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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 June 30, 2000
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)
(262) 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 July 31, 2000, there were outstanding 2,009,149 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.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets ..................................................... 2
Consolidated Statements of Operations ........................................... 3
Consolidated Statements of Cash Flows ........................................... 4
Notes to Consolidated Financial Statements ...................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................................... 6
PART II Other Information
Item 3. Quantitative and Qualitative Disclosures about Market Risk ...................... 8
Item 6. Exhibits and Reports on Form 8-K ................................................ 8
SIGNATURES ........................................................................................ 8
</TABLE>
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ELECTRONIC TELE-COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
(UNAUDITED) (Note 1)
JUNE 30 December 31
2000 1999
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 161,893 $ 307,652
Trade accounts receivable, net 1,795,166 873,423
Inventories (Note 2) 1,686,554 1,574,413
Net investment in installment sales contracts 337,569 288,925
Refundable income taxes -- 73,097
Prepaid expenses and other current assets 100,884 127,905
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Total current assets 4,082,066 3,245,415
PROPERTY, PLANT AND EQUIPMENT, NET 1,430,284 1,460,281
NET INVESTMENT IN INSTALLMENT SALES CONTRACTS 1,073,780 1,122,842
EXCESS COST OVER NET ASSETS ACQUIRED 815,595 851,137
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Total Assets $7,401,725 $6,679,675
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility $ 240,000 $ 200,000
Accounts payable 304,508 120,892
Accrued expenses 669,515 534,837
Income taxes payable 38,683 --
Deferred revenue 119,922 89,327
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Total current liabilities 1,372,628 945,056
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 2,009,149 shares
in 2000 and 2,008,949 shares in 1999 20,091 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 3,335,647 3,335,349
Retained earnings 2,668,359 2,374,181
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Total stockholders' equity 6,029,097 5,734,619
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Total Liabilities and Stockholders' Equity $7,401,725 $6,679,675
==================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 - (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
NET SALES $ 3,369,368 $ 2,875,246 $ 6,465,780 $ 6,144,353
COST OF PRODUCTS SOLD 1,606,579 1,451,053 3,261,978 3,034,798
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GROSS PROFIT 1,762,789 1,424,193 3,203,802 3,109,555
OPERATING EXPENSES:
General and administrative 305,252 298,242 644,516 652,553
Marketing and selling 758,497 676,088 1,329,832 1,317,115
Research and development 444,842 423,835 879,406 857,952
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1,508,591 1,398,165 2,853,754 2,827,620
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EARNINGS FROM OPERATIONS 254,198 26,028 350,048 281,935
OTHER INCOME (EXPENSE):
Interest expense (3,998) - (11,970) (1,283)
Interest and dividend income - 937 - 3,171
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(3,998) 937 (11,970) 1,888
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EARNINGS BEFORE INCOME TAXES 250,200 26,965 338,078 283,823
Income taxes 32,700 3,000 43,900 82,000
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NET EARNINGS $ 217,500 $ 23,965 $ 294,178 $ 201,823
================================== ===================================
BASIC AND DILUTED EARNINGS
PER SHARE:
Class A common $ 0.09 $ 0.01 $ 0.12 $ 0.09
Class B common $ 0.09 $ 0.01 $ 0.12 $ 0.05
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 - (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
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2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 294,178 $ 201,823
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 178,173 207,372
Deferred income taxes 20,500 22,153
(Gain) loss from sale of equipment (8,625) -
Changes in operating assets and liabilities:
Accounts receivable (921,743) 1,362,128
Inventories (112,141) (442,384)
Net investment in installment sales contracts 418 (163,478)
Prepaid expenses and other assets 27,021 35,857
Accounts payable and accrued expenses 318,294 (72,952)
Income taxes 111,780 57,048
Deferred revenue 30,595 (56,602)
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Total adjustments (355,728) 949,142
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Net cash provided by (used in) operating activities (61,550) 1,150,965
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (124,509) (114,792)
------------------------------------------
Net cash provided by (used in) investing activities (124,509) (114,792)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings on revolving credit facility, net 40,000 (1,300,000)
Dividends paid - (80,358)
Proceeds from issuance of common stock 300 -
------------------------------------------
Net cash provided by (used in) financing activities 40,300 (1,380,358)
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Net increase (decrease) in cash and cash equivalents (145,759) (344,185)
Cash and cash equivalents at beginning of year 307,652 848,087
------------------------------------------
Cash and cash equivalents at end of period $ 161,893 $ 503,902
==========================================
Supplemental disclosures of cash flow information:
Cash received from income tax refunds $ 141,000 $ -
Cash paid for income taxes 52,720 5,587
Cash paid for interest expense 12,599 8,027
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 - (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited 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 and
six-month periods ended June 30, 2000, are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000.
The balance sheet at December 31, 1999, 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 1999 Annual Report to Shareholders.
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30 December 31
2000 1999
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<S> <C> <C>
Raw materials and supplies $ 625,325 $ 577,456
Work-in-process and finished goods 846,128 714,119
Maintenance and demo parts 385,739 410,498
Reserve for obsolescence (170,638) (127,660)
----------- -----------
Total inventories $ 1,686,554 $ 1,574,413
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</TABLE>
3. REVOLVING CREDIT FACILITY
Effective June 30, 2000, the Company signed an Amendment to a Revolving Credit
Agreement with its bank. The Amendment increases the credit facility to
$4,000,000 and lowers the interest rate on borrowings to 0.50% under the
announced reference rate of the bank. The Amendment expires on June 30, 2003, at
which time any outstanding balances are due.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales were $3,369,368 and $2,875,246 for the three-month periods ended June
30, 2000 and 1999, respectively. Net sales for the six-month period ended June
30, 2000 were $6,465,780, compared to $6,144,353 for the corresponding period of
1999. The increase in net sales for the 2000 periods was due to increased demand
for the Company's interactive voice information systems, particularly its
flagship Digicept DNA product line. The increased demand came from competitive
and independent local exchange carriers upgrading and adding to their
telecommunications infrastructures. Increases in DNA sales were partially offset
by lower sales in 2000 of System 3 upgrades and Interact systems that were sold
in 1999 to meet customers' Y2K needs. Revenues from sales of the Company's
interactive voice information systems were $4,442,854 or 69% of net sales, and
$3,747,300 or 61% of net sales, for the six-month periods ended June 30, 2000
and 1999, respectively. Revenues from operating leases, installment sales
contracts, and services were consistent between periods at $1,811,826 or 28% of
net sales for the 2000 six-month period, compared to $1,838,721 or 30% of net
sales for the corresponding 1999 six-month 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, 2000 and 1999, the gross profit
percentage was 52% and 50%, respectively. Gross profit as a percentage of net
sales for the six-month periods ended June 30, 2000 and 1999, were 50% and 51%,
respectively. The increase in gross profit percentage in the 2000 three-month
period was due to primarily to the effect of spreading fixed manufacturing costs
over higher sales volume in the 2000 three-month period. The decrease in gross
profit percentage in the 2000 six-month period was due to the effect of higher
1999 sales of various Y2K upgrades which have a higher profit margin than the
Company's normal product mix.
For the three-month periods ended June 30, 2000 and 1999, total operating
expenses were $1,508,591 or 45% of net sales, and $1,398,165 or 49% of net
sales, respectively. Total operating expenses were $2,853,754 or 44% of net
sales for the six-month period ended June 30, 2000, compared to $2,827,620 or
46% for the corresponding period of 1999. General and administrative expenses
and research and development expenses were relatively constant between periods.
Marketing and selling expenses increased in the three-month period ended June
30, 2000 due primarily to higher commission expenses paid on higher sales,
higher advertising costs related to new products, and higher convention expenses
related to the Supercom convention in April 2000, but decreased as a percentage
of sales. For the six-month periods ended June 30, 2000 and 1999, marketing and
selling expenses remained relatively constant.
Net other expenses were $11,970 for the six-month period ended June 30, 2000,
compared to net other income of $1,888 for the corresponding six-month period of
1999. The increase between periods of net other expenses was primarily due to
more interest expense incurred for bank borrowings during the 2000 six-month
period and higher interest income earned from investing Company funds in the
1999 six-month period.
For the three-month periods ended June 30, 2000 and 1999, net earnings were
$217,500 and $23,965, respectively. Higher net earnings for the 2000 quarter
were due to higher sales, higher gross margins, and a lower effective tax rate,
partially offset by higher marketing and selling costs. Net earnings for the
six-month period ended June 30, 2000 were $294,178 compared to net earnings of
$201,823 for the corresponding 1999 period. Higher earnings in the 2000
six-month period were due to higher sales and a lower effective tax rate,
partially offset by lower gross margins. The lower effective tax rate in the
2000 periods was due to the use of net operating loss carryforwards from prior
years to offset current year income tax expenses, and a reduction of the
valuation reserve relating to the utilized net operating loss carryforwards.
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ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND SOURCES OF CAPITAL
Working capital was $2,709,438 as of June 30, 2000, compared to $2,300,359 at
December 31, 1999. The increase in working capital was due primarily to net
earnings, partially offset by expenditures made for capital equipment. Cash used
in operating activities was $61,550 for the six-month period ended June 30,
2000, compared to cash provided by operating activities of $1,150,965 for the
corresponding 1999 six-month period. The cash used in operating activities in
the 2000 period was due primarily to an increase in accounts receivable,
partially offset by net earnings and refunds of income taxes. The significant
increase in accounts receivable was due to the timing of sales in June 2000 that
were not yet due or paid as of June 30, 2000. Cash provided by operating
activities in the 1999 six-month period was due primarily to net earnings and a
large decrease in accounts receivable, partially offset by an increase in
inventories. The large decrease in accounts receivable in the 1999 six-month
period was due to large sales in the fourth quarter of 1998 that were paid in
early 1999.
For the six-month period ended June 30, 2000, cash provided by net earnings and
an increase in accounts payable and accrued expenses was used to finance an
increase in accounts receivable and purchases of capital equipment. For the 1999
six-month period, cash provided by net earnings and a decrease in accounts
receivable was used for repayment of bank borrowings, payment of dividends,
purchases of capital equipment, and increases in inventories.
As of June 30, 2000, the Company had borrowings of $240,000 on its available
$3,500,000 revolving credit facility. The revolving credit facility expired on
June 30, 2000 and was renewed on July 1, 2000 with a new $4,000,000 credit
facility that expires on June 30, 2003.
At current operating levels, management believes that cash generated from future
operations, together with the available revolving credit facility, will provide
adequate funds to meet the Company's operating needs for the foreseeable future.
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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PART II - OTHER INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not use derivative financial instruments for speculative or
trading purposes. The Company is exposed to market risk related to changes in
short-term interest rates as a result of borrowings under its revolving credit
facility. However, due to the short-term nature and low amount of borrowings,
any impact on the Company's earnings due to changes in interest rates would be
insignificant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.11 Sixth Amendment to Credit Agreement
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated
June 30, 2000, pertaining to its change in
certifying accountant.
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: August 7, 2000
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