UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period ended March 31, 2002
OR
[ ] Transition Report Under 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)
As of May 1, 2002, 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.
ELECTRONIC TELE-COMMUNICATIONS, INC.
INDEX
Page
PART I Financial Information
Item 1. Financial Statements
Balance Sheets ................................................2
Statements of Operations ......................................3
Statements of Cash Flows ......................................4
Notes to Financial Statements .................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................7
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....9
PART II Other Information
Item 4. Submission of Matters to a Vote of Security Holders ...........9
Item 6. Exhibits and Reports on Form 8-K .............................10
SIGNATURES ...................................................................10
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ELECTRONIC TELE-COMMUNICATIONS, INC.
BALANCE SHEETS
March 31, 2002 and December 31, 2001
(UNAUDITED) (Note 1)
MARCH 31 December 31
2002 2001
--------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32,860 $ 64,811
Trade accounts receivable, net 671,803 431,310
Inventories (Note 2) 1,250,505 1,380,151
Net investment in sales-type leases 372,376 391,060
Prepaid expenses and other current assets 114,841 91,140
--------------------------
Total current assets 2,442,385 2,358,472
PROPERTY, PLANT AND EQUIPMENT, NET 392,363 434,945
NET INVESTMENT IN SALES-TYPE LEASES 532,646 618,910
GOODWILL (Note 3) 790,596 790,596
OTHER ASSETS (Note 4) 39,500 --
--------------------------
Total Assets $ 4,197,490 $ 4,202,923
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility (Note 5) $ 87,005 $ --
Accounts payable 124,154 99,806
Accrued expenses 414,588 381,141
Income taxes payable 66,214 65,630
Deferred revenue 125,215 123,931
Deferred gain on sale of building 62,675 62,675
--------------------------
Total current liabilities 879,851 733,183
DEFERRED GAIN ON SALE OF BUILDING 401,701 417,370
--------------------------
Total liabilities 1,281,552 1,150,553
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 20,091 20,091
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 3,335,647
Retained earnings (deficit) (444,800) (308,368)
--------------------------
Total stockholders' equity 2,915,938 3,052,370
--------------------------
Total Liabilities and Stockholders' Equity $ 4,197,490 $ 4,202,923
==========================
The accompanying notes are an integral part of these financial statements.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
THREE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 - (UNAUDITED)
THREE MONTHS ENDED
MARCH 31
--------------------------------
2002 2001
--------------------------------
NET SALES $ 1,109,558 $ 1,671,825
COST OF PRODUCTS SOLD 542,284 1,005,689
--------------------------------
GROSS PROFIT 567,274 666,136
OPERATING EXPENSES:
General and administrative 192,930 301,314
Marketing and selling 273,822 539,673
Research and development 234,824 516,829
--------------------------------
701,576 1,357,816
--------------------------------
EARNINGS (LOSS) FROM OPERATIONS (134,302) (691,680)
OTHER INCOME (EXPENSE):
Interest expense (1,130) (14,569)
--------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES (135,432) (706,249)
Income taxes 1,000 1,000
--------------------------------
NET EARNINGS (LOSS) $ (136,432) $ (707,249)
================================
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE:
Class A common $ (0.05) $ (0.28)
Class B common $ (0.05) $ (0.28)
The accompanying notes are an integral part of these financial statements.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
THREE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 - (UNAUDITED)
THREE MONTHS ENDED MARCH 31
----------------------------
2002 2001
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(136,432) $(707,249)
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 46,342 75,506
(Gain) loss from sale of property, plant and equipment (15,229) --
Changes in operating assets and liabilities:
Accounts receivable (240,493) 765,975
Inventories 129,646 (236,505)
Net investment in sales-type leases 104,948 75,002
Prepaid expenses and other assets (63,201) (4,032)
Accounts payable and accrued expenses 57,795 (101,979)
Income taxes 584 49,846
Deferred revenue 1,284 35,852
----------------------------
Total adjustments 21,676 659,665
----------------------------
Net cash provided by (used in) operating activities (114,756) (47,584)
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,200) (36,490)
----------------------------
Net cash provided by (used in) investing activities (4,200) (36,490)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings on revolving credit facility, net 87,005 (55,000)
----------------------------
Net cash provided by (used in) financing activities 87,005 (55,000)
----------------------------
Net increase (decrease) in cash and cash equivalents (31,951) (139,074)
Cash and cash equivalents at beginning of year 64,811 242,612
----------------------------
Cash and cash equivalents at end of period $ 32,860 $ 103,538
===========================
Supplemental disclosures of cash flow information:
Cash received from income tax refunds $ 510 $ 1,154
Cash paid for income taxes -- 50,000
Cash paid for interest expense 564 17,230
The accompanying notes are an integral part of these financial statements.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2002 - (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by the
Company in accordance with accounting principles generally accepted in the
United States of America (GAAP) for interim financial information and with the
instructions to Form 10-QSB 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, 2002, are not necessarily
indicative of the results that may be expected for the year ended December 31,
2002.
The balance sheet at December 31, 2001, has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by GAAP for complete financial statements.
For further information, refer to the financial statements and footnotes thereto
included in the Company's 2001 Annual Report to Shareholders.
2. INVENTORIES
Inventories consisted of the following:
MARCH 31 December 31
2002 2001
----------- -----------
Raw materials and supplies $ 416,815 $ 417,752
Work-in-process and finished goods 685,836 785,778
Maintenance and demo parts 286,159 302,849
Reserve for obsolescence (138,305) (126,228)
----------- -----------
Total inventories $ 1,250,505 $ 1,380,151
=========== ===========
3. NEW ACCOUNTING PRONOUNCEMENT
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 supersedes APB Opinion No. 17, "Intangible Assets." SFAS
No. 142 addresses how intangible assets acquired outside of a business
combination should be accounted for upon acquisition and how goodwill and other
intangible assets should be accounted for after they have been initially
recognized. SFAS No. 142 eliminates the amortization for goodwill and other
intangible assets with indefinite lives. Other intangible assets with a finite
life will be amortized over their useful life. Goodwill and other intangible
assets with indefinite useful lives shall be tested for impairment annually or
more frequently if events or changes in circumstances indicate that the asset
may be impaired. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. The Company adopted SFAS No. 142 effective January 1, 2002.
The impairment analysis for goodwill and other intangible assets with indefinite
useful lives has been completed and no impairment charge was taken at the time
of adoption or during the three-month period ended March 31, 2002. The amount of
goodwill amortization taken in 2001, the year prior to adoption of SFAS No. 142,
was $30,256.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2002 - (UNAUDITED)
(CONTINUED)
4. OTHER ASSETS
Other assets of $39,500 as of March 31, 2002, consisted entirely of capitalized
software production costs in accordance with SFAS No. 86, "Accounting for
Computer Software to be Sold, Leased, or Otherwise Marketed." These costs will
be amortized on a straight-line basis over the remaining estimated economic life
of the product.
5. REVOLVING CREDIT FACILITY
On January 22, 2002, the Company signed a revolving credit facility with esitec,
llc, an affiliate. The term of the revolving credit facility ends December 31,
2002. Under the revolving credit facility, the Company can borrow up to a
maximum of $200,000. Interest is payable monthly at a rate of 2% over prime, and
any outstanding balances of principal and interest are due at the end of the
term. The revolving credit facility is secured by trade accounts receivable. As
of March 31, 2002, the Company has borrowed $87,005 under the revolving credit
facility.
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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 $1,109,558 and $1,671,825 for the three-month periods ended March
31, 2002 and 2001, respectively. The significant decrease in net sales for the
three-month period ended March 31, 2002, was due primarily to lower customer
demand for the Company's interactive voice information systems. Included in net
sales were revenues from sales of the Company's interactive voice information
systems of $267,289 or 24% of net sales, and $749,494 or 45% of net sales, for
the three-month periods ended March 31, 2002 and 2001, respectively. The
Company's customers have been severely impacted by slowing economic conditions,
especially in the domestic telecommunications industry, where falling stock
prices, financial losses, and workforce reductions have adversely impacted
customers' buying decisions. It is not possible to predict the duration of
depressed conditions in these customer industries. In addition, the terrorist
attacks of September 11, 2001, further slowed the customers' purchasing cycle.
Revenues from operating leases, sales-type leases, and services were $713,446 or
64% of net sales for the 2002 three-month period, compared to $810,183 or 48% of
net sales for the corresponding 2001 three-month period. The decrease in these
sales dollars was due primarily to lower lease revenue from the Company's time
weather temperature 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, 2002 and 2001, the gross profit
percentage was 51% and 40%, respectively. Despite the decrease in net sales
between periods, the gross profit percentage in the 2002 three-month period
showed a substantial increase due to the effect of the Company's cost savings
measures that were implemented during 2001, including reductions of
manufacturing personnel and related costs.
For the three-month periods ended March 31, 2002 and 2001, total operating
expenses were $701,576 or 63% of net sales, and $1,357,816 or 81% of net sales,
respectively. General and administrative expenses, sales and marketing expenses,
and research and development expenses were all significantly lower for the 2002
three-month period due to cost savings programs and staff downsizing implemented
beginning late in the first quarter of 2001 and continuing into the third
quarter of 2001. The staff downsizing has reduced the Company's workforce by
approximately 50% and included all departments within the Company. The
reductions implemented since the first quarter of 2001 are designed to save the
Company approximately $3,000,000 on an annualized basis. In addition, general
and administrative expenses included goodwill amortization of $7,564 in the 2001
first quarter that did not occur in the 2002 first quarter because of the
adoption of SFAS No. 142.
Net other expenses were $1,130 for the three-month period ended March 31, 2002,
compared to $14,569 for the corresponding three-month period of 2001. The
decrease between periods of net other expenses was due to less interest expense
incurred on lower borrowings during the 2002 three-month period.
For the three-month period ended March 31, 2002, there was a net loss of
$136,432, compared to a net loss of $707,249 for the three-month period ended
March 31, 2001. Despite lower sales in the 2002 period, the loss decreased
significantly due primarily to the cost savings programs and staff downsizing
which improved gross margins and reduced operating expenses. The income tax
expense in the 2002 and 2001 periods was related to minimum state taxes due in
various states.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND SOURCES OF CAPITAL
Working capital was $1,562,534 at March 31, 2002, compared to $1,625,289 for
December 31, 2001. The decrease in working capital was primarily due to the net
loss. Cash used by operating activities in the 2002 first quarter of $114,756
was a result of the net loss and an increase in accounts receivable, partially
offset by a decrease in inventories and sales-type leases. Cash used by
operating activities in the 2001 quarter was due primarily to the net loss and
an increase in inventories, partially offset by a large decrease in accounts
receivable which was a result of the timing of several large sales made in the
fourth quarter of 2000 that were paid in the first quarter of 2001.
For the three-month period ended March 31, 2002, cash provided by borrowings was
used to finance the net loss. For the three-month period ended March 31, 2001,
cash provided by the reduction in accounts receivable was used to finance the
net loss, purchase capital equipment, and reduce borrowings.
The Company has sustained substantial operating losses over the past seven
quarters, however the level of losses has been decreasing over the last three
quarters. In addition, the Company has used substantial amounts of working
capital in its operations. The losses and use of working capital were a result
of the significant decrease in sales caused by lower customer demand for the
Company's products. The Company's customers were severely impacted by slowing
economic conditions, especially in the domestic telecommunications industry,
where falling stock prices, financial losses and workforce reductions adversely
impacted customers' buying decisions. In addition, the terrorist attacks of
September 11, 2001 further slowed customers' purchasing cycles.
To address the resultant cash flow requirements caused by the decrease in sales,
the Company entered into a sale leaseback transaction in 2001 with an affiliate
for the building and associated land in Waukesha, Wisconsin which serves as the
Company's principal office and manufacturing facility. The proceeds from the
transaction were used to pay off remaining amounts outstanding under a revolving
credit facility with a bank and to fund working capital. The revolving credit
facility agreement with the bank was subsequently terminated. In addition, the
Company reduced its workforce by almost 50% during 2001 through a combination of
terminations and lay-offs.
To supplement cash flow in the short-term, the Company has signed an agreement
with an affiliate for up to $200,000 of borrowing availability. As of March 31,
2002, the Company had borrowings of $87,005. Working capital was $1,562,534, and
the Company's current ratio was 2.8. With the workforce reductions in 2001 and
strict control of all costs, the Company has significantly reduced the sales
levels necessary to turn its operations profitable. Sales increased steadily
during the fourth quarter of 2001 and the first quarter of 2002, and the Company
began shipments in December 2001 of two new products, the Emcee and Z-10. The
order backlog increased to $812,000 as of March 31, 2002 from $561,000 at
December 31, 2001. The Company will continue to monitor its operations to
determine if additional cost savings measures need to be implemented to improve
cash flow.
The Company is optimistic that market conditions and demand for the Company's
new products will continue to improve and that the Company's operations will
return to profitability within the next 12 months. If the Company's operations
become profitable, management believes the Company can generate sufficient
internal cash flow to support its operations. In addition, assuming profitable
operations, management believes the Company will be able to secure additional
financing from a bank to provide additional working capital as needed. However,
there are no guarantees that any or all of these items will be accomplished.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
If the Company does not return to profitability, however, it is unlikely that it
will be able to secure such bank financing. In such case, the Company could
further reduce costs to a level which would permit it to operate profitably by
relying on the revenue stream generated by its time/weather/temperature and
services business. However, the Company does not believe that this additional
cost cutting measure will be necessary.
The Company did not pay a dividend on Class A common stock in 2000 or 2001. If
the Company does not pay a minimum dividend of $.08 per share on Class A common
stock in 2002, or approximately $161,000, the holders of Class A common stock
will be entitled to vote in 2003.
Management believes that the actions it has taken as described above, together
with continuing to control costs and the close monitoring of operations, provide
the opportunity for the Company to continue as a going concern.
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, improved conditions in the Company's markets, the availability of
adequate working capital and credit facilities, the ability successfully to
complete development of and bring to market new products for which there is
customer demand, technology changes, backlog, 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-KSB with the Securities and Exchange Commission.
Investors are encouraged to consider the risks and uncertainties included in
those filings.
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.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the Registrant on May 3, 2002, 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:
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Director Votes Votes
Name For Withheld
---- --- --------
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 Computation of Earnings Per Share
(b) Reports on Form 8-K
None.
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 10, 2002
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