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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
for the transition period from __________ to __________
Commission File Number 0-13981
ELECTRONIC TELE-COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1357760
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1915 MacArthur Road Waukesha, Wisconsin 53188
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 542-5600
Securities registered pursuant to section 12(b) of the Act:
None.
Securities registered pursuant to section 12(g) of the Act:
Class A Common Stock, Par Value $.01 per share.
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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of March 1, 1997, there were outstanding 2,003,949 shares of Class A common
stock and 500,000 shares of Class B common stock. The Class B common stock is
the only voting stock. 79.5% of the Class B common stock is owned by
affiliates. There is no market for the Class B common stock.
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In this report, Electronic Tele-Communications, Inc. is also referred to as
Electronic Tele-Communications, ETC, and the Company.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV incorporate by reference portions of Electronic
Tele-Communications' 1996 Annual Report to Shareholders. Part IV incorporates
by reference certain exhibits previously filed with Electronic
Tele-Communications' S-1 Registration Statement (No. 2-99175) dated July 24,
1985, and subsequent reports under the Securities Exchange Act of 1934.
PART I
ITEM 1. BUSINESS.
(a) General Development of Business
Electronic Tele-Communications, Inc. is a Wisconsin corporation, incorporated
in 1980. The Company designs, manufactures, programs, markets and leases
digital voice information platforms, call processing systems, and related
computer software and services. ETC is one of the leading domestic
manufacturers of digital voice information systems for the telephone industry.
Substantially all of the Company's products are proprietary and have been
developed since 1986. Research and development activities have been and will
continue to be important to the development of new products and markets.
ETC has executive offices, manufacturing, engineering, technical services,
marketing, and a regional sales office in Waukesha, Wisconsin. In addition,
engineering, technical services, and corporate sales staff are located in
Atlanta, Georgia, and technical services, repair services, and a regional sales
office are located in Pleasanton, California. ETC also has five sales
representatives in various other locations in the United States.
(b) Financial Information About Industry Segments
Not applicable. The Company operates in one industry segment.
(c) Narrative Description of Business
GENERAL
Electronic Tele-Communications designs, manufactures, markets and leases
digital voice and call processing systems and related software. It also
provides comprehensive services in support of these systems, including
installation, training, 24-hour technical support, voice recording and weather
forecasting. Its equipment, compatible with most telephone systems, provides a
wide range of audio information and call handling capabilities via the
telephone network. The Company's products are utilized by a variety of
customers, including: (1) telephone companies which use the products to provide
information to callers regarding misdialed or changed numbers, sources of
assistance or calling instructions, enhanced services such as call forwarding,
and automated pay phone interaction; (2) public and private providers of
informational announcements such
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as news, sports, weather, time, stock reports, or advertisements; (3) large and
small businesses which use call handling products for applications such as
voice mail, call sequencing and automated attendant; and (4) private reporting
and information services through pay-per- call services, commonly referred to
as "900 Services." The Company's systems are generally priced from $500 to
$200,000.
The Company's solid-state products are microprocessor controlled and use
digital technology for voice storage and playback. Digital storage provides
for the instant and unlimited playback of voice messages. Voice recordings are
digitized, or encoded as data, and stored in memory in the Company's equipment.
This data may then be decoded and delivered as voice messages via the telephone
network.
The Company's products provide 100% non-blocking operation, so that the caller
always receives the announcement service without any delay, regardless of the
number of telephone lines simultaneously accessing the service. This provides
greater caller acceptance of the service and reduces telephone traffic by
eliminating long waits for announcements and repeated calls to a busy
announcement service.
In addition to an extensive line of standard digital announcer equipment, ETC
designs and manufactures interactive voice platforms which provide callers with
a spoken menu from which to choose informational topics of interest. ETC also
offers voice mail systems that provide prompt telephone answering and
message-taking capabilities, eliminating annoying and time-consuming telephone
tag. Automated attendant products offered by the Company provide cost savings
and increased efficiencies by automatically answering and routing calls,
reducing the personal handling of most calls. The Company also offers call
sequencing products which ensure that calls to heavily-used phone centers are
maintained in the proper order until a service representative is available to
speak with the caller, playing music and informational messages while on hold.
Finally, ETC provides a variety of special function and customized products,
meeting the varied needs of telephone service providers world-wide.
TECHNOLOGY AND PRODUCT DEVELOPMENT
Most of Electronic Tele-Communications' products consist of electronic
components assembled on printed circuit boards and programmed with proprietary
software. The electronic components include computer memory chips,
microprocessors, integrated circuits, resistors, capacitors, transformers, and
switches. The Company's technologies involve the design of electronic systems,
including printed circuit boards and the arrangement of electronic components
thereon, and the development of the application software necessary to access
and control the messages and their formats.
The Company designs printed circuit boards using computer aided design
equipment and software. This equipment permits the design of complex
multi-layered printed circuit boards which not only have wiring on the top and
bottom surfaces, but also incorporate six or more inside layers of circuitry.
Printed circuit boards, when equipped with the electronic components required
to perform specified functions, are called cards.
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Development of application software to operate the Company's products involves
the formulation of specialized computer programs. The Company's proprietary
software provides the operating equipment with the instructions necessary to
access and control the messages and their format, permit diagnostic tests, and
allow monitoring by reading, translating and acting upon commands and
information. The Company is currently developing most of its own software
programs.
ETC's products employ the concept of distributed processing. This means that
each printed circuit card contains its own microprocessor which controls the
functions of that particular card. When properly configured, these cards form
a network providing a custom designed announcement system. Distributed
processing permits the system to be modularly expanded, allows for a variety of
configurations of the systems, and increases system reliability.
All of ETC's products are equipped with self-diagnostic features that
automatically alert the user to equipment malfunctions or external problems
which must be corrected to maintain proper system operation.
New product and software development and product improvements are significant
to ETC's business. The Company spent approximately $1,981,000, $2,533,000, and
$2,537,000 in 1996, 1995, and 1994, respectively, on research and development
activities, all of which were exclusively Company sponsored and supported.
Electronic Tele-Communications owns some patents, and seeks to obtain
copyright protection on all of its proprietary computer software and printed
material. The Company has registered its corporate logo and the Audichron(R),
Digicept(R), Aris(R), and USA TIME(R) trademarks to protect its products. The
Company believes that its patents, trademarks, and copyrights are a
significant factor in maintaining its market position, but does not believe
that its business is dependent upon any single patent, copyright or trademark.
PRODUCTS
Digital Recorder/Announcers
The basic unit of the Company's Digicept(R) system is the Digicept(R)
recorder/announcer, which stores a single announcement for playback to the
telephone network. The Digicept(R) line also includes the Extended Memory
recorder/announcer, providing extended-length, single-channel messages. Calls
to the recorder/announcers are generally grouped through multiple interface
circuits, also manufactured by the Company, allowing simultaneous access to the
recorder/announcer by hundreds of phone lines. T1 interfaces are available to
connect large recorder/announcer systems directly to a 24-channel digital T1
network. The Digicept(R) recorder/announcers are most often found in telephone
company central offices, providing informational announcements regarding
incorrectly dialed or changed numbers, telephone services and weather
conditions. These announcers are also used by businesses to provide information
on finance, transportation, public service and education. The Messenger(TM) 612
single-channel announcer, housed in a self-contained package, provides similar
functionality in a business office environment.
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The Company's Digicept(R), Aris(R) and Messenger(TM) product lines include
multi-channel recorder/announcers designed for applications requiring the
simultaneous playback of multiple messages. These multi-channel announcers
provide informational announcements similar to those of the single-channel
recorder/announcers. The Digicept(R) line offers two multi-channel
recorder/announcers, which are typically rack mounted in telephone company
central offices or other large business applications. The Aris(R) and
Messenger(TM) announcers are housed in self- contained packages, ideal for use
in office environments. The Aris(R) line offers one multi-channel announcer, in
several configurations, while the Messenger(TM) line offers two multi-channel
announcers.
Interactive Voice Platforms
The Company produces the Digicept(R) 2000, 2002 and Intr-Act systems, as well
as the Audichron(R) IIS System 3 and System 3 Jr. These products constitute a
comprehensive line of interactive voice platforms, providing multi-message,
user selectable voice announcements. All five systems feature Automatic
Intercept Service, Changed Number Announcement and Automatic Number
Announcement. These applications intercept erroneously dialed numbers,
informing the caller of changed numbers or other dialing instructions. Each
system also provides prompts and messages in support of enhanced telephone
services, providing instructions for custom calling services and automated pay
phone operation. In addition, the interactive voice platforms may be used to
provide user selectable information regarding entertainment or transportation
schedules, medical, financial and insurance data, news and sports updates, and
other public information. Beyond these applications, the Digicept(R) 2000 and
2002 systems serve as processing platforms to meet the expanding service
requirements of the intelligent network.
Voice Mail/Automated Attendant Systems
The Company's MAX(TM) family of products meet the call routing and answering
needs of the business marketplace. These automated attendant products answer
incoming phone calls and route calls to the proper destination. Additionally,
the MAX(TM) line can deliver informational messages, gather caller data and
generate system usage and call management reports. The MAX(TM) family
enclosures are well suited for use in the office environment.
The Audichron(R) 410 combines voice mail, audiotex, and
time/weather/temperature functions in a single system. Flexible, industry
standard hardware and software allows for the continued development of
additional features required by the business user or service provider. Both
rack- mount and tower enclosures are available, designed to meet the varied
needs of both the telephone company and business office environments.
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Call Sequencing Systems
The Company's CMS(TM) Sr and CMS(TM) Jr automatic call sequencers place
incoming calls in a queue, assuring that each caller is serviced in the proper
order by an available service representative. While on hold, the caller may
hear music and informational messages. These systems process two to 60 phone
lines and can play as many as 16 different informational messages, up to a
total of 68 minutes in length. These call sequencers also serve as call
management systems, providing a variety of statistical and graphical reports.
These reports allow the telephone system administrator to evaluate system usage
including answered and abandoned calls, total number of calls, average caller
holding times and service representative staffing requirements.
The Company also offers the CMS(TM) Sr 9-1-1 Auxiliary Unit. This product adds
customized fail-safe features, meeting the specialized requirements of a public
safety answering point in the 9-1-1 emergency response telephone network.
Time/Weather/Temperature Systems
The Company manufactures the Audichron(R) line of time, weather and temperature
announcers. These announcers provide professionally recorded voice
announcements, available with synchronous entry so that every caller hears the
entire announcement from the beginning. Up to six promotional announcements, in
rotating or fixed time slots, may be added for additional revenue generation.
All maintenance for weather forecast updates, message changes and time
adjustment is provided remotely. Monthly call rate reporting is provided to the
customer to document system usage.
The Audichron(R) 410 provides similar functionality, while allowing for
expanded weather and promotional announcement features. The flexible design of
the Audichron(R) 410 allows additional call processing capabilities to be
added, increasing its versatility.
The Digicept(R) Time & Temperature II announcer provides a low-cost
alternative, announcing the current time and temperature. Digicept(R)
multi-channel announcers may be included as part of the system to provide
rotating promotional messages.
Common Equipment
Interface and trunk circuits combine hardware and software to provide the
connection between the telephone central office, the calling party and the
Company's announcement systems. The Company has developed interface circuits
for its Digicept(R), Audichron(R) and AEC product lines. By providing both the
interface circuits and the announcement systems, the Company offers integrated
solutions designed to meet customers' needs while providing for the modular
expansion of the systems. The Company provides interface circuits that can
perform a wide variety of functions and are compatible with most telephone
circuitry, including T1 interfaces for direct connection to the digital
telephone network.
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SERVICES
Leasing Services
The Company's Audichron subsidiary leases announcement systems in the United
States and internationally. These systems form the USA TIME(R) network of
time/weather/temperature announcers. These systems primarily serve financial
institutions and telephone companies.
Recording Services
A professional staff is available from ETC's recording studio in Atlanta,
Georgia to provide high quality recordings of commercial announcements and
customized messages in a variety of formats. These announcements include
interactive system vocabularies, call processing system prompts,
information-on-hold announcements and commercial announcements for telemedia.
Recordings may be provided on cassette or reel-to-reel tapes, or may be
digitized and stored on floppy diskettes or delivered via the Internet.
Meteorological Services
A staff of degreed meteorologists, using state-of-the-art information services
and equipment, update weather forecasts at least four times daily from ETC's
weather center in Atlanta, Georgia. When severe weather conditions warrant,
updates are provided as often as necessary. A rigid quality control program
ensures that forecasts are accurate and timely. These forecasts serve
approximately 500 USA TIME(R) sites, and are downloaded to the Company's
time/weather/temperature systems via the telephone network, using
computer-generated calling. Additionally, all maintenance, call rate reports,
promotional messages, time adjustment and daylight savings time changes are
provided remotely from the weather center.
Technical Services
The Company offers equipment installation, training, and 24-hour technical
support of its various products. Maintenance and installation services include
customer premise support and software and documentation updates. Classes are
held in ETC's training centers, and at customer sites, to instruct employees
and customers on the operation and use of ETC's products. Technical bulletins
and software updates are also available from the Company's World Wide Web site.
Miscellaneous Services
In addition to its manufactured products, the Company offers engineering and
product services to the telephone companies and other equipment customers. The
company can design call processing and voice announcement systems to a
customer's specifications. This includes determining equipment requirements
based on the Company's standard offerings and interconnecting the cards and
systems to the exact size and capability needed by the customer.
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MANUFACTURING PROCESSES
ETC's manufacturing processes involve the fabrication of products from
components manufactured to specification by others or purchased as stock items
from independent suppliers. Items such as memory chips, computers, disk
drives, microprocessing units, integrated circuits, resistors, capacitors,
transformers, switches, wire and related items are purchased as stock items
from a variety of manufacturers and distributors. The Company is not dependent
upon any single supplier for such material. Some components are manufactured
by a single producer, but the Company believes suitable replacement components
would be available from a variety of sources should the product of any producer
become unavailable. The Company's printed circuit boards and product
enclosures are manufactured by outside suppliers to the Company's
specifications. The Company believes these products would be available from a
variety of sources and that the loss of any single source of supply would not
materially affect the Company's business.
The products manufactured by ETC generally require a high degree of precision
and dexterity in the assembly stage and multiple testing and quality assurance
checks prior to shipment. By stressing quality and maintaining rigid testing
and quality assurance procedures, the Company has been able to achieve a low
product return-for-service rate.
The Company purchases computers, monitors, printers, disk drives, and other
computer related accessories. These components are assembled into systems and
packaged with mostly proprietary and some purchased software and sold to the
customer.
In addition to hardware manufactured by the Company, computer software is an
intregal component of the Company's announcement systems. Most of the
Company's computer software is designed and generated internally by the
Company's engineers. The software programs are then loaded into the voice
announcement systems in a variety of methods, including "burning" the programs
into microprocessors, or using floppy disks to transfer the programs into
memory chips or computer hard drives. These software programs dictate how the
voice announcement systems perform, and give the products flexibility to meet
many different customer specifications and needs.
SALES, MARKETING AND CUSTOMERS
ETC's manufactured products are marketed through independent distributors,
telecommunications dealers, and Company sales personnel. Leases of the
Company's time/weather/temperature machines and related information update
services are performed through the Company's sales personnel. Distributors
comprised approximately 4% of the Company's 1996 sales. The Company's largest
distributors include GTE Supply, Inc., North Supply, Inc., and Graybar Electric
Company, Inc. Telecommunications dealers comprised approximately 3% of the
Company's 1996 sales. Approximately 85% of the Company's 1996 sales were in
the United States, and 15% were to international customers.
During 1996, ETC's manufactured products and related services were sold to
approximately 612 customers, primarily operating telephone companies,
telephone
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equipment manufactures, telecommunication dealers, telephone service
providers, and other businesses. The Company's time/weather/temperature
equipment and related services were leased to approximately 818 customers in
1996, primarily financial institutions and operating telephone companies.
Siemens Stromberg-Carlson accounted for 23% of the Company's 1996 sales, and
TeleSystems, Inc. accounted for 11% of 1996 sales.
ETC engages in direct advertising through trade publications, direct mail
communications, and the Company's World Wide Web site (http://www.etcia.com).
The Company participates in a number of trade shows each year and is a member
of many national and state telephone associations. The Company's corporate
sales staff and a regional sales office are located in Atlanta, Georgia. The
Company's marketing staff are headquartered in Waukesha, Wisconsin. In
addition regional sales offices are located in Waukesha, Wisconsin and
Pleasanton, California, and five sales representatives are at various other
locations in the United States. Technical service departments exist within all
three regional sales offices to provide assistance to customer questions and
custom application requirements.
BACKLOG
As of December 31, 1996, the amount of the Company's backlog orders believed to
be firm was $1,635,000. This compares with $850,000 of backlog orders as of
December 31, 1995. One customer comprised 60% of the 1996 backlog. Two other
customers comprised 33% and 10%, respectively, of the 1995 backlog. The
Company typically experiences variations in product sales that have no seasonal
pattern and are caused by the timing of major equipment purchases by the
operating telephone companies and telephone equipment manufacturers.
COMPETITION
The market as a whole for telecommunications equipment sold to operating
telephone companies and telephone equipment manufacturers is highly
competitive, primarily on the basis of quality, price, availability for
delivery, and capabilities. The segment of the operating telephone company and
equipment manufacturing market in which the Company's products are sold is
competitive, primarily on the basis of product capabilities and quality, and to
a lesser extent on the basis of price and availability for delivery. Product
capability is determined by the ability to provide the type of service required
by the customer. The sale of call processing equipment to telecommunications
dealers is primarily competitive on the basis of price and delivery time, and
the Company believes it is competitive in these two areas. Product quality is
determined by factors such as product consistency, durability, workmanship and
reliability.
Based on comparisons with competitors' products, the Company believes it offers
comparable products with more features at lower prices. Some of the Company's
competitors are larger than the Company and have substantially greater
financial resources.
The Company's time/weather/temperature systems compete indirectly with other
sources of time, weather and temperature information such as radio stations,
television, and cable TV, where these services are provided to listeners and
viewers free of charge on a regular basis.
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EMPLOYEES
As of December 31, 1996, ETC employed 138 persons. Approximately 20% of the
Company's employees are engaged in product development, 18% in sales and
marketing, 13% in management and office support, 19% in service and support,
and 30% in manufacturing. The Company has never experienced a work stoppage
due to a labor dispute, is not a party to any labor contract, and considers its
relations with employees to be excellent. The Company believes that there is
an adequate supply of professional and manufacturing personnel available in the
metropolitan areas where it has facilities to meet its anticipated personnel
requirements.
ITEM 2. PROPERTIES.
The Company's executive offices, manufacturing and engineering facilities,
technical services, marketing, and a regional sales office are located at 1915
MacArthur Road, Waukesha, Wisconsin 53188. This facility contains
approximately 29,000 square feet of space. The Company believes that its
equipment and facilities at its Waukesha location are modern, well maintained,
and adequate for its anticipated needs.
The Company leases 87,300 square feet in seven buildings located in Atlanta,
Georgia. These facilities include corporate sales, a regional sales office,
engineering, technical services, and accounting. The leases expire in the year
2000, and the Company is currently subleasing 61,500 square feet of this space
to other tenants. The properties are modern and well maintained, and include
adequate space for anticipated needs.
The Company leases 12,277 square feet at 6689 Owens Drive, Suite B, Pleasanton,
California 94588. This lease expires in 1999, with an option to extend to
2004. This facility contains a regional sales office, repair services,
engineering, and technical services. The Company believes that its equipment
and facilities at its California location are modern, well maintained, and
adequate for its anticipated needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending material legal proceedings not
arising in the normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) Market Information
The Company's Class A common stock trades on the NASDAQ National Market tier of
The NASDAQ Stock Market under the Symbol: ETCIA. There is no market for the
Company's Class B common stock.
See the caption "Quarterly Financial Data" on page 24 in ETC's 1996 Annual
Report to Shareholders incorporated herein by reference.
(b) Holders
As of February 28, 1997, there were approximately 820 shareholders of record
and beneficial shareholders owning Class A common stock and 9 shareholders of
record of Class B common stock.
(c) Dividends
For 1996, 1995 and 1994, the Company each year paid a cash dividend of $.12 per
share on Class A common stock and $.04 per share on Class B common stock.
On February 28, 1997, the Board of Directors of the Company declared an annual
cash dividend of $.12 per share on Class A common stock, the first $.06 per
share payable on March 31, 1997, to shareholders of record on March 14, 1997,
and the second $.06 per share payable on September 30, 1997, to shareholders of
record on September 1, 1997.
ITEM 6. SELECTED FINANCIAL DATA.
The information under the caption "Eleven Year Review of Selected Financial
Data" on pages 22 and 23 in ETC's 1996 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information on pages 9, 10 and 11 in ETC's 1996 Annual Report to
Shareholders is incorporated herein by reference.
The Company may from time to time make statements that could be considered
"forward-looking" statements as defined in the Private Securities Litigation
Reform Act of 1995. These "forward-looking" statements are provided in
compliance with the "Safe Harbor" provision of the Private Securities
Litigation Reform Act of 1995.
The Company wishes to caution readers that the following factors, among others,
sometimes have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results during 1996,
and beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of the Company:
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Technology Changes
As technological advancements are made in the product requirements of the
Company's customers, the Company must continue to develop new products to keep
pace with such advancements. If the Company were unable to develop new
products, its ability to continue to serve existing customers and obtain new
customers would be impaired, thus adversely affecting the Company's revenues
and profitability.
Backlog
Because of the nature of the products sold by the Company and the delivery
requirements of customers, most of the Company's orders are filled within a
short time and the Company has relatively short production cycles and low
levels of order backlog. This low level of long-term orders and backlog makes
it more difficult to predict accurately future sales than would be the case if
the Company had a higher level of long-term orders and backlog.
Acquisitions
The Company has in the past expanded through acquisition of other companies.
The extent to which the Company varies its rate of acquisitions and the
profitability of the companies it acquires will impact the Company's overall
profitability.
Status of the Economy
The Company's products are sold to a number of different customers in different
industries and different countries. Thus, any general downturn in domestic or
international economic conditions or rates of growth could impact the Company's
sales and levels of profitability.
Governmental Regulations
Many different governmental regulations affect the telecommunications industry.
Any changes in these regulations could have a material impact on the Company's
business.
Sources of Supply
The Company is, in part, dependent upon the continuing availability of products
and raw materials provided by single source suppliers. The inability of the
Company to obtain products or raw materials on a timely basis or the
termination of such relationships could have an adverse effect on the Company.
Expense Structure
The Company's expense structure for certain costs is based on the Company's
expected level of sales and growth. To the extent that the Company's actual
level of sales or growth is different from that which it expects, the Company's
ability to timely adjust its cost structure to those levels will impact the
Company's results of operations.
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Product Mix
The Company's profitability is impacted by the mix of products it sells.
Certain of the Company's products have lower profit margins than others. If
the Company's actual mix of products sold is different from the expected mix,
the Company's expected profit margins would be affected by such changes.
Major Customers
The Company has in the past and probably will in the future rely on large sales
volume to certain customers. Loss of any of these customers could have a
material impact on the sales revenue and profitability of the Company.
Competition
The Company operates in the telecommunications industry where many companies
are substantially larger and have substantially greater resources than ETC. If
any of these companies were to decide to compete with ETC in its markets, the
sales revenues and profitability of ETC could be materially impacted.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information on pages 12 through 24 in ETC's 1996 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Directors and executive officers of the Company are as follows:
NAME AGE TITLE
---- --- -----
George W. Danner 77 Chairman of the Board
and Director
Dean W. Danner 46 President, Chief Executive
Officer and Director
Bonita M. Danner 45 Vice President Engineering
and Director
Hazel Danner 76 Corporate Secretary
and Director
Jeffrey M. Nigl 38 Vice President, Treasurer
and Chief Financial Officer
R.W. Johns, Jr. 48 Vice President Sales
Robert R. Spiering 52 Vice President Tech Services
Cynthia K. Carlson 52 Vice President Contracts
Joanne B. Huelsman 58 Director
A. William Huelsman 59 Director
Peter J. Lettenberger 59 Director
Richard A. Gabriel 64 Director
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GEORGE W. DANNER - Mr. Danner retired as the Company's Chief Executive Officer
in May 1993. He has served as Chairman of the Board and Director since May
1993. Prior thereto, he served as Chairman of the Board, Chief Executive
Officer and a Director since May 1989. Prior thereto he served as President,
Chief Executive Officer and a Director of the Company since its incorporation
in 1980. Prior thereto he was Vice President of GTE Automatic Electric
Corporation (a diversified manufacturer of telecommunications equipment), a
subsidiary of GTE Corporation. Mr. Danner is a registered Professional
Engineer, and has been actively involved in the telephone industry since 1949,
when he founded Electronic Secretary Industries, Inc., a manufacturer of
electronic telephone answering and recording equipment, which was merged into
GTE Corporation in 1957.
DEAN W. DANNER - Mr. Danner was elected the Company's Chief Executive Officer
in May 1993. Mr. Danner has served as a Director of the Company since
incorporation in 1980. Prior to his election as CEO, he was elected President
in May 1989 and has served as Chief Operating Officer since 1987. Prior
thereto he served as Executive Vice President since 1985. He was Vice
President and Director of Engineering prior thereto since the Company's
incorporation in 1980. Prior thereto he was a Manager of Engineering of GTE
Automatic Electric Corporation. He is a registered Professional Engineer and
holds five United States patents.
BONITA M. DANNER - Ms. Danner has served as a Director of the Company since
incorporation in 1980. She was appointed Assistant Vice President in 1983,
Director of Engineering in 1988, and Vice President Engineering in May 1989.
Prior thereto, she was a project engineer since 1980. She has been a member of
the Company's Audit Committee since 1993. She is a registered Professional
Engineer.
HAZEL DANNER - Ms. Danner has served as a Director of the Company and has been
employed as its Administrative Coordinator since its incorporation in 1980.
She was elected Corporate Secretary in 1983.
JEFFREY M. NIGL - Mr. Nigl, a certified public accountant, was elected Vice
President in May 1990 and Treasurer in May 1993. He has been Chief Financial
Officer since 1988 and prior thereto he was Controller since joining the
Company in 1985. Prior thereto he was employed for two years as Controller of
SportsVue Cable Network of Milwaukee, Wisconsin, and prior thereto for more
than three years as a senior accountant for Arthur Andersen & Co.
R.W. JOHNS, JR. - Mr. Johns was elected Vice President Sales in May 1995.
Prior thereto, he was Vice President of the Company and General Manager of its
Atlanta operations since May 1989. Prior thereto he was employed by Audichron
for 17 years where he served as Vice President, Chief Financial Officer,
Corporate Secretary, and Treasurer from 1984 to May 1989.
ROBERT R. SPIERING - Mr. Spiering was elected Vice President Technical Services
in May 1994. Prior thereto he was Director of Technical Services since 1990.
Prior thereto he was Engineering Supervisor since 1988 and Project Engineer
since joining the Company in 1985.
-13-
<PAGE> 15
CYNTHIA K. CARLSON - Ms. Carlson was elected Vice President Contracts in May
1994, and has been General Manager of its Pleasanton operations since 1991.
Prior thereto she was Western Regional Sales Manager and a member of the sales
department since joining the Company in 1986.
JOANNE B. HUELSMAN - Ms. Huelsman has served as a Director of the Company since
its incorporation in 1980. Ms. Huelsman has been a member of the Company's
Audit Committee since its creation in 1985. She served as Secretary of the
Company from 1980 to 1983 and has served as its Treasurer from 1983 to May
1993. Ms. Huelsman has been the owner of Berg Management Company since 1980,
has been an elected member of the Wisconsin State Legislature since 1983 and
has been engaged in the practice of law since 1980.
A. WILLIAM HUELSMAN - Mr. Huelsman has served as a Director of the Company
since its incorporation in 1980. He has been a member of the Company's
Compensation Committee since its creation in 1985. Mr. Huelsman is a
registered Professional Engineer and a real estate developer and, prior to 1996
was Chairman and Chief Executive Officer of Intelligraphics, Inc., a digital
mapping firm.
PETER J. LETTENBERGER - Mr. Lettenberger has served as a Director of the
Company and a member of its Compensation Committee since 1985. He is a partner
of Quarles & Brady, which firm he joined in 1964, and is a director of
W.H.Brady Co.
RICHARD A. GABRIEL - Mr. Gabriel was elected to the Board of Directors in
December 1993. He is also a member of the Company's Audit Committee and
Compensation Committee. Mr. Gabriel is a business consultant and, prior to
1997, was Executive Vice President of Stolper Fabralloy Company of Waukesha,
Wisconsin, a manufacturer of precision aircraft and ground turbine sheet metal
components. Prior thereto he was Manufacturing Manager of Kieffer Company from
1992 to 1993, and Executive Vice President of Intelligraphics, Inc. from 1989
to 1992.
All of the Directors serve until their respective successors are elected at the
next annual meeting of shareholders. Officers serve at the discretion of the
Board of Directors. George W. Danner and Hazel Danner are the parents of Dean
W. Danner, who is the husband of Bonita M. Danner, and are the parents of
Cynthia K. Carlson, who is the sister of Dean W. Danner. A. William Huelsman
is the husband of Joanne B. Huelsman. Other than as noted, none of the
Company's Directors or executive officers has any family relationship with any
other Director or executive officer.
-14-
<PAGE> 16
ITEM 11. EXECUTIVE COMPENSATION.
The Company is a "small business issuer" as defined in Item 10(a)(1) of
Regulation S-B and has elected to provide information in response to this Item
11 in accordance with the provisions of Item 402(a)(1)(i).
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation for the
Company's Chief Executive Officer and the highest-paid executive officers, as
well as the total compensation paid to each individual during the Company's
last three fiscal years. Columns (e) in the table related to Other Annual
Compensation, (f) related to Restricted Stock Awards, and (h) related to LTIP
Payouts have been omitted as there is no compensation to report.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
(a) (b) (c) (d) (g) (i)
Securities
Name Under- All Other
and lying Compen-
Principal Options/ sation
Position Year Salary($) Bonus($) SARs(#) ($)
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dean W. Danner 1996 132,000 2,700 5,100(1)
President and 1995 130,600 1,000 5,500(1)
CEO 1994 125,000 14,500 5,000 8,100(1)
R.W. Johns, Jr. 1996 95,600 1,200 1,000 2,000(2)
Vice President 1995 96,000 1,000 2,200(2)
1994 93,400 7,300 4,300(2)
- ------------------------------
</TABLE>
(1) Consists of directors' fees of $2,500 in each year, with the remainder
being profit sharing (in 1994), and Company matching contributions pursuant
to the Company's 401(k) retirement savings plan.
(2) Consists of profit sharing (in 1994), and Company matching contributions
pursuant to the Company's 401(k) retirement savings plan.
-15-
<PAGE> 17
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning options/SARs
granted during 1996 to the named executives:
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates
of Stock Price
Appreciation
Individual Grants for Option Term
- ------------------------------------------------------------ ----------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Number of Options/SARs
Securities Granted to Exercise
Underlying Employees or Base
Options/SARs in Fiscal Price Expiration
Name Granted(#) Year ($/Share) Date 5%($) 10%($)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R.W. Johns, Jr. 1,000 8.20% 2.875 5/3/2006 1,800 4,600
</TABLE>
The stock options included in the table above were granted in accordance with
the Company's Nonqualified Stock Option Plan. Under the Plan, options granted
may be exercised not more than 20% each year from the date of grant, and expire
10 years from the date of grant. The exercise price is the average of the
highest and lowest transaction prices of the stock on the date of the grant.
Options are canceled upon termination of employment.
AGGREGATED OPTIONS/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUES
The following table summarizes options and SARs exercised during 1996 and the
value of unexercised options and SARs held by the named executives at fiscal
year-end:
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities
Underlying
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at Fiscal at Fiscal
Acquired Value Year-End(#) Year-End($)
on Exercise Realized Exercisable(E)/ Exercisable(E)/
Name (#) ($) Unexercisable(U) Unexercisable(U)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dean W. Danner 0 0 2,200(E) 0(E)
3,800(U) 0(U)
R.W. Johns, Jr. 0 0 12,300(E) 0(E)
2,200(U) 0(U)
</TABLE>
-16-
<PAGE> 18
The Company does not have any information to report and has therefore omitted
disclosures related to S-B Item 402(e) Long-Term Incentive Plan ("LTIP") Awards
Table, and S-B Item 402(i) Report on Repricing of Options/SARs.
COMPENSATION OF DIRECTORS
Each Director of the Company is entitled to receive $500 for each Directors'
meeting attended, except for the Chairman of the Board, who receives $1,000 per
Directors' meeting attended. In addition, each outside Director receives an
annual retainer of $2,500 upon reelection at each Annual Shareholders Meeting.
These amounts are included in the preceding Summary Compensation Table.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of each class of the Company's Common Stock by each Director,
Executive Officer, or person known by the Company to own beneficially more than
5% of either class of Common Stock, and all Directors and Executive Officers as
a group as of February 7, 1997:
<TABLE>
<CAPTION>
Class A Common Stock(1) Class B Common Stock(1)
--------------------------- --------------------------
Shares Percentage Shares Percentage
Beneficially of Shares Beneficially of Shares
Owned Outstanding Owned Outstanding
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Hazel Danner 175,351(3) 8.8% 67,880 13.6%
Bonita M. Danner 172,101(3) 8.6% 67,880 13.6%
Dean W. Danner 168,387(3) 8.4% 64,635 12.9%
George W. Danner 158,837 7.9% 64,635 12.9%
Joanne B. Huelsman 139,701 7.0% 67,880 13.6%
A. William Huelsman 114,187 5.7% 64,635 12.9%
Georgia Barre(2) 104,959 5.2% 41,984 8.4%
Loren D. Barre(2) 82,460 4.1% 41,984 8.4%
R.W. Johns, Jr. 12,300(3) 0.6% - 0.0%
Peter J. Lettenberger 5,500(3) 0.3% - 0.0%
Richard Gabriel 2,500(3) 0.1% - 0.0%
All Executive Officers
and Directors as a
group (12 persons) 965,361(3) 48.2% 397,545 79.5%
- -------------
</TABLE>
(1) George W. Danner and Hazel Danner are the parents of Dean W. Danner
(the husband of Bonita M. Danner). A. William Huelsman is the husband of
Joanne B. Huelsman. All spouses disclaim beneficial ownership of one
another's shares, and the owners hold the shares directly and have sole
voting and investment power over the shares beneficially held, except that
Bonita M. and Dean W. Danner share voting and investment power with respect
to 10,400 shares of Class A Common Stock owned by their children.
(2) Loren Barre and Georgia Barre are not officers or directors of the
Company.
(3) Class A common shares beneficially owned include the right to
acquire shares of Class A common stock upon exercise of stock options as
follows:
-17-
<PAGE> 19
Hazel Danner, 400 shares; Bonita Danner, 600 shares; Dean Danner, 2,200
shares; R.W. Johns, Jr., 12,300 shares; Peter Lettenberger, 5,000 shares;
and Richard Gabriel, 2,000 shares. Shares beneficially owned by all
officers and directors as a group include 3 additional officers with the
right to acquire a total of 21,720 shares of Class A common stock upon
exercise of stock options.
The address for Bonita M. Danner, Hazel B. Danner, George W. Danner, and Dean
W. Danner is 1915 MacArthur Road, Waukesha, WI 53188. The address for Joanne
B. Huelsman is 235 West Broadway, Suite 30, Waukesha, WI 53186. The address
for A. William Huelsman is 235 West Broadway, Suite 40, Waukesha, WI 53186.
The address for Loren D. Barre is 1901 Bay Road #304, Vero Beach, FL 32963.
The address for Georgia Barre is 1110 Belmont Drive, Waukesha, WI 53186. The
address for Peter J. Lettenberger is 411 East Wisconsin Avenue, Milwaukee, WI
53202-4497. The address for Richard Gabriel is 19625 Killarney Way,
Brookfield, WI 53045.
All of the outstanding Class B common stock is subject to a cross purchase
agreement among the owners thereof (the "Parties") pursuant to which the shares
generally may not be transferred except to a spouse, descendant or certain
other permitted transferees unless they have first been offered to the other
Parties.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial statements
The Financial Statements, Notes to Financial Statements,
Independent Auditors' Report, Eleven Year Review, and Quarterly
Financial Data on pages 12 through 24 in ETC's 1996 Annual Report to
Shareholders are incorporated herein by reference.
2. Financial statement schedules
SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
-------- ----------- ------
II Valuation and Qualifying Accounts 23
The Independent Auditors' Report on Financial Statement
Schedules appear on page 22 of this report.
All other financial statement schedules are omitted as they are not
required, or the required information is shown in the Financial
-18-
<PAGE> 20
Statements and Notes to Financial Statements on pages 12 through 24 in ETC's
1996 Annual Report to Shareholders incorporated herein by reference.
3. Exhibits
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
3.1 Restated Articles of Incorporation of Electronic
Tele-Communications, Inc. - July 2, 1985 was
filed as Exhibit 3.1 to Form S-1 (No. 2-99175)
and is incorporated herein by reference.
3.2 Amended Bylaws of Electronic Tele-Communications,
Inc. adopted June 28, 1985 was filed as Exhibit
3.2 to Form S-1 (No. 2-99175) and is incorporated
herein by reference.
10.1 Electronic Tele-Communications, Inc. Tuition
Reimbursement Plan effective January 1, 1985 was
filed as Exhibit 10.1 to Form S-1 (No. 2-99175)
and is incorporated herein by reference.
10.2 Executive Incentive Compensation Plan effective
January 1, 1989 was filed as Exhibit 10.2 to
the 1988 Form 10-K and is incorporated herein
by reference.
10.3 Electronic Tele-Communications, Inc.
1989 Nonqualified Stock Option Plan effective
April 21, 1989 was filed as Form S-8 and is
incorporated herein by reference.
10.4 First Amendment to Credit Agreement dated April 4,
1991, by and between Electronic Tele-
Communications, Inc. and Bank One, Milwaukee, NA
(the original Credit Agreement dated May 17, 1989
was filed as Exhibit 10.1 to the Registrant's Form
8-K dated May 31, 1989) was filed as Exhibit 10.1
to Form 8-K dated April 17, 1991 and is
incorporated herein by reference.
-19-
<PAGE> 21
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
10.5 Letters of amendment, dated March 6, 1992 and
February 18, 1993, to First Amendment to Credit
Agreement dated April 4, 1991 by and between
Electronic Tele-Communications, Inc. and Bank One,
Milwaukee, NA was filed as Exhibit 10.5 to the
1992 Form 10-K and is incorporated herein by
reference.
11 Computation of Per Share Earnings 24
13 1996 Annual Report to Shareholders.
24.1 Consent of Ernst & Young LLP, Independent Auditors 22
27 Financial Data Schedule
28 Cross Purchase Agreement dated June 28, 1985 was
filed as Exhibit 28.1 to Form S-1 (No. 2-99175) and
is incorporated herein by reference.
(b) Reports on Form 8-K:
None.
-20-
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Dean W. Danner
------------------------------
Dean W. Danner
President and
Date: March 21, 1997 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Dean W. Danner President, Chief Executive March 21, 1997
- -------------------------- Officer and Director
Dean W. Danner
/s/ Jeffrey M. Nigl Vice President, Treasurer, March 21, 1997
- -------------------------- Chief Financial Officer,
Jeffrey M. Nigl and Principal Accounting
Officer
/s/ Bonita M. Danner Vice President Engineering March 21, 1997
- -------------------------- and Director
Bonita M. Danner
/s/ Hazel Danner Secretary and Director March 21, 1997
- --------------------------
Hazel Danner
/s/ George W. Danner Director March 21, 1997
- --------------------------
George W. Danner
/s/ Joanne B. Huelsman Director March 21, 1997
- --------------------------
Joanne B. Huelsman
/s/ A. William Huelsman Director March 21, 1997
- --------------------------
A. William Huelsman
/s/ Peter J. Lettenberger Director March 21, 1997
- --------------------------
Peter J. Lettenberger
/s/ Richard A. Gabriel Director March 21, 1997
- --------------------------
Richard A. Gabriel
-21-
<PAGE> 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Annual Report (Form 10-K)
of Electronic Tele-Communications, Inc. of our report dated February 7, 1997
included in the 1996 Annual Report to Shareholders of Electronic
Tele-Communications, Inc.
Our audits also included the financial statement schedule of Electronic
Tele-Communications, Inc. listed in Item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-30746) pertaining to the Electronic Tele-Communications, Inc.
1989 Nonqualified Stock Option Plan of our report dated February 7, 1997, with
respect to the consolidated financial statements incorporated herein by
reference, and our report included in the preceding paragraph with respect to
the financial statement schedule included in this Annual Report (Form 10-K) of
Electronic Tele-Communications, Inc.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
March 24, 1997
-22-
<PAGE> 24
Schedule II
ELECTRONIC TELE-COMMUNICATIONS, INC.
_________________
VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 1996
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions of Period
- --------------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for
Doubtful Accounts:
Year Ended
December 31, 1994 $215,800 $ (7,249) $ 43,751 $164,800
Year Ended
December 31, 1995 $164,800 $(15,000) $ 12,000 $137,800
Year Ended
December 31, 1996 $137,800 $(11,400) $ 12,900 $113,500
Allowance for
Inventory Obsolescence:
Year Ended
December 31, 1994 $560,017 $353,400 $138,297 $775,120
Year Ended
December 31, 1995 $775,120 $ 86,000 $500,530 $360,590
Year Ended
December 31, 1996 $360,590 $165,000 $283,008 $242,582
</TABLE>
-23-
<PAGE> 1
EXHIBIT 11
ELECTRONIC TELE-COMMUNICATIONS, INC.
_________________
COMPUTATION OF EARNINGS PER SHARE
Three Years Ended December 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- -----------
<S> <C> <C> <C>
Weighted average common
shares outstanding:
Class A common 2,003,949 2,003,949 2,003,515
Class B common 500,000 500,000 500,000
Net effect of dilutive stock options -
based on the treasury stock method
using average market price:
Class A common - - 4,528
--------- --------- ---------
Total shares:
Class A common 2,003,949 2,003,949 2,008,043
========= ========= =========
Class B common 500,000 500,000 500,000
========= ========= =========
Net earnings (loss) $ 256,566 $(230,716) $ 961,942
Less dividends paid:
Class A common 240,474 240,474 240,384
Class B common 20,000 20,000 20,000
--------- --------- ---------
Undistributed earnings (loss) $ (3,908) $(491,190) $ 701,558
========= ========= =========
Allocation of undistributed
earnings (loss):
Class A common $ (3,128) $(393,107) $ 561,696
Class B common (780) (98,083) 139,862
Calculation of earnings (loss) per share:
Class A common:
Dividends paid $ 0.12 $ 0.12 $ 0.12
Allocation of undistributed
earnings (loss) 0.00 (0.20) 0.28
--------- --------- ---------
Earnings (loss) per Class A common share $ 0.12 $ (0.08) $ 0.40
========= ========= =========
Class B common:
Dividends paid $ 0.04 $ 0.04 $ 0.04
Allocation of undistributed
earnings (loss) 0.00 (0.20) 0.28
--------- --------- ---------
Earnings (loss) per Class B common share $ 0.04 $ (0.16) $ 0.32
========= ========= =========
</TABLE>
-24-
<PAGE> 1
1996
ANNUAL REPORT
Electronic Tele-Communications, Inc.
<PAGE> 2
"ETC IS A QUALITY SUPPLIER OF
TELECOMMUNICATIONS SOLUTIONS
FOR OUR CUSTOMERS WORLDWIDE"
A LETTER TO OUR SHAREHOLDERS
As we reported in our letter last year, we expected 1996 would start slowly and
gain momentum as the year progressed. After incurring losses in the first two
quarters, sales and earnings steadily increased, capping off the year with a
very healthy fourth quarter.
For the year 1996, your Company recognized earnings of $257 thousand on sales
of $12.91 million. This compared with slightly lower sales of $12.90 million in
the prior year and a loss of $231 thousand. The favorable trend in 1996
earnings was primarily the result of tight cost controls and reduced staffing
levels in most operating areas.
ETC's 1996 fourth quarter saw a solid profit of $438 thousand on sales of $4.05
million, versus profit of $122 thousand and sales of $3.20 million for the 1995
fourth quarter. Benefitting the 1996 quarter was the partial shipment of a
large international order, news of which we previously announced.
While we are pleased with the upward trend and profitable results during the
second half of 1996, we remain focused on improving ETC and increasing
shareholder value for the long term. As such, we hired an investment banker in
1996 to assist ETC in locating a suitable acquisition or merger. We realize
that our particular niche of the telecommunications industry offers limited
growth potential, and to address this we must identify markets that are
complimentary to our technology and customer base, yet possess more opportunity
for diversification and growth. We will keep you apprised as we move forward
with this important strategy.
ETC is also pleased to announce that its Board of Directors declared a dividend
of $.12 per Class A common share for 1997, payable in two equal semi-annual
installments in March and September.
Please take a moment to review the remainder of our Annual Report. You will see
there are many exciting opportunities and challenges for your Company in the
upcoming years. One example is the international market where ETC has made
significant strides. Sales to international customers
represented 15% of total sales in 1996. A second area is the Telecommunications
Act of 1996, which will bring increased competition to the local exchange
market. The new players in the local exchange market will require the type of
sophisticated equipment offered by ETC to provide the services demanded by
today's telephone user.
In addition to the information in our Annual Report, we invite you to visit us
at our World Wide Web site (http://www.etcia.com) for the most up-to-date
information about the Company, its products and services.
Sincerely,
/s/ Dean W. Danner
Dean W. Danner
President and Chief Executive Officer
March 3, 1997
<PAGE> 3
QUESTIONS/ANSWERS
Q: HOW DOES THE TELECOMMUNICATIONS ACT OF
1996 AFFECT THE COMPANY?
A: The Telecommunications Act of 1996 has opened the door for competition
in the local exchange market. Each new local exchange carrier will be
required to provide services similar to those of the incumbent
carrier, such as intercept and changed number announcements.
Additionally, each carrier will attempt to differentiate itself by
offering enhanced services such as voice mail. ETC's products and
services are positioned to meet the needs of both the traditional and
non-traditional service providers. Each new carrier and service
provider offers new opportunities for growth in ETC's market.
Q: WHAT OPPORTUNITIES ARE
PRESENTED BY THE INTERNATIONAL
TELECOMMUNICATIONS MARKET?
A: Privatization and modernization are two key trends in the
international marketplace. New carriers are emerging world wide, with
many markets seeing competition for the first time. Existing service
providers are forced to upgrade their infrastructure to meet the
competition and the demands of their customers. These trends will
drive a continued need for the Company's products and services
world-wide. The Company has already realized an increased demand in
South America and Asia.
Q: WHAT OPPORTUNITIES ARE PROVIDED BY
THE EXPLOSIVE GROWTH OF THE INTERNET
AND WORLD WIDE WEB?
A: The Internet has provided ETC with a means to reach existing and
potential customers in a more efficient manner. The Company's World
Wide Web site (http://www.etcia.com) provides information about the
Company, its products and services to anyone with access to the Web.
The information is available 24 hours a day, every day, and is updated
on a regular basis. Technical bulletins and software upgrades are
available for download at the customer's convenience. A "guest book"
and e-mail link allow visitors to instantly send questions and
feedback to the Company. This has expanded ETC's commitment to
providing exceptional customer service.
Q: THE COMPANY HAS ACQUIRED OTHERS IN
THE PAST. ARE THERE ANY CURRENT PLANS
FOR ACQUISITIONS AND/OR MERGERS?
A: As always, the Company looks for the best opportunities that may
become available. In 1996, the Company increased its efforts to locate
suitable acquisitions for expansion into additional telecommunications
areas with different market dynamics. A special Board Committee was
appointed to oversee acquisition activities. Furthermore, the Company
has retained the services of an investment banker to identify and
contact potential acquisition opportunities in the interest of
increasing shareholder value.
Q: WHAT ARE THE COMPANY'S
GREATEST CHALLENGES?
A: The challenge is keeping pace with the changing demands of the
telephone user and ever-faster technological changes. No longer is the
telephone user satisfied with "plain old telephone service." Enhanced
services are in greater demand, fueled by the growing sophistication
of the average user. Technological change and new service introduction
are more rapid than ever. Commitment to customer awareness and
investment in research and development allow the Company to meet these
challenges.
Q: WHAT IS THE COMPANY'S OUTLOOK FOR
THE FUTURE?
A: Growth of the telecommunications industry world-wide and increased
competition are keys to the future. The Company seeks to expand its
market with an array of telecommunications solutions. Strategic
acquisitions could enhance the Company's offerings to this market.
Telecommunications is an industry with explosive growth, and ETC will
strive to participate in that growth.
2
<PAGE> 4
Service.
This describes ETC's mission
in manufacturing products that are
solution-focused in
meeting our
customers'
challenges. From
initial inception,
and through
development
and testing,
our products
are designed
to keep the
switching
network or
business
system
flowing smoothly.We
want our customers' subscribers
and patrons to never miss a
beat in their busy schedules.
CORPORATE PROFILE
ETC's history grew from a revolutionary idea. In 1949, its founder George
Danner, along with Joseph Zimmerman, an equally aspiring engineer, introduced
their Electronic Secretary telephone answering and recording device. While
simple by today's standards, this device offered the telephone company (telco)
a means not only to provide its customers service, but the power to generate
revenue with an ordinary telephone.
Although initially resisted by the phone companies, a combination of
perseverance by its creators as well as several state and federal service
commission hearings would eventually win over the industry. A healthy
combination of product demand and investment ensured not only the success of
the Electronic Secretary, but the birth of a new company.
The two-man Electronic Secretary operation soon grew to 60 employees. General
Telephone System approached the founders for acquisition and a merger which
consummated in 1957. By 1963, with 160 employees, annual sales exceeded four
million dollars. Further integration took place with General Telephone
Company's largest manufacturing facility, GTE Automatic Electric, as the
Waukesha Branch. In 1980, Danner left GTE to establish Electronic
Tele-Communications, Inc. and introduced central office digital voice
announcers.
Two acquisitions followed. In 1989 ETC acquired The Audichron Company,
inventor of the telephone time of day answering system. In 1991, ETC acquired
Automation Electronics Corporation, expanding ETC's telco offerings to include
business equipment such as call sequencers, auto attendants, and announcement
devices.
ETC's executive offices are located at 1915 MacArthur Road, Waukesha, WI.
Branches are maintained in Atlanta, GA and Pleasanton, CA. Each of the
Company's three offices supplies technical support. Recording services and
weather forecasting are maintained at the Atlanta facility while primary
manufacturing takes place at the Waukesha facility.
From its beginning, ETC has built on its cornerstone of service. In addition to
wireline, ETC has provided tools and services for the wireless industry. Our
product applications will continue to evolve as the level of wireline and
wireless services expected by customers continues to grow. ETC not only meets
the needs of today's telephone user, but is poised for success in tackling the
challenges of the future in the ever changing telecommunications industry.
FROM ITS BEGINNING,
ETC HAS BUILT ON
ITS CORNERSTONE
OF SERVICE...
3
<PAGE> 5
OUR VOICES, OUR BUSINESS
ETC's primary line of equipment works hand-in-hand with the telephone switching
network. Special messages, called intercept, are often supplied by an ETC Voice
Platform. ETC voice platforms announce information related to changed numbers,
network status, calling feature status or payment information. Voice Platforms
speak for the telephone switch, the brains of the network, and provide
information for customers to complete their calls.
Another recent offering to the telephone switching industry is a combined Voice
Mail/Audiotex product. Telcos can provide this convenient, easy to use system
to their customers and customize the types of services offered. For example,
one package may feature unlimited voice recording and storage while another may
have a prescribed message length or duration of time that messages are stored.
The system can also serve as an information bulletin board where callers
receive information after pressing sequences of numbers on their telephone
keypad.
ETC also manufactures Call Sequencers, effective in high-traffic situations.
Calls are prioritized by the sequencer and held in queue for the next available
agent. While waiting, callers hear information on community events or other
custom messages. In addition, call sequencers generate reports for effective
staffing and call management.
Digital Announcers, ideal when information needs to be accessed frequently,
also effectively manage calls. Digital announcers greet callers and provide
directions on which keypad combinations should be pressed in order to receive
information. Acting as an automated hotline of information, a digital announcer
frees businesses to focus on clients asking the really tough questions.
Auto Attendants, another product line, expand staffing capability by directing
calls without the intervention of a live operator. Attendants work around the
clock by transferring calls to the appropriate extension and if they are not
answered, offer the caller transfer to a live operator or external voice mail
system.
IN ADDITION TO WIRELINE, ETC HAS PROVIDED TOOLS AND SERVICES FOR
THE WIRELESS INDUSTRY.
Multi-million dollar orders
require teamwork of the highest
quality. ETC employees not only
utilize innovation in production,
but contribute their own
dedication in satisfying the
customer. In 1996, an all-out
multi-departmental effort enabled
ETC to successfully manufacture
and meet the deadlines for one of
the largest orders in the
company's history.
4
<PAGE> 6
ETC also keeps telephone peripherals, such as voice mail systems, working
efficiently. When a caller hangs up while on hold, the line may not disconnect
in a reasonable time. This causes unnecessary waiting for new callers behind
empty lines. Also, voice mail systems may record minutes of annoying,
screeching-sounding telephone tones. ETC Disconnect Units detect steady or
interrupted progress tones within three seconds and quickly disconnect the
line, freeing it to receive additional calls.
Finally, ETC offers time/weather/temperature announcement systems known as USA
Time(R). Weather forecasting information is sold in various Weathertel(R)
packages that offer basic to detailed reports. By modem, a subscriber receives
updated forecasts from ETC's Weather Center in Atlanta which are downloaded
into that facility's ETC weather equipment. Weather information is accessed by
the community through a special published phone number. Short advertising
messages may be played before the weather announcement. This is an effective
community service and promotional vehicle. Several sponsors can either record
their own messages or take advantage of professional recordings through ETC's
Recording Services Studio.
"Significant changes took place in
1996 for all departments involved
in Manufacturing. Through the
cooperation of Purchasing,
Stock Room, Production,
Testing, QA, Service, and
Shipping, we developed
programs that enable us
to build things faster,
smarter, and more
efficiently; fulfilling our
customer orders is important in
building customer satisfaction."
--Mark Malinowski, Production Manager
5
<PAGE> 7
"We're sorry, all circuits are busy now. Will you please try your call again
later."
"Your calls will be forwarded to 555-0000. If this number is correct, dial 1.
If this number is not correct, dial 0. Please dial now."
"The custom calling feature you are attempting to use has not been activated
for this phone."
"Excuse me. Please deposit thirty-five cents for the next five minutes."
"The number you have dialed, 555-0000, has been changed and is now a multiple
listing. The individual parties may be contacted as follows...".
"Your cellular service does not allow calling to the number dialed; for more
information, please call *611 from your cellular phone."
"Good morning. You have just answered your wake up call. Please have a pleasant
day. "
"THE NUMBER YOU HAVE REACHED, 555-0011, HAS BEEN CHANGED. THE NEW NUMBER IS
777-0000. PLEASE NOTE, THE NEW NUMBER IS 777-0000.
THIS IS A RECORDING."
"....shall I connect you now?"
"This is the Pleasant Telephone Company. To activate your service, please call
555-0000. Thank you."
"For school closing information, please press 1 now..."
"MIDCITY AREA WEATHER: RAIN TODAY, PARTLY CLOUDY AND LITTLE TEMPERATURE CHANGE
TONIGHT. TEMPERATURE 74 DEGREES."
Maybe the
number has
changed, it's been
misdialed, or the
service required is not
accessible--ETC
intercept messages
take away the headache
of guessing how to get connected.
Providing announcement messages for telephone companies,
cellular operators or other service providers is our specialty.
INDUSTRY TRENDS
The 1996 Telecommunications Act has opened the industry to competition. As
companies take advantage of this opportunity, ETC's voice platforms will be in
demand not only by traditional dial tone providers, but industry newcomers.
Wireline and wireless services are growing rapidly. The widespread use of fax
machines, modems, wireless telephones and pagers, and other devices has
prompted expansion of the telephone numbering scheme. Area codes have been
added and modified to accommodate these needs. A common problem is alerting
subscribers to these changes in an efficient manner.
Competition and demand have also fueled the requirement of increased services
and applications. Integration, flexibility, and revenue generation are primary
concerns. Equipment that allows applications to be added or changed on a unit
without the need to purchase additional hardware is a sought after feature.
6
<PAGE> 8
ETC business products, when
used as a confidential "hotline", can help
troubled teens and
concerned parents have
repeat access to
information for the price of a local
phone call. System statistics can further assist
health care agencies in targeting their services or obtaining
funding. Other applications for ETC business products include funeral homes,
finance, insurance, education,
transportation, radio,
theaters, hotels, and
government.
"Do I have to wear boots today?" 56.8% of adult households call ETC
time/weather/temperature services once a month or more (R.H. Bruskin Associates
study). ETC's weather announcement systems and services are offered by over
1800 sites in the United States, Mexico and Canada. Our weather customers'
phone numbers are among the most frequently dialed by millions of people every
day.
MARKETS
Markets for ETC products have traditionally been divided into two groups:
telcos and business systems (customer premise equipment). Following the
Telecommunications Act, this simple categorizing is no longer valid. Any switch
provider can be classified as a prospective ETC customer. These alternate
providers of dial tone are known in the industry by various terms: CLECs
(competitive local exchange companies), CAPs (competitive access providers),
AAPs (alternate access providers). In addition, long distance companies, cable
companies, and utilities have provided access to the public telephone network
through their switches. These opportunities for competition have broadened
ETC's niche markets.
Internationally, ETC has made strides in marketing its products to countries in
South America, Asia and other parts of the world. Whether a telco is seeking
solutions for maximizing existing switching equipment, or ways to enhance the
latest switching technology, ETC products can accommodate its networks needs.
Business markets for ETC products are broader in spectrum. Applications can be
found in many industries including health care, funeral homes, finance,
insurance, education, transportation, radio, theaters, hotels, and government.
ETC products are a simple, economical way for businesses to transform their
telephones into public bulletin boards, community promotional tools, business
advertising mediums, or information services.
OUR PRODUCT APPLICATIONS WILL CONTINUE TO EVOLVE
AS THE LEVEL OF WIRELINE AND WIRELESS SERVICES
EXPECTED BY CUSTOMERS CONTINUES TO GROW.
7
<PAGE> 9
"Our focus on
customer
accessibility
brought about the
restructuring of sales
and customer service
in 1996. We
assembled an inside
sales staff to work as
a team with outside sales
and customer service in
supporting our customers."
--Debbie Scott, Customer Service Supervisor
COMPETITIVE ADVANTAGES
ETC's products are designed for compatibility with the majority of switches in
the market. In 1996, testing was completed at Siemens Stromberg Carlson, Nortel
(formerly Northern Telecom), and at Motorola's IN2 Solution Center. ETC is
committed to product compatibility and participates in a number of
certification or compliance field testing programs.
ETC voice platforms solve administrative and traffic problems of changed number
situations. Database changes take place with relative ease and callers are
provided with the changed number information. In wireless situations this is
particularly valuable in increasing the call completion index for increased
revenue.
Multiple applications also take place simultaneously on ETC voice platforms.
Many types of intercept messages ranging from standard to changed number
announcements are available within a single unit. Allocation of channels to
specific applications is not required. This flexibility enables the switch to
utilize any channel for maximum call handling efficiencies.
Additional announcement applications can be developed and added to voice
platforms to meet specific needs. Flexibility is further offered through
custom announcements capabilities. Announcements can be recorded locally or
remotely from a standard telephone.
Product support and customer education are also important ingredients in
setting ETC apart from its competition. Whether through on-site training or
24-hour customer service, ETC customers can be assured of product assistance
that meets their needs.
FUTURE FOCUSED
The telecommunications industry, by its nature, promotes change, growth and
challenge. Meeting the existing needs of ETC's customers, while focusing on
future technology, ensures the development of products that are application
driven. Customers want products today that are flexible enough for tomorrow.
ETC has begun redefining its product development process to maintain focus on
the customer's application needs. Our team approach to product development
incorporates ideas from research and the field to create equipment with revenue
generating applications for our customers. Current projects to implement
features such as ISDN (Integrated Services Digital Network) interfaces, voice
activated dialing, and voice/speaker verification will bring increased value
and service to products for the switching network.
Keeping a close eye on
industry trends ensures
development of products
that are application
driven. While
no one has
a crystal ball,
we believe
ETC's future
will be filled
with opportunity.
Three determining
factors include:
industry growth, competition,
and acquisition.
ETC NOT ONLY MEETS THE NEEDS OF TODAY'S TELEPHONE USER, BUT IS POISED FOR
SUCCESS IN TACKLING THE CHALLENGES OF THE FUTURE IN THE EVER CHANGING
TELECOMMUNICATIONS INDUSTRY.
8
<PAGE> 10
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis should be read in conjunction with
the Consolidated Financial Statements, Notes to Consolidated Financial
Statements, and Eleven Year Review of Selected Financial Data, all of which
appear later in this report.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
Consolidated Statements of Operations, expressed as percentages of net sales,
together with the percentage changes in such items from the prior period.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Percent Change
Increase
(Decrease)
1996 1995
Percentage of Net Sales VS. vs.
1996 1995 1994 1995 1994
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 0.1% -20.7%
Cost of products sold 50.4 47.7 47.2 5.6 -19.7
Gross profit 49.6 52.3 52.8 -4.9 -21.5
General and administrative expenses 12.9 13.1 11.4 -1.8 -8.4
Marketing and selling expenses 18.1 21.6 16.9 -16.3 1.1
Research and development expenses 15.3 19.6 15.6 -21.8 -0.1
Other income (expense) -0.1 -0.3 -0.5 -57.2 -53.3
Earnings (loss) before income taxes 3.2 -2.4 8.4 * *
Income taxes (benefit) 1.2 -0.6 2.5 * *
Net earnings (loss) 2.0 -1.8 5.9 * *
- --------------------------------------------------------------------------------------------
</TABLE>
*Not meaningful to presentation
1996 VS. 1995
REVENUES
Net sales increased by 0.1% from $12,902,000 in 1995 to $12,914,000 in
1996. The increase in net sales in 1996 was due primarily to higher sales of
the Company's interactive voice information systems, partially offset by lower
sales of older technology passive recorder/announcer equipment. Sales of the
Company's interactive voice information systems were made primarily to large,
original equipment manufacturers and several operating telephone companies.
Sales of interactive voice information systems increased $1,101,000 in 1996 and
represented 60%, 52%, and 59% of sales in 1996, 1995 and 1994, respectively.
Sales of older technology passive recorder/ announcer equipment decreased
$358,000 in 1996 to $876,000, and it is expected that these sales will continue
to decrease as a percentage of total Company sales in upcoming years. Lease
revenue remained relatively constant between periods, accounting for 27% and
28% of net sales in 1996 and 1995, respectively. Product pricing remained
relatively constant between years, and inflation did not have a material impact
on revenues.
GROSS PROFIT
Gross profit was 49.6% of net sales in 1996 versus 52.3% in 1995. The
decrease was due primarily to the change in responsibility for certain product
support costs from research and development to cost of sales in 1996. The
effect of this change increased cost of sales by $173,000 in 1996 and reduced
the 1996 gross profit percentage by 1.3%. The remaining decrease in the gross
profit percentage in 1996 was due to increased sales to an international
customer of older technology equipment which had a slightly lower profit margin.
OPERATING EXPENSES
Total operating expenses were $5,974,000 in 1996, or 46.2% of net sales,
compared to $7,009,000 in 1995, or 54.3% of net sales. The decrease in operating
expenses in 1996 were primarily in the areas of marketing and selling expenses
and research and development expenses. Marketing and selling expenses decreased
by $453,000 in 1996. The decrease was a result of lower staffing levels, lower
1996 convention expenses as compared with 1995 which included the international
telecommunications convention in Switzerland attended by the Company, and lower
costs associated with printing of product literature. Research and development
expenses decreased by $553,000 in 1996. The decrease in research and development
was a result of the change in responsibility for certain product support costs
referred to above, and lower staffing levels in engineering during the year.
9
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OTHER INCOME AND EXPENSE
Net other expense in 1996 was $18,000, compared to $41,000 in 1995. The
decrease was related primarily to the occurrence of interest income as a result
of investing the Company's cash position in 1996 compared to interest expense on
borrowings in 1995.
INCOME TAXES
Income tax expense was $161,000 in 1996, or an effective tax rate of
38.6%, compared to an income tax benefit of $77,000 in 1995, or an effective tax
rate of (24.9)%. The 1996 tax expense was the result of federal and state taxes
on net earnings, partially offset by a reduction of the valuation allowance
excluding use of net operating loss carryforwards. The 1995 tax benefit was the
result of the net loss, partially reduced by the effect of goodwill amortization
and state income tax expense.
NET EARNINGS AND EARNINGS PER SHARE
Net earnings were $257,000 in 1996 versus a net loss of $231,000 in
1995. The increase in net earnings between years was due primarily to lower
marketing and selling expenses and lower research and development expenses in
1996. Earnings per Class A common share were $.12 in 1996, versus loss per share
of $.08 in 1995.
1995 VS. 1994
REVENUES
Net sales decreased by 20.7% from $16,263,000 in 1994 to $12,902,000 in
1995. The decrease in net sales in 1995 was due primarily to lower sales of the
Company's interactive voice information systems. Demand slowed in 1995 for the
Company's interactive voice information systems from large, original equipment
manufacturers and several operating telephone companies. Sales of interactive
voice information systems decreased $2,871,000 in 1995 and represented 52%, 59%,
and 48% of sales in 1995, 1994 and 1993, respectively. Sales of basic
recorder/announcer equipment and call processing equipment remained relatively
constant between years. Lease revenue remained relatively constant between
periods, but as a percentage of sales increased from 23% in 1994 to 28% in 1995
due to comparing lease revenue with lower total revenue in 1995. Product pricing
remained relatively constant between years.
GROSS PROFIT
Gross profit was 52.3% of net sales in 1995 versus 52.8% in 1994. The
decrease was due primarily to lower sales volume over which to spread fixed
manufacturing costs, partially offset by more efficient manufacturing operations
and improved management of inventory levels.
OPERATING EXPENSES
Operating expenses were $7,009,000 in 1995, or 54.3% of net sales,
compared to $7,138,000 in 1994, or 43.9% of net sales. The decrease in operating
expenses in 1995 was due primarily to lower general and administrative expenses
related to lower staffing levels in the Corporate and Finance departments.
Marketing and selling expenses increased marginally and research and development
expenses were maintained at levels the Company considers important to support
future product development. As a percentage of net sales, operating expenses
increased in 1995 due to spreading costs over lower sales volume.
OTHER INCOME AND EXPENSE
Net other expense in 1995 was $41,000, compared to $88,000 in 1994. The
decrease was related primarily to losses on sales of equipment in 1994, which
did not reoccur in 1995.
INCOME TAXES
Income tax benefit was $77,000 in 1995, or an effective tax rate of
(24.9)%, compared to income tax expense of $401,000 in 1994, or an effective tax
rate of 29.4%. The 1995 tax benefit was the result of the net loss, partially
reduced by the effect of goodwill amortization and state income tax expense.
NET EARNINGS AND EARNINGS PER SHARE
Net loss was $231,000 in 1995 versus net earnings of $962,000 in 1994.
The decrease in net earnings between years was due primarily to lower sales
volume, partially offset by lower operating expenses. Loss per Class A common
share was $.08 in 1995, versus earnings of $.40 in 1994.
10
<PAGE> 12
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $4,116,000 at December 31, 1996, compared to
$3,880,000 for 1995 and $4,100,000 for 1994. The increase in working capital in
1996 was due primarily to net earnings, partially offset by payments made for
dividends and equipment. The decrease in working capital in 1995 was due
primarily to a net loss and payments made for equipment and dividends. Cash
provided by operating activities increased $567,000 in 1996 from 1995. The
increase was a function of net earnings in 1996 compared to a 1995 net loss,
coupled with refunds of income taxes in 1996.
In 1996, payments made for dividends and purchases of capital equipment
were funded primarily by net earnings and refunds of income taxes. In 1995,
payments made for dividends and purchases of equipment were funded primarily by
reductions of accounts receivable and inventories. In 1994, payments made on the
revolving credit facility and purchases of capital assets were funded primarily
by net earnings.
Income tax refunds in 1996 were in response to tax returns filed to
claim refunds by carryback of the 1995 loss to offset previous years' earnings.
Accounts receivable decreased in 1995 due to the timing of shipments to a few
major customers in late 1994 that did not repeat in 1995. In 1995 and 1994,
inventories decreased primarily due to the continued use of inventory management
programs by the Company and further consolidation of purchasing and
manufacturing in Waukesha, Wisconsin.
Capital expenditures were $167,000 in 1996, $228,000 in 1995, and
$416,000 in 1994. Capital expenditures in 1996 consisted primarily of personal
computer additions and upgrades, together with purchases of test equipment for
manufacturing. Capital expenditures in 1995 consisted primarily of purchases of
equipment used in research and development and purchases of additional personal
computers. Capital expenditures in1994 consisted primarily of upgrades to the
Company's computer equipment, updated equipment for research and development,
and test equipment for manufacturing.
As of December 31, 1996, the Company had no borrowings on a $3,500,000
revolving credit facility.
At current operating levels, management believes that cash generated
from operations, together with the available revolving credit facility, will
provide adequate funds to meet the Company's operating needs for the foreseeable
future.
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
ELECTRONIC TELE-COMMUNICATIONS, INC.
We have audited the consolidated balance sheets of Electronic
Tele-Communications, Inc. and subsidiary as of December 31,1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31,1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Electronic Tele-Communications, Inc. and subsidiary at December 31,1996 and
1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31,1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
February 7,1997
11
<PAGE> 13
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES (Note 13) $ 12,913,830 $ 12,902,268 $ 16,262,639
COST OF PRODUCTS SOLD 6,503,886 6,159,220 7,674,331
---------------------------------------------
GROSS PROFIT 6,409,944 6,743,048 8,588,308
OPERATING EXPENSES:
General and administrative 1,661,419 1,691,228 1,847,018
Marketing and selling 2,332,151 2,784,829 2,753,570
Research and development 1,980,856 2,533,422 2,537,056
---------------------------------------------
5,974,426 7,009,479 7,137,644
---------------------------------------------
EARNINGS (LOSS) FROM OPERATIONS 435,518 (266,431) 1,450,664
OTHER INCOME (EXPENSE):
Interest expense (1,859) (11,052) (20,114)
Interest and dividend income 23,963 1,191 12,978
Miscellaneous (39,656) (31,124) (80,586)
---------------------------------------------
(17,552) (40,985) (87,722)
---------------------------------------------
EARNINGS (LOSS) BEFORE INCOME
TAXES 417,966 (307,416) 1,362,942
Income taxes (benefit) (Note 8) 161,400 (76,700) 401,000
---------------------------------------------
NET EARNINGS (LOSS) $ 256,566 $ (230,716) $ 961,942
---------------------------------------------
EARNINGS (LOSS) PER SHARE
(Notes 10, 11 and 12):
Class A common $ 0.12 $ (0.08) $ 0.40
---------------------------------------------
Class B common $ 0.04 $ (0.16) $ 0.32
---------------------------------------------
Weighted average common shares
outstanding (Notes 10 and 12) 2,503,949 2,503,949 2,508,043
---------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE> 14
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,001,976 $ 497,971
Trade accounts receivable, less allowance for doubtful
accounts of $113,500 in 1996 and
$137,800 in 1995 (Note 5) 1,329,880 1,280,955
Inventories (Notes 2 and 5) 2,434,372 2,495,822
Refundable income taxes - 201,072
Deferred income tax benefits (Note 8) 268,350 320,402
Prepaid expenses and other current assets 153,442 63,271
----------------------------------
Total current assets 5,188,020 4,859,493
LEASED SERVICE EQUIPMENT (Note 5) 14,394 37,993
PROPERTY, PLANT AND EQUIPMENT (Notes 3 and 5) 1,832,946 2,053,482
DEFERRED INCOME TAX BENEFITS (Note 8) 52,850 46,998
EXCESS OF COST OVER NET ASSETS ACQUIRED,
less accumulated amortization of $316,120 in
1996 and $275,536 in 1995 (Note 8) 1,005,514 1,126,285
OTHER ASSETS 21,332 -
----------------------------------
Total Assets $ 8,115,056 $ 8,124,251
----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 127,562 $ 238,608
Accrued expenses (Note 9) 627,808 639,851
Income taxes payable 120,139 -
Deferred revenue 196,379 100,937
----------------------------------
Total current liabilities 1,071,888 979,396
LONG-TERM LIABILITIES (Note 4) 226,700 324,479
----------------------------------
Total liabilities 1,298,588 1,303,875
----------------------------------
STOCKHOLDERS' EQUITY (Notes 10 and 11):
Preferred stock, authorized 5,000,000 shares,
none issued - -
Class A common stock, authorized 10,000,000 shares,
par value $.01, issued and outstanding 2,003,949 shares 20,039 20,039
Class B common stock, authorized 10,000,000 shares,
par value $.01, issued and outstanding 500,000 shares 5,000 5,000
Additional paid-in capital 3,323,528 3,323,528
Retained earnings 3,467,901 3,471,809
----------------------------------
Total stockholders' equity 6,816,468 6,820,376
----------------------------------
Total Liabilities and Stockholders' Equity $ 8,115,056 $ 8,124,251
----------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 15
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 256,566 $ (230,716) $ 961,942
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 438,031 496,365 560,798
Deferred income taxes 126,400 161,300 3,729
(Gain) loss from sale of equipment (941) (8,984) 23,727
Changes in operating assets and liabilities:
Accounts receivable (48,925) 555,724 (821,725)
Inventories 61,450 93,631 578,644
Prepaid expenses and other assets (111,503) 89,388 (20,866)
Accounts payable and accrued expenses (220,868) (451,397) 39,405
Income taxes 321,211 (251,498) (26,323)
Deferred revenue 95,442 (104,359) 3,465
-----------------------------------------
Total adjustments 660,297 580,170 340,854
-----------------------------------------
Net cash provided by operating activities 916,863 349,454 1,302,796
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (167,411) (228,349) (415,680)
Proceeds from sale of equipment 15,027 10,295 17,940
-----------------------------------------
Net cash used in investing activities (152,384) (218,054) (397,740)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (260,474) (260,474) (260,385)
Repayment of revolving credit facility - - (650,000)
Proceeds from issuance of common stock - - 8,775
-----------------------------------------
Net cash used in financing activities (260,474) (260,474) (901,610)
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 504,005 (129,074) 3,446
Cash and cash equivalents at beginning of year 497,971 627,045 623,599
-----------------------------------------
Cash and cash equivalents at end of year $ 1,001,976 $ 497,971 $ 627,045
-----------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 56,533 $ 13,498 $ 423,594
Cash received from income tax refunds 342,744 - -
Cash paid for interest expense 1,859 11,052 26,851
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 16
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock (Note 10)
-----------------------------------------
Class A Class B Total
------- ------- Additional Stock-
Number Number Paid-in Retained holders'
of Shares Amount of Shares Amount Capital Earnings Equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 2,002,149 $ 20,021 500,000 $ 5,000 $ 3,314,771 $ 3,261,442 $ 6,601,234
Net earnings - - - - - 961,942 961,942
Stock options exercised 1,800 18 - - 8,757 - 8,775
Cash dividends paid:
$.12 per Class A common share - - - - - (240,385) (240,385)
$.04 per Class B common share - - - - - (20,000) (20,000)
--------------------------------------------------------------------------------------
Balances at December 31, 1994 2,003,949 20,039 500,000 5,000 3,323,528 3,962,999 7,311,566
Net loss - - - - - (230,716) (230,716)
Cash dividends paid:
$.12 per Class A common share - - - - - (240,474) (240,474)
$.04 per Class B common share - - - - - (20,000) (20,000)
--------------------------------------------------------------------------------------
Balances at December 31, 1995 2,003,949 20,039 500,000 5,000 3,323,528 3,471,809 6,820,376
NET EARNINGS - - - - - 256,566 256,566
CASH DIVIDENDS PAID:
$.12 PER CLASS A COMMON SHARE - - - - - (240,474) (240,474)
$.04 PER CLASS B COMMON SHARE - - - - - (20,000) (20,000)
--------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 2,003,949 $ 20,039 500,000 $ 5,000 $ 3,323,528 $ 3,467,901 $ 6,816,468
--------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND CONCENTRATION OF CREDIT RISK
The Company designs, manufactures, programs, markets and leases digital
voice information and call processing systems and related computer software
and services. The Company's equipment, compatible with most telephone
systems, provides a wide range of audio information and call handling
capabilities via the telephone network. The Company's systems interface
with customer computer systems to provide voice access to computerized
information. Examples of these voice information capabilities include
time, temperature, road conditions, stock prices, repair status, and many
others. Examples of the call processing capabilities include voice mail,
call sequencing, and automated attendant functions. The Company's systems
can also announce new and old telephone numbers, flexible pay telephone
charges, class of service announcements, and service specific customer
dialing information.
The Company was incorporated in Wisconsin in 1980. The Company's executive
offices, together with manufacturing, engineering, marketing, sales, and
technical services are located in Waukesha, Wisconsin. Engineering, sales,
technical services, and limited manufacturing are located in Atlanta,
Georgia and Pleasanton, California.
The Company's sales are concentrated primarily in the domestic
telecommunications industry. The Company performs periodic credit
evaluations of its customers' financial condition and does not require
collateral.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary, The Audichron Company. All intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an original maturity of three months or
less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
LEASED SERVICE EQUIPMENT
The Company leases its voice announcement equipment and related computer
software for terms of one month to three years with renewal options on a
month-to-month basis. All such leases are treated as operating leases.
Leased service equipment is stated at cost less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated
useful lives of the equipment.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. For financial reporting purposes,
depreciation and amortization is provided using the straight-line method
over estimated useful lives of 3 to 20 years.
EXCESS COST OVER NET ASSETS ACQUIRED
Excess cost over net assets acquired are recorded at cost and amortized by
the straight-line method over periods between 25 and 40 years.
REVENUE RECOGNITION
Revenue from equipment sales is recognized at the time of shipment. Lease
and service revenue, approximating 28%, 28%, and 23% of total revenue in
1996, 1995 and 1994, respectively, is recognized when the related service
is provided. Revenue from the sale of maintenance contracts is deferred and
recognized over the term of the contract.
RESEARCH AND DEVELOPMENT
Research and development costs related to the design and development of new
products are expensed as incurred.
RECLASSIFICATIONS
Certain 1995 amounts have been reclassified to conform to the 1996
classifications.
16
<PAGE> 18
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
2. INVENTORIES
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 714,249 $ 1,218,365
Work-in-process and finished goods 1,278,059 1,013,766
Maintenance and demo parts 684,646 624,281
Reserve for obsolescence (242,582) (360,590)
-------------------------------
Total inventories $ 2,434,372 $ 2,495,822
- ---------------------------------------------------------------------------
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Land $ 289,290 $ 289,290
Buildings and improvements 1,614,218 1,618,306
Equipment and furniture 3,232,587 3,315,398
-------------------------------
5,136,095 5,222,994
Accumulated depreciation and amortization (3,303,149) (3,169,512)
-------------------------------
Net property, plant and equipment $ 1,832,946 $ 2,053,482
- ---------------------------------------------------------------------------
</TABLE>
4. PLANT, OFFICE AND EQUIPMENT LEASES
The Company leases its plant and office facilities in Atlanta, Georgia and
Pleasanton, California under long-term operating leases extending to the
years 2000 and 1999, respectively. Future minimum lease payments, which for
the Atlanta facility increase with the consumer price index, at December
31,1996 are as follows:
<TABLE>
<CAPTION>
Rental Sublease Net Rental
Year Payments Rentals Payments
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $ 698,100 $ 233,000 $ 465,100
1998 698,100 164,400 533,700
1999 553,300 109,700 443,600
2000 282,100 73,100 209,000
------------------------------------------
Total minimum lease payments $2,231,600 $ 580,200 $1,651,400
- -------------------------------------------------------------------------------
</TABLE>
Included in minimum lease payments are certain payments for abandoned
leases. A liability of $241,100 and $299,700 at December 31,1996 and 1995,
respectively, for those payments is included in accrued expenses and other
long-term liabilities (see Note 10).
Rent expense consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Total rent expense $ 613,772 $ 585,657 $ 531,533
Amounts received under sublease rentals (236,529) (222,110) (211,413)
-------------------------------------
Net rent expense $ 377,243 $ 363,547 $ 320,120
- ------------------------------------------------------------------------------
</TABLE>
5. REVOLVING CREDIT FACILITY
The Company has a $3,500,000 revolving credit facility available with
interest at the announced reference rate of the bank (8.5% at December 31,
1996). No compensating balances or commitment fees are required under the
revolving credit facility. There were no borrowings under the revolving
credit facility at December 31, 1996, which expires on May 15,1997.
The revolving credit facility is secured by a credit agreement with the
bank listing certain assets as collateral. The provisions of the credit
agreement restrict security interests in Company assets, require
maintenance of minimum current ratios, tangible net worth, and debt ratios,
and limit capital expenditures and restricted payments.
17
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
6. PROFIT SHARING PLAN
The Company has a profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code, whereby participants may contribute a percentage of
compensation, but not in excess of the maximum allowed under the Code.
Substantially all employees are eligible to participate. The plan provides
for, and the Company expenses, Company matching contributions and
additional discretionary contributions determined by the Board of
Directors which, in the aggregate, amounted to $97,000 in 1996, $96,200 in
1995, and $200,000 in 1994.
7. STOCK OPTION PLAN
The Company has a Nonqualified Stock Option Plan whereby 175,000 shares of
Class A common stock are authorized for granting of options to key
employees of the Company as determined by the Stock Option Committee of the
Board of Directors. At December 31, 1996, 34,200 shares are available for
future grants. Options granted may be exercised not more than 20% each
year from date of grant, and expire ten years from date of grant. The
exercise price is the average of the highest and lowest transaction prices
of the stock on the date of grant. Options are cancelled upon termination
of employment and that stock becomes available for future option grants.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
(Statement 123) requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994, under the fair value method of
that Statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1995: risk-free interest rate of
6.3%; dividend yield of 4.2%; volatility factor of the expected market
price of the Company's common stock of .51; and a weighted-average expected
life of the option of 4.6 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
Pro forma net income (loss) $ 253,909 $ (231,559)
Pro forma earnings (loss) per share:
Class A common $ 0.12 $ (0.08)
Class B common $ 0.04 $ (0.16)
- -----------------------------------------------------------------------
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
1997.
18
<PAGE> 20
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
Transactions with respect to the Company's stock option plan were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
- ---------------------------------------------------------------------------------------------
Weighted Weighted WEIGHTED
Average Average AVERAGE
Option Exercise Option Exercise OPTION EXERCISE
Shares Price Shares Price SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 136,300 $5.76 149,700 $5.71 139,600 $5.41
Granted 20,200 5.38 15,900 2.88 12,200 2.88
Exercised (1,800) 4.88 - -
Forfeited (5,000) 6.09 (26,000) 5.56 (18,000) 5.74
Outstanding at end of year 149,700 5.71 139,600 5.41 133,800 5.14
Exercisable at end of year 97,560 5.58 96,320 5.69 97,320 5.62
Weighted average fair value of options
granted during the year n/a 1.04 1.04
- --------------------------------------------------------------------------------------------
</TABLE>
Exercise prices for options outstanding as of December 31, 1996, ranged
from $2.88 to $8.50. The weighted average remaining contractual life of
those options is 5.0 years.
8. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $(288,000) $ 383,271
State 35,000 50,000 14,000
---------------------------------------
Total current 35,000 (238,000) 397,291
Deferred 147,991 161,300 81,203
Change in valuation reserve (21,591) - (77,474)
---------------------------------------
Income tax expense (benefit) $161,400 $ (76,700) $ 401,000
- -----------------------------------------------------------------------
</TABLE>
For 1995, the current state income tax expense is related to the profitable
operations of the Company's subsidiary.
A reconciliation of income taxes at the United States statutory rate to the
effective tax rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% (34.0)% 34.0%
State income taxes net of Federal benefit 5.5 10.7 0.7
State effect of change in deferred tax assets (2.2) (11.8) -
Amortization of goodwill and acquisition costs 3.3 4.5 0.7
Reduction in valuation allowance excluding use
of acquired loss carryforwards (5.2) - (5.7)
Other 3.2 5.7 (0.3)
Effective tax rate 38.6% (24.9)% 29.4%
- ------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $699,000 available to offset future federal taxable income.
The utilization of the net operating loss carryforwards is subject to an
annual limitation of approximately $155,000 and expires in the year 2005.
The carryforwards resulted from the Company's acquisition of Automation
Electronics Corporation (AEC) in 1991. For financial reporting purposes, a
valuation reserve of $237,567 and $317,754 as of December 31, 1996 and
1995, respectively, was provided to offset the deferred tax assets related
to those carryforwards. When realized, the tax benefit related to the
acquired net operating loss carryforwards will be applied to reduce
goodwill related to the acquisition of AEC. The additional valuation
reserve of $75,000 and $96,591 at December 31, 1996 and 1995, respectively,
was provided because of uncertainty, based on the Company's financial
results in the current and prior years, whether a portion of the net
deferred tax asset would be realized. As the Company has primarily been
profitable in prior years and, if profitable in future years, this portion
of the valuation reserve will be reduced and used to offset income tax
expense.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
as of December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Excess of tax over book depreciation $(135,662) $(158,597)
Deferred tax assets:
Acquired net operating loss
carryforwards 237,567 317,754
Inventories 229,935 281,846
Allowance for doubtful
accounts 43,116 52,370
Restructuring charge 91,602 113,877
Accrued charges and other 167,209 174,495
------------------------------
Total deferred tax assets 769,429 940,342
------------------------------
633,767 781,745
Valuation reserve (312,567) (414,345)
------------------------------
Net deferred tax asset $ 321,200 $ 367,400
- -----------------------------------------------------------------------------
</TABLE>
9. ACCRUED EXPENSES
Accrued expenses consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------
<S> <C> <C>
Accrued wages and benefits $ 305,099 $ 303,271
Product warranty reserve 100,288 107,111
Other accrued expenses 222,421 229,469
-------------------------------
Total accrued expenses $ 627,808 $ 639,851
- -------------------------------------------------------------------------
</TABLE>
10. CAPITAL STOCK
The Company has two classes of common stock and has also authorized
5,000,000 shares of preferred stock.
In the event of liquidation, holders of Class A common stock are entitled
to receive, after distribution of amounts due to holders of preferred
stock, $3 per share (subject to adjustments for stock splits, stock
dividends or similar events involving Class A common stock) before any
distribution to holders of Class B common stock. After the payment of $3
per share to Class A common stock holders, the Class B common stock holders
are entitled to receive $3 per share. Thereafter, the Class A and Class B
common stock holders share equally in any further distributions.
The Company's Board of Directors has the authority and responsibility to
determine the rate of dividend, liquidation value, and other preferences of
the preferred stock upon issuance. No shares of preferred stock have been
issued to date.
20
<PAGE> 22
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
11. DIVIDENDS
The holders of Class A common stock, which is non-voting, are entitled to
receive a non-cumulative annual cash dividend of $.08 per share before any
dividends may be paid to the holders of Class B common stock. Thereafter,
any additional dividend in a fiscal year must be paid on the two classes of
common stock on an equal basis. If the preferential dividend is omitted
for three consecutive years, the Class A common stock is entitled to vote
in the following year.
12. EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per Class A and Class B common share were computed, as
shown in the table below, by adding dividends paid per Class A and Class B
common share (distributed earnings) to earnings (loss) net of dividends
paid (undistributed earnings). Undistributed earnings are allocated
equally per share to weighted average Class A shares, as adjusted for the
dilative effect of stock options using the treasury stock method, and
weighted average Class B shares outstanding during the year.
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
1996 1995 1994 1996 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Distributed earnings $ .12 $ .12 $ .12 $ .04 $ .04 $ .04
Undistributed earnings .00 (.20) .28 .00 (.20) .28
-----------------------------------------
Total $ .12 $(.08) $ .40 $ .04 $(.16) $ .32
- -------------------------------------------------------------------------
</TABLE>
13. MAJOR CUSTOMERS
One customer accounted for 23%, 23%, and 41% of sales in 1996, 1995, and
1994, respectively. Amounts due from the customer were approximately
$410,400 and $375,500 at December 31, 1996 and 1995, respectively. Another
customer accounted for 11% of sales in 1996. In addition, a different
customer accounted for 14% of sales in 1995.
<PAGE> 23
ELEVEN YEAR REVIEW OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net sales $ 12,913,830 $ 12,902,268 $ 16,262,639 $ 16,854,708 $ 16,314,790
Cost of products sold 6,503,886 6,159,220 7,674,331 7,723,430 8,076,399
------------------------------------------------------------------------
Gross profit 6,409,944 6,743,048 8,588,308 9,131,278 8,238,391
General and administrative 1,661,419 1,691,228 1,847,018 2,090,129 2,041,188
Marketing and selling (1) 2,332,151 2,784,829 2,753,570 2,920,257 3,414,824
Research and development 1,980,856 2,533,422 2,537,056 2,469,730 2,577,943
Other income (expense) (17,552) (40,985) (87,722) (154,452) (1,709,390)(2)
------------------------------------------------------------------------
Earnings (loss) before income taxes 417,966 (307,416) 1,362,942 1,496,710 (1,504,954)
Income taxes 161,400 (76,700) 401,000 368,000 (728,800)(3)
------------------------------------------------------------------------
Net earnings (loss) $ 256,566 $ (230,716) $ 961,942 $ 1,128,710 $ (776,154)
------------------------------------------------------------------------
PER SHARE DATA:
Weighted average
shares outstanding 2,503,949 2,503,949 2,508,043 2,512,274 2,530,195
Earnings (loss) per share:
Class A common $ 0.12 $ (0.08) $ 0.40 $ 0.47 $ (0.29)
Class B common $ 0.04 $ (0.16) $ 0.32 $ 0.39 $ (0.37)
Shares outstanding at year end 2,503,949 2,503,949 2,503,949 2,502,149 2,502,149
Book value per share $ 2.72 $ 2.72 $ 2.92 $ 2.64 $ 2.27
Cash dividends paid per share $ 0.12 $ 0.12 $ 0.12 $ 0.10 $ 0.10
OTHER DATA:
Working capital $ 4,116,132 $ 3,880,097 $ 4,099,811 $ 2,928,946 $ 3,350,661
Current ratio 4.8 5.0 3.7 2.4 2.1
Total assets $ 8,115,056 $ 8,124,251 $ 9,221,623 $ 9,144,744 $ 10,743,754
Total long-term obligations $ - $ - $ - $ - $ 1,650,000
Stockholders' equity $ 6,816,468 $ 6,820,376 $ 7,311,566 $ 6,601,234 $ 5,682,739
After tax return on sales 2.0% -1.8% 5.9% 6.7% -4.8%
Return on equity 3.8% -3.4% 13.2% 17.1% -13.7%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Prior to 1987, general, administrative, marketing and selling expenses
were combined into general and administrative expenses.
(2) Includes restructuring change of $1,375,000 for estimated ocosts associated
with severance payments, discontinuance of certain product lines,
consolidation of facilities, and related matters.
(3) Includes gain of $187,000 from adoption of Statement of Financial
Accounting Standards No. 109 titled "Accounting for Income Taxes."
22
<PAGE> 24
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987 1986
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 17,897,351 $ 13,102,637 $ 9,869,107 $ 3,269,866 $ 3,101,746 $ 5,605,536
8,542,136 5,352,084 5,179,304 1,754,464 1,507,552 2,206,906
- -----------------------------------------------------------------------------------------------------
9,355,215 7,750,553 4,689,803 1,515,402 1,594,194 3,398,630
2,342,440 1,728,570 1,214,545 442,202 392,576 631,064
3,673,246 2,229,056 1,641,898 580,527 400,625 -
2,473,116 2,087,500 1,234,041 638,602 769,781 627,436
(566,674) (309,269) (232,140) 181,876 68,407 191,582
- -----------------------------------------------------------------------------------------------------
299,739 1,396,158 367,179 35,947 99,619 2,331,712
95,000 492,000 168,700 (1,200) (36,600) 1,096,800
- -----------------------------------------------------------------------------------------------------
$ 204,739 $ 904,158 $ 198,479 $ 37,147 $ 136,219 $ 1,234,912
- -----------------------------------------------------------------------------------------------------
2,508,189 2,296,726 2,295,000 2,295,000 2,295,000 2,295,000
$ 0.10 $ 0.41 $ 0.10 $ 0.03 $ 0.08 $ 0.56
$ 0.02 $ 0.33 $ 0.02 $ (0.05) $ 0.00 $ 0.48
2,563,238 2,300,000 2,295,000 2,295,000 2,295,000 2,295,000
$ 2.71 $ 2.50 $ 2.18 $ 2.18 $ 2.23 $ 2.23
$ 0.10 $ 0.10 $ 0.10 $ 0.08 $ 0.08 $ 0.08
$ 5,982,277 $ 2,813,104 $ 2,380,702 $ 4,329,206 $ 4,335,924 $ 4,304,520
3.2 2.0 2.5 28.0 20.7 17.4
$ 13,321,905 $ 9,261,853 $ 8,646,024 $ 5,220,946 $ 5,371,481 $ 5,402,727
$ 3,600,000 $ 766,667 $ 2,066,667 $ - $ - $ -
$ 6,950,118 $ 5,751,300 $ 5,012,517 $ 5,003,538 $ 5,109,991 $ 5,117,372
1.1% 6.9% 2.0% 1.1% 4.4% 22.0%
2.9% 15.7% 4.0% 0.7% 2.7% 24.1%
- -----------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 25
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1996 QUARTERS
- ---------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 2,870,133 $ 2,773,906 $ 3,217,381 $ 4,052,410 $ 12,913,830
Gross profit 1,412,081 1,357,827 1,541,162 2,098,874 6,409,944
Net earnings (loss) (160,774) (128,485) 107,590 438,235 256,566
Earnings (loss) per share:
Class A common (0.05) (0.05) 0.05 0.18 0.12
Class B common (0.11) (0.05) 0.03 0.18 0.04
Dividends per Class A common share 0.06 0.00 0.06 0.00 0.12
Stock price for Class A common:
High 3 1/2 3 1/2 2 1/2 2 3/8
Low 2 3/4 2 1 7/8 1 3/4
<CAPTION>
1995 Quarters
- ---------------------------------------------------------------------------------------------------------------
First Second Third Fourth Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 2,963,568 $ 3,776,796 $ 2,958,538 $ 3,203,366 $ 12,902,268
Gross profit 1,534,133 2,066,108 1,388,612 1,754,195 6,743,048
Net earnings (loss) (277,371) 187,599 (262,950) 122,006 (230,716)
Earnings (loss) per share:
Class A common (0.10) 0.08 (0.10) 0.05 (0.08)
Class B common (0.16) 0.08 (0.12) 0.05 (0.16)
Dividends per Class A common share 0.06 0.00 0.06 0.00 0.12
Stock price for Class A common:
High 5 4 3 3/4 4
Low 3 2 3/4 2 3/4 2 3/4
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
SHAREHOLDER INFORMATION
ANNUAL MEETING OF SHAREHOLDERS
2:00 P.M., Friday, May 2, 1997, Merrill Hills Country Club, W270 S3425
Merrill Hills Road Waukesha, Wisconsin 53188
10-K REPORT AND INVESTOR RELATIONS
Electronic Tele-Communications, Inc. Form 10-K annual report may be
obtained without charge by writing to Jeffrey M. Nigl, Vice President,
Electronic Tele-Communications,Inc.,
1915 MacArthur Road, Waukesha, Wisconsin 53188. Investor relations
inquiries may be made to Mr. Nigl in writing or by telephone, (414)
542-5600.
STOCK HELD IN "STREET NAME"
Electronic Tele-Communications, Inc. maintains a direct mailing list to
ensure that shareholders whose stock is held in broker accounts receive
shareholder information on a
timely basis. Shareholders may add their names to this list by writing or
calling our Investor Relations Department.
STOCK LISTING
Electronic Tele-Communications, Inc. Class A common stock trades on The
NASDAQ Stock Market under the symbol ETCIA (ElecTel).
SHAREHOLDERS OF RECORD
As of February 28, 1997, there were approximately 820 shareholders of
record and beneficial shareholders owning Class A common stock.
TRANSFER AGENT AND REGISTRAR
For address changes or questions regarding your shares or dividend checks,
please contact: Firstar Trust Company, 615 East Michigan Avenue, Milwaukee,
Wisconsin 53202, Telephone (414) 287-3900.
INDEPENDENT AUDITORS
Ernst & Young LLP,111 East Kilbourn Avenue, Milwaukee, Wisconsin 53202
LEGAL COUNSEL
Quarles & Brady, 411 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
24
<PAGE> 26
CORPORATE OFFICERS
Dean W. Danner, P.E.
President and
Chief Executive Officer
Jeffrey M. Nigl, C.P.A.
Vice President, Treasurer and
Chief Financial Officer
Hazel Danner
Corporate Secretary and
Director Human Resources
R.W. Johns, Jr., C.P.A.
Vice President Sales
Bonita M. Danner, P.E.
Vice President Engineering
Robert R. Spiering
Vice President Technical Services
Cynthia K. Carlson
Vice President Contracts
Elaine McTyre
Assistant Corporate Secretary
OUTSIDE DIRECTORS George W. Danner, P.E.(3), Chairman of the Board o Richard
A. Gabriel (1),(2) o A. William Huelsman(2),(4) Joanne B. Huelsman, Esq.(1),
Wisconsin State Senator o Peter J. Lettenberger, Esq. (2), Partner, Quarles &
Brady
INSIDE DIRECTORS Bonita M. Danner (1),(3), Vice President Engineering o
Dean W. Danner, (3),(4), President and Chief Executive Officer Hazel Danner,
(3),(4), Corporate Secretary and Director Human Resources
COMMITTEE ASSIGNMENTS 1. Audit Committee 2. Compensation Committee
3. Executive Committee 4. Building and Grounds Committee
Dean W. Danner, P.E. Jeffrey M. Nigl, C. P. A.
Hazel Danner R.W. Johns, Jr., C. P. A. Bonita M. Danner, P. E.
Robert R. Spiering Cynthia K. Carlson
<PAGE> 27
[ETC LOGO]
CORPORATE OFFICE
Electronic Tele-Communications, Inc.
1915 MacArthur Road
Waukesha, Wisconsin 53188
Telephone (414) 542-5600
FAX (414) 542-1524
GEORGIA OFFICE
Electronic Tele-Communications, Inc.
3605 Clearview Place
Altlanta, Georgia 30340
Telephone (770) 457-5600
FAX (770) 455-3822
CALIFORNIA OFFICE
Electronic Tele-Communications, Inc.
6689 Owens Drive, Suite B
Pleasanton, California 94588
Telephone (510) 463-3393
FAX (510) 463-3737
http://www.etcia.com
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Cconsolidated Balance Sheet at December 31, 1996 and the Consolidated Statements
of Operations for the Year Ended December 31, 1996, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,001,976
<SECURITIES> 0
<RECEIVABLES> 1,443,380
<ALLOWANCES> 113,500
<INVENTORY> 2,434,372
<CURRENT-ASSETS> 5,188,020
<PP&E> 6,422,406
<DEPRECIATION> 4,575,066
<TOTAL-ASSETS> 8,115,056
<CURRENT-LIABILITIES> 1,071,888
<BONDS> 0
<COMMON> 25,039
0
0
<OTHER-SE> 6,791,429
<TOTAL-LIABILITY-AND-EQUITY> 8,115,056
<SALES> 12,913,830
<TOTAL-REVENUES> 12,913,830
<CGS> 6,503,886
<TOTAL-COSTS> 6,503,886
<OTHER-EXPENSES> 6,001,519
<LOSS-PROVISION> (11,400)
<INTEREST-EXPENSE> 1,859
<INCOME-PRETAX> 417,966
<INCOME-TAX> 161,400
<INCOME-CONTINUING> 256,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 256,566
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
