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, 2004
[ ] 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)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 August 6, 2004, 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, 2004 and December 31, 2003
(UNAUDITED) (Note 1)
JUNE 30 December 31
2004 2003
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 89,358 $ 88,606
Trade accounts receivable, net 527,774 178,302
Inventories (Note 2) 739,804 963,572
Net investment in sales-type leases 145,148 238,817
Prepaid expenses and other current assets 41,391 43,533
----------- -----------
Total current assets 1,543,475 1,512,830
PROPERTY, PLANT AND EQUIPMENT, NET 90,892 136,070
NET INVESTMENT IN SALES-TYPE LEASES 20,806 62,188
GOODWILL 790,596 790,596
CAPITALIZED SOFTWARE PRODUCTION COSTS, NET (Note 3) 244,276 232,513
----------- -----------
Total Assets $ 2,690,045 $ 2,734,197
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility (Note 4) $ 108,390 $ 90,000
Accounts payable 75,114 65,971
Accrued expenses 434,149 412,130
Income taxes payable 68,277 68,462
Deferred revenue and customer deposits 76,767 53,052
Deferred gain on sale of building 88,674 88,674
----------- -----------
Total current liabilities 851,371 778,289
DEFERRED GAIN ON SALE OF BUILDING 221,684 266,021
----------- -----------
Total liabilities 1,073,055 1,044,310
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) (1,743,748) (1,670,851)
----------- -----------
Total stockholders' equity 1,616,990 1,689,887
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,690,045 $ 2,734,197
=========== ===========
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, 2004 AND 2003 - (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------- -----------------------------
2004 2003 2004 2003
----------------------------- -----------------------------
NET SALES $ 1,022,982 $ 628,466 $ 1,839,655 $ 1,348,410
COST OF PRODUCTS SOLD 548,466 383,342 1,000,852 824,693
----------- ----------- ----------- -----------
GROSS PROFIT 474,516 245,124 838,803 523,717
OPERATING EXPENSES:
General and administrative 150,880 162,527 314,715 344,606
Marketing and selling 192,004 191,525 377,897 409,739
Research and development 107,386 126,317 214,904 362,315
----------- ----------- ----------- -----------
450,270 480,369 907,516 1,116,660
----------- ----------- ----------- -----------
EARNINGS (LOSS) FROM OPERATIONS 24,246 (235,245) (68,713) (592,943)
OTHER INCOME (EXPENSE):
Interest expense (1,093) (2,584) (2,184) (3,476)
----------- ----------- ----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES 23,153 (237,829) (70,897) (596,419)
Income taxes 1,000 1,000 2,000 2,000
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) $ 22,153 $ (238,829) $ (72,897) $ (598,419)
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE:
Class A common $ 0.01 $ (0.10) $ (0.03) $ (0.24)
Class B common $ 0.01 $ (0.10) $ (0.03) $ (0.24)
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, 2004 AND 2003 - (UNAUDITED)
SIX MONTHS ENDED JUNE 30
-------------------------
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (72,897) $(598,419)
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 114,415 105,715
(Gain) loss from sale of property, plant and equipment (44,337) (43,119)
Changes in operating assets and liabilities:
Accounts receivable (349,472) 64,541
Inventories 223,768 102,780
Net investment in sales-type leases 135,051 177,357
Prepaid expenses and other current assets 2,142 7,029
Accounts payable and accrued expenses 31,162 (52,141)
Income taxes (185) (466)
Deferred revenue and customer deposits 23,715 56,004
--------- ---------
Total adjustments 136,259 417,700
--------- ---------
Net cash provided by (used in) operating activities 63,362 (180,719)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- (2,929)
Proceeds from sale of property, plant and equipment -- 15,117
Capitalized software production costs (81,000) (60,150)
--------- ---------
Net cash provided by (used in) investing activities (81,000) (47,962)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings on revolving credit facility, net 18,390 167,310
--------- ---------
Net cash provided by (used in) financing activities 18,390 167,310
--------- ---------
Net increase (decrease) in cash and cash equivalents 752 (61,371)
Cash and cash equivalents at beginning of year 88,606 92,023
--------- ---------
Cash and cash equivalents at end of period $ 89,358 $ 30,652
========= =========
Supplemental disclosures of cash flow information:
Cash received from income tax refunds $ -- $ --
Cash paid for income taxes 2,185 2,465
Cash paid for interest expense 2,122 2,876
The accompanying notes are an integral part of these financial statements.
-4-
ELECTRONIC TELE-COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004 - (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, 2004, are not necessarily
indicative of the results that may be expected for the year ended December 31,
2004.
The balance sheet at December 31, 2003, 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 2003 Annual Report to Shareholders.
2. INVENTORIES
Inventories consisted of the following:
JUNE 30 December 31
2004 2003
--------- -----------
Raw materials and supplies $ 344,079 $ 417,402
Work-in-process and finished goods 376,203 505,865
Maintenance and demo parts 193,824 199,556
Reserve for obsolescence (174,302) (159,251)
--------- ---------
Total inventories $ 739,804 $ 963,572
========= =========
3. 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." Software production costs incurred related to internally developed
software products, enhancements, and purchased software to be sold, leased, or
otherwise marketed are capitalized once technological feasibility of the
software product has been established. Capitalization ends when the software
product is available for general release. Software production costs incurred up
to the time technological feasibility is established are considered research and
development costs and are expensed as incurred.
Capitalized software production costs are amortized on a straight-line basis
over the remaining estimated economic life of the product. Capitalized software
production costs are reported at the lower of unamortized costs or net
realizable value. The net realizable value of the capitalized software
production costs is evaluated for all periods after capitalization.
As of June 30, 2004, gross capitalized software production costs of $399,785
have been reduced by $155,509 of accumulated amortization.
-5-
ELECTRONIC TELE-COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 - (UNAUDITED)
(CONTINUED)
4. REVOLVING CREDIT FACILITY
On December 23, 2002, the Company signed a revolving credit facility renewal
with esitec, llc, an entity controlled by affiliates of ETC. The term of the
revolving credit facility ended December 31, 2003, at which time it renewed
automatically in consecutive one-year increments, provided that 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. The revolving credit facility is secured by trade accounts
receivable. As of June 30, 2004, the Company had borrowings of $108,390 under
the revolving credit facility. Interest paid for borrowings on the revolving
credit facility during the six-month period ended June 30, 2004 was $2,184.
5. STOCK OPTIONS
ETC has a Nonqualified Stock Option Plan that is accounted for under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). Under the plan, no compensation cost has been recognized. Had compensation
cost for this plan been determined consistent with Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," our net earnings and earnings per share would have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- -----------------------------
JUNE 30 June 30 JUNE 30 June 30
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net earnings as reported $ 22,153 $ (238,829) $ (72,897) $ (598,419)
Less employee compensation expense determined
under a fair value based method, net of
related tax effects 3,437 3,996 4,960 7,993
----------- ----------- ----------- -----------
Pro forma net earnings $ 18,716 $ (242,825) $ (77,857) $ (606,412)
=========== =========== =========== ===========
Basic and diluted earnings per share:
As reported:
Class A common $ 0.01 $ (0.10) $ (0.03) $ (0.24)
Class B common $ 0.01 $ (0.10) $ (0.03) $ (0.24)
Pro forma:
Class A common $ 0.01 $ (0.10) $ (0.03) $ (0.24)
Class B common $ 0.01 $ (0.10) $ (0.03) $ (0.24)
-6-
ELECTRONIC TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ETC designs, manufactures, markets and sells digital voice information systems
and related services to the telecommunications industry and other businesses.
Its systems are sold to operating telephone companies, competitive local
exchange carriers, wireless carriers, cable companies, leading
telecommunications manufacturers, and other telecommunication companies to
provide them with revenue generating applications and informational services for
their telecommunications networks. In addition, ETC provides time weather
temperature systems and related services to telecommunications customers and
other businesses that allow them to advertise and provide informational services
to their communities.
Revenues are generated by selling and leasing equipment to customers. In
addition, ETC generates revenue by providing services to customers such as
installation, repair, maintenance, professional recording of announcements, and
weather updates.
Since the middle of 2000, ETC and the telecommunications industry have been
severely impacted by slowing economic conditions. In addition, the explosive
growth of the telecommunications industry over the approximate ten-year period
prior to the slowdown had resulted in an over capacity in the telecommunications
industry infrastructure. These conditions have caused our customers to delay
and/or scale back their purchases of capital equipment for their
telecommunication networks, which has resulted in significant decreases in our
sales volume. The decreased sales volume has caused significant financial losses
for ETC together with significant uses of working capital. ETC has adjusted its
operations by cutting costs several times, beginning in 2001 and continuing
through 2003. We are continuing to monitor our sales levels and operations to
determine if additional adjustments are necessary to reach breakeven for
profitability and cash flow. Sales revenues have increased in 2004 over 2003
levels, resulting in a profit for the second quarter of 2004. It is not possible
to predict whether sales will continue to increase. In addition, the Company has
repaid all outstanding advances on its revolving credit facility in August 2004.
RESULTS OF OPERATIONS
REVENUES
Net sales were $1,022,982 and $628,466 for the three-month periods ended June
30, 2004 and 2003, respectively, an increase of 63% between periods. Net sales
for the 2004 three-month period ended June 30, 2004 were comprised of equipment
sales of $539,627, or 53% of total net sales, and revenues from operating
leases, sales-type leases, and services of $483,355 or 47%. Net sales for the
2003 three-month period ended June 30, 2003 were comprised of equipment sales of
$154,334 or 25%, and revenues from operating leases, sales-type leases, and
services of $474,132 or 75%.
Net sales were $1,839,655 and $1,348,410 for the six-month periods ended June
30, 2004 and 2003, respectively, an increase of 36% between periods. Net sales
for the 2004 six-month period were comprised of equipment sales of $902,432, or
49% of total net sales, and revenues from operating leases, sales-type leases,
and services of $937,223 or 51%. Net sales for the 2003 six-month period were
comprised of equipment sales of $365,614 or 27%, and revenues from operating
leases, sales-type leases, and services of $982,796 or 73%.
-7-
ELECTRONIC TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The increase in net sales in the 2004 three-month and six-month periods was due
primarily to higher customer demand for our interactive voice information
systems. Even though our customers continue to be severely impacted by depressed
economic conditions and over-capacity in the domestic telecommunications
industry, it appears that customer demand for these products may be showing
signs of increasing. Even with this short-term increase, however, it is not
possible to predict whether the increases will continue or the duration of
depressed conditions in these customer industries. While we continue to see an
increase in quotation activity for new systems, it is not possible to predict
the success rate in turning these quotations into sales.
For the three-month period ending June 30, 2004, revenues from leases and
services were up slightly due to sales of maintenance contracts and increased
equipment installation fees, partially offset by lower lease revenue from our
time weather temperature systems. As older leased time weather temperature
systems are replaced by the sale of newer units, these lease revenues will
continue to decrease, but will be partially offset by revenue from increased
services provided to the time weather temperature systems that customers
purchase to replace the leased units and by sales of new time weather
temperature units. For the six-month period ended June 30, 2004, revenues from
leases and services were down slightly due to the lower lease revenue from time
weather temperature systems.
Product pricing for our equipment remained relatively constant between years.
Inflation did not have a material impact on revenues.
GROSS PROFIT
Gross profit was 46% of net sales for the three and six-month periods ended June
30, 2004, compared to 39% for the comparable 2003 three and six-month periods.
The increase in the gross profit percentage for the 2004 periods was due
primarily to higher sales volume over which to spread fixed manufacturing costs,
a higher sales mix of equipment versus services, and the positive effect of our
cost reduction measures that included reductions of manufacturing personnel and
related costs. It is possible that the reduced levels of manufacturing and
service personnel could hamper our ability to meet customer demand should sales
volume increase in the future. However, if this occurs we believe we could hire
additional personnel to meet our needs.
OPERATING EXPENSES
For the three-month periods ended June 30, 2004 and 2003, total operating
expenses were $450,270 or 44% of net sales, and $480,369 or 76% of net sales,
respectively. Total operating expenses were $907,516 or 49% of net sales, and
$1,116,660 or 83% of net sales for the six-month periods ended June 30, 2004 and
2003, respectively. General and administrative expenses, marketing and selling
expenses, and research and development expense dollars were all significantly
lower in the 2004 six-month period due to additional staff downsizing
implemented in the first quarter of 2003 that did not take effect until the
second quarter of 2003. Cost reduction programs and staff downsizing implemented
beginning late in the first quarter of 2001 and continuing through 2003 have
reduced our workforce by approximately 60% and included all departments within
ETC.
-8-
ELECTRONIC TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Despite the sizeable reductions in personnel, we believe we have sufficient
staff to service our customers' needs and identify opportunities for new sales
of products and services. We also have sufficient engineers on staff to design
new products and add new features to our existing products that are intended to
increase future sales volume. However, even though new product and feature
development is continuing, it has been slowed somewhat by the staff reductions.
While our staffing levels are sufficient at the current sales volume, we will
have to add staff in the future if sales increase significantly.
OTHER INCOME AND EXPENSE
Net other expense was $2,184 and $3,476 for the six-month periods ended June 30,
2004 and 2003, respectively, and was related to interest expense incurred on
line of credit borrowing during the periods.
INCOME TAXES
Income tax expense was $2,000 for each of the six-month periods ended June 30,
2004 and 2003, and was related to minimum taxes due for various states.
NET EARNINGS AND EARNINGS PER SHARE
For the three-month period ended June 30, 2004, net earnings were $22,153
compared to a net loss of $238,829 for the three-month period ended June 30,
2003. Net loss was $72,897 and $598,419 for the six-month periods ended June 30,
2004 and 2003, respectively. The profit for the 2004 three-month period and the
significant decrease in net loss between six-month periods was due primarily to
the higher sales volume over which to spread fixed costs and the resultant
higher gross margin, together with the lower operating expenses from the cost
reduction programs and staff downsizing.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $692,104 at June 30, 2004, compared to $734,541 at December
31, 2003. The decrease in working capital in 2004 was primarily due to the net
loss and an increase in accounts receivable from higher sales in the three-month
period ended June 30, 2004, partially offset by a decrease in inventory levels
and collection of customer payments on long-term sales-type leases. Cash
provided by operating activities of $63,362 in the six-month period ended June
30, 2004, was a result of decreasing inventory levels via sales of available
products and decreasing sales-type leases by collecting amounts due from
customers, partially offset by the net loss and funding an increase in accounts
receivable from increased sales. Cash used in operating activities of $180,719
in the comparable 2003 period was a result of the net loss, partially offset by
a decrease in inventories and collection of accounts receivable and sales-type
leases.
In the six-month period ended June 30, 2004, cash generated internally by
selling inventory and collecting from customers of sales-type leases was used to
fund the net loss and an increase in accounts receivable. In the six-month
period ended June 30, 2003, cash provided by borrowing on a revolving credit
facility, a decrease in inventories, and increased collections of accounts
receivable and sales-type leases was used to finance the net loss.
Capital expenditures were $0 and $2,929 for the six-month periods ended June 30,
2004 and 2003, respectively. In addition, the Company capitalized software
production costs incurred in the 2004 six-month period of $81,000 and in the
2003 six-month period of $60,150 related to internally developed software
products that will be sold, leased, or otherwise marketed.
-9-
ELECTRONIC TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Accounts receivable increased from $178,302 at December 31, 2003, to $527,774 at
June 30, 2004 due to the increase of equipment sales in the three-month period
ended June 30, 2004 and the timing of collections of the related accounts
receivable from customers. Inventories decreased from $963,572 at December 31,
2003, to $739,804 at June 30, 2004 due to sales of voice information systems
during the six-month period ended June 30, 2004 that were in stock, and our
concerted effort to keep inventory levels low to conserve cash. Net investment
in sales-type leases decreased from $301,005 at December 31, 2003, to $165,954
at June 30, 2004 due to payments received from customers on our sale-type leases
of our Audichron 410 time weather temperature systems. Another factor
contributing to the decrease in sales-type leases has been the Company's
decision to de-emphasize new sales-type lease contracts for time weather
temperature systems in favor of selling such systems directly to customers or to
third party lessors. It is expected that the cash flow generated from new sales
of time weather temperature systems will offset the decrease in cash flow
related to the declining sales-type leases.
ETC has sustained substantial operating losses over the past three years. In
addition, we have used substantial amounts of working capital in our operations.
The losses and use of working capital were a result of the significant decrease
in sales caused by lower customer demand for our products. Our customers have
been severely impacted by slowing economic conditions and over-capacity,
especially in the domestic telecommunications industry, which adversely impacted
customers' buying decisions. Based on the above, the report of the independent
auditors included in our 2003 annual report contains a statement that there is
substantial doubt about our ability to continue as a going concern. Management's
plans in regard to these matters are covered below and are also described in
Note 16 to the financial statements in that annual report.
To address the resultant cash flow requirements caused by the decrease in sales,
ETC 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, we entered into an agreement with an entity controlled by
affiliates of ETC for up to $200,000 of borrowing availability. As of June 30,
2004, we had borrowings of $108,390 on the revolving credit facility. On August
5, 2004, the Company repaid all outstanding advances on its revolving credit
facility. It is the affiliated entity's current position that $200,000 will
continue to be the maximum that will be made available under the revolving
credit facility.
With the workforce reductions from 2001 to 2003 and strict control of all costs,
we have significantly reduced the sales levels necessary to turn our operations
profitable. However, we have not yet reached the sales levels necessary to
consistently achieve profitability. We will continue to monitor our operations
to determine if additional cost savings measures need to be implemented to
improve cash flow.
-10-
ELECTRONIC TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Management remains cautiously optimistic that market conditions and demand for
our new products will improve and that our operations will return to
profitability over the next 12 months. If our operations return to
profitability, management believes ETC can generate sufficient internal cash
flow to support our operations. In addition, assuming profitable operations,
management believes we will, at some point, be able to secure additional
financing from a bank to provide additional working capital as needed. If we are
able to increase sales volume, additional financing in the form of internally
generated cash flow and/or bank financing may be required to finance increases
in inventory and accounts receivable. However, there can be no assurance that
any or all of these items will be accomplished. Our future sales, earnings, and
cash flows are heavily dependent on overall economic conditions, especially
within the domestic telecommunications industry.
If we do not return to profitability, however, it is unlikely that we will be
able to secure such bank financing. In such case, we may be able to further
reduce costs to a level that would permit us to operate profitably by relying on
the revenue stream generated by our time/weather/temperature and services
business. This option would be used only as a last resort and would necessitate
ceasing the majority of production and research activities. The risk associated
with this strategy is that we may lose customers for a variety of reasons,
including, but not limited to, our inability to support our products, ship
products on a timely basis, or keep up to date on product technology.
Management believes that the actions described above, together with continuing
to control costs and the close monitoring of operations, provide the opportunity
for ETC to continue as a going concern.
CONTRACTUAL OBLIGATIONS
ETC 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, 2004, for the two
facilities are as follows:
2004 $ 161,200
2005 330,800
2006 340,600
2007 350,900
2008 65,100
-----------
Total $ 1,248,600
===========
We treat these contractual obligations as normal operating expenses and plan to
fund them with internally generated cash flow. Our ability to do this will
depend on achieving the sales levels necessary to reach cash flow breakeven.
There are no assurances that this can be accomplished.
In addition, ETC has contractual obligations for purchases of materials from
vendors used in the manufacture of our products in the amount of $23,000 for
2004. There are no purchase obligations beyond 2004. Our plan is to fund these
purchase obligations with internally generated cash flow.
-11-
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes in our critical accounting policies since
the filing of our Annual Report on Form 10-KSB for the year ended December 31,
2003. As discussed in our annual report, the preparation of financial statements
in conformity with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions about future events that affect the
amounts reported in the financial statements and accompanying notes. Future
events and their effects cannot be determined with absolute certainty.
Therefore, the determination of estimates requires the exercise of judgment.
Actual results inevitably will differ from those estimates, and such differences
may be material to the financial statements.
The most significant accounting estimates inherent in the preparation of our
financial statements include estimates as to the recovery of accounts receivable
and inventory reserves, as well as those used in the determination of income
taxes and related valuation allowances, and those used in the evaluation of
goodwill and fixed assets for impairment. Various assumptions and other factors
underlie the determination of these significant estimates. The process of
determining significant estimates is fact specific and takes into account
factors such as historical experience, current and expected economic conditions,
and product mix. We reevaluate these significant factors as facts and
circumstances change.
FORWARD LOOKING INFORMATION
From time to time, information provided by ETC, 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 our 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 our 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.
ITEM 3. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
the information the Company must disclose in its filings with the Securities and
Exchange Commission is recorded, processed, summarized and reported on a timely
basis. The Company's principal executive officer and principal financial officer
have reviewed and evaluated the Company's disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act") as of the end of the period covered by
this report (the "Evaluation Date"). Based on such evaluation, such officers
have concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures are effective in bringing to their attention on a timely
basis material information relating to the Company required to be included in
the Company's periodic filings under the Exchange Act.
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There have not been any changes in the Company's internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are 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 Section 302 of
the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial
Officer 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 August 3, 2004, to furnish a press
release dated August 3, 2004 announcing its
second quarter 2004 financial results.
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 10, 2004
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
11 Computation of Earnings Per Share
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer 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
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