<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, 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 April 30, 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.
<PAGE> 2
ELECTRONIC TELE-COMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <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 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . ..8
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . ..8
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
</TABLE>
-1-
<PAGE> 3
ELECTRONIC TELE-COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
(UNAUDITED) (Note 1)
MARCH 31 December 31
2000 1999
-------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 191,648 $ 307,652
Trade accounts receivable, net 1,980,572 873,423
Inventories (Note 2) 1,223,311 1,574,413
Net investment in installment sales contracts 312,895 288,925
Refundable income taxes - 73,097
Prepaid expenses and other current assets 126,722 127,905
-------------------------------------
Total current assets 3,835,148 3,245,415
PROPERTY, PLANT AND EQUIPMENT, NET 1,423,566 1,460,281
NET INVESTMENT IN INSTALLMENT SALES CONTRACTS 1,097,286 1,122,842
EXCESS COST OVER NET ASSETS ACQUIRED 833,366 851,137
-------------------------------------
Total Assets $ 7,189,366 $ 6,679,675
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility $ 460,000 $ 200,000
Accounts payable 185,476 120,892
Accrued expenses 554,394 534,837
Income taxes payable 66,183 -
Deferred revenue 111,716 89,327
-------------------------------------
Total current liabilities 1,377,769 945,056
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 2,450,859 2,374,181
-------------------------------------
Total stockholders' equity 5,811,597 5,734,619
-------------------------------------
Total Liabilities and Stockholders' Equity $ 7,189,366 $ 6,679,675
=====================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 4
ELECTRONIC TELE-COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 - (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------------------
2000 1999
----------------------------------
<S> <C> <C>
NET SALES $ 3,096,412 $ 3,269,107
COST OF PRODUCTS SOLD 1,655,399 1,583,745
----------------------------------
GROSS PROFIT 1,441,013 1,685,362
OPERATING EXPENSES:
General and administrative 339,264 354,311
Marketing and selling 571,335 641,027
Research and development 434,564 434,117
----------------------------------
1,345,163 1,429,455
----------------------------------
EARNINGS FROM OPERATIONS 95,850 255,907
OTHER INCOME (EXPENSE):
Interest expense (7,972) (1,283)
Interest and dividend income - 2,234
----------------------------------
(7,972) 951
----------------------------------
EARNINGS BEFORE INCOME TAXES 87,878 256,858
Income taxes 11,200 79,000
----------------------------------
NET EARNINGS $ 76,678 $ 177,858
==================================
BASIC AND DILUTED EARNINGS
PER SHARE:
Class A common $ 0.03 $ 0.08
Class B common $ 0.03 $ 0.04
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
<PAGE> 5
ELECTRONIC TELE-COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 - (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
------------------------------------------
2000 1999
------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 76,678 $ 177,858
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 91,835 103,329
Deferred income taxes 10,200 11,413
(Gain) loss from sale of equipment (372) -
Changes in operating assets and liabilities:
Accounts receivable (1,107,149) 891,649
Inventories 351,102 (265,783)
Net investment in installment sales contracts 1,586 (61,312)
Prepaid expenses and other assets 1,183 (14,258)
Accounts payable and accrued expenses 84,141 (55,944)
Income taxes 139,280 66,789
Deferred revenue 22,389 19,270
------------------------------------------
Total adjustments (405,805) 695,153
------------------------------------------
Net cash provided by (used in) operating activities (329,127) 873,011
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (47,177) (55,962)
------------------------------------------
Net cash provided by (used in) investing activities (47,177) (55,962)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings on revolving credit facility, net 260,000 (1,300,000)
Dividends paid - (80,358)
Proceeds from issuance of common stock 300 -
------------------------------------------
Net cash provided by (used in) financing activities 260,300 (1,380,358)
------------------------------------------
Net increase (decrease) in cash and cash equivalents (116,004) (563,309)
Cash and cash equivalents at beginning of year 307,652 848,087
------------------------------------------
Cash and cash equivalents at end of period $ 191,648 $ 284,778
==========================================
Supplemental disclosures of cash flow information:
Cash received from income tax refunds $ 141,000 $ -
Cash paid for income taxes 2,720 3,587
Cash paid for interest expense 5,420 8,027
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 6
ELECTRONIC TELE-COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 period
ended March 31, 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>
MARCH 31 December 31
2000 1999
------------- --------------
<S> <C> <C>
Raw materials and supplies $ 512,778 $ 577,456
Work-in-process and finished goods 450,033 714,119
Maintenance and demo parts 409,814 410,498
Reserve for obsolescence (149,314) (127,660)
------------- --------------
Total inventories $ 1,223,311 $ 1,574,413
============= ==============
</TABLE>
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
amended by SFAS No. 137. Provisions of these standards are required to be
adopted in years beginning after June 15, 2000. 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 the adoption of SFAS No. 133 and SFAS No. 137 will have
an effect on it results of operations or financial position.
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<PAGE> 7
ELECTRONIC TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales were $3,096,412 and $3,269,107 for the three-month periods ended March
31, 2000 and 1999, respectively. The decrease in net sales for the three-month
period ended March 31, 2000, was due to lower sales of the Company's older
technology business systems, lower sales of various Y2K upgrades, and lower
installation revenue, partially offset by a slight increase in sales of
interactive voice information systems. Revenues from sales of the Company's
interactive voice information systems were $2,087,798 or 67% of net sales, and
$2,071,527 or 63% of net sales, for the three-month periods ended March 31, 2000
and 1999, respectively. Revenues from operating leases, installment sales
contracts, and services were $866,247 or 28% of net sales for the 2000
three-month period, which was lower than $968,623 or 30% of net sales for the
corresponding 1999 three-month period. The decrease was due primarily to lower
installation revenue resulting from fewer installations 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, 2000 and 1999, the gross profit
percentage was 47% and 52%, respectively. The decrease in gross profit
percentage in the 2000 three-month period was due to sales of various Y2K
upgrades in the 1999 three-month period which had a higher profit margin than
the Company's normal product mix, and the effect of spreading fixed
manufacturing costs over lower sales volume in the 2000 three-month period.
For the three-month periods ended March 31, 2000 and 1999, total operating
expenses were $1,345,163 or 43% of net sales, and $1,429,455 or 44% of net
sales, respectively. General and administrative expenses and research and
development expenses were relatively constant between periods. Marketing and
selling expenses decreased in the 2000 three-month period due primarily to lower
commission expenses paid on lower sales, partially offset by higher advertising
costs.
Net other expenses were $7,972 for the three-month period ended March 31, 2000,
compared to net other income of $951 for the corresponding three-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 three-month
period and higher interest income earned from investing Company funds in the
1999 three-month period.
For the three-month periods ended March 31, 2000 and 1999, net earnings were
$76,678 and $177,858, respectively. Lower net earnings for the 2000 quarter were
due to lower sales, lower gross margins, and higher interest expense, partially
offset by lower operating expenses and a lower effective tax rate. The lower
effective tax rate in the 2000 quarter 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.
LIQUIDITY AND SOURCES OF CAPITAL
Working capital was $2,457,379 as of March 31, 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 $329,127 for the three-month period ended March 31,
2000, compared to cash provided by operating activities of $873,011 for the
corresponding 1999 three-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, a reduction of inventories, and refunds of
income taxes. The significant increase in accounts receivable was due to timing
of several large sales in March 2000 that were not yet due or paid as of March
31, 2000. Cash provided by operating activities in the 1999 three-month period
was due primarily to net earnings and a large decrease in accounts receivable,
partially offset by an increase in 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, 2000, cash provided by net earnings,
a reduction of inventories, and bank borrowing was used to finance an increase
in accounts receivable and purchases of capital equipment. For the 1999
three-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 March 31, 2000, the Company had borrowings of $460,000 on its available
$3,500,000 revolving credit facility. The revolving credit facility expires on
June 30, 2000. The Company does not foresee any problems in renewing a similar
credit facility with a bank upon expiration of the current revolving credit
facility.
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.
YEAR 2000 ISSUE
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission-critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company's
expenses in connection with remediating its systems were minimal and were
included in the Company's normal operating budget. The Company is not aware of
any material problems resulting from Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties. The Company
will continue to monitor its mission-critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
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.
-7-
<PAGE> 9
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the Registrant on May 5, 2000, shareholders voted on
the election of directors for a one-year term. The Class B common stock of the
Registrant is the only class of voting securities. The Class B common stock is
not registered under the Securities Exchange Act of 1934. There was no
solicitation in opposition to the nominees proposed and there were no
abstentions or broker non-votes. Each of the nominees were elected as follows:
<TABLE>
<CAPTION>
Director Votes Votes
Name For Withheld
---------------------- ------- --------
<S> <C> <C>
Dean W. Danner 439,527 0
Bonita M. Danner 439,527 0
Hazel Danner 439,527 0
George W. Danner 439,527 0
A. William Huelsman 439,527 0
Joanne B. Huelsman 439,527 0
Peter J. Lettenberger 439,527 0
Richard A. Gabriel 439,527 0
R.W. (Johnny) Johns 439,527 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 Computation of Earnings Per
Share
Exhibit 27 Financial Data Schedule
-8-
<PAGE> 10
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 11, 2000
-9-
<PAGE> 1
EXHIBIT 11
ELECTRONIC TELE-COMMUNICATIONS, INC.
COMPUTATION OF EARNINGS PER SHARE
THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
Earnings 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 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
2000 1999
-----------------------------------
<S> <C> <C>
Numerator for basic and diluted earnings per share:
Net earnings $ 76,678 $ 177,858
Less dividends paid:
Class A common - 80,358
Class B common - -
-----------------------------------
Undistributed earnings $ 76,678 $ 97,500
Denominator for basic and diluted earnings per share:
Weighted average shares:
Class A common 2,009,107 2,008,949
Class B common 499,998 499,998
-----------------------------------
Total 2,509,105 2,508,947
Calculation of basic and diluted earnings per share:
Class A common:
Distributed earnings $ - $ 0.04
Undistributed earnings 0.03 0.04
-----------------------------------
Basic and diluted earnings per share $ 0.03 $ 0.08
===================================
Class B common:
Distributed earnings $ - $ -
Undistributed earnings 0.03 0.04
-----------------------------------
Basic and diluted earnings per share $ 0.03 $ 0.04
===================================
</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, 2000 and 1999. 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. The number of shares excluded from the
computation were 70,480 for the 2000 period and 91,400 for the 1999 period.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH
31, 2000 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 191,648
<SECURITIES> 0
<RECEIVABLES> 2,339,479
<ALLOWANCES> 71,794
<INVENTORY> 1,223,311
<CURRENT-ASSETS> 3,835,148
<PP&E> 5,178,366
<DEPRECIATION> 3,754,800
<TOTAL-ASSETS> 7,189,366
<CURRENT-LIABILITIES> 1,377,769
<BONDS> 0
0
0
<COMMON> 25,091
<OTHER-SE> 5,786,506
<TOTAL-LIABILITY-AND-EQUITY> 7,189,366
<SALES> 3,096,412
<TOTAL-REVENUES> 3,096,412
<CGS> 1,655,399
<TOTAL-COSTS> 1,655,399
<OTHER-EXPENSES> 1,297,163
<LOSS-PROVISION> 48,000
<INTEREST-EXPENSE> 7,972
<INCOME-PRETAX> 87,878
<INCOME-TAX> 11,200
<INCOME-CONTINUING> 76,678
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,678
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
