<PAGE> 1
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, 1997
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, 1998, there were outstanding 2,008,949 shares of Class A common
stock and 499,998 shares of Class B common stock. The Class B common stock is
the only voting stock. 87.9% of the Class B common stock is owned by
affiliates. There is no market for the Class B common stock.
<PAGE> 2
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' 1997 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 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 a regional sales office are located in
Atlanta, Georgia, and technical services, repair services, and a regional sales
office are located in Pleasanton, California. ETC also has four 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 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
-2-
<PAGE> 3
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. The Company's call sequencing products 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 proprietary circuit
card assemblies, purchased assemblies, and proprietary software. 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 for use in its systems 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. The
electronic components include computer memory chips, microprocessors,
integrated circuits, resistors, capacitors, transformers, and switches.
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 assembly contains its own microprocessor which controls the functions of
that particular card. 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 $1,785,000, $1,981,000, and
$2,533,000 in 1997, 1996, and 1995, respectively, on research and
-3-
<PAGE> 4
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
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.
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) 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.
-4-
<PAGE> 5
Voice Mail, Audiotex, Time/Weather/Temperature
The Audichron(R) 410 combines voice mail, audiotex, and
time/weather/temperature functions in a single system. Flexible, industry
standard hardware and software allow 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.
Audichron(R) 410 announcers provide professionally recorded voice
announcements, available with synchronous entry so that every caller hears the
entire announcement from the beginning. 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 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.
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.
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.
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.
-5-
<PAGE> 6
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.
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
-6-
<PAGE> 7
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
integral 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 primarily through Company sales
personnel, with approximately 5% being sold through independent distributors
and telecommunications dealers. Sales and leases of the Company's
time/weather/temperature machines and related information update services are
performed through the Company's sales personnel. Approximately 88% of the
Company's 1997 sales were in the United States, and 12% were to international
customers.
During 1997, ETC's products and related services were sold and leased to
approximately 1,440 customers, primarily operating telephone companies,
telephone equipment manufactures, telecommunication dealers, telephone service
providers, financial institutions, and other businesses. Siemens
Stromberg-Carlson accounted for 13% of the Company's 1997 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 marketing
staff are headquartered in Waukesha, Wisconsin. In addition regional sales
offices are located in Waukesha, Wisconsin, Atlanta, Georgia, and Pleasanton,
California, and four 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, 1997, the amount of the Company's backlog orders believed to
be firm was $682,000. This compares with $1,635,000 of backlog orders as of
December 31, 1996. Two customers comprised 28% and 14%, respectively, of the
1997 backlog. A different customer comprised 60% of the 1996 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
-7-
<PAGE> 8
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. Product quality is determined by factors such as product
consistency, durability, workmanship and reliability. 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.
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.
EMPLOYEES
As of December 31, 1997, ETC employed 134 persons. Approximately 21% of the
Company's employees are engaged in product development, 19% in sales and
marketing, 13% in management and office support, 19% in service and support,
and 28% 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 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, 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
-8-
<PAGE> 9
None.
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 1997 Annual
Report to Shareholders incorporated herein by reference.
(b) Holders
As of March 1, 1998, there were approximately 940 shareholders of record and
beneficial shareholders owning Class A common stock and 8 shareholders of
record of Class B common stock.
(c) Dividends
For 1997, 1996 and 1995, 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 23, 1998, the Board of Directors of the Company declared a cash
dividend of $.04 per share on Class A common stock, payable on March 31, 1998,
to shareholders of record on March 10, 1998.
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 1997 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 7, 8 and 9 in ETC's 1997 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 1997,
and beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of the Company:
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.
-9-
<PAGE> 10
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.
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,
-10-
<PAGE> 11
the sales revenues and profitability of ETC could be materially impacted.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information on pages 10 through 24 in ETC's 1997 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:
<TABLE>
<CAPTION>
NAME AGE TITLE
<S> <C> <C>
George W. Danner 78 Chairman of the Board
and Director
Dean W. Danner 47 President, Chief Executive
Officer and Director
Bonita M. Danner 46 Vice President Engineering
and Director
Hazel Danner 77 Corporate Secretary
and Director
Jeffrey M. Nigl 39 Vice President, Treasurer
and Chief Financial Officer
Robert R. Spiering 53 Vice President Tech Services
Cynthia K. Carlson 53 Vice President Sales
Joanne B. Huelsman 59 Director
A. William Huelsman 60 Director
Peter J. Lettenberger 60 Director
Richard A. Gabriel 65 Director
</TABLE>
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,
-11-
<PAGE> 12
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.
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.
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. She is currently serving as Vice
President Sales since November of 1997.
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
-12-
<PAGE> 13
Company's Directors or executive officers has any family relationship with any
other Director or executive officer.
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 1997 132,000 5,300(1)
President and 1996 132,000 2,700 5,100(1)
CEO 1995 130,600 1,000 5,500(1)
</TABLE>
____________________________
(1) Consists of directors' fees of $2,500 in each year, with the remainder
being Company matching contributions pursuant to the Company's 401(k)
retirement savings plan.
AGGREGATED OPTIONS/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUES
The following table summarizes options and SARs exercised during 1997 and the
value of unexercised options and SARs held by the named executives at fiscal
year-end:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES AT FISCAL AT FISCAL
ACQUIRED VALUE YEAR-END(#) YEAR-END($)
ON EXERCISE REALIZED EXERCISABLE(E)/ EXERCISABLE(E)/
NAME (#) ($) UNEXERCISABLE(U) UNEXERCISABLE(U)
- ------ ------------ --------- ---------------- ----------------
<S> <C> <C> <C> <C>
Dean W. Danner 0 0 3,400(E) 0(E)
2,600(U) 0(U)
</TABLE>
The Company does not have any information to report and has therefore omitted
disclosures related to S-B Item 402(c) Options/SAR Grants Table, S-B Item
402(e) Long-Term Incentive Plan ("LTIP") Awards Table, and S-B Item 402(i)
-13-
<PAGE> 14
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 13, 1998:
<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 175,551(3) 8.7% 75,048 15.0%
Bonita M. Danner 172,501(3) 8.6% 75,048 15.0%
Dean W. Danner 169,587(3) 8.4% 71,461 14.3%
George W. Danner 158,837 7.9% 71,461 14.3%
Joanne B. Huelsman 139,801 7.0% 75,048 15.0%
A. William Huelsman 114,187 5.7% 71,461 14.3%
Georgia Barre(2) 104,959 5.2% 41,984 8.4%
Peter J. Lettenberger 5,500(3) 0.3% - 0.0%
Richard Gabriel 3,500(3) 0.2% - 0.0%
All Executive Officers
and Directors as a
group (11 persons) 959,401(3) 47.8% 439,527 87.9%
</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) Georgia Barre is not an officer or director 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: Hazel Danner, 600 shares; Bonita Danner, 1,000 shares; Dean
Danner, 3,400 shares; Peter Lettenberger, 5,000 shares; and Richard
Gabriel, 3,000 shares. Shares beneficially owned by all officers and
directors as a group include 3 additional officers with the right to
acquire a total of 25,160 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 Georgia Barre is 1110 Belmont Drive, Waukesha, WI 53186. The
-14-
<PAGE> 15
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 10 through 24 in ETC's 1997 Annual Report
to Shareholders are incorporated herein by reference.
2. Financial statement schedules
<TABLE>
<CAPTION>
SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
----------- ----------- --------
<S> <C> <C>
II Valuation and Qualifying Accounts 19
</TABLE>
The Independent Auditors' Report on Financial Statement Schedules
appear on page 18 of this report.
All other financial statement schedules are omitted as they are not
required, or the required information is shown in the Financial
Statements and Notes to Financial Statements on pages 10 through 24
in ETC's 1997 Annual Report to Shareholders incorporated herein by
reference.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
--------- ----------- --------
<S> <C> <C>
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)
</TABLE>
-15-
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
-------- ----------- -------
<S> <C> <C>
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.
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.
10.6 Second Amendment to Credit Agreement dated as of
May 13, 1994, by and between Electronic Tele-
Communications, Inc. and Bank One, Milwaukee, NA.
10.7 Third Amendment to Credit Agreement dated as of
September 26, 1997, by and between Electronic
Tele-Communications, Inc. and Bank One, Wisconsin.
13 1997 Annual Report to Shareholders.
24.1 Consent of Ernst & Young LLP, Independent Auditors. 18
27 Financial Data Schedule. 20
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.
</TABLE>
(b) Reports on Form 8-K:
None.
-16-
<PAGE> 17
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 23, 1998 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.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Dean W. Danner President, Chief Executive March 23, 1998
- ----------------------------
Dean W. Danner Officer and Director
/s/ Jeffrey M. Nigl Vice President, Treasurer, March 23, 1998
- ----------------------------
Jeffrey M. Nigl Chief Financial Officer,
and Principal Accounting
Officer
/s/ Bonita M. Danner Vice President Engineering March 23, 1998
- ----------------------------
Bonita M. Danner and Director
/s/ Hazel Danner Secretary and Director March 23, 1998
- ----------------------------
Hazel Danner
/s/ George W. Danner Director March 23, 1998
- ----------------------------
George W. Danner
/s/ Joanne B. Huelsman Director March 23, 1998
- ----------------------------
Joanne B. Huelsman
/s/ A. William Huelsman Director March 23, 1998
- ----------------------------
A. William Huelsman
/s/ Peter J. Lettenberger Director March 23, 1998
- ----------------------------
Peter J. Lettenberger
/s/ Richard A. Gabriel Director March 23, 1998
- ----------------------------
Richard A. Gabriel
</TABLE>
-17-
<PAGE> 18
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 6, 1998
included in the 1997 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 6, 1998, 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 23, 1998
-18-
<PAGE> 19
Schedule II
ELECTRONIC TELE-COMMUNICATIONS, INC.
_________________
VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 1997
<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, 1995 $164,800 $(15,000) $12,000 $137,800
Year Ended
December 31, 1996 $137,800 $(11,400) $12,900 $113,500
Year Ended
December 31, 1997 $113,500 $270,000 $262,000 $121,500
Allowance for
Inventory Obsolescence:
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
Year Ended
December 31, 1997 $242,582 $40,000 $109,310 $173,272
</TABLE>
-19-
<PAGE> 1
Exhibit 10.6
SECOND AMENDMENT TO CREDIT AGREEMENT
This Second Amendment to Credit Agreement dated as of May 13, 1994 by and
between Electronic Tele-Communications, Inc., a Wisconsin corporation ("ETC")
and Bank One, Milwaukee, NA (the "Bank").
WHEREAS, the Bank and ETC entered into a credit agreement dated as of May
17, 1989, which was amended by First Amendment dated April 4, 1991 (as amended,
the "Credit Agreement"); and
WHEREAS, the Bank and ETC wish to further amend the Credit Agreement as
hereinafter set forth.
NOW, THEREFORE, the parties hereto agree as follows (all capitalized terms
not defined herein shall have the meaning assigned them in the Credit
Agreement):
1. Section 1.15 of the Credit Agreement is amended and restated as follows:
1.15 "Final Maturity Date" means May 1, 1997, which is the date on which
the outstanding principal balance of the Re- volving Note is payable.
2. Section 1.17 of the Credit Agreement is amended and restated as follows:
1.17 "Note" means the Revolving Note of ETC which is to be executed and
delivered to the Bank as described in Section 2.2.
3. Section 1.22 of the Credit Agreement is amended and restated as follows:
1.22 "Revolving Loans" means the loans described in Section 2.2.
4. Sections 1.23, 1.29, 1.30 and 2.1 of the Credit Agreement are all deleted
in their entirety.
5. Section 2.2. of the Credit Agreement is amended by deleting "$1,000,000"
appearing therein and substituting "$3,500,000" in its place.
6. Section 2.3 of the Credit Agreement is amended and restated as follows:
Use of Proceeds: Borrowing Procedure. ETC shall use all of
the proceeds of Revolving Loans for working capital and
general corporate purposes. ETC shall provide one
<PAGE> 2
Business Day prior telephone notice (confirming in writing
Promptly thereafter) of a requested Revolving Loan, specify-
ing the amount requested and the proposed Borrowing Date.
The Bank shall deposit Revolving Loan proceeds in the gen-
eral account of ETC with the Bank.
7. Section 6.8 of the Credit Agreement is amended by deleting "$5,750,000"
appearing therein and inserting "$4,000,000" in its place.
8. Section 6.9 of the Credit Agreement is amended by deleting "2.25:1"
appearing therein and inserting "2.50:1" in its place.
9. Section 6.10 of the Credit Agreement is amended by deleting "1.5:1"
appearing therein and inserting "1.25:1" in its place.
10. Section 6.11 of the Credit Agreement is amended by deleting
"$1,200,000" appearing therein and inserting "$3,000,000" in its place.
11. Section 6.12 of the Credit Agreement is amended and restated as follows:
6.12 Restricted Payments. Make any Restricted Payments,
except that, so long as no Event of Default exists, the follow-
ing Restricted Payments may be declared and paid during
any fiscal year as set forth below:
<TABLE>
<CAPTION>
Amount Fiscal Year
-------- -----------
<S> <C> <C>
$300,000 1994 Plus 12.5% of (consolidated
$375,000 1995 Plus 12.5% of net earnings
$450,000 1996 & Thereafter plus 12.5% of in any given
year)
</TABLE>
12. This Second Amendment shall be effective upon the execution and delivery
to the Bank of this Agreement and the Revolving Note of even date, a copy of
which is attached hereto as Exhibit A. After the effective date, such Exhibit A
shall become an exhibit to the Credit Agreement.
13. ETC hereby represents and warrants that the representations contained in
Section 3 of the Credit Agreement are true and correct as of the date hereof,
there is no Event of Default which exists and, since April 4, 1991 there has
been no material adverse change in the business prospects or financial
condition of ETC.
14. Except as amended hereby, the Credit Agreement remains in full force
and effect and after this Second Amendment is effective, any reference to the
Credit Agreement, whether therein or otherwise, shall mean the Credit Agreement
as amended hereby.
2
<PAGE> 3
BANK ONE, MILWUAKEE, NA
By: /s/ Terry R. Sutter
-------------------------------
Terry R. Sutter, Vice President
ELECTRONIC TELE-COMMUNICATIONS, INC.
By: /s/ Dean W. Danner
-------------------------
Dean W. Danner, President
3
<PAGE> 4
REVOLVING NOTE
$3,500,000.00 Milwaukee, Wisconsin
May, 15, 1994
FOR VALUE RECEIVED, the undersigned, Electronic Tele-Communications,
Inc., a Wisconsin corporation, promises to pay to the order of Bank One,
Milwaukee, NA f/k/a Bank One, Waukesha (the "Bank"), on or before May 15, 1997
the principal sum of Three Million Five Hundred Thousand Dollars or such lesser
amount as is shown to be outstanding according to the records of the Bank,
together with interest on the principal; balance outstanding from time to time.
This Note bears interest on its unpaid principal balance from the date hereof
until maturity, payable on June 15, 1994 and the same date each month
thereafter, at the rate which is equal to the reference rate of interest
announced from time to time by the Bank as its base rate for interest
rate determinations (the "Reference Rate"), and the interest rate shall change
on each day on which the Reference Rate changes. The Reference Rate may not be
the lowest rate of interest charged by the Bank. The unpaid balance of
principal and accrued interest shall bear interest after maturity until paid at
the rate which is equal to the Reference Rate in effect from time to time plus
three percentage points. Interest is calculated for actual days elapsed on the
basis of a 360-day year.
Payments of both principal and interest are to be made in lawful currency
of the United States of America at the Bank's office at 255 West Broadway,
Waukesha, Wisconsin, or such other place as the holder hereof shall designate to
the undersigned in writing.
This Note renews and replaces, without novation, the Revolving Notes dated
March 15, 1994 in the original principal amounts of $1,000,000.00 and
$4,000,000.00, respectively. This Note is issued pursuant to the Credit
Agreement dated as of May 17, 1989 between the Bank and the undersigned, as
amended, to which reference is made for rights and obligations as to prepayment
and acceleration of maturity.
The undersigned agrees to pay all cost of collection, including reasonable
attorneys' fees.
ELECTRONIC TELE-COMMUNICATIONS, INC.
By: /s/ Dean W. Danner
-------------------------
Dean W. Danner, President
<PAGE> 1
Exhibit 10.7
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT, dated as of September 26, 1997, amends and
supplements that certain Credit Agreement dated as of May 17, 1989, as amended
to date (as so amended, the "Agreement"), between BANK ONE, WISCONSIN (f/k/a
Bank One Milwaukee, National Association, successor by merger to Bank One,
Waukesha) (the "Bank") and ELECTRONIC TELE-COMMUNICATIONS, INC. ("ETC"), a
Wisconsin corporation.
RECITAL
The Bank and ETC desire to amend the Agreement as set forth below.
AGREEMENTS
In consideration of the promises and agreements contained in the
Agreement, as amended hereby, the Bank and ETC agree as follows:
1. Definitions and References. Capitalized terms not otherwise defined
herein have the meanings assigned in the Agreement. Upon the satisfaction of
the conditions in section 3 below, all references to the Agreement contained in
the Agreement, the Note, the Bank Security Documents or any other agreement
relating thereto shall mean the Agreement as amended by this Third Amendment.
2. Amendments. The Agreement is amended as follows:
(a) Section 1.2 is amended in its entirety to read as follows:
1.2 "Bank Security Documents" means the documents described
in subsections (i), (ii), (iv), (vii) or (viii) of section 4.1(c),
that certain Assignment dated as of April 2, 1991 from ETC to the
Bank and any other document, instrument or agreement furnished by
ETC to the Bank which provides collateral for the obligations of
ETC to the Bank.
<PAGE> 2
(b) Section 1.4 is amended in its entirety to read as follows:
1.4 "Business Day" means (a) with respect to the making,
payment or rate determination of a LIBOR Rate Loan, a day (other
than a Saturday or Sunday) on which banks are open for business in
Milwaukee, Wisconsin and on which dealings in United States
dollars are carried on in the London interbank market and (b) for
all other purposes, a day (other than Saturday or Sunday) on which
banks are open for business in Milwaukee, Wisconsin.
(c) Section 1.15 is amended in its entirety to read as follows:
1.15 "Final Maturity Date" means June 30, 2000, or such
earlier date on which the Bank declares the Note to be immediately
due and payable pursuant to section 7 of this Agreement.
(d) Section 1.17 is amended in its entirety to read as follows:
1.17 "Note" means the promissory note of ETC in the form of
Exhibit A attached hereto, evidencing the Revolving Loans.
(e) The term "Note" is inserted in place of the term "Revolving Note B" in
each place "Revolving Note B" appears in the Agreement.
(f) Sections 1.33 through 1.40 are added to the Agreement to read as
follows:
1.33 "Adjusted LIBOR Rate" means, with respect to a LIBOR
Rate Loan for the relevant Interest Period, a rate per annum
(rounded upward, if necessary, to the next higher 1/16 of 1%)
determined according to the following formula:
Adjusted LIBOR Rate = LIBOR Rate
-------------------------------
1.00 - LIBOR Reserve
Requirement
-2-
<PAGE> 3
The Adjusted LIBOR Rate shall be adjusted automatically as to all
LIBOR Rate Loans then outstanding as of the effective date of any
change in the LIBOR Reserve Requirement.
1.34 "Dollars" and "$" each mean lawful money of the United
States.
1.35 "Interest Period" means:
(a) With respect to each LIBOR Rate Loan, a period of one,
two or three months commencing on (and including) a Business Day
selected by ETC pursuant to sections 2.4 or 2.5(c) of this
Agreement and ending on (but excluding) the day which corresponds
numerically to such date one, two or three months thereafter (or,
if such month has no numerically corresponding date, on the last
Business Day of such month):
(i) if an Interest Period would otherwise end on a day which
is not a Business Day, such Interest Period shall end on the next
following Business Day (unless such next following Business Day is
in a new calendar month in which case such Interest Period shall
end on the immediately preceding Business Day);
(ii) no Interest Period may end later than the Final Maturity
Date;
(b) With respect to each Reference Rate Loan, the period
commencing on the Borrowing Date of such Reference Rate Loan, or
in the case of LIBOR Rate Loan converted to a Reference Rate Loan,
the period commencing on the date of such conversion and ending on
the date of repayment of such Reference Rate Loan or date of
conversion of such Reference Rate Loan to a LIBOR Rate Loan.
1.36 "LIBOR Rate" means, with respect to a LIBOR Rate Loan
for the applicable Interest Period, the interest rate at which
deposits in United States dollars, in an amount approximately
equal to the requested LIBOR Rate Loan and having a maturity
approximately equal to the requested Interest Period, would be
offered to prime banks in the London interbank market at
-3-
<PAGE> 4
approximately 11 a.m. (London time) two Business Days prior to the
first day of such Interest Period. The LIBOR Rate determined by
the Bank shall, in the absence of manifest error, be conclusive.
1.37 "LIBOR Rate Loan" means any portion of a loan bearing
interest at a rate determined by reference to the Adjusted LIBOR
Rate.
1.38 "LIBOR Reserve Requirement" means, with respect to a
LIBOR Rate Loan for the applicable Interest Period, the percentage
(expressed as a decimal) equal to the maximum aggregate reserve
requirements (including, without limitation, any marginal,
special, emergency and supplemental reserves) established by the
Board of Governors of the Federal Reserve System for "eurocurrency
liabilities" (as defined in Regulation D of such Board), or for
other liabilities which include deposits of the type used in
determining the LIBOR Rate, having a term approximately equal to
the applicable Interest Period.
1.39 "Reference Rate Loan" means any portion of a loan
bearing interest at a rate determined by reference to the
Reference Rate.
1.40 "Type" means, with respect to any loan, its nature as a
Reference Rate Loan or as a LIBOR Rate Loan.
(g) Sections 2.3 and 2.4 are amended in their entirety to read as follows:
2.3 Interest Rate Options. Revolving Loans may be Reference
Rate Loans or LIBOR Rate Loans, or a combination thereof;
provided, however, that ETC shall not have more than 4 LIBOR Rate
Loans outstanding at any time. ETC shall select the Type of
Revolving Loan in accordance with section 2.4.
2.4 Borrowing Procedure for Revolving Loans. ETC shall
request Revolving Loans by written notice, or by telephonic notice
confirmed in writing, to the Bank (i) in the case of a LIBOR Rate
Loans, not later than 11 a.m. on the date which is three Business
Days prior to the requested Borrowing Date (which must be a
Business Day) and (ii) in the case of Reference Rate Loans, not
later than 11 a.m. on the requested Borrowing Date
-4-
<PAGE> 5
(which must be a Business Day). In the event of any inconsistency
between the telephonic notice and the written confirmation
thereof, the telephonic notice shall control. Each such request
by ETC must specify the amount and Type of the requested Revolving
Loan and, in the case of a requested LIBOR Rate Loan, the relevant
Interest Period. The aggregate amount of Revolving Loans made on
each Borrowing Date shall be in the same minimum amounts set forth
in section 2.2 above. Each request for Revolving Loans shall be
irrevocable and shall constitute a certification by ETC that the
borrowing conditions specified in sections 4.2 will be satisfied
on the requested Borrowing Date. The Bank shall deposit Revolving
Loan proceeds in the general account of ETC with the Bank.
(h) Sections 2.5 through 2.11 are added to the Agreement to read as
follows:
2.5 Continuation and Conversion Procedure for Revolving
Loans.
(a) A Reference Rate Loan shall continue as a Reference Rate
Loan unless and until converted into a LIBOR Rate Loan. ETC may
elect from time to time, subject to the terms and conditions of
this Agreement, to convert all or any part of the outstanding
Reference Rate Loans into LIBOR Rate Loans (in the same minimum
amounts as set forth in section 2.2 above).
(b) At the end of the applicable Interest Period for a LIBOR
Rate Loan, such LIBOR Rate Loan shall be automatically converted
into a Reference Rate Loan unless ETC shall have given the Bank
notice in accordance with section 2.5(c) requesting that, at the
end of such Interest Period, such LIBOR Rate Loan continue as a
LIBOR Rate Loan.
(c) ETC shall give the Bank irrevocable notice (a
"Conversion/Continuation Notice") of each conversion of a
Reference Rate Loan to a LIBOR Rate Loan or of a continuation of a
LIBOR Rate Loan not later than 11 a.m. at least three Business
Days prior to the date of the requested conversion or
continuation, specifying (i) the requested date (which shall be a
Business Day) of such conversion or continuation, (ii) the amount
and Type of loan to be converted or continued (in the same
-5-
<PAGE> 6
minimum amounts as set forth in section 2.2 above) and (iii) the
relevant Interest Period.
(d) Notwithstanding anything to the contrary contained in
this section, no loans may be converted into or continued as LIBOR
Rate Loans when any Default or Event of Default has occurred and
is continuing.
2.6 Interest Rates.
(a) Reference Rate Loans. The unpaid principal balance of
each Reference Rate Loan shall bear interest prior to the Final
Maturity Date at an annual rate equal to the Reference Rate and
such rate shall change on each day on which the Reference Rate
changes. Accrued interest on Revolving Loans shall be due on the
first Business Day of each month, commencing November 1, 1997, and
on the Final Maturity Date.
(b) LIBOR Rate Loans. The unpaid principal balance of each
LIBOR Rate Loan shall bear interest during the applicable Interest
Period at the corresponding Adjusted LIBOR Rate plus two
percentage points. Accrued interest for each Revolving Loan shall
be due on the last day of its Interest Period.
(c) Default. Notwithstanding the provisions of subsections
(a) and (b) above, upon the occurrence and during the continuance
of an Event of Default, the unpaid principal balance of the Note
shall, upon notice from the Bank to ETC, bear interest at an
annual rate equal to the otherwise applicable rate plus two
percentage points (the "Default Rate"), payable upon demand. On
and after the Final Maturity Date, the unpaid principal balance of
the Revolving Loans and all accrued interest thereon shall bear
interest at the Default Rate and shall be payable upon demand.
(d) Calculation. Interest shall be calculated for the actual
number of days elapsed on the basis of a 360-day year.
2.7 Payments. All payments of principal and interest on the
Note and of all fees due hereunder shall be made at the office of
the Bank in immediately available funds not later
-6-
<PAGE> 7
than 2 p.m. on the date due; funds received after that time shall
be deemed to have been received on the next Business Day.
Whenever any payment hereunder or under the Note is stated to be
due on a
-7-
<PAGE> 8
day which is not a Business Day, such payment shall be made on the
next succeeding Business Day and such extension of time shall be
included in computing any interest or fee then due.
2.8 Prepayments. Reference Rate Loans may be prepaid, in
whole or in part, at any time without premium or penalty. ETC
will give the Bank notice of any optional prepayment of a LIBOR
Rate Loan, said notice to be given not later than two Business
Days prior to the prepayment date and specifying the prepayment
date and the amount to be prepaid. The prepayment amount shall
become due and payable on the specified prepayment date. A LIBOR
Rate Loan may be paid only at the end of its Interest Period.
Each payment of a LIBOR Rate Loan shall be in a minimum amount of
$25,000 and in integral multiples of $10,000 above such minimum.
Any partial prepayment of the Note shall be applied first to any
prepayment fee or premium under this Agreement, then to accrued
but unpaid interest, and then to the outstanding principal
balance.
2.9 Capital Adequacy. As used in this section, the term
"Regulatory Change" means any change enacted or issued after the
date of this Agreement of any (or the adoption after the date of
this Agreement of any new) federal or state law, regulation,
interpretation, direction, policy or guideline, or any court
decision, which affects (or, in the case of a court decision
would, if the decision were applicable to the Bank, affect) the
treatment of any loan or commitment of the Bank hereunder as an
asset or other item included for the purpose of calculating the
appropriate amount of capital to be maintained by the Bank or any
corporation controlling the Bank. If such Regulatory Change has
the effect of reducing the rate of return on the Bank's or such
corporation's capital as a consequence of the loans or commitments
of the Bank hereunder to a level below that which the Bank or such
corporation could have achieved but for such Regulatory Change
(taking into account the Bank's or such corporation's policies
with respect to capital adequacy) by an amount deemed in good
faith by the Bank to be material, then from time to time following
notice by the Bank to ETC of such Regulatory Change, within ten
days after demand from the Bank, ETC shall pay to the Bank such
additional amount or amounts as will compensate the Bank or such
corporation, as the case may be, for such reduction.
-8-
<PAGE> 9
2.10 Yield Protection. If any law or any governmental rule,
regulation, policy, guideline or directive (whether or not having
the force of law), or any interpretation thereof, or the
compliance of the Bank therewith,
(a) subjects the Bank to any tax, duty, charge or withholding
on or from payments due from ETC (excluding taxes imposed on the
overall net income of the Bank and any such tax, duty, charge or
withholding in effect as of the date of this Agreement), or
changes the basis of taxation of payments to the Bank in respect
of its Revolving Loans or other amounts due it hereunder
(excluding taxes imposed on the overall net income of the Bank);
(b) imposes or increases or deems applicable any reserve,
assessment, insurance charge, special deposit or similar
requirement against assets of, deposits with or for the account
of, or credit extended by, the Bank (other than reserves and
assessments taken into account in determining the interest rate
applicable to LIBOR Rate Loans) with respect to its Revolving
Loans; or
(c) imposes any other condition the result of which is to
increase the cost to the Bank of making, funding or maintaining
the Revolving Loans or reduces any amount received by the Bank in
connection with the Revolving Loans or requires the Bank to make
any payment calculated by reference to the amount of Revolving
Loans held or interest received by it, by an amount deemed
material by the Bank;
then, within ten days of written demand by the Bank, ETC shall pay
the Bank that portion of such increased expense incurred or
reduction in an amount received (as shown by calculations in
reasonable detail provided by the Bank to ETC, which calculations
shall, in the absence of manifest error, be conclusive and binding
on ETC) which the Bank reasonably determines is attributable
thereto.
2.11 Additional LIBOR Rate Loan Provisions.
(a) If the Bank determines that the making or maintaining of
a LIBOR Rate Loan would violate any
-9-
<PAGE> 10
applicable law, rule regulation or directive, whether or not
having the force of law, then the obligation of the Bank to make
or continue LIBOR Rate Loans, or to convert Reference Rate Loans
into LIBOR Rate Loans, shall be suspended until the Bank notifies
ETC that the circumstances causing such suspension no longer
exist. During any such period, all LIBOR Rate Loans shall
automatically convert into Reference Rate Loans at the end of the
applicable Interest Period or sooner if required by law.
(b) If the Bank is unable to determine the LIBOR Rate in
respect of a requested Interest Period or the Bank is unable to
obtain deposits of United States dollars in the London interbank
market in the applicable amounts and for the requested Interest
Period, then, upon notice from the Bank to ETC, the obligation of
the Bank to make or continue LIBOR Rate Loans, or to convert
Reference Rate Loans into LIBOR Rate Loans, shall be suspended
until the Bank notifies ETC that the circumstances causing such
suspension no longer exist.
(c) If the Bank shall incur any loss or expense (including
any loss or expense incurred by reason of a liquidation or
redeployment of deposits or other funds acquired by the Bank to
make, continue or maintain any portion of a LIBOR Rate Loan, or to
convert any portion of a Reference Rate Loan into a LIBOR Rate
Loan) as a result of: (i) any conversion or repayment or
prepayment of the principal amount of LIBOR Rate Loan on a date
other than the last day of the Interest Period applicable thereto
(whether as a result of acceleration, prepayment or otherwise);
(ii) any loan not being made as a LIBOR Rate Loan in accordance
with the request therefor; or (iii) any loan not being continued
as, or converted into, a LIBOR Rate Loan in accordance with the
Continuation/Conversion notice therefor;
then, upon written notice from the Bank to ETC, ETC shall, within
ten days of its receipt thereof, pay to the Bank such amount as
will (in the reasonable determination of the Bank) reimburse the
Bank for such loss or expense. Such written notice (which shall
include calculations in reasonable detail) shall, in the absence
of manifest error, be conclusive and binding on ETC.
-10-
<PAGE> 11
(i) Section 6.8 is amended in its entirety to read as follows:
6.8 Consolidated Tangible Net Worth. Permit Consolidated
Tangible Net Worth at any time during the following periods to be
less than the following amounts:
<TABLE>
<CAPTION>
PERIOD AMOUNT
------ ------
<S> <C>
Fiscal year 1997 $5,000,000
Fiscal year 1998 and thereafter $5,250,000
</TABLE>
Notwithstanding the foregoing, if ETC writes-off all or a portion
of its account receivable from Telesystems, Inc. related to the
sale of 17 Inter-act Systems to the Philippine Long Distance
Telephone Company (the "Telesystems Account"), the Consolidated
Tangible Net Worth covenant shall thereafter be decreased by the
amount of such write-off, up to a maximum of $1,200,000; provided
that, if ETC collects any portion of the Telesystems Account so
written off, the Consolidated Tangible Net Worth covenant shall
thereafter be increased by the amount of such collection.
(j) Section 6.10 is amended by deleting the ratio "1.25:1" contained
therein and inserting "0.75:1" in its place.
(k) Section 6.11 is amended by deleting the amount "$3,000,000" contained
therein an inserting "$750,000" in its place.
(l) Section 6.12 is amended in its entirety to read as follows:
6.12 Restricted Payments. Make any Restricted Payments,
except that, so long as no Event of Default exists, the following
Restricted Payments may be declared and paid during any fiscal
year: $325,000 plus up to 15% of Consolidated Net Earnings for
such fiscal year.
(m) Section 6.13 is added to the Agreement to read as follows:
-11-
<PAGE> 12
6.13 Consolidated Net Earnings. Permit Consolidated Net
Earnings to be less than 0 for any two consecutive fiscal years of ETC;
provided, that any write-off by ETC of all or a portion of the
Telesystems Account, up to a maximum aggregate amount of
$1,200,00, shall not be included in calculating Consolidated Net
Earnings; provided further, that if ETC collects any portion of
the Telesystems Account so written off, such collection shall not
be included in calculating Consolidated Net Earnings.
(n) Exhibit A attached hereto shall be deemed an exhibit to the Agreement
and shall replace its predecessor thereto.
3. Effectiveness of this Third Amendment This Third Amendment shall
become effective upon (i) execution and delivery hereof by ETC and the Bank and
(ii) receipt by the Bank of:
(a) The Note, duly executed by ETC;
(b) Personal property searches of the appropriate public offices
demonstrating that the Bank has a first priority security interest in the
personal property of ETC and that no security interest, tax lien, judgment lien
or other charge or encumbrance is of record affecting ETC or its properties
except those which are acceptable to the Bank; and
(c) Copies, certified by the Secretary of ETC to be true and correct and
in full force and effect on the date of this Third Amendment of (i) resolutions
of the Board of Directors of ETC authorizing the execution and delivery of this
Third Amendment and the Note; (ii) a statement that the Restated Articles of
Incorporation and By-Laws of ETC remain unamended since the most recent copies
of the same were delivered to the Bank on May 17, 1989; and (iii) a statement
containing the names and titles of the officer or officers of ETC authorized to
sign this Third Amendment and the Note, together with true signatures of such
officers.
4. No Waiver. ETC agrees that nothing contained herein shall be construed
by ETC as a waiver by the Bank of ETC's compliance with any representation,
warranty or covenant contained in the Agreement and that no waiver of any
provisions of the Agreement has occurred.
-12-
<PAGE> 13
5. Representations and Warranties. ETC represents and warrants that:
(a) The execution and delivery of this Third Amendment and the Note by ETC
are within its corporate power, have been duly authorized by the proper
corporate action on the part of ETC, are not in violation of any existing law,
rule or regulation of any governmental agency or authority, any order or
decision of any court, the Restated Articles of Incorporation or By-Laws of ETC
or the terms of any agreement, restriction or undertaking to which ETC is a
party or by which it is bound and do not require the approval or consent of the
shareholders of ETC, any governmental body, agency or authority or any other
person or entity;
(b) The representations and warranties contained in the Agreement,
including but not limited to the representations in sections 3.21 and 3.23, are
true and correct in all material respects as of the date of this Third
Amendment and, after giving effect to the amendments to the Agreement set forth
above, no condition or event exists or act has occurred that, with or without
the giving of notice or the passage of time, would constitute an Event of
Default.
6. Costs and Expenses. ETC agrees to pay to the Bank on demand all costs
and expenses (including reasonable attorneys' fees) incurred by the Bank in
connection with the negotiation, execution and delivery of this Third
Amendment.
7. Full Force and Effect. The Agreement, as amended hereby, remains in
full force and effect.
BANK ONE, WISCONSIN (f/k/a Bank
One Milwaukee, National Association,
successor by merger to Bank One,
Waukesha)
BY /s/ Terry R. Sutter
----------------------------------
Terry R. Sutter, Vice President
ELECTRONIC
TELE-COMMUNICATIONS, INC.
BY /s/ Dean W. Danner
----------------------------------
Dean W. Danner, President
-13-
<PAGE> 14
EXHIBIT A
REVOLVING NOTE
$3,500,000 September 27, 1997
FOR VALUE RECEIVED, on or before the Final Maturity Date (as defined in
the Credit Agreement referred to below), the undersigned, ELECTRONIC
TELE-COMMUNICATIONS, INC., a Wisconsin corporation, promises to pay to the
order of BANK ONE, WISCONSIN (f/k/a Bank One, Milwaukee, National Association,
successor by merger to Bank One, Wisconsin) (the "Bank"), the principal sum of
Three Million Five Hundred Thousand Dollars, or such lesser amount as is shown
to be outstanding according to the records of the Bank, together with interest
on the principal balance outstanding from time to time at such rates and
payable at such times as set forth in the Credit Agreement.
Payments of both principal and interest are to be made in immediately
available funds in lawful currency of the United States of America at the
office of the Bank, 111 East Wisconsin Avenue, Milwaukee, Wisconsin 53202, or
such other place as the holder hereof shall designate to the undersigned in
writing.
This Revolving Note is the Note issued pursuant to a Credit Agreement
dated as of May 17, 1989, as amended to date (as so amended, the "Credit
Agreement"), between the undersigned and the Bank, to which reference is made
for rights and obligations as to prepayment and acceleration of maturity. This
Revolving Note replaces that certain Revolving Note dated May 15, 1994 from the
undersigned to the Bank and the undersigned acknowledges that the indebtedness
evidenced thereby has not been extinguished and that no novation has occurred.
The undersigned agrees to pay all costs of collection, including
reasonable attorneys' fees.
ELECTRONIC
TELE-COMMUNICATIONS, INC.
BY /s/Dean W. Danner
-----------------------------
Dean W. Danner, President
-14-
<PAGE> 1
EXHIBIT 13
1997
ANNUAL REPORT
Electronic Tele-Communications, Inc.
[photo]
<PAGE> 2
[PHOTO]
<TABLE>
<S> <C>
LETTER TO SHAREHOLDERS 1
QUESTIONS/ANSWERS 2
CORPORATE PROFILE 3
OUR VOICES, OUR BUSINESS 4
INDUSTRY TRENDS 5
MARKETS 5
COMPETITIVE ADVANTAGES 6
FUTURE FOCUSED 6
MANAGEMENT'S DISCUSSION
AND ANALYSIS 7
REPORT OF AUDITORS 10
CONSOLIDATED FINANCIAL
STATEMENTS 11
NOTES TO FINANCIAL STATEMENTS 15
ELEVEN YEAR REVIEW 22
QUARTERLY FINANCIAL DATA 24
SHAREHOLDER INFORMATION 24
CORPORATE OFFICERS AND DIRECTORS 25
</TABLE>
<PAGE> 3
A LETTER TO OUR SHAREHOLDERS
Nineteen ninety-seven was an unacceptable year for your Company. Despite
efforts to expand its business base and increase sales, ETC fell short of its
goals, especially during the second half of the year. In addition, our strategy
of using an investment banking firm failed to produce an acquisition that would
diversify our markets.
ETC recorded a loss of $677 thousand in 1997, or $.25 per Class A share, on
sales of $11.6 million. This compared with 1996 earnings of $257 thousand, or
$.12 per Class A share, on sales of $12.9 million. For the fourth quarter of
1997, ETC had a loss of $372 thousand on sales of $2.5 million, as compared to
the fourth quarter of 1996 which had earnings of $438 thousand on sales of $4.1
million. The 1996 quarter included a large shipment to an international
customer, while the 1997 quarter included an adverse income tax adjustment
related to FAS 109, "Accounting For Income Taxes."
Addressing these financial results has promoted many changes at ETC. Our sales
process is undergoing radical change with an emphasis on improving how we bring
our products to the new deregulated marketplace. In addition to serving our
traditional central office customers, ETC is aggressively pursuing the
competitive markets created by the Telecommunications Act of 1996. Already in
1998, ETC has booked a significant order to a customer in this new market.
Finally, ETC will take advantage of the international market as the
telecommunications infrastructure continues to modernize and deregulate around
the globe.
Key to the changes in our strategies is new sales and marketing management. In
the third quarter of 1997, Scott Stephenson joined ETC as Director of Marketing.
Also, Cynthia Carlson took over as Vice President of Sales at the end of the
year and a new Regional Sales Manager will be joining ETC shortly. These changes
to ETC's sales and marketing team have already impacted sales activity.
Although we anticipate a weak first quarter of 1998, this increased activity
should promote sales growth as 1998 progresses.
ETC invites our shareholders, customers and employees to follow our progress on
our web site at www.etcia.com. We look forward to sharing our future
improvements and financial results with you.
Sincerely,
/s/ Dean W. Danner
Dean W. Danner
President and Chief Executive Officer
March 10, 1998
[PHOTO OF DEAN W. DANNER]
"ETC IS A QUALITY SUPPLIER OF TELECOMMUNICATIONS SOLUTIONS FOR OUR CUSTOMERS
WORLDWIDE"
--ETC's Mission Statement
<PAGE> 4
[photo]
QUESTIONS/ANSWERS
IS THE COMPANY STILL WORKING
ON ACQUISITIONS AS AN
IMPORTANT STRATEGY?
Long-term, we are still interested in acquisitions as a means to providing
growth and diversification for the Company. Our immediate focus, however, must
be on rebuilding momentum in our core business. Gaining a stronger position in
the market will enhance our opportunities in the acquisition arena.
WHAT NEW FEATURES AND ENHANCEMENTS ARE BEING ADDED TO ETC PRODUCTS TO
STAY COMPETITIVE IN THE MARKETPLACE?
In 1997, several enhancements were made to ETC product lines that strengthened
their position in the marketplace. The Media Module (TM), utilized with our
Digicept(R) 2000 and 2002 products, provides a means for the customer to easily
install, back-up, and restore software and data.
FlexText(TM), an enhancement to Audichron(R) 410, gives administrators a
flexible tool in creating audiotex applications. A recent software release also
enabled a remote record feature for transmitting up-to-date information such as
sports scores, emergency messages, and schedule changes.
Product developments in 1998 will address the growing need for services and
revenue-generating applications in the marketplace. A few of these projects
include establishing the necessary interfaces for network capabilities within
the Advanced Intelligent Network, and incorporating time, temperature and
weather capabilities in the Digicept(R) line.
HAS ETC BEEN SUCCESSFUL IN SELLING TO NEW PLAYERS WHO ENTERED THE MARKET
FOLLOWING THE 1996 TELECOMMUNICATIONS ACT?
While ETC has met with some success in penetrating this new market, our sales
strategies are being further refined to promote increased activity in 1998. In
addition, ETC will position itself to provide applications that meet the needs
of competitive carriers as they gear up to provide enhanced services across the
country. Our efforts in early 1998 have already generated a significant order
from one of the premier carriers in the industry.
HOW HAS ETC USED TECHNICAL SERVICES TO PROVIDE A COMPETITIVE EDGE?
ETC Technical Services has incorporated flexibility into its service offerings
to meet the varied needs and scheduling demands of our customers. Providing
options for installing, administering, and supporting equipment are important
since our customers' on-site technical staffs are often limited.
ETC offers complete or partial administration programs. In addition, due to the
networkability in ETC products, administration is possible either on or
off-site. Equipment set-up ranges from complete turn-key services to a basic
set-up/check-out program. Customers can also receive training to maintain their
ETC equipment through customized on-site training or classes held at
ETC facilities. Finally, ETC Technical Services provides quality recordings and
weather forecasts to enhance our customers' applications.
HAS ETC SIGNED CONTRACTS WITH CUSTOMERS OVER THE LAST YEAR?
ETC signed a number of important contracts in 1997 to increase our domestic and
international sales opportunities. Most notably, an OEM and distribution
agreement with Nortel expanded ETC's access to Nortel's established and growing
worldwide switch market. Also, a distribution agreement was signed with
Motorola to provide a digital announcement solution for their cellular
switching system.
In addition to these new contracts, ETC renewed several important existing
contracts. Included among these were contracts with Siemens Telecom Networks
and Ameritech.
2
<PAGE> 5
CORPORATE PROFILE
[photo]
ETC's history began with 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 a service to its customers, 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-person 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 in Waukesha, WI. Branches are maintained in
Atlanta, GA and Pleasanton, CA. Each of the Company's three offices supplies
technical and sales 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.
3
<PAGE> 6
OUR VOICES, OUR BUSINESS
ETC's primary line of equipment works hand-in-hand with the wireline and
wireless telephone switching network. ETC Voice Platforms announce information
for the switch related to changed numbers, network status, calling feature
status or payment information. These messages, called intercept, are often
customized by the access provider to include branding or specific service
information. In a marketplace defined by services, Voice Platforms keep
providers competitive. ETC Voice Platforms include Digicept(R) 2002, Digicept(R)
2000, Audichron(R) System 3 and Audichron(R) System 3 JR.
Audichron(R) 410, another offering to the telephone switching industry, is a
Voice Mail/Audiotex product. Access providers can easily administer the system
with Class of Service templates to provide various service packages. For
example, a full-feature package may include unlimited voice recording and
storage while a more basic type may have a prescribed message length or
duration of time that messages are stored. Access providers set price points
for each type of service level.
The system can also serve as an information bulletin board where callers
receive information after pressing sequences of numbers on their telephone
keypad. ETC's FlexText(TM) creation tool enables easy set-up and administration
of audiotex applications and menus. Up-to-the-minute information can be
recorded remotely for accurate sports scores, schedules, promotional and
emergency information.
ETC's Call Sequencers, effective in high-traffic situations, prioritize calls
and hold them 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 to receive
information. Acting as an automated hotline, digital announcers free businesses
to refocus their personnel.
ETC also keeps telephone peripherals 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's MAX(TM) Terminator 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. Weather
forecasting information is sold in various Weathertel(R) packages. Subscribers
receive updated forecasts from ETC's Weather Center in Atlanta which are
downloaded into ETC weather equipment. Weather information is accessed by the
community through a special published phone number. Advertising messages may be
played before the weather announcement. Several sponsors can either record
their own messages or take advantage of professional recordings through ETC's
Recording Services Studio.
[PHOTOS]
Surf's up!
ETC's Audichron(R) 410 (left) provides voice mail service or announces the
current time and weather forecasts to callers. Numerous markets have taken
advantage of its audiotex applications to supply around-the-clock recreation,
banking and community service information to customers.
4
<PAGE> 7
INDUSTRY TRENDS
ETC's Voice Platforms are in demand not only by traditional dial tone
providers, but industry newcomers. Since the Telecommunications Act of 1996
opened the industry to competition, ETC has taken advantage of the opportunity
by offering its products and services to new providers. Competition and demand
have also fueled the requirement of increased services and applications.
Integration, flexibility, and revenue generation are primary concerns to
wireline and wireless providers.
Wireline and wireless services continue growing rapidly. The widespread use of
wireless telephones and pagers, modems, fax machines 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.
MARKETS
Markets for ETC products include providers of wireline or wireless
service--ILECs (incumbent local exchange carriers), RBOCs (Regional Bell
Operating Companies), CLECs (competitive local exchange companies), and CAPs
(competitive 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 markets.
Internationally, ETC has marketed 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, finance, education,
transportation, theaters, and hospitality. ETC products are an easy, economical
way for businesses to transform their telephones into public bulletin boards,
community promotional tools, business advertising mediums, or information
services.
[PHOTO]
"The last incoming call was 123-1234. This call was received on February 14 at
8:00 p.m. To activate call return, dial 1."
[PHOTOS]
"Please hold while we connect you with a cellular operator. You will be able
to immediately place a call using your credit card, calling card or place a
third party or collect call. Thank you."
[PHOTO]
"The person you are waiting for will answer your call soon. Please stay on the
line."
[PHOTO]
ETC's Digicept(R) 2002 (left) speaks for the telephone network. Intercept
messages (above) include information on network status, call features, changed
numbers and methods of payment.
5
<PAGE> 8
COMPETITIVE ADVANTAGES
ETC's products are designed for compatibility with the majority of switches in
the market. ETC is committed to product compatibility and participates in a
number of OEM certification or compliance field testing programs on a regular
basis.
Multiple applications 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
announcement 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,
turn-key service, 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's 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.
Changes in key management personnel have also provided opportunity for new
direction in sales and marketing in meeting the needs of today's marketplace.
Our team of Manufacturing, Marketing, Sales, Engineering, and Technical Support
are consistently reexamining how to satisfy our customers now and in the
future.
Deregulation, competition, and acquisition--these factors will shape ETC's
future in the marketplace. Keeping a close eye on these trends ensures products
for the emerging network that are application driven.
[photos]
ETC's Technical Services include turn-key installations, recording services,
weather forecasting, and training.
6
<PAGE> 9
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)
1997 1996
Percentage of Net Sales vs. vs.
1997 1996 1995 1996 1995
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% (9.9)% 0.1%
Cost of products sold 57.1 50.4 47.7 2.2 5.6
Gross profit 42.9 49.6 52.3 (22.1) (4.9)
General and administrative expenses 14.1 12.9 13.1 (1.1) (1.8)
Marketing and selling expenses 19.6 18.1 21.6 (2.5) (16.3)
Research and development expenses 15.3 15.3 19.7 (9.9) (21.8)
Other income (expense) (0.4) (0.1) (0.3) 191.6 (57.2)
Earnings (loss) before income taxes (6.5) 3.2 (2.4) * *
Income taxes (benefit) (0.7) 1.2 (0.6) * *
Net earnings (loss) (5.8) 2.0 (1.8) * *
- ------------------------------------------------------------------------------------
</TABLE>
*Not meaningful to presentation
1997 vs. 1996
REVENUES
Net sales decreased by 9.9% from $12,914,000 in 1996 to $11,636,000 in 1997.
The decrease in net sales in 1997 was due primarily to lower sales of the
Company's interactive voice information systems, partially offset by higher
revenues from services and sales-type leases. Sales of the Company's
interactive voice information systems were made primarily to large, original
equipment manufacturers, several operating telephone companies, and
competitive local exchange carriers. Sales of interactive voice information
systems decreased $1,790,000 in 1997 and represented 51% and 60% of sales in
1997 and 1996, respectively. Sales of older technology passive
recorder/announcer equipment decreased $188,000 in 1997 to $688,000, and it is
expected that these sales will continue to decrease as a percentage of total
Company sales in upcoming years as the industry continues to shift toward
interactive products. Revenues from operating leases, sales-type leases, and
services increased between periods, accounting for 35% and 28% of net sales in
1997 and 1996, respectively. The increase was due primarily to increased sales
of the Company's time/weather/temperature systems under sales-type leases.
Product pricing remained relatively constant between years, and inflation did
not have a material impact on revenues.
GROSS PROFIT
Gross profit was 42.9% of net sales in 1997 versus 49.6% in 1996. The decrease
was due primarily to a one-time $240,000 write-off of a portion of an account
receivable related to a large international sale, together with spreading fixed
manufacturing costs over a lower sales volume.
OPERATING EXPENSES
Total operating expenses were $5,702,000 in 1997, or 49.0% of net sales,
compared to $5,974,000 in 1996, or 46.3% of net sales. The decrease in
operating expense dollars in 1997 was primarily in research and development.
While general and administrative expense and marketing and selling expense
dollars decreased slightly between years, research and development expense
dollars decreased by $196,000 in 1997. The decrease in research and development
was a result of open engineering positions during the early part of the year
which have subsequently been filled, together with the elimination of the
product development function in the Pleasanton, California office. As a
percentage of net sales, general and administrative expenses and marketing and
selling expenses increased between years due to spreading fixed operating costs
over lower sales volume.
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OTHER INCOME AND EXPENSE
Net other expense in 1997 was $51,000, compared to $18,000 in 1996. The
increase was related primarily to the occurrence of interest expense on
borrowings in 1997 compared to interest income as a result of investing the
Company's cash position in 1996.
INCOME TAXES
Income tax benefit was $84,000 in 1997, or an effective tax rate of (11.0)%,
compared to income tax expense of $161,000 in 1996, or an effective tax rate of
38.6%. The 1997 tax benefit was the result of the net loss and an increase in
the valuation allowance for deferred income taxes, partially reduced by the
effect of goodwill amortization and state income tax expense. The 1996 tax
expense was the result of federal and state taxes on net earnings, partially
offset by a reduction of the valuation allowance.
NET EARNINGS AND EARNINGS PER SHARE
Net loss was $677,000 in 1997 versus net earnings of $257,000 in 1996.
The decrease in net earnings between years was due primarily to lower sales
volume and the one-time write-off of a portion of an international receivable,
partially offset by a reduction in research and development expenses in 1997.
Loss per Class A common share was $.25 in 1997, versus earnings per share of
$.12 in 1996.
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% and 52% of sales in 1996 and 1995, respectively. Sales of older
technology passive recorder/announcer equipment decreased $358,000 in 1996 to
$876,000. Lease revenue remained relatively constant between periods,
accounting for 28% of net sales in 1996 and 1995. 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 was 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
Company's attendance at the international telecommunications convention in
Switzerland 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.
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 receipt 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. The
1995 tax benefit was the result of the net loss, partially reduced by the
effect of goodwill amortization and state income tax expense.
8
<PAGE> 11
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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $2,854,000 at December 31, 1997, compared to $4,116,000 for
1996 and $3,880,000 for 1995. The decrease in working capital in 1997 was due
primarily to a net loss and payments made for equipment and dividends. The
increase in working capital in 1996 was due to net earnings, partially offset
by payments made for dividends and equipment. Cash used by operating activities
in 1997 of $244,000 was a result of a net loss, investment in sales-type
leases, and accrual of income tax benefits, partially offset by reductions of
accounts receivable and inventories.
In 1997, payments made for dividends and purchases of capital equipment were
funded primarily by short-term borrowings and reductions of accounts receivable
and inventories. 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.
Reduction of accounts receivable in 1997 was due to the collection of a large
receivable from an international customer. The reduction in inventories was due
to the large shipment of products to the international customer in the first
quarter of 1997 which was included in inventory at the end of 1996. 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.
Capital expenditures were $233,000 in 1997, $167,000 in 1996, and 228,000 in
1995. Capital expenditures in 1997 consisted primarily of computer equipment
additions and upgrades. 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.
As of December 31, 1997, the Company had borrowings of $225,000 on its
available $3,500,000 revolving credit facility. The revolving credit facility
was renewed during 1997 and expires on June 30, 2000.
At current operating levels, management believes that future 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.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Some of the Company's
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than the year 2000. This could cause system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has completed its assessment of the Year 2000 Issue and will have
to modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
total year 2000 project cost is expected to be minimal and all costs will be
expensed as incurred.
The project is estimated to be completed not later than June 30, 1999, which is
prior to any anticipated impact on its operating systems. The Company believes
that with modifications to existing software and conversions to new software,
the Year 2000 Issue will not pose significant operational problems for its
computer systems. However, if such modifications and conversions are not made
or are not completed timely, the Year 2000 Issue could have a material impact
on the operations of the Company.
9
<PAGE> 12
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, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
[Ernst & Young LLP]
Milwaukee, Wisconsin
February 6, 1998
10
<PAGE> 13
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES (Note 14) $11,636,464 $12,913,830 $12,902,268
COST OF PRODUCTS SOLD 6,644,969 6,503,886 6,159,220
-------------------------------------------
GROSS PROFIT 4,991,495 6,409,944 6,743,048
OPERATING EXPENSES:
General and administrative 1,642,345 1,661,419 1,691,228
Marketing and selling 2,274,716 2,332,151 2,784,829
Research and development 1,784,590 1,980,856 2,533,422
-------------------------------------------
5,701,651 5,974,426 7,009,479
-------------------------------------------
EARNINGS (LOSS) FROM OPERATIONS (710,156) 435,518 (266,431)
OTHER INCOME (EXPENSE):
Interest expense (19,278) (1,859) (11,052)
Interest and dividend income 7,408 23,963 1,191
Miscellaneous (39,313) (39,656) (31,124)
-------------------------------------------
(51,183) (17,552) (40,985)
-------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES (761,339) 417,966 (307,416)
Income taxes (benefit) (Note 7) (84,000) 161,400 (76,700)
-------------------------------------------
NET EARNINGS (LOSS) $(677,339) $256,566 $(230,716)
===========================================
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE (Notes 11, 12 and 13):
Class A common $ (0.25) $ 0.12 $ (0.08)
===========================================
Class B common $ (0.33) $ 0.04 $ (0.16)
===========================================
- ---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE> 14
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 489,573 $1,001,976
Trade accounts receivable, less allowance for doubtful accounts
of $121,500 in 1997 and $113,500 in 1996 (Note 8) 1,090,776 1,313,075
Inventories (Notes 2 and 8) 1,842,940 2,434,372
Net investment in sales-type leases (Note 3) 77,123 16,805
Refundable income taxes 212,859 -
Deferred income tax benefits (Note 7) 78,000 268,350
Prepaid expenses and other current assets 143,393 153,442
----------------------
Total current assets 3,934,664 5,188,020
PROPERTY, PLANT AND EQUIPMENT (Notes 4 and 8) 1,721,026 1,847,340
NET INVESTMENT IN SALES-TYPE LEASES (Note 3) 389,778 21,332
DEFERRED INCOME TAX BENEFITS (Note 7) - 52,850
EXCESS OF COST OVER NET ASSETS ACQUIRED,
less accumulated amortization of $349,793 in 1997
and $316,120 in 1996 (Note 7) 1,052,041 1,085,714
----------------------
Total Assets $7,097,509 $8,195,256
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility (Note 8) $ 225,000 $ -
Accounts payable 84,964 127,562
Accrued expenses (Note 6) 637,927 627,808
Income taxes payable - 200,339
Deferred revenue 132,328 196,379
----------------------
Total current liabilities 1,080,219 1,152,088
LONG-TERM LIABILITIES (Note 5) 126,760 226,700
----------------------
Total liabilities 1,206,979 1,378,788
----------------------
STOCKHOLDERS' EQUITY (Notes 11 and 12):
Preferred stock, authorized 5,000,000 shares,
none issued - -
Class A common stock, authorized 10,000,000 shares,
par value $.01, issued and outstanding 2,008,949 shares
in 1997 and 2,003,949 shares in 1996 20,089 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 3,335,353 3,323,528
Retained earnings 2,530,088 3,467,901
----------------------
Total stockholders' equity 5,890,530 6,816,468
----------------------
Total Liabilities and Stockholders' Equity $7,097,509 $8,195,256
======================
- ----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE> 15
ELECTRONIC TELECOMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(677,339) $ 256,566 $(230,716)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 387,473 438,031 496,365
Issuance of common stock 11,875 - -
Deferred income taxes 243,200 46,200 161,300
(Gain) loss from sale of equipment 5,654 (941) (8,984)
Changes in operating assets and liabilities:
Accounts receivable 222,299 (32,120) 555,724
Inventories 591,432 61,450 93,631
Net investment in sales-type leases (428,764) (38,137) -
Prepaid expenses and other assets 10,049 (90,171) 89,388
Accounts payable and accrued expenses (132,419) (220,868) (451,397)
Income taxes (413,198) 401,411 (251,498)
Deferred revenue (64,051) 95,442 (104,359)
-----------------------------------
Total adjustments 433,550 660,297 580,170
-----------------------------------
Net cash provided by (used in) operating activities (243,789) 916,863 349,454
===================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (233,140) (167,411) (228,349)
-----------------------------------
Proceeds from sale of equipment - 15,027 10,295
-----------------------------------
Net cash used in investing activities (233,140) (152,384) (218,054)
===================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (260,474) (260,474) (260,474)
Borrowings on revolving credit facility, net 225,000 - -
-----------------------------------
Net cash used in financing activities (35,474) (260,474) (260,474)
===================================
Net increase (decrease) in cash and cash equivalents (512,403) 504,005 (129,074)
Cash and cash equivalents at beginning of year 1,001,976 497,971 627,045
-----------------------------------
Cash and cash equivalents at end of year $ 489,573 $1,001,976 $ 497,971
===================================
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 85,998 $ 56,533 $ 13,498
Cash received from income tax refunds - 342,744 -
Cash paid for interest expense 16,904 1,859 11,052
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 16
ELECTRONIC TELECOMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock (Note 11)
------------------------------------------
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, 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
ISSUANCE OF COMMON STOCK 5,000 50 - - 11,825 - 11,875
NET LOSS - - - - - (677,339) (677,339)
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, 1997 2,008,949 $20,089 500,000 $5,000 $3,335,353 $2,530,088 $5,890,530
===============================================================================
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 17
ELECTRONIC TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND CONCENTRATION OF CREDIT RISK
The Company designs, manufactures, programs, and markets 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. In addition,
engineering, technical services, and a regional sales office are located in
Atlanta, Georgia, and technical services, repair services, and a regional sales
office are located in 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.
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.
The Company leases certain 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. The
leased equipment is stated at cost less accumulated depreciation. Depreciation
is provided on the straight-line method over the estimated useful lives of the
equipment.
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.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to Statement 128 requirements.
15
<PAGE> 18
ELECTRONIC TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
REVENUE RECOGNITION
Revenue from equipment sales is recognized at the time of shipment. Revenue
from operating leases and services 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.
Certain sales of the Company's Audichron(R) 410 interactive systems are
accounted for as sales-type leases. Revenue is recognized upon shipment of
these systems to the customer. The difference between the expected minimum
payments and the revenue recognized for each agreement is classified as
unearned revenue. The unearned revenue is amortized over the term of each
agreement using the effective interest method.
Revenue from sales-type leases, operating leases and services were
approximately 35%, 28%, and 28% of total revenue in 1997, 1996 and 1995,
respectively.
RESEARCH AND DEVELOPMENT
Research and development costs related to the design and development of new
products are expensed as incurred.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes the standards
for reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) as part of a full set of financial statements. This
statement requires that all elements of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The statement is effective for fiscal years beginning
after December 15, 1997. Since this standard applies only to the presentation
of comprehensive income, it will not have any impact on the Company's results
of operations, financial position or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for years beginning
after December 15, 1997. SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company will adopt SFAS No. 131 in
the first quarter of 1998. Management has not completed its review of SFAS No.
131, but does not anticipate that the adoption of this statement will have a
significant effect on the Company's reported segments.
RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform to the 1997
classifications.
2. INVENTORIES
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 611,561 $ 714,249
Work-in-process and finished goods 784,518 1,278,059
Maintenance and demo parts 620,133 684,646
Reserve for obsolescence (173,272) (242,582)
----------------------
Total inventories $1,842,940 $2,434,372
======================
------------------------------------------------------------------------------
</TABLE>
3. SALES-TYPE LEASES
The Company engages in sales agreements with customers for Audichron(R) 410
systems that are accounted for as sales-type leases. The agreements have
varying length terms expiring in various years through 2004.
Following is a summary of the components of the Company's net investment in
sales-type leases at December 31:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Total minimum lease payments to be received $ 825,230 $ 58,611
Unearned revenue (358,329) (20,474)
--------------------
Net investment in sales-type leases $ 466,901 $ 38,137
=====================
- ------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
ELECTRONIC TELECOMMUNICATIONS, INC. AND SUBSIDIARY
In accordance with the sales agreements, title passes to the customer upon
shipment of the equipment, and therefore, there is no residual value of the
equipment.
Future minimum lease payments to be received under these agreements at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Lease Payments
- -----------------------------------------------------------------------------------------
<S> <C>
1998 $196,824
1999 178,554
2000 167,214
2001 156,651
2002 91,896
Thereafter 34,091
--------
Total minimum lease payments to be received $825,230
========
- --------------------------------------------------------------------------------------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 289,290 $ 289,290
Buildings and improvements 1,614,218 1,614,218
Equipment and furniture 3,133,043 3,246,981
------------------------
5,036,551 5,150,489
Accumulated depreciation and amortization (3,315,525) (3,303,149)
------------------------
Net property, plant and equipment $ 1,721,026 $ 1,847,340
========================
- -------------------------------------------------------------------------------------------------
</TABLE>
5. 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, 1997
are as follows:
<TABLE>
<CAPTION>
Year Rental Payments Sublease Rentals Net Rental Payments
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 $ 710,600 $171,100 $ 539,500
1999 565,900 120,200 445,700
2000 287,100 80,100 207,000
-------------------------------------------------
Total minimum lease payments $1,563,600 $371,400 $1,192,200
=================================================
- ------------------------------------------------------------------------------------
</TABLE>
Included in minimum lease payments are certain payments for abandoned leases. A
liability of $180,400 and $241,100 at December 31, 1997 and 1996, respectively,
for those payments is included in accrued expenses and long-term liabilities.
Rent expense consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total rent expense $ 606,664 $ 613,772 $ 585,657
Amounts received under sublease rentals (238,980) (236,529) (222,110)
--------------------------------------------
Net rent expense $ 367,684 $ 377,243 $ 336,547
============================================
- ----------------------------------------------------------------------------------------------
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Accrued wages and benefits $295,046 $305,099
Product warranty reserve 89,384 100,288
Other accrued expenses 253,497 222,421
----------------------
Total accrued expenses $637,927 $627,808
======================
- -------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
7. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $(332,200) $ 80,200 $(288,000)
State 5,000 35,000 50,000
-----------------------------------------------------------
Total current (327,200) 115,200 (238,000)
Deferred 6,800 67,800 161,300
Change in valuation reserve 236,400 (21,600) -
-----------------------------------------------------------
Income tax expense (benefit) $ (84,000) $161,400 $(76,700)
===========================================================
- ------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of income taxes at the United States statutory rate to
the effective tax rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate (34.0)% 34.0% (34.0)%
State income taxes net of Federal benefit 0.4 5.5 10.7
State effect of change in deferred tax assets (2.6) (2.2) (11.8)
Amortization of goodwill and acquisition costs 1.5 3.3 4.5
Change in deferred income tax valuation allowance 31.1 (5.2) -
Other (7.4) 3.2 5.7
-------------------------------
Effective tax rate (11.0)% 38.6% (24.9)%
===============================
- -------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $935,000 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 $317,800 as of December 31, 1997 and 1996, 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 $311,400 and $75,000 at December 31, 1997 and 1996,
respectively, was provided because of uncertainty as to whether a portion of
the net deferred tax asset would be realized, based on the Company's financial
results in the current and prior years. If the Company is 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>
1997 1996
------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Excess of tax over book depreciation $ (122,800) $(135,700)
Deferred tax assets:
Acquired net operating loss carryforwards 317,800 317,800
Inventories 232,300 229,900
Allowance for doubtful accounts 46,200 43,100
Restructuring charge 68,500 91,600
Accrued charges and other 165,200 167,300
----------------------------
Total deferred tax assets 830,000 849,700
----------------------------
707,200 714,000
Valuation reserve (629,200) (392,800)
----------------------------
Net deferred tax asset $ 78,000 $ 321,200
============================
- -------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
ELECTRONIC TELECOMMUNICATIONS, INC. AND SUBSIDIARY
8. REVOLVING CREDIT FACILITY
The Company has a $3,500,000 Revolving Credit Agreement with a bank. Under the
agreement, the Company has the option to elect to have interest rates
determined based upon the announced reference rate of the bank (8.5% at
December 31, 1997), or LIBOR rate plus margin. No compensating balances or
commitment fees are required under the agreement. The agreement expires on June
30, 2000, at which time any outstanding balances are due.
As of December 31, 1997, the Company had borrowings of $225,000 on the
revolving credit facility. This amount has been classified as current as it is
the intention of the Company to repay the balance during 1998.
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, net earnings, and debt ratios, and limit
capital expenditures and restricted payments.
9. 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 $87,900 in 1997, $97,000 in 1996, and $96,200 in 1995.
10. 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, 1997, 26,400 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:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 6.3% 6.3% 6.3%
Expected dividend yield 6.9% 4.2% 4.2%
Volatility factor of the expected market price
of the Company's common stock 0.54 0.51 0.51
Weighted-average expected life of the option 4.6 YEARS 4.6 years 4.6 years
===============================
- -------------------------------------------------------------------------------
</TABLE>
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.
19
<PAGE> 22
ELECTRONIC TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
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>
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income (loss) $(681,362) $253,909 $(231,559)
Pro forma earnings (loss)
per share:
Class A common $ (0.26) $ 0.12 $ (0.08)
Class B common $ (0.34) $ 0.04 $ (0.16)
===============================================
- ----------------------------------------------------------------------------------------
</TABLE>
Transactions with respect to the Company's stock option plan were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
- --------------------------------------------------------------------------------------------------------
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 149,700 $5.71 139,600 $5.41 133,800 $5.14
Granted 15,900 2.88 12,200 2.88 17,600 1.75
Forfeited (26,000) 5.56 (18,000) 5.74 (9,800) 4.64
Outstanding at end of year 139,600 5.41 133,800 5.14 141,600 4.75
Exercisable at end of year 96,320 5.69 97,320 5.62 101,440 5.49
Weighted average fair value of
Options granted during the year 1.04 1.04 0.54
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Exercise prices for options outstanding as of December 31, 1997, ranged from
$1.75 to $8.50. Additional information related to these options segregated by
exercise price range is as follows:
<TABLE>
<CAPTION>
Exercise Price Range
$1.75 to $3.00 to $5.25 to
$2.99 $5.24 $8.50
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding 40,600 49,300 51,700
Weighted average exercise price of options outstanding $2.43 $4.76 $6.57
Weighted average remaining contractual life
of options outstanding 7.1 years 1.8 years 3.7 years
Options exercisable 7,620 49,300 44,520
Weighted-average exercise price of options exercisable $2.88 $4.76 $6.74
- -------------------------------------------------------------------------------------------
</TABLE>
11. 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> 23
ELECTRONIC TELECOMMUNICATIONS, INC. AND SUBSIDIARY
12. 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.
13. EARNINGS PER SHARE
Earnings (loss) net of dividends paid (undistributed earnings) are allocated
equally per share to weighted average Class A shares, as adjusted for the
dilutive effect of stock options using the treasury stock method, and weighted
average Class B shares outstanding during the year. 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
undistributed earnings.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Net earnings (loss) $ (677,339) $ 256,566 $ (230,716)
Less dividends paid:
Class A common 240,474 240,474 240,474
Class B common 20,000 20,000 20,000
-----------------------------------------------------
Undistributed earnings (loss) $ (937,813) $ (3,908) $ (491,190)
Denominator for basic and diluted earnings per share:
Weighted average shares:
Class A common 2,004,751 2,003,949 2,003,949
Class B common 500,000 500,000 500,000
-----------------------------------------------------
Total 2,504,751 2,503,949 2,503,949
Calculation of basic and diluted earnings (loss) per share:
Class A common:
Distributed earnings $0.12 $ 0.12 $ 0.12
Undistributed earnings (loss) (0.37) 0.00 (0.20)
-----------------------------------------------------
Basic and diluted earnings (loss) per share $ (0.25) $ 0.12 $ (0.08)
Class B common:
Distributed earnings $ 0.04 $ 0.04 $ 0.04
Undistributed earnings (loss) (0.37) 0.00 (0.20)
-----------------------------------------------------
Basic and diluted earnings (loss) per share $ (0.33) $0.04 $ (0.16)
=====================================================
</TABLE>
Options to purchase shares of Class A common stock under the Company's
Nonqualified Stock Option Plan were outstanding during the years 1997, 1996,
and 1995. However, these shares were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive. See Note 10 for additional information regarding stock options.
14. MAJOR CUSTOMERS
One customer accounted for 13%, 23%, and 23% of sales in 1997, 1996, and 1995,
respectively. Amounts due from the customer were approximately $72,400 and
$410,400 at December 31, 1997 and 1996, respectively. Another customer
accounted for 11% of sales in 1996. In addition, a different customer accounted
for 14% of sales in 1995.
21
<PAGE> 24
ELEVEN YEAR REVIEW OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31, 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net sales $11,636,464 $12,913,830 $12,902,268 $16,262,639 $16,854,708
Cost of products sold 6,644,969 6,503,886 6,159,220 7,674,331 7,723,430
---------------------------------------------------------------
Gross profit 4,991,495 6,409,944 6,743,048 8,588,308 9,131,278
General and administrative 1,642,345 1,661,419 1,691,228 1,847,018 2,090,129
Marketing and selling 2,274,716 2,332,151 2,784,829 2,753,570 2,920,257
Research and development 1,784,590 1,980,856 2,533,422 2,537,056 2,469,730
Other income (expense) (51,183) (17,552) (40,985) (87,722) (154,452)
--------------------------------------------------------------
Earnings (loss) before income taxes (761,339) 417,966 (307,416) 1,362,942 1,496,710
Income taxes (84,000) 161,400 (76,700) 401,000 368,000
---------------------------------------------------------------
Net earnings (loss) $ (677,339) $ 256,566 $ (230,716) $ 961,942 $ 1,128,710
===============================================================
PER SHARE DATA:
Weighted average
shares outstanding 2,504,751 2,503,949 2,503,949 2,508,043 2,512,274
Basic and diluted earnings (loss)
per share: (3)
Class A common $ (0.25) $ 0.12 $ (0.08) $ 0.40 $ 0.47
Class B common $ (0.33) $ 0.04 $ (0.16) $ 0.32 $ 0.39
Shares outstanding at year end 2,508,949 2,503,949 2,503,949 2,503,949 2,502,149
Book value per share $ 2.35 $ 2.72 $ 2.72 $ 2.92 $ 2.64
Cash dividends paid per share $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.10
OTHER DATA:
Working capital $ 2,854,445 $ 4,035,932 $ 3,880,097 $ 4,099,811 $ 2,928,946
Current ratio 3.6 4.5 5.0 3.7 2.4
Total assets $ 7,097,509 $ 8,195,256 $ 8,124,251 $ 9,221,623 $ 9,144,744
Total long-term obligations $ - $ - $ - $ - $ -
Stockholders' equity $ 5,890,530 $ 6,816,468 $ 6,820,376 $ 7,311,566 $ 6,601,234
After tax return on sales (5.8)% 2.0% (1.8)% 5.9% 6.7%
Return on equity (11.5)% 3.8% (3.4)% 13.2% 17.1%
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes restructuring charge of $1,375,000 for estimated costs
associated with severance payments, discontinuance of certain product lines,
consolidation of facilities, and related matters.
(2) Includes gain of $187,000 from adoption of Statement of Financial
Accounting Standards No. 109 titled "Accounting For Income Taxes."
(3) Earnings per share amounts for all years are presented in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
22
<PAGE> 25
ELECTRONIC TELECOMMUNICATIONS, INC AND SUBSIDIARY
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988 1987
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$16,314,790 $17,897,351 $13,102,637 $9,869,107 $3,269,866 $3,101,746
8,076,399 8,542,136 5,352,084 5,179,304 1,754,464 1,507,552
-----------------------------------------------------------------------------
8,238,391 9,355,215 7,750,553 4,689,803 1,515,402 1,594,194
2,041,188 2,342,440 1,728,570 1,214,545 442,202 392,576
3,414,824 3,673,246 2,229,056 1,641,898 580,527 400,625
2,577,943 2,473,116 2,087,500 1,234,041 638,602 769,781
(1,709,390) (1) (566,674) (309,269) (232,140) 181,876 68,407
-----------------------------------------------------------------------------
(1,504,954) 299,739 1,396,158 367,179 35,947 99,619
(728,800) (2) 95,000 492,000 168,700 (1,200) (36,600)
-----------------------------------------------------------------------------
$ (776,154) $ 204,739 $ 904,158 $ 198,479 $ 37,147 $ 136,219
=============================================================================
2,530,195 2,508,189 2,296,726 2,295,000 2,295,000 2,295,000
$ (0.29) $ 0.10 $ 0.41 $ 0.10 $ 0.03 $ 0.08
$ (0.37) $ 0.02 $ 0.33 $ 0.02 $ (0.05) $ -
2,502,149 2,563,238 2,300,000 2,295,000 2,295,000 2,295,000
$ 2.27 $ 2.71 $ 2.50 $ 2.18 $ 2.18 $ 2.23
$ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.08 $ 0.08
$ 3,350,661 $ 5,982,277 $2,813,104 $2,380,702 $4,329,206 $4,335,924
2.1 3.2 2.0 2.5 28.0 20.7
$10,743,754 $13,321,905 $9,261,853 $8,646,024 $5,220,946 $5,371,481
$ 1,650,000 $ 3,600,000 $ 766,667 $2,066,667 $ - $ -
$ 5,682,739 $ 6,950,118 $5,751,300 $5,012,517 $5,003,538 $5,109,991
(4.8)% 1.1% 6.9% 2.0% 1.1% 4.4%
(13.7)% 2.9% 15.7% 4.0% 0.7% 2.7%
- ---------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1997 QUARTERS
- -----------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $3,499,879 $3,052,554 $2,544,378 $2,539,653 $11,636,464
GROSS PROFIT 1,548,970 1,467,335 898,383 1,076,807 4,991,495
NET EARNINGS (LOSS) 77,930 14,621 (397,592) (372,298) (677,339)
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE: *
CLASS A COMMON 0.04 0.01 (0.15) (0.15) (0.25)
CLASS B COMMON (0.02) 0.01 (0.17) (0.15) (0.33)
DIVIDENDS PER CLASS A COMMON SHARE 0.06 0.00 0.06 0.00 0.12
STOCK PRICE FOR CLASS A COMMON:
HIGH 3 1/8 2 5/8 3 2 7/8
LOW 1 3/4 2 1 3/4 2
</TABLE>
<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
Basic and diluted 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
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* The 1996 and 1997 quarterly earnings per share amounts are presented
in accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share."
SHAREHOLDER INFORMATION
ANNUAL MEETING OF SHAREHOLDERS
2:00 P.M., Friday, May 1,1998, 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 Investor Relations Department, Electronic
Tele-Communications,Inc., 1915 MacArthur Road, Waukesha, Wisconsin 53188.
Investor relations inquiries may be made 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 March 1, 1998, there were approximately 940 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, 1555 North RiverCenter Drive, Suite 301,
Milwaukee, Wisconsin, 53212, Telephone (414) 905-5000.
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> 27
OUTSIDE DIRECTORS
GEORGE W. DANNER, P.E. (3), CHAIRMAN OF THE BOARD o RICHARD A. GABRIEL (1),(2),
CONSULTANT
A. WILLIAM HUELSMAN (2),(4), INVESTOR o JOANNE B. HUELSMAN, ESQ.(1), WISCONSIN
STATE SENATOR
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 o HAZEL DANNER, (3),(4), CORPORATE
SECRETARY AND DIRECTOR HUMAN RESOURCES
COMMITTEE ASSIGNMENTS
1. AUDIT COMMITTEE 2. COMPENSATION AND STOCK OPTION COMMITTEE 3. EXECUTIVE
COMMITTEE
4. BUILDING AND GROUNDS COMMITTEE
CORPORATE
OFFICERS
DEAN W. DANNER, P.E.
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
[PHOTO]
ROBERT R. SPIERING
VICE PRESIDENT TECHNICAL SERVICES
[PHOTO]
BONITA M. DANNER, P.E.
VICE PRESIDENT ENGINEERING
[PHOTO]
JEFFREY M. NIGL, C.P.A.
VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER
[PHOTO]
HAZEL DANNER
CORPORATE SECRETARY AND DIRECTOR HUMAN RESOURCES
[PHOTO]
CYNTHIA K. CARLSON
VICE PRESIDENT SALES AND CONTRACTS
[PHOTO]
ELAINE MCTYRE
ASSISTANT CORPORATE SECRETARY
<PAGE> 28
[photo]
[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
Atlanta, 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 (925) 463-3393
FAX (925) 463-3737
1-888-RING ETC HTTP://WWW.ETCIA.COM
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1997 and the Consolidated Statement
of Operations for the Year Ended December 31, 1997, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 489,573
<SECURITIES> 0
<RECEIVABLES> 1,212,276
<ALLOWANCES> 121,500
<INVENTORY> 1,842,940
<CURRENT-ASSETS> 3,934,664
<PP&E> 5,036,551
<DEPRECIATION> 3,315,525
<TOTAL-ASSETS> 7,097,509
<CURRENT-LIABILITIES> 1,080,219
<BONDS> 0
<COMMON> 25,089
0
0
<OTHER-SE> 5,865,441
<TOTAL-LIABILITY-AND-EQUITY> 7,097,509
<SALES> 11,636,464
<TOTAL-REVENUES> 11,636,464
<CGS> 6,644,969
<TOTAL-COSTS> 6,644,969
<OTHER-EXPENSES> 5,463,556
<LOSS-PROVISION> 270,000
<INTEREST-EXPENSE> 19,278
<INCOME-PRETAX> (761,339)
<INCOME-TAX> (84,000)
<INCOME-CONTINUING> (677,339)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (677,339)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
