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 September 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 November 3, 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
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(UNAUDITED) (Note 1)
SEPTEMBER 30 December 31
2003 2002
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 62,471 $ 92,023
Trade accounts receivable, net 461,149 278,353
Inventories (Note 2) 979,080 1,273,854
Net investment in sales-type leases 271,965 333,692
Prepaid expenses and other current assets 57,917 82,207
----------- -----------
Total current assets 1,832,582 2,060,129
PROPERTY, PLANT AND EQUIPMENT, NET 177,280 280,269
NET INVESTMENT IN SALES-TYPE LEASES 104,108 296,513
GOODWILL 790,596 790,596
CAPITALIZED SOFTWARE PRODUCTION COSTS, NET (Note 4) 198,411 130,693
----------- -----------
Total Assets $ 3,102,977 $ 3,558,200
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility (Note 5) $ 148,565 $ -
Accounts payable 78,652 195,931
Accrued expenses 456,095 395,993
Income taxes payable 67,587 67,137
Deferred revenue and customer deposits 72,089 76,017
Deferred gain on sale of building 62,675 62,675
----------- -----------
Total current liabilities 885,663 797,753
DEFERRED GAIN ON SALE OF BUILDING 307,689 354,695
----------- -----------
Total liabilities 1,193,352 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) (1,451,113) (954,986)
----------- -----------
Total stockholders' equity 1,909,625 2,405,752
----------- -----------
Total Liabilities and Stockholders' Equity $ 3,102,977 $ 3,558,200
=========== ===========
The accompanying notes are an integral part of these financial statements.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
THREE-MONTH AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2003 AND 2002 - (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- --------------------------
2003 2002 2003 2002
-------------------------- --------------------------
NET SALES $ 1,098,163 $ 728,375 $ 2,446,573 $ 3,138,403
COST OF PRODUCTS SOLD 529,012 436,990 1,353,705 1,546,600
----------- ----------- ----------- -----------
GROSS PROFIT 569,151 291,385 1,092,868 1,591,803
OPERATING EXPENSES:
General and administrative 171,358 166,071 515,964 540,540
Marketing and selling 202,690 241,392 612,429 818,063
Research and development 90,078 182,278 452,393 635,441
----------- ----------- ----------- -----------
464,126 589,741 1,580,786 1,994,044
----------- ----------- ----------- -----------
EARNINGS (LOSS) FROM OPERATIONS 105,025 (298,356) (487,918) (402,241)
OTHER INCOME (EXPENSE):
Interest expense (1,733) - (5,209) (2,736)
----------- ----------- ----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES 103,292 (298,356) (493,127) (404,977)
Income taxes (benefit) 1,000 (63,000) 3,000 (61,000)
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) $ 102,292 $ (235,356) $ (496,127) $ (343,977)
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE:
Class A common $ 0.04 $ (0.09) $ (0.20) $ (0.14)
Class B common $ 0.04 $ (0.09) $ (0.20) $ (0.14)
The accompanying notes are an integral part of these financial statements.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002 - (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
2003 2002
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(496,127) $(343,977)
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 138,066 139,532
(Gain) loss from sale of property, plant and equipment (56,340) (68,132)
Changes in operating assets and liabilities:
Accounts receivable (182,796) 17,143
Inventories 294,774 143,660
Net investment in sales-type leases 254,132 284,170
Prepaid expenses and other current assets 24,290 2,249
Accounts payable and accrued expenses (57,177) 94,158
Income taxes 450 1,014
Deferred revenue and customer deposits (3,928) (37,101)
--------- ---------
Total adjustments 411,471 576,693
--------- ---------
Net cash provided by (used in) operating activities (84,656) 232,716
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,929) (5,387)
Proceeds from sale of property, plant and equipment 21,618 23,332
Capitalized software production costs (112,150) (126,035)
--------- ---------
Net cash provided by (used in) investing activities (93,461) (108,090)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings on revolving credit facility, net 148,565 -
--------- ---------
Net cash provided by (used in) financing activities 148,565 -
--------- ---------
Net increase (decrease) in cash and cash equivalents (29,552) 124,626
Cash and cash equivalents at beginning of year 92,023 64,811
--------- ---------
Cash and cash equivalents at end of period $ 62,471 $ 189,437
========= =========
Supplemental disclosures of cash flow information:
Cash received from income tax refunds $ - $ 63,643
Cash paid for income taxes 2,549 1,727
Cash paid for interest expense 4,721 2,736
The accompanying notes are an integral part of these financial statements.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 nine-month periods ended September 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:
SEPTEMBER 30 December 31
2003 2002
----------- -----------
Raw materials and supplies $ 402,263 $ 461,259
Work-in-process and finished goods 503,558 692,862
Maintenance and demo parts 205,724 232,882
Reserve for obsolescence (132,465) (113,149)
----------- -----------
Total inventories $ 979,080 $ 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.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2003,
gross capitalized software production costs of $262,785 have been reduced by
$64,374 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 September 30, 2003, the Company had borrowings of $148,565
under the revolving credit facility. Interest paid for borrowings on the
revolving credit facility during the nine-month period ended September 30, 2003
was $5,209.
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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 $1,098,163 and $728,375 for the three-month periods ended
September 30, 2003 and 2002, respectively. Net sales for the nine-month period
ended September 30, 2003, were $2,446,573, compared to $3,138,403 for the
corresponding nine-month period of 2002. The increase in net sales for the
three-month period ended September 30, 2003, was due primarily to higher
customer demand for the Company's interactive voice information systems versus
the comparable period in the prior year, partially offset by lower revenues from
leases and services. For the nine-month period ended September 30, 2003, the
decrease in net sales compared to the prior year nine-month period was due
primarily to lower sales of the Company's interactive voice information systems
in the first two quarters of 2003 and lower revenues from leases and services.
Included in net sales were revenues from sales of the Company's interactive
voice information systems of $517,338 or 47% of net sales, and $146,120 or 20%
of net sales, for the three-month periods ended September 30, 2003 and 2002,
respectively. For the nine-month periods ended September 30, 2003 and 2003,
sales of the Company's interactive voice information systems were $680,823 or
28% of net sales and $993,338 or 32% of net sales, respectively. While there was
an increase in sales of interactive voice information systems in the three-month
period ended September 30, 2003, 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 $1,755,577 or 72% of net sales for the 2003 nine-month period,
compared to $2,078,834 or 66% of net sales for the corresponding 2002 nine-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 as a
result of the Company discontinuing leasing of new systems, but it is the
Company's goal that these revenues will be replaced by revenue from increased
services provided to the owners of 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 September 30, 2003 and 2002, the gross profit
percentage was 52% and 40%, respectively. Gross profit as a percentage of sales
for the nine-month periods ended September 30, 2003 and 2002, was 45% and 51%,
respectively. The increase in the gross profit percentage in the 2003
three-month period was due to a higher sales mix of systems versus services,
higher sales volume over which to spread fixed manufacturing costs, and by the
effect of the Company's cost reduction measures, including reductions of
manufacturing personnel and related costs. For the 2003 nine-month period, the
decrease in the gross profit percentage 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 ended September 30, 2003 and 2002, total operating
expenses were $464,126 or 42% of net sales and $589,741 or 81% of net sales,
respectively. Total operating expenses were $1,580,786 or 65% of net sales for
the nine-month period ended September 30, 2003, compared to $1,994,044 or 64% of
net sales for the corresponding period of 2002. Total operating expense dollars
were lower in the 2003 periods due to additional staff
-7-
ELECTRONIC TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
downsizing implemented in the first quarter of 2003 that included all
departments within the Company. The dollar amounts of sales and marketing
expenses and research and development expenses were both lower in 2003 periods
due to staff downsizing. In addition, lower commissions caused by lower sales
revenue decreased sales and marketing expenses in the 2003 periods.
Net other expenses were $5,209 for the nine-month period ended September 30,
2003, compared to $2,736 for the corresponding nine-month period of 2002 and
were related to interest expense on borrowings outstanding during the periods.
For the three-month period ended September 30, 2003, net earnings were $102,292,
compared to a net loss of $235,356 for the three-month period ended September
30, 2002. Net loss for the nine-month period ended September 30, 2003 was
$496,127 compared to a net loss of $343,977 for the corresponding period of
2002. The increase in net earnings for the three-month period ended September
30, 2003, was due primarily to higher sales volume and savings from the cost
reduction programs and staff downsizing. For the nine-month period ended
September 30, 2003, the increase in the net loss over the prior year nine-month
period was due primarily to the lower sales volume over which to spread fixed
costs, partially offset by the savings from the cost reduction programs and
staff downsizing.
LIQUIDITY AND SOURCES OF CAPITAL
Working capital was $946,919 at September 30, 2003, compared to $1,262,376 as of
December 31, 2002. The decrease in working capital was primarily due to the net
loss, partially offset by collection of customer payments of long-term
sales-type leases. Cash used in operating activities in the 2003 nine-month
period of $84,656 was a result of the net loss and an increase in accounts
receivable, partially offset by a decrease in inventories and collections of
sales-type leases. Cash provided by operating activities in the 2002 nine-month
period of $232,716 was the result of a decrease in inventories and collections
of sales-type leases, partially offset by the net loss.
For the nine-month period ended September 30, 2003, cash provided by borrowings
on a revolving credit facility, a decrease in inventories, and increased
collections on sales-type leases was used to finance the net loss and an
increase in accounts receivable. For the nine-month period ended September 30,
2002, cash provided by a decrease in inventories and collections on sales-type
leases was used to finance the net loss.
The Company has sustained substantial operating losses over the past three
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.
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ELECTRONIC TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
To address the resultant cash flow requirements caused by the decrease in sales,
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 September 30, 2003, the Company had borrowings of
$148,565 on the revolving credit facility. 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 2.1 at September 30, 2003. With the workforce reductions from
2001 to 2003 and strict control of all costs, the Company has significantly
reduced the sales levels necessary to turn its operations profitable. However,
until the quarter ended September 30, 2003, the Company had not yet reached 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. If the Company is able to increase its 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.
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 $1,486,961.
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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.
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
-10-
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
October 21, 2003, to furnish a press release dated October
21, 2003 announcing its third quarter 2003 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: November 3, 2003
-11-
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------
11 Computation of Earnings Per Share
32.1 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
32.2 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
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