technology changes, backlog, acquisitions, status of the economy,
governmental regulations, sources of supply, expense structure, product mix,
major customers, competition, litigation, and other risk factors detailed in the
Company's filings of Form 10-K with the Securities and Exchange Commission.
Investors are encouraged to consider the risks and uncertainties included in
those filings.
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<PAGE> 10
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: May 3, 1999
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<PAGE> 1
Exhibit 11
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
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
MARCH 31
1999 1998
------------------------------
<S> <C> <C>
Numerator for basic and diluted earnings per share:
Net earnings (loss) $ 177,858 $ (244,083)
Less dividends paid:
Class A common 80,358 80,358
Class B common - -
Undistributed earnings (loss) ------------------------------
$ 97,500 $ (324,441)
Denominator for basic and diluted earnings per share:
Weighted average shares:
Class A common 2,008,949 2,008,949
Class B common 499,998 499,999
Total ------------------------------
2,508,947 2,508,948
Calculation of basic and diluted earnings (loss) per share:
Class A common:
Distributed earnings $ 0.04 $ 0.04
Undistributed earnings (loss) 0.04 (0.13)
Basic and diluted earnings (loss) per share ------------------------------
$ 0.08 $ (0.09)
==============================
Class B common:
Distributed earnings $ - $ -
Undistributed earnings (loss) 0.04 (0.13)
Basic and diluted earnings (loss) per share ------------------------------
$ 0.04 $ (0.13)
==============================
</TABLE>
Options to purchase shares of Class A common stock under the Company's
Nonqualified Stock Option
Plan were outstanding during the three-month periods ended March 31, 1999 and
1998.
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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 284778
<SECURITIES> 0
<RECEIVABLES> 1818210
<ALLOWANCES> 109630
<INVENTORY> 1650048
<CURRENT-ASSETS> 4005461
<PP&E> 5216300
<DEPRECIATION> 3627648
<TOTAL-ASSETS> 7266381
<CURRENT-LIABILITIES> 1143058
<BONDS> 0
0
0
<COMMON> 25,089
<OTHER-SE> 6061903
<TOTAL-LIABILITY-AND-EQUITY> 7266381
<SALES> 3269107
<TOTAL-REVENUES> 3269107
<CGS> 1583745
<TOTAL-COSTS> 1583745
<OTHER-EXPENSES> 1359221
<LOSS-PROVISION> 68000
<INTEREST-EXPENSE> 1283
<INCOME-PRETAX> 256858
<INCOME-TAX> 79000
<INCOME-CONTINUING> 177858
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 177858
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
