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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 September 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 October 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
September 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
(UNAUDITED) (Note 1)
SEPTEMBER 30 December 31
2000 1999
-------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 97,151 $ 307,652
Trade accounts receivable, net 660,352 873,423
Inventories (Note 2) 1,780,118 1,574,413
Net investment in installment sales contracts 371,216 288,925
Refundable income taxes -- 73,097
Prepaid expenses and other current assets 112,577 127,905
---------- ----------
Total current assets 3,021,414 3,245,415
PROPERTY, PLANT AND EQUIPMENT, NET 1,409,117 1,460,281
NET INVESTMENT IN INSTALLMENT SALES CONTRACTS 1,068,518 1,122,842
EXCESS COST OVER NET ASSETS ACQUIRED 828,424 851,137
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Total Assets $6,327,473 $6,679,675
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility $ 90,000 $ 200,000
Accounts payable 131,755 120,892
Accrued expenses 650,909 534,837
Income taxes payable 13,095 --
Deferred revenue 127,855 89,327
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Total current liabilities 1,013,614 945,056
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 1,953,121 2,374,181
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Total stockholders' equity 5,313,859 5,734,619
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Total Liabilities and Stockholders' Equity $6,327,473 $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 NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2000 AND 1999 - (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------- -----------------------------
2000 1999 2000 1999
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
NET SALES $ 1,575,630 $ 2,888,497 $ 8,041,410 $ 9,032,850
COST OF PRODUCTS SOLD 923,227 1,447,817 4,185,205 4,482,615
----------------------------- -----------------------------
GROSS PROFIT 652,403 1,440,680 3,856,205 4,550,235
OPERATING EXPENSES:
General and administrative 349,906 323,130 994,422 975,683
Marketing and selling 559,607 567,807 1,889,439 1,884,922
Research and development 493,335 404,252 1,372,741 1,262,204
----------------------------- -----------------------------
1,402,848 1,295,189 4,256,602 4,122,809
----------------------------- -----------------------------
EARNINGS (LOSS) FROM OPERATIONS (750,445) 145,491 (400,397) 427,426
OTHER INCOME (EXPENSE):
Interest expense (5,693) - (17,663) (1,283)
Interest and dividend income - 39 - 3,210
----------------------------- -----------------------------
(5,693) 39 (17,663) 1,927
----------------------------- -----------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES (756,138) 145,530 (418,060) 429,353
Income taxes (benefit) (40,900) 49,400 3,000 131,400
----------------------------- -----------------------------
NET EARNINGS (LOSS) $ (715,238) $ 96,130 $ (421,060) $ 297,953
============================= =============================
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE:
Class A common $ (0.29) $ 0.05 $ (0.17) $ 0.13
Class B common $ (0.29) $ 0.01 $ (0.17) $ 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
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999 - (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
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2000 1999
----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (421,060) $ 297,953
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 253,684 293,336
Deferred income taxes - 32,894
(Gain) loss from sale of equipment (235) 455
Changes in operating assets and liabilities:
Accounts receivable 213,071 1,244,822
Inventories (205,705) (161,392)
Net investment in installment sales contracts (27,967) (462,282)
Prepaid expenses and other assets 15,328 51,451
Accounts payable and accrued expenses 126,935 (123,076)
Income taxes 86,192 (45,301)
Deferred revenue 38,528 (50,199)
---------------------------------
Total adjustments 499,831 780,708
---------------------------------
Net cash provided by (used in) operating activities 78,771 1,078,661
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (179,572) (159,599)
----------------------------------
Net cash provided by (used in) investing activities (179,572) (159,599)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings on revolving credit facility, net (110,000) (1,300,000)
Dividends paid - (160,716)
Proceeds from issuance of common stock 300 -
---------------------------------
Net cash provided by (used in) financing activities (109,700) (1,460,716)
---------------------------------
Net increase (decrease) in cash and cash equivalents (210,501) (541,654)
Cash and cash equivalents at beginning of year 307,652 848,087
---------------------------------
Cash and cash equivalents at end of period $ 97,151 $ 306,433
=================================
Supplemental disclosures of cash flow information:
Cash received from income tax refunds $ 141,000 $ -
Cash paid for income taxes 57,883 146,595
Cash paid for interest expense 17,481 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
SEPTEMBER 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
nine-month periods ended September 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>
SEPTEMBER 30 DECEMBER 31
2000 1999
---------------- ---------------
<S> <C> <C>
Raw materials and supplies $ 492,884 $ 577,456
Work-in-process and finished goods 1,018,454 714,119
Maintenance and demo parts 394,876 410,498
Reserve for obsolescence (126,096) (127,660)
------------- -------------
Total inventories $ 1,780,118 $ 1,574,413
============= =============
</TABLE>
3. REVOLVING CREDIT FACILITY
The Company has a Credit Agreement with a bank which is secured by listing
certain assets of the Company as collateral. The provisions of the credit
agreement restrict security interests in the Company's assets, require
maintenance of minimum current ratios, tangible net worth, net earnings, debt
ratios, and limit capital expenditures and restricted payments. The credit
agreement expires on June 30, 2003, at which time any outstanding balances are
due. As of September 30, 2000, the Company had borrowings of $90,000 on the
revolving credit facility.
On November 14, 2000, the credit agreement was amended to establish the maximum
borrowing available under the agreement. The new borrowing limit is calculated
by applying certain percentages to the Company's qualified accounts receivable,
inventories, and fixed assets. Applying the amended calculation, the maximum
borrowing available as of September 30, 2000 would have been approximately
$2,900,000. The previous maximum borrowing available under the agreement was
$4,000,000.
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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 $1,575,630 and $2,888,497 for the three-month periods ended
September 30, 2000 and 1999, respectively. Net sales for the nine-month period
ended September 30, 2000, were $8,041,410, compared to $9,032,850 for the
corresponding period of 1999. The decrease in net sales for the three-month
period ended September 30, 2000, was due to a shortfall in sales of our DNA
product line to competitive local exchange carriers (CLECs), which were
significant customers of ETC during the first half of the year. The CLECs have
been delaying their purchasing decisions due to the current turmoil caused by
acquisitions and consolidation within their industry. The decrease in sales for
the nine-month period of 2000 was due to the same reason as the three-month
period, partially offset by stronger sales to the CLECs during the first six
months of the year. Revenues from sales of the Company's interactive voice
information systems, which includes the DNA product line, were $5,047,457 or 63%
of net sales, and $5,357,181 or 59% of net sales, for the nine-month periods
ended September 30, 2000 and 1999, respectively. Revenues from operating leases,
installment sales contracts, and services were fairly consistent between periods
at $2,690,268 or 33% of net sales for the 2000 nine-month period, compared to
$2,726,255 or 30% of net sales for the corresponding 1999 nine-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 September 30, 2000 and 1999, the gross profit
percentage was 41% and 50%, respectively. Gross profit as a percentage of net
sales for the nine-month periods ended September 30, 2000 and 1999, were 48% and
50%, respectively. The decrease in gross profit percentage in the 2000 periods
was due primarily to the effect of spreading fixed manufacturing costs over
lower sales volume.
For the three-month periods ended September 30, 2000 and 1999, total operating
expenses were $1,402,848 or 89% of net sales, and $1,295,189 or 45% of net
sales, respectively. Total operating expenses were $4,256,602 or 53% of net
sales for the nine-month period ended September 30, 2000, compared to $4,122,809
or 46% for the corresponding period of 1999. Total operating expenses increased
as a percentage of sales due to the spreading of fixed costs over a smaller
sales base. General and administrative expenses and marketing and selling
expenses were relatively constant between periods. Research and development
expenses increased in the three-month and nine-month periods ended September 30,
2000, due primarily to increased costs related to new product certification, and
higher salaries and benefits related to full staffing of the engineering
department.
Net other expenses were $17,663 for the nine-month period ended September 30,
2000, compared to net other income of $1,927 for the corresponding nine-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
nine-month period and higher interest income earned from investing Company funds
in the 1999 nine-month period.
For the three-month period ended September 30, 2000, net loss was $715,238
compared to net earnings of $96,130 for the comparable period of 1999. Net loss
for the nine-month period ended September 30, 2000 was $421,060 compared to net
earnings of $297,953 for the corresponding 1999 period. The net loss for the
2000 periods was due to lower sales, lower gross margins, higher research and
development expenses, and a lower effective tax benefit rate.
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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 $2,007,800 as of September 30, 2000, compared to $2,300,359
at December 31, 1999. The decrease in working capital was due primarily to the
net loss and expenditures made for capital equipment. Cash provided by operating
activities was $78,771 for the nine-month period ended September 30, 2000,
compared to $1,078,661 for the corresponding 1999 nine-month period. The cash
provided by operating activities in the 2000 period was due primarily to a
decrease in accounts receivable and an increase in accounts payable and accrued
expenses, mostly offset by the net loss. Cash provided by operating activities
in the 1999 nine-month period was due primarily to net earnings and a large
decrease in accounts receivable, partially offset by an increase in inventories
and an increase in installment sales contracts. The large decrease in accounts
receivable in the 1999 nine-month period was due to large sales in the fourth
quarter of 1998 that were paid in early 1999.
For the nine-month period ended September 30, 2000, cash provided by decreased
accounts receivable and increased accounts payable and accrued expenses was used
to finance an increase in inventories, purchases of capital equipment, and
repayment of bank borrowings. For the 1999 nine-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,
investment in installment sales contracts, and increases in inventories.
As of September 30, 2000, the Company had borrowings of $90,000 on its available
revolving credit facility. The revolving credit facility 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 10.12 Seventh 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
September 25, 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: November 15, 2000
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