UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 15 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ________
Commission File Number 0-13981
ELECTRONIC TELE-COMMUNICATIONS, INC.
(Exact name of small business issuer 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)
(262) 542-5600
(Issuer's telephone number)
As of August 8, 2003, 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.
BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002
(UNAUDITED) (Note 1)
JUNE 30 December 31
2003 2002
-----------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30,652 $ 92,023
Trade accounts receivable, net 213,812 278,353
Inventories (Note 2) 1,171,074 1,273,854
Net investment in sales-type leases 292,615 333,692
Prepaid expenses and other current assets 75,178 82,207
-----------------------------
Total current assets 1,783,331 2,060,129
PROPERTY, PLANT AND EQUIPMENT, NET 201,014 280,269
NET INVESTMENT IN SALES-TYPE LEASES 160,233 296,513
GOODWILL 790,596 790,596
CAPITALIZED SOFTWARE PRODUCTION COSTS, NET (Note 4) 163,976 130,693
-----------------------------
Total Assets $ 3,099,150 $ 3,558,200
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility (Note 5) $ 167,310 $ --
Accounts payable 143,807 195,931
Accrued expenses 395,976 395,993
Income taxes payable 66,671 67,137
Deferred revenue and customer deposits 132,021 76,017
Deferred gain on sale of building 62,675 62,675
-----------------------------
Total current liabilities 968,460 797,753
DEFERRED GAIN ON SALE OF BUILDING 323,357 354,695
-----------------------------
Total liabilities 1,291,817 1,152,448
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) (1,553,405) (954,986)
-----------------------------
Total stockholders' equity 1,807,333 2,405,752
-----------------------------
Total Liabilities and Stockholders' Equity $ 3,099,150 $ 3,558,200
=============================
The accompanying notes are an integral part of these financial statements.
-2-
ELECTRONIC TELE-COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002 - (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- ----------------------------
2003 2002 2003 2002
---------------------------- ----------------------------
NET SALES $ 628,466 $ 1,300,470 $ 1,348,410 $ 2,410,028
COST OF PRODUCTS SOLD 383,342 567,326 824,693 1,109,610
---------------------------- ----------------------------
GROSS PROFIT 245,124 733,144 523,717 1,300,418
OPERATING EXPENSES:
General and administrative 162,527 181,539 344,606 374,469
Marketing and selling 191,525 302,849 409,739 576,671
Research and development 126,317 218,339 362,315 453,163
---------------------------- ----------------------------
480,369 702,727 1,116,660 1,404,303
---------------------------- ----------------------------
EARNINGS (LOSS) FROM OPERATIONS (235,245) 30,417 (592,943) (103,885)
OTHER INCOME (EXPENSE):
Interest expense (2,584) (1,606) (3,476) (2,736)
---------------------------- ----------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES (237,829) 28,811 (596,419) (106,621)
Income taxes 1,000 1,000 2,000 2,000
---------------------------- ----------------------------
NET EARNINGS (LOSS) $ (238,829) $ 27,811 $ (598,419) $ (108,621)
============================ ============================
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE:
Class A common $ (0.10) $ 0.01 $ (0.24) $ (0.04)
Class B common $ (0.10) $ 0.01 $ (0.24) $ (0.04)
The accompanying notes are an integral part of these financial statements.
-3-
ELECTRONIC TELE-COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002 - (UNAUDITED)
SIX MONTHS ENDED JUNE 30
----------------------------
2003 2002
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(598,419) $(108,621)
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 105,715 96,372
(Gain) loss from sale of property, plant and equipment (43,119) (31,763)
Changes in operating assets and liabilities:
Accounts receivable 64,541 (119,233)
Inventories 102,780 258,165
Net investment in sales-type leases 177,357 185,464
Prepaid expenses and other current assets 7,029 1,102
Accounts payable and accrued expenses (52,141) 25,354
Income taxes (466) 369
Deferred revenue and customer deposits 56,004 55,211
----------------------------
Total adjustments 417,700 471,041
----------------------------
Net cash provided by (used in) operating activities (180,719) 362,420
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,929) (11,074)
Proceeds from sale of property, plant and equipment 15,117 33,711
Capitalized software production costs (60,150) (73,700)
----------------------------
Net cash provided by (used in) investing activities (47,962) (51,063)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings on revolving credit facility, net 167,310 --
----------------------------
Net cash provided by (used in) financing activities 167,310 --
----------------------------
Net increase (decrease) in cash and cash equivalents (61,371) 311,357
Cash and cash equivalents at beginning of year 92,023 64,811
----------------------------
Cash and cash equivalents at end of period $ 30,652 $ 376,168
============================
Supplemental disclosures of cash flow information:
Cash received from income tax refunds $ -- $ --
Cash paid for income taxes 2,465 1,725
Cash paid for interest expense 2,876 2,736
The accompanying notes are an integral part of these financial statements.
-4-
ELECTRONIC TELE-COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2003 - (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 GAAP for
complete financial statements. The information furnished herein reflects all
adjustments and accruals that management believes are necessary to fairly state
the operating results for the respective periods. Operating results for the
three-month and six-month periods ended June 30, 2003, are not necessarily
indicative of the results that may be expected for the year ended December 31,
2003.
The balance sheet at December 31, 2002, 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 2002 Annual Report to Shareholders.
2. INVENTORIES
Inventories consisted of the following:
JUNE 30 December 31
2003 2002
----------- -----------
Raw materials and supplies $ 412,498 $ 461,259
Work-in-process and finished goods 664,840 692,862
Maintenance and demo parts 202,422 232,882
Reserve for obsolescence (108,686) (113,149)
----------- -----------
Total inventories $ 1,171,074 $ 1,273,854
=========== ===========
3. NEW ACCOUNTING PRONOUNCEMENT
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities." FIN
46 addresses consolidation by business enterprises of variable interest entities
and is intended to achieve more consistent application of consolidation
policies. The Interpretation requires an entity to consolidate a variable
interest entity if that enterprise has a variable interest (or combination of
variable interests) that will absorb a majority of the entity's expected losses
if they occur, receive a majority of the entity's expected residual returns if
they occur, or both. In addition, the Interpretation requires an entity that
holds significant variable interests in a variable interest entity, but is not
the primary beneficiary, to disclose certain information. Currently, management
does not anticipate the adoption of FIN 46 will have a material impact on the
Company's financial statements as it relates to an affiliated entity that leases
real estate and lends funds via revolving credit facility to the Company.
-5-
ELECTRONIC TELE-COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2003 - (UNAUDITED)
(CONTINUED)
4. CAPITALIZED SOFTWARE PRODUCTION COSTS
Capitalized software production costs are accounted for in accordance with SFAS
No. 86, "Accounting for Computer Software to be Sold, Leased, or Otherwise
Marketed." These costs are being amortized on a straight-line basis over the
remaining estimated economic life of the product. As of June 30, 2003, gross
capitalized software production costs of $210,785 have been reduced by $46,809
of accumulated amortization.
5. REVOLVING CREDIT FACILITY
On December 23, 2002, the Company renewed a revolving credit facility with
esitec, llc, an entity controlled by affiliates of the Company. The term of the
revolving credit facility ends December 31, 2003, at which time it will renew
automatically in consecutive one-year increments. Either party may terminate the
revolving credit facility upon 45 days written notice. Under the revolving
credit facility, the Company can borrow up to a maximum of $200,000. Interest is
payable monthly at a rate of prime as quoted in the Wall Street Journal, and any
outstanding balances of principal and interest are due at the end of the term of
the agreement. The revolving credit facility is secured by trade accounts
receivable. As of June 30, 2003, the Company had borrowings of $167,310 under
the revolving credit facility. Interest paid for borrowings on the revolving
credit facility during the six-month period ended June 30, 2003 was $3,476.
-6-
ELECTRONIC TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales were $628,466 and $1,300,470 for the three-month periods ended June
30, 2003 and 2002, respectively. Net sales for the six-month period ended June
30, 2003, were $1,348,410, compared to $2,410,028 for the corresponding
six-month period of 2003. The decrease in net sales for the three-month and six
month periods ended June 30, 2003, was due primarily to lower customer demand
for the Company's interactive voice information systems versus the comparable
period in the prior year and lower revenues from leases and services. Included
in net sales were revenues from sales of the Company's interactive voice
information systems of $163,486 or 12% of net sales, and $647,218 or 27% of net
sales, for the six-month periods ended June 30, 2003 and 2002, respectively. The
Company's customers continue to be severely impacted by slow economic
conditions, especially in the domestic telecommunications industry, which has
adversely impacted their buying decisions. It is not possible to predict the
duration of depressed conditions in these customer industries. Revenues from
operating leases, sales-type leases, and services were $982,827 or 73% of net
sales for the 2003 six-month period, compared to $1,416,804 or 59% of net sales
for the corresponding 2002 six-month period. The decrease in these sales dollars
was due primarily to lower lease revenue from the Company's time weather
temperature systems and lower revenue from repairs. It is anticipated that lease
revenue will continue to fall, but it is the Company's goal that these revenues
will be replaced by revenue from increased services provided to the sold time
weather temperature systems that replace the leased units. Product pricing for
the Company's equipment remained relatively constant between periods. Inflation
did not have a material impact on revenues.
For the three-month periods ended June 30, 2003 and 2002, the gross profit
percentage was 39% and 56%, respectively. Gross profit as a percentage of sales
for the six-month periods ended June 30, 2003 and 2002, was 39% and 54%,
respectively. The decrease in the gross profit percentage in the 2003
three-month and six-month periods was due to lower sales volume over which to
spread fixed manufacturing costs, partially offset by the effect of the
Company's cost reduction measures, including reductions of manufacturing
personnel and related costs.
For the three-month periods June 30, 2003 and 2002, total operating expenses
were $480,369 or 76% of net sales, and $702,727 or 54% of net sales,
respectively. Total operating expenses were $1,116,660 or 83% of net sales for
the six-month period ended June 30, 2003, compared to $1,404,303 or 58% for the
corresponding period of 2002. Total operating expenses as a percentage of net
sales for all periods presented were higher than historical percentages due to
the substantially lower sales volumes over which to spread fixed operating
expenses. Overall, total operating expense dollars were lower in the 2003
periods due to additional staff downsizing implemented in the first quarter of
2003 that included all departments within the Company. The dollar amounts of
general and administrative expenses, sales and marketing expenses, and research
and development expenses were all lower in 2003 periods due to staff downsizing.
In addition, lower commissions on lower sales revenue decreased sales and
marketing expenses in the 2003 periods.
Net other expenses were $3,476 for the six-month period ended June 30, 2003,
compared to $2,736 for the corresponding six-month period of 2002 and were
related to interest expense on borrowings outstanding during the periods.
-7-
ELECTRONIC TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
For the three-month period ended June 30, 2003, net loss was $238,829, compared
to net earnings of $27,811 for the three-month period ended June 30, 2002. Net
loss for the six-month period ended June 30, 2003 was $598,419 compared to a net
loss of $108,621 for the corresponding period of 2002. The increase in the loss
between periods was due primarily to the lower sales volume over which to spread
fixed costs in the 2003 periods, partially offset by the savings from the cost
reduction programs and staff downsizing.
LIQUIDITY AND SOURCES OF CAPITAL
Working capital was $814,871 at June 30, 2003, compared to $1,262,376 as of
December 31, 2002. The decrease in working capital was primarily due to the net
loss. Cash used in operating activities in the 2003 six-month period of $180,719
was a result of the net loss, partially offset by a decrease in inventories and
collections of sales-type leases and accounts receivable. Cash provided by
operating activities in the 2002 six-month period of $362,420 was the result of
a decrease in inventories and collections of sales-type leases, partially offset
by the net loss and an increase in accounts receivable.
For the six-month period ended June 30, 2003, cash provided by borrowings on a
revolving credit facility, a decrease in inventories, and increased collections
on sales-type leases and accounts receivable was used to finance the net loss.
For the six-month period ended June 30, 2002, cash provided by a decrease in
inventories and collections on sales-type leases was used to finance an increase
in accounts receivable and the net loss.
The Company has sustained substantial operating losses over the past two and
three-quarter years. 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 have been severely impacted by
slowing economic conditions, especially in the domestic telecommunications
industry, which adversely impacted customers' buying decisions.
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 entity
controlled by affiliates of the Company 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 has reduced its workforce
by over 60% beginning in 2001 and continuing into 2003 through a combination of
terminations and lay-offs.
To supplement cash flow in the short-term, the Company entered into an agreement
with an entity controlled by affiliates of the Company for up to $200,000 of
borrowing availability. As of June 30, 2003, the Company had borrowings of
$167,310 on the revolving credit facility. Subsequent to June 30, 2003, the
Company borrowed additional amounts on the revolving credit facility bringing
the total borrowing to $199,985. It is the affiliated entity's current position
that $200,000 is the maximum that will be made available. The Company's current
ratio was 1.8 at June 30, 2003. With the workforce reductions from 2001 to 2003
and strict control of all costs, the
-8-
ELECTRONIC TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Company has significantly reduced the sales levels necessary to turn its
operations profitable. However, the Company has yet to reach the sales levels
necessary to achieve profitability. The Company will continue to monitor its
operations to determine if additional cost savings measures need to be
implemented to improve cash flow.
Management remains cautiously optimistic that market conditions and demand for
the Company's new products will improve and that the Company's operations will
return to profitability over the next 12 months. If the Company's operations
return to profitability, management believes the Company can generate sufficient
internal cash flow to support its operations. In addition, assuming profitable
operations, management believes the Company will, at some point, be able to
secure additional financing from a bank to provide additional working capital as
needed. However, there can be no assurance that any or all of these items will
be accomplished.
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 may be
able to 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.
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.
CONTRACTUAL OBLIGATIONS
The Company has contractual obligations for operating leases for its facilities
in Waukesha, Wisconsin and Norcross, Georgia. The leases end in 2007 and 2008,
respectively. Future minimum lease payments as of June 30, 2003, for the two
facilities total $1,565,086.
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 provisions 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, improvement of conditions in the Company's customer markets, the
ability to increase sales and control expenses, the availability of adequate
working capital and credit facilities, the ability to successfully 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, threat of war, 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.
-9-
ITEM 3. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision of the Company's
Chief Executive Officer and Chief Financial Officer and with the participation
of the Company's management, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15 as of the end of the period covered by this quarterly report. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective to
ensure that the Company is able to collect, process and disclose the information
required to be included in the Company's periodic Securities and Exchange
Commission filings within the required time periods. There have been no changes
in the Company's internal controls over financial reporting that occurred during
the Company's last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 Computation of Earnings Per Share
Exhibit 31.1 Certification of Chief Executive
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 31.2 Certification of Chief Financial
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 Certification of Dean W. Danner
pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Jeffrey M. Nigl
pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed a Current Report of Form
8-K dated July 15, 2003, to furnish a press
release dated July 15, 2003 announcing its
second quarter 2003 financial results.
-10-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant 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 8, 2003
-11-
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
11 Computation of Earnings Per Share
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Dean W. Danner pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of Jeffrey M. Nigl pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
-12-