10-Q 1 c66016e10-q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Period ended September 30, 2001 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 0-13981 ELECTRONIC TELE-COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) Wisconsin 39-1357760 (State of incorporation) (IRS Employer Identification No.) 1915 MacArthur Road Waukesha, Wisconsin 53188 (Address of principal executive offices) (Zip Code) (262) 542-5600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of November 1, 2001, 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

-1- ELECTRONIC TELE-COMMUNICATIONS, INC. BALANCE SHEETS SEPTEMBER 30, 2001 AND DECEMBER 31, 2000

The accompanying notes are an integral part of these financial statements. -2- ELECTRONIC TELE-COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 - (UNAUDITED)

The accompanying notes are an integral part of these financial statements. -3- ELECTRONIC TELE-COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 - (UNAUDITED)

The accompanying notes are an integral part of these financial statements. -4- ELECTRONIC TELE-COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2001 - (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-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, which consist only of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended September 30, 2001, are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The balance sheet at December 31, 2000, 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 2000 Annual Report to Shareholders. 2. INVENTORIES Inventories consisted of the following:

3. FUTURE ACCOUNTING CHANGE In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 supersedes Accounting Principles Board (APB) Opinion No. 16, "Business Combinations", and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS No. 141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001. 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's adoption of SFAS No. 142 on January 1, 2002 is still being assessed and management, at this time, cannot determine the effect that adoption of SFAS No. 142 may have on the financial statements of the Company. -5- ELECTRONIC TELE-COMMUNICATIONS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net sales were $918,605 and $1,575,630 for the three-month periods ended September 30, 2001 and 2000, respectively. Net sales for the nine-month period ended September 30, 2001, were $3,805,355, compared to $8,041,410 for the corresponding period of 2000. The significant decrease in net sales for the three-month and nine-month periods ended September 30, 2001, was due primarily to lower customer demand for the Company's interactive voice information systems. 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. In addition, the terrorist attacks of September 11, 2001, further slowed the customers' purchasing cycle. Included in net sales were revenues from sales of the Company's interactive voice information systems of $1,126,790 or 30% of net sales, and $5,047,457 or 63% of net sales, for the nine-month periods ended September 30, 2001 and 2000, respectively. Revenues from operating leases, installment sales contracts, and services were $2,461,035 or 65% of net sales for the 2001 nine-month period, compared to $2,690,268 or 33% of net sales for the corresponding 2000 nine-month period. The decrease in sales dollars was due primarily to lower lease revenue from the Company's time weather temperature systems and lower installation sales. 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 September 30, 2001 and 2000, the gross profit percentage was 29% and 41%, respectively. Gross profit as a percentage of net sales for the nine-month periods ended September 30, 2001 and 2000, were 37% and 48%, respectively. The decrease in gross profit percentage in the 2001 three-month and nine-month periods was due to the effect of spreading fixed manufacturing costs over significantly lower sales volume. For the three-month periods ended September 30, 2001 and 2000, total operating expenses were $796,819 or 87% of net sales, and $1,402,848 or 89% of net sales, respectively. Total operating expenses were $3,318,712 or 87% of net sales for the nine-month period ended September 30, 2001, compared to $4,256,602 or 53% for the corresponding period of 2000. General and administrative expenses, sales and marketing expenses, and research and development expenses were all significantly lower in dollars for the 2001 three-month and nine-month periods due to cost savings programs and staff downsizing implemented beginning late in the first quarter of 2001 and continuing into the third quarter. 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 will save the Company approximately $3,000,000 on an annualized basis. Net other expenses were $38,383 for the nine-month period ended September 30, 2001, compared to $17,663 for the corresponding nine-month period of 2000. The increase between periods of net other expenses was due to more interest expense incurred for bank borrowings during the 2001 nine-month period. However, interest expense was reduced to $3,880 in the three-month period ended September 30, 2001, due to the payoff of all bank borrowings in July of 2001. For the three-month period ended September 30, 2001, there was a net loss of $535,708, compared to a net loss of $715,238 for the three-month period ended September 30, 2000. Net loss for the nine-month period ended September 30, 2001, was $1,966,748 compared to a net loss of $421,060 for the corresponding period of 2000. The loss in the 2001 periods was due primarily to significantly lower sales, partially offset by cost savings programs and staff downsizing. The income tax expense in the 2001 and 2000 periods was related to minimum state taxes due in various states. -6- ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND SOURCES OF CAPITAL Working capital was $1,660,868 as of September 30, 2001, compared to $2,011,725 at December 31, 2000. The decrease in working capital was due primarily to the net loss, partially offset by the proceeds from the sale and leaseback transaction for the Company's building and land in Wisconsin. Cash used in operating activities was $554,975 for the nine-month period ended September 30, 2001, compared to cash provided of $78,771 for the corresponding 2000 nine-month period. The cash used in operating activities in the 2001 period was due primarily to the net loss and a decrease in accrued expenses, partially offset by a decrease in accounts receivable. The significant decrease in accounts receivable was due to lower sales and to the timing of several large sales made in the fourth quarter of 2000 that were paid during early 2001. The cash provided by operating activities in the 2000 nine-month period was due primarily to a decrease in accounts receivable and an increase in accrued expenses, partially offset by a net loss and an increase in inventories. For the nine-month period ended September 30, 2001, cash provided by a reduction in accounts receivable and the sale and leaseback transaction was used to finance the net loss, purchases of capital equipment and payoff of bank borrowings. For the nine-month period ended September 30, 2000, cash provided by a reduction in accounts receivable and an increase in accrued expenses was used to finance the net loss, an increase in inventories, payment of bank borrowings, and purchases of capital equipment. On July 18, 2001, the Company entered into a sale and leaseback transaction with an affiliate for the building and associated land located in Waukesha, Wisconsin which serves as the Company's principal office and manufacturing facility. Details of the transaction were included in a Current Report on Form 8-K filed on July 18, 2001. The proceeds from the transaction were used to pay off the entire $1,010,000 of bank borrowing and add to the Company's working capital. The Company ended its borrowing relationship with the bank subsequent to the full repayment of all borrowings and is currently seeking additional sources of financing. As a result of the downturn in the economy and its effect on the Company's sales volume and operations, the Company has reduced its workforce by almost 50% with a combination of terminations and lay-offs. The Company will continue to monitor the situation to determine if additional cost savings measures need to be implemented to improve cash flow. The Company is currently seeking additional sources of financing and liquidity. There is no assurance that it will be successful in this endeavor. If new financing cannot be secured, the Company's cash flow may not be adequate to fund its operations. 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 to successfully complete development of and bring to market new products for which there is customer demand, technology changes, backlog, acquisitions, status of the economy, governmental regulations, sources of supply, expense structure, product mix, major customers, competition, litigation, and other risk factors detailed in the Company's filings of Form 10-K with the Securities and Exchange Commission. Investors are encouraged to consider the risks and uncertainties included in those filings. -7- 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 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: November 12, 2001 -8-

ELECTRONIC TELE COMMUNICATIONS INC 10-Q