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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the year ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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]
The aggregate market value of voting and non-voting common stock held by
non-affiliates of the Registrant as of March 1, 1999 was $2,216,000. As of March
1, 1999, 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.
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In this report, Electronic Tele-Communications, Inc. is also referred to as
Electronic Tele-Communications, ETC, and the Company.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV incorporate by reference portions of Electronic
Tele-Communications' 1998 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, markets and sells 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 1989. 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 three 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 sells 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; 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
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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. 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 $1,752,000, $1,785,000, and
$1,981,000 in 1998, 1997, and 1996, respectively, on research and development
activities, all of which were exclusively Company sponsored and supported.
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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
Interactive Voice Platforms
The Company produces Digicept(R) Digital Network Application ("DNA") Modules,
the Digicept(R) 2000, Intr-Act systems, and 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) DNA Modules and Digicept(R) 2000 systems serve as processing
platforms to meet the expanding service requirements of the Advanced Intelligent
Network.
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.
Digital Recorder/Announcers
The basic unit of the Company's Digicept(R) system is the Digicept(R)
recorder/announcer, which stores a single announcement for playback to the
telephone network. The Digicept(R) line also includes the Extended Memory
recorder/announcer, providing extended-length, single-channel messages. Calls to
the recorder/announcers are generally grouped through multiple interface
circuits, also manufactured by the Company, allowing simultaneous access to the
recorder/announcer by hundreds of phone lines. High-speed T1 interfaces are
available to connect large recorder/announcer systems directly to a 24-
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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.
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.
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 from ETC's weather center in Atlanta,
Georgia. 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
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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. Some components are manufactured by a single
producer, but the Company believes suitable replacement components would be
available from a variety of sources should the product of any producer become
unavailable. The Company's printed circuit boards and product enclosures are
manufactured by outside suppliers to the Company's specifications. The Company
believes these products would be available from a variety of sources and that
the loss of any single source of supply would not materially affect the
Company's business.
The products manufactured by ETC generally require a high degree of precision
and dexterity in the assembly stage and multiple testing and quality assurance
checks prior to shipment. By stressing quality and maintaining rigid testing and
quality assurance procedures, the Company has been able to achieve a low product
return-for-service rate.
The Company purchases computers, monitors, printers, disk drives, and other
computer related accessories. These components are assembled into systems and
packaged with mostly proprietary and some purchased software and sold to the
customer.
In addition to hardware manufactured by the Company, computer software is an
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 CDs or floppy disks to transfer the programs onto
computer hard drives or memory chips. These software programs dictate how the
voice announcement systems perform, and give the products flexibility to meet
many different customer specifications and needs.
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SALES, MARKETING AND CUSTOMERS
ETC's manufactured products are marketed primarily through Company sales
personnel, with approximately 10% 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 97% of the
Company's 1998 sales were in the United States, and 3% were to international
customers.
During 1998, ETC's products and related services were sold and leased to
approximately 1,470 customers, primarily operating telephone companies,
competitive local exchange carriers ("CLECs"), telephone original equipment
manufactures ("OEMs"), telecommunication dealers, telephone service providers,
financial institutions, and other businesses. Century Telephone Company
accounted for 16% of the Company's 1998 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 three 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, 1998, the amount of the Company's backlog orders believed to
be firm was $1,288,000. This compares with $682,000 of backlog orders as of
December 31, 1997. Four customers comprised 21%, 11%, 10%, and 10%,
respectively, of the 1998 backlog. Two different customers comprised 28% and
14%, respectively, of the 1997 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, CLECs
and OEMs.
COMPETITION
The market as a whole for telecommunications equipment sold to operating
telephone companies, CLECs and OEMs is highly competitive, primarily on the
basis of quality, price, availability for delivery, and capabilities. The
segment of the 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.
Based on comparisons with competitors' products, the Company believes it offers
comparable products with more features at lower prices. Some of the Company's
competitors are larger than the Company and have substantially greater financial
resources.
The Company's time/weather/temperature systems compete indirectly with other
sources of time, weather and temperature information such as radio stations,
television, and cable TV, where these services are provided to listeners and
viewers free of charge on a regular basis.
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EMPLOYEES
As of December 31, 1998, ETC employed 127 persons. Approximately 20% of the
Company's employees are engaged in research and development, 20% in sales and
marketing, 12% in management and office support, 21% in service and support, and
27% 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.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The information in Note 14 on page 21 in ETC's 1998 Annual Report to
Shareholders is incorporated herein by reference.
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
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) Market Information
The Company's Class A common stock trades on the NASDAQ SmallCap Market tier of
The NASDAQ Stock Market under the symbol ETCIA. There is no market for the
Company's Class B common stock.
For the market prices of common stock, see the caption "Quarterly Financial
Data" on page 24 in ETC's 1998 Annual Report to Shareholders incorporated herein
by reference.
(b) Holders
As of March 1, 1999, there were approximately 800 shareholders of record and
beneficial shareholders owning Class A common stock and 8 shareholders of record
of Class B common stock.
(c) Dividends
For 1998, the Company paid a cash dividend of $.04 per share of Class A common
stock. For 1997, the Company paid a cash dividend of $.12 per share on Class A
common stock and $.04 per share on Class B common stock.
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 1998 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 6 through 9 in ETC's 1998 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 1998
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
at a pace required by customers, its ability to continue to serve existing
customers and obtain new customers would be impaired, thus adversely affecting
the Company's revenues and profitability.
Backlog
Because of the nature of the products sold by the Company and the delivery
requirements of customers, most of the Company's orders are filled within a
short time and the Company has relatively short production cycles and low
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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 does acquisitions and the profitability of the
companies it acquires may 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. However, the
Company believes suitable replacement components would be available in most
cases from other sources should the product of any producer become unavailable.
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, the sales
revenues and profitability of ETC could be materially impacted.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not use derivative financial instruments for speculative or
trading purposes. The Company is exposed to market risk related to changes in
short-term interest rates as a result of borrowings under its revolving credit
facility. However, due to the short-term nature and low amount of borrowings,
any impact on the Company's earnings due to changes in interest rates would be
insignificant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information on pages 10 through 24 in ETC's 1998 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 79 Chairman of the Board
and Director
Dean W. Danner 48 President, Chief Executive
Officer and Director
Bonita M. Danner 47 Vice President Engineering
and Director
Hazel Danner 78 Corporate Secretary
and Director
Jeffrey M. Nigl 40 Vice President, Treasurer
and Chief Financial Officer
Robert R. Spiering 54 Vice President Tech Services
Cynthia K. Carlson 54 Vice President Sales
Joanne B. Huelsman 60 Director
A. William Huelsman 61 Director
Peter J. Lettenberger 61 Director
Richard A. Gabriel 66 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 became
actively involved in the telephone industry in 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
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President and Director of Engineering prior thereto since the Company's
incorporation in 1980. Prior thereto he was a Manager of Engineering of GTE
Automatic Electric Corporation. He is a registered Professional Engineer and
holds five United States patents.
BONITA M. DANNER - Ms. Danner has served as a Director of the Company since
incorporation in 1980. She was appointed Assistant Vice President in 1983,
Director of Engineering in 1988, and Vice President Engineering in May 1989.
Prior thereto, she was a project engineer since 1980. She has been a member of
the Company's Audit Committee since 1993. She is a registered Professional
Engineer.
HAZEL DANNER - Ms. Danner has served as a Director of the Company and has been
employed as its Administrative Coordinator since its incorporation in 1980. She
was elected Corporate Secretary in 1983.
JEFFREY M. NIGL - Mr. Nigl, a certified public accountant, was elected Vice
President in May 1990 and Treasurer in May 1993. He has been Chief Financial
Officer since 1988 and prior thereto he was Controller since joining the Company
in 1985. Prior thereto he was employed for two years as Controller of SportsVue
Cable Network of Milwaukee, Wisconsin, and prior thereto for more than three
years as a senior accountant for Arthur Andersen LLP.
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 has served 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 Brady
Corporation.
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.
-12-
<PAGE> 13
All of the Directors serve until their respective successors are elected at the
next annual meeting of shareholders. Officers serve at the discretion of the
Board of Directors. George W. Danner and Hazel Danner are the parents of Dean W.
Danner, who is the husband of Bonita M. Danner; and are the parents of Cynthia
K. Carlson, who is the sister of Dean W. Danner. A. William Huelsman is the
husband of Joanne B. Huelsman. Other than as noted, none of the Company's
Directors or executive officers has any family relationship with any other
Director or executive officer.
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)
Name Securities
and Underlying All Other
Principal Options/ Compensation
Position Year Salary($) Bonus($) SARs(#) ($)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dean W. Danner 1998 132,000 7,100 5,300(1)
President and 1997 132,000 5,300(1)
CEO 1996 132,000 2,700 5,100(1)
Cynthia Carlson 1998 101,400 4,200 2,500 2,100(2)
Vice President 1997 76,875 1,500 1,600(2)
1996 70,800 1,500 1,000 1,500(2)
</TABLE>
- ---------------
(1) Consists of directors' fees of $2,500 in each year, with the remainder
being Company matching contributions pursuant to the Company's 401(k)
retirement savings plan.
(2) Consists of Company matching contributions pursuant to the Company's 401(k)
retirement savings plan.
-13-
<PAGE> 14
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning options/SARs
granted during 1998 to the named executives:
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates
of Stock Price
Appreciation
Individual Grants for Option Term
- ---------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Number of Options/SARs
Securities Granted to Exercise
Underlying Employees or Base
Options/SARs in Fiscal Price Expiration
Name Granted(#) Year ($/Share) Date 5%($) 10%($)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cynthia Carlson 2,500 5.85% 1.500 3/23/2008 2,400 6,000
</TABLE>
The stock options in the table above were granted in accordance with the
Company's Nonqualified Stock Option Plan. Under the Plan, options granted may be
exercised not more than 20% each year from the date of grant, and expire 10
years from the date of grant. The exercise price is the average of the highest
and lowest transaction prices of the stock on the date of the grant. Options are
canceled upon termination of employment.
AGGREGATED OPTIONS/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUES
The following table summarizes options and SARs exercised during 1998 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 4,600(E) 0(E)
1,400(U) 0(U)
Cynthia Carlson 0 0 8,300(E) 0(E)
3,900(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, S-B Item 402(h) Employment
Contracts and Termination of Employment and Change in Control Arrangements, and
S-B Item 402(i) Report on Repricing of Options/SARs.
-14-
<PAGE> 15
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 12, 1999:
<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 187,751(3) 9.3% 75,048 15.0%
Bonita M. Danner 182,901(3) 9.1% 75,048 15.0%
Dean W. Danner 180,887(3) 9.0% 71,461 14.3%
George W. Danner 163,837 8.2% 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 4,500(3) 0.2% -- 0.0%
All Executive Officers
and Directors as a
group (11 persons) 992,841(3) 49.4% 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 20,400 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, 800 shares; Bonita Danner, 1,400 shares; Dean
Danner, 4,600 shares; Peter Lettenberger, 5,000 shares; and Richard
Gabriel, 4,000 shares. Shares beneficially owned by all officers and
directors as a group include 3 additional officers with the right to
acquire a total of 28,700 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 address for
Peter J. Lettenberger is 411 East Wisconsin Avenue, Milwaukee, WI 53202-4497.
The address for Richard Gabriel is 498 Johns Pass Avenue, Madeira Beach, FL
33708.
-15-
<PAGE> 16
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 1998
Annual Report to Shareholders are incorporated herein by
reference.
2. Financial statement schedules
SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
II Valuation and Qualifying Accounts 19
The Independent Auditors' Report on Financial Statement Schedules
appears in Exhibit 24.1 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 1998 Annual Report to Shareholders
incorporated herein by reference.
3. Exhibits
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
3.1 Restated Articles of Incorporation of Electronic
Tele-Communications, Inc. - July 2, 1985 was
filed as Exhibit 3.1 to Form S-1 (No. 2-99175)
and is incorporated herein by reference.
3.2 Amended Bylaws of Electronic Tele-Communications,
Inc. adopted June 28, 1985 was filed as Exhibit
3.2 to Form S-1 (No. 2-99175) and is incorporated
herein by reference.
10.1 Electronic Tele-Communications, Inc. Tuition
Reimbursement Plan effective January 1, 1985 was
filed as Exhibit 10.1 to Form S-1 (No. 2-99175)
and is incorporated herein by reference.
-16-
<PAGE> 17
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
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 1998 Annual Report to Shareholders.
24.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
28 Cross Purchase Agreement dated June 28, 1985 was
filed as Exhibit 28.1 to Form S-1 (No. 2-99175)
and is incorporated herein by reference.
(b) Reports on Form 8-K:
None.
-17-
<PAGE> 18
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 24, 1999 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Dean W. Danner President, Chief Executive March 24, 1999
- -------------------------------- Officer and Director
Dean W. Danner
/s/ Jeffrey M. Nigl Vice President, Treasurer, March 24, 1999
- -------------------------------- Chief Financial Officer,
Jeffrey M. Nigl and Principal Accounting
Officer
/s/ Bonita M. Danner Vice President Engineering March 24, 1999
- -------------------------------- and Director
Bonita M. Danner
/s/ Hazel Danner Secretary and Director March 24, 1999
- --------------------------------
Hazel Danner
/s/ George W. Danner Director March 24, 1999
- --------------------------------
George W. Danner
/s/ Joanne B. Huelsman Director March 24, 1999
- --------------------------------
Joanne B. Huelsman
/s/ A. William Huelsman Director March 24, 1999
- --------------------------------
A. William Huelsman
/s/ Peter J. Lettenberger Director March 24, 1999
- --------------------------------
Peter J. Lettenberger
/s/ Richard A. Gabriel Director March 24, 1999
- --------------------------------
Richard A. Gabriel
-18-
<PAGE> 19
Schedule II
ELECTRONIC TELE-COMMUNICATIONS, INC.
-----------------
VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
Charge
(Credit)
Balance at to Costs Balance
Beginning and at End
Description of Period Expenses Deductions of Period
- -------------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for
Doubtful Accounts:
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
Year Ended
December 31, 1998 $ 121,500 $ 47,600 $ 61,900 $ 107,200
Allowance for
Inventory Obsolescence:
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
Year Ended
December 31, 1998 $ 173,272 $ 70,000 $ 98,012 $ 145,260
</TABLE>
-19-
<PAGE> 1
ELECTRONIC TELE-COMMUNICATIONS, INC.
[PHOTOS]
1998
ANNUAL REPORT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders 1
1998 Highlights 2
Our Voices, Our Business 3
Corporate Profile and History 5
Management's Discussion and Analysis 6
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
ETC moved in a positive direction in 1998. While the year
began slowly, as we indicated in last year's shareholder
[PHOTO] letter, results steadily improved. A solid fourth quarter
aided by shipments to a major independent local exchange
carrier capped off the year in a profitable position. Our
challenge is to build on this momentum in 1999 and improve
your Company's financial performance as we move into the new
millennium.
On 1998 sales of $13,150,000, ETC recorded a profit of
$179,000, or $.08 per Class A common share. For 1997, sales
were $11,636,000, resulting in a loss of $677,000, or $.25
[PHOTO] per Class A common share. The fourth quarter of 1998 came in
very strong with sales of $4,269,000 and a profit of
$351,000, or $.14 per share. The comparable period of 1997
had sales of $2,540,000 and a loss of $372,000, or $.15 per
share.
"ETC is a quality While sales and profits for 1998 were not as high as we
supplier of tele- would have liked, we are pleased with the improvement during
communications the year and the upward trend created. This improvement was
solutions for our a direct result of changes we made in 1997. New Marketing
customers management and a fully staffed Marketing team provided Sales
worldwide." personnel with better market intelligence and sales tools.
Armed with these assets, a more aggressive Sales team,
ETC's Mission headed by new Sales management, increased their success rate
Statement in the marketplace to "win the business" of our customers.
In addition to a more sound Marketing and Sales approach,
ETC has the opportunity to increase sales because of the
Year 2000 issue. We are ready to meet our customers' needs
by supplying new equipment or upgrades that will fulfill
their Year 2000 requirements.
On the internal side of the Year 2000 issue, ETC has
completed an assessment of our own computer systems and is
pleased to report that only minor modifications and upgrades
will be required to make our internal systems fully Year
2000 compliant. We will complete these changes shortly,
before any impact would be felt by the Company. We have also
evaluated our critical third party suppliers for their Year
2000 readiness, and do not anticipate any adverse
consequences due to these relationships.
We would like to thank our shareholders, customers and
employees for their support over the past year. Please visit
us on our web site at www.etcia.com to follow our progress.
"We were pleased QUARTERLY NET SALES
with the improve-
ment during the [GRAPH] Sincerely,
year and the
upward trend /s/ DEAN W. DANNER
created." Dean W. Danner
President and Chief
Executive Officer
March 10, 1999
<PAGE> 4
1998 highlights
[PHOTO] RECEIPT AND DELIVERY OF $2 MILLION+ ORDER
In the fourth quarter, ETC received orders totaling over $2
million for its Digicept(R) DNA Modules from a leading local
exchange carrier to supply voice announcements and enhanced
services, such as time and temperature, for the carrier's
network. All orders were scheduled for shipment in 1998 to
meet the carrier's requirements for Y2K compliance by the
end of the year.
This order presented a unique challenge to ETC's
[PHOTO] manufacturing team. Production for November and December had
to increase nearly 400% over previous months. Also, the team
would need to address scheduling issues related to the
holidays and the usual year-end shutdowns for ETC and its
suppliers.
"The WinStar order
signifies our A combination of internal and external factors ensured
commitment to success in meeting the order. First, a new master production
providing schedule and a series of meetings with suppliers and
solutions for the production employees initiated the process. Second, a
new competitive supplier inventory program and a supportive supplier base
local exchange expedited the material requirements of the orders. Third, an
carrier market and outstanding effort by ETC's various departments--materials,
applications that production, test and quality assurance--provided the
meet CLEC needs." necessary overtime to complete production. Finally,
effective management allocated the team's resources
Cynthia Carlson, appropriately and maintained the daily production schedule.
VP Sales
Ultimately, ETC not only filled this order on time, but
"Our customers enjoyed an on-time shipping performance rate of 100% for
enjoyed meeting November and December. A high degree of customer commitment,
the 'face behind quality, planning, and teamwork throughout ETC's supply
the voice.' One chain contributed to achieving these goals.
commented that
his two-year old ETC SELECTED AS VOICE OF CLEC NETWORKS
daughter loved to A number of orders were placed in 1998 by CLECs (Competitive
call the local Local Exchange Carriers) for ETC's Voice Application
time and tempera- Platforms. Most significantly, in March, ETC received an
ture service just $800,000 Order from WinStar Communications, Inc. a national
to hear Jane." local communications Company, for 16 sites across the
country. In April, Hyperion Communications, a leading
Scott Stephenson, provider of competitive communications services, selected
Marketing Director ETC's Digicept(R) products to provide voice applications for
its network. Units were installed at 12 Hyperion sites
across the country.
CLECs, to stay competitive, require products that
differentiate or set them apart from other service
providers. One important means to gaining market presence is
building brand recognition. Another is to offer unique
enhanced applications, such as time, temperature, and
weather observations to its customers. ETC's DNA Modules
meet these current needs and provide for the future through
their unlimited custom announcement capabilities.
"TELEPHONE LADY" JANE BARBE AT SUPERCOMM '98
"Telephone Lady" Jane Barbe made an appearance at ETC's
booth for Supercomm '98, the premier communications
technology exhibition and conference, held in Atlanta,
Georgia, and sponsored by the Telecommunications Industry
Association (TIA), and the United States Telephone
Association (USTA). ETC customers, Supercomm attendees, and
booth staffers had the opportunity to enjoy this rare treat
of meeting the famous "first lady" of the public telephone
network.
Barbe, an Atlanta native, has enjoyed a long association
with ETC's Recording Services Department. She has regularly
recorded announcements over the years for many of ETC's
Audichron(R) time, temperature, and weather services heard
by millions of people every day. Her familiar voice has
alerted callers of changed numbers, disconnected numbers,
busy circuits and many other types of pertinent dialing
information. In addition, Barbe has recorded messages for
Bell laboratory computers, The National Bureau of Standards,
and voice mail systems nation wide.
Barbe also made her mark in television on a variety of shows
including I've Got a Secret, The Mike Douglas Show, CBS
News, Real People, Good News and PM Magazine as the "Time
[PHOTO] Lady." She appeared with Ron Reagan, Jr. in a segment on
Good Morning America. Barbe's portfolio includes
commercials, both on and off camera, for companies such as
Coca Cola, Delta Air Lines, Georgia Power, Hardees, IBM,
Miller Brewing, Southern Bell, Sunbeam and Whirlpool.
ETC exhibits yearly at Supercomm which attracts over 45,000
attendees and 700 exhibitors from around the world. The
majority of ETC's markets are represented at this diverse
and exciting exhibition.
2
<PAGE> 5
OUR VOICES, OUR BUSINESS
ETC's Voice Application Platforms serve the needs of
providers and their customers in the wireline and wireless
[PHOTO] telephone network. ETC's Digicept(R) Digital Network
Application (DNA) Modules announce information for the
switch related to changed numbers, network status, calling
Digicept(R) DNA feature status or payment information. These messages,
Modules called intercept, are often customized by the service
provider to include branding for name recognition in the
industry. Revenue-generating applications such as time,
Audichron(R) 410 temperature, and weather forecasts, have been integrated
into this scalable, modular system. The new Weathertel(R) on
the `Net application interfaces with the DNA Module to
provide local forecasts and weather observations with the
click of a mouse. In a marketplace defined by services,
voice application platforms keep providers competitive.
ETC's Audichron(R) 410, another offering to the telephone
switching industry, combines Voice Mail and Audiotex in an
MAX(TM) Terminator easy-to-administer platform. Class of Service templates
enable administrators to provide various service packages.
For example, a full-feature package may include unlimited
voice recording and storage while a more basic package may
have a prescribed message length or duration of time that
messages are stored. Access providers can set different
Time, Temperature price points for each service level.
and Weather
Announcers The system can also serve as an audiotex 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 also keeps telephone peripherals working efficiently
with MAX(TM)Terminator Disconnect Units. When a caller hangs
up while on hold, the line may not disconnect in a
Weather reasonable time. This causes unnecessary waiting for new
Forecasting 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
Recording steady or interrupted progress tones within three seconds
Services and quickly disconnect the line, freeing it to receive
additional calls.
Finally, ETC offers Audichron(R)
time, weather, temperature
announcement systems. Weather
forecasting information is sold in
various Weathertel(R) packages. [PHOTO]
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
[PHOTO] messages may be played before the
weather announcement. Sponsors can
either record their own messages or
take advantage of professional
recordings through ETC's Recording
Services Studio.
3
<PAGE> 6
OUR VOICES, OUR BUSINESS
ETC's Voice Application Platforms are in demand by
traditional dial tone providers as well as industry
newcomers. Since the Telecommunications Act of 1996 opened
[PHOTO] 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 for increased services and applications.
Integration, flexibility, and revenue generation are primary
concerns to wireline and wireless providers.
Additionally, wireline and wireless services continue to
grow rapidly. The widespread use of wireless telephones and
[PHOTO] 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
"Please deposit: efficient manner.
thirty-five cents
for the next five Markets for ETC products include providers of wireline or
minutes." wireless service--ILECs (incumbent local exchange carriers),
RBOCs (Regional Bell Operating Companies), CLECs
"The number you (competitive local exchange carriers), and cellular and PCS
have dialed has carriers. In addition, long distance companies, cable
been changed and companies, and utilities have provided access to the public
is now a multiple telephone network through their switches. These
listing. The opportunities for competition have broadened ETC's markets.
individual
parties may be Internationally, ETC has marketed its products to countries
contacted as in South America, Asia and other parts of the world. Whether
follows..." a telephone company is seeking solutions for maximizing
existing switching equipment or enhancing the latest
"We're sorry, all switching technology, ETC products can accommodate the
circuits are busy telco's needs.
now. Will you
please try your Business markets for ETC products are broader in spectrum.
call again later." Applications can be found in many industries including
health care, finance, education, transportation, theaters,
and hospitality. ETC products are an easy, economical way
"Don't be tied to for businesses to transform their telephones into public
your phone. Call bulletin boards, community promotional tools, business
forwarding lets advertising mediums, or information services.
you take your
calls with you. ETC's products are designed for compatibility with
Let ETC help. The the majority of switches in the market. ETC is
current time: committed to product compatibility and
6:40 a.m. participates in a number of OEM certification or
Temperature: 54." compliance field testing programs on a regular
basis.
The telecommunications industry, by its nature,
promotes change, growth and challenge. Meeting the
existing needs of ETC's customers, while focusing
[PHOTO] on future technology, ensures the development of
products that are application driven. ETC's team
approach to product development incorporates ideas
from research and the field to create equipment
with revenue generating applications for our
customers. Customers want products today that are
flexible enough for tomorrow.
Product support and customer education are also
important ingredients in setting ETC apart from
its competition. Whether through on-site training,
turn-key installation, or 24-hour technical
service, ETC customers can be assured of product
assistance that meets their needs.
4
<PAGE> 7
CORPORATE PROFILE AND HISTORY
ETC's history began with a revolutionary idea. In 1949, its
[PHOTO] 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 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
[PHOTO] several favorable 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
"This is the approached the founders for
Pleasant acquisition and a merger which
Telephone Company. consummated in 1957. By 1963, with
To activate your 160 employees, annual sales [PHOTO]
service, please exceeded four million dollars.
call 555-0000. Further integration took place with
Thank you." General Telephone Company's largest
manufacturing facility, GTE
"For school Automatic Electric, as the Waukesha
closing Branch. In 1980, Danner left GTE to
information, establish Electronic
please press 1." Tele-Communications, Inc. and
introduced central office digital
"The custom voice announcers.
calling feature
you are Two acquisitions followed. In 1989,
attempting to use ETC acquired The Audichron Company,
has not been inventor of the telephone time of
activated for day answering system. In 1991, ETC
this phone." acquired Automation Electronics
Corporation, expanding ETC's telco
"For more informa- offerings to include announcement [PHOTO] [PHOTO]
tion, pleae call devices for business applications.
star-811 from your
cellular phone." ETC's executive offices are located
in Waukesha, Wisconsin. Branches
[PHOTO] are maintained in Atlanta, Georgia
and Pleasanton, California. Each of
the Company's three offices [PHOTO]
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.
5
<PAGE> 8
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)
1998 1997
Percentage of Net Sales VS. VS.
1998 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 13.0% (9.9)%
Cost of products sold 54.2 57.1 50.4 7.2 2.2
Gross profit 45.8 42.9 49.6 20.8 (22.1)
General and administrative expenses 10.8 14.1 12.9 (13.4) (1.1)
Marketing and selling expenses 17.9 19.5 18.1 3.3 (2.5)
Research and development expenses 13.3 15.3 15.3 (1.8) (9.9)
Other income (expense) (0.8) (0.4) (0.1) 114.7 191.6
Earnings (loss) before income taxes 3.0 (6.5) 3.2 * *
Income taxes (benefit) 1.6 (0.7) 1.2 * *
Net earnings (loss) 1.4 (5.8) 2.0 * *
- ---------------------------------------------------------------------------------------------------------
</TABLE>
*Not meaningful to presentation
1998 vs. 1997
REVENUES
Net sales increased by 13% from $11,636,000 in 1997 to $13,150,000 in
1998. The increase in net sales in 1998 was due primarily to higher
sales of the Company's interactive voice information systems, partially
offset by lower revenues from services. 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 increased $1,828,000 in 1998 and
represented 59% and 51% of sales in 1998 and 1997, respectively. Sales
of older technology passive recorder/announcer equipment decreased
$198,000 in 1998 to $490,000, 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, installment sales contracts, and
services decreased between periods, accounting for 29% and 35% of net
sales in 1998 and 1997, respectively. The decrease was due primarily to
decreased lease revenue from the Company's older
time/weather/temperature systems, partially offset by increased sales
of the Company's newer time/weather/temperature systems under
installment sales contracts. Product pricing remained relatively
constant between years, and inflation did not have a material impact on
revenues.
GROSS PROFIT
Gross profit was 45.8% of net sales in 1998 versus 42.9% in 1997. The
increase was due primarily to spreading fixed manufacturing costs over
a higher sales volume, partially offset by volume discounts and
trade-up allowances given to a major customer in 1998. In addition, the
1997 gross margin was adversely affected by a one-time $240,000
write-off of a portion of an account receivable related to a large
international sale.
6
<PAGE> 9
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
OPERATING EXPENSES
Total operating expenses were $5,524,000 in 1998, or 42.0% of net
sales, compared to $5,702,000 in 1997, or 49.0% of net sales. The
decrease in operating expense dollars in 1998 was primarily in general
and administrative expenses due to lower staffing and decreased legal
expenses. Marketing and selling expenses were up slightly in 1998 due
to increased salary, benefits and commission expenses related to sales
positions that were fully staffed during 1998. Research and development
expense remained relatively constant between years. As a percentage of
net sales, all operating expense categories decreased between years due
to spreading fixed operating costs over higher sales volume.
OTHER INCOME AND EXPENSE
Net other expense in 1998 was $110,000, compared to $51,000 in 1997.
The increase was related primarily to higher interest expense on
increased levels of bank borrowing in 1998.
INCOME TAXES
Income tax expense was $215,000 in 1998, or an effective tax rate of
54.5%, compared to income tax benefit of $84,000 in 1997, or an
effective tax rate of (11.0)%. The 1998 income tax expense was a result
of federal and state taxes on net earnings and an increase in the
valuation allowance on deferred tax assets, offset somewhat by reversal
of a previously recorded tax liability no longer deemed necessary. The
1997 income 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.
NET EARNINGS AND EARNINGS PER SHARE
Net earnings were $179,000 in 1998 versus a net loss of $677,000 in
1997. The increase in net earnings between years was due primarily to
higher sales volume and lower operating expenses in 1998. In addition,
in 1997 there was an impact from the one-time write-off of a portion of
an international receivable. Earnings per Class A common share were
$.08 in 1998 versus a loss per share of $.25 in 1997.
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 installment sales
contracts. 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,
installment sales contracts, 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 installment sales contracts.
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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $2,759,000 at December 31, 1998, compared to
$2,854,000 for 1997 and $4,116,000 for 1996. The slight decrease in
working capital in 1998 was due primarily to investment in installment
sales contracts and payments made for equipment and dividends,
partially offset by net earnings. 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 1998 of $389,000 was a
result of an increase in accounts receivable and investment in
installment sales contracts, partially offset by net earnings, a
reduction of inventories, and income taxes refunded.
In 1998, payments made for dividends and purchases of capital equipment
were funded primarily by short-term borrowings and reductions of
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 1998, the increase in accounts receivable and reduction in
inventories were due to large shipments of products to a major
telephone company in the fourth quarter of 1998. Income tax refunds in
1998 were in response to tax returns filed to claim refunds by
carryback of the 1997 loss to offset previous years' earnings.
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.
Capital expenditures were $247,000 in 1998, $233,000 in 1997, and
$167,000 in 1996. Capital expenditures in 1998 and 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.
As of December 31, 1998, the Company had borrowings of $1,300,000 on
its available $3,500,000 revolving credit facility. The entire amount
borrowed was subsequently paid off in January 1999. The revolving
credit facility 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.
8
<PAGE> 11
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
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 ETC's internal computer 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. In addition, ETC's products contain
computer programs that may be impacted by the Year 2000 Issue. The
Company also deals with third parties that may be affected by the Year
2000 Issue and may subsequently affect ETC.
ETC has completed its assessment of the Year 2000 Issue in regard to
its internal computer systems and will have to modify or replace minor
portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. 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 these modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose
significant operational problems for its computer systems.
The Company has completed evaluation of its products and has determined
that all of its current systems are Year 2000 compliant. For any
customers that possess ETC equipment that is currently not Year 2000
compliant, the Company will provide upgrades or migration paths to new
equipment to address the Year 2000 needs of its customers.
ETC is continuing to evaluate the Year 2000 readiness of its critical
third party suppliers. Where it is determined that any suppliers are
not Year 2000 ready, ETC will continue to monitor the situation and
take appropriate action. Based on current progress, ETC does not
anticipate any adverse consequences due to supplier Year 2000
readiness.
The total year 2000 project cost is expected to be minimal and all
costs will be expensed as incurred and are included within the
Company's normal operating budget. Computer system software upgrades
are included under normal maintenance contracts.
ETC believes, based on an overall analysis of the Year 2000 Issue, that
it will be able to manage its total Year 2000 transition without any
adverse effect on its business operations, products or financial
prospects. However, the actual results could differ and 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.
FORWARD LOOKING STATEMENTS
From time to time, information provided by the Company, statements made
by its employees, and information included in its filings with the
Securities and Exchange Commission which are not historical facts are
"forward-looking" statements as defined in the Private Securities
Litigation Reform Act of 1995. Any "forward-looking" statements are
provided in compliance with the "Safe Harbor" provision of the Private
Securities Litigation Reform Act of 1995. The Company's actual future
outcomes and results may differ significantly from those stated in such
"forward-looking" statements. "Forward-looking" statements are not
guarantees of future performance and involve a number of risks and
uncertainties including, but not limited to, technology changes,
backlog, acquisitions, status of the economy, governmental regulations,
sources of supply, expense structure, product mix, major customers,
competition, litigation, and other risk factors detailed in the
Company's filings of Form 10-K with the Securities and Exchange
Commission. Investors are encouraged to consider the risks and
uncertainties included in those filings.
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, 1998 and
1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. 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,
1998 and 1997, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 5, 1999
10
<PAGE> 13
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES (Note 14) $ 13,149,994 $ 11,636,464 $ 12,913,830
COST OF PRODUCTS SOLD 7,122,327 6,644,969 6,503,886
---------------------------------------------
GROSS PROFIT 6,027,667 4,991,495 6,409,944
OPERATING EXPENSES:
General and administrative 1,421,910 1,642,345 1,661,419
Marketing and selling 2,350,465 2,274,716 2,332,151
Research and development 1,751,603 1,784,590 1,980,856
---------------------------------------------
5,523,978 5,701,651 5,974,426
---------------------------------------------
EARNINGS (LOSS) FROM OPERATIONS 503,689 (710,156) 435,518
OTHER INCOME (EXPENSE):
Interest expense (67,388) (19,278) (1,859)
Interest and dividend income 215 7,408 23,963
Miscellaneous (42,692) (39,313) (39,656)
---------------------------------------------
(109,865) (51,183) (17,552)
---------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES 393,824 (761,339) 417,966
Income taxes (benefit) (Note 7) 214,500 (84,000) 161,400
---------------------------------------------
NET EARNINGS (LOSS) $ 179,324 $ (677,339) $ 256,566
============================================
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE (Notes 11, 12 and 13):
Class A common $ 0.08 $ (0.25) $ 0.12
============================================
Class B common $ 0.04 $ (0.33) $ 0.04
============================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE> 14
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 848,087 $ 489,573
Trade accounts receivable, less allowance for doubtful accounts
of $107,200 in 1998 and $121,500 in 1997 (Notes 8 and 14) 2,600,229 1,090,776
Inventories (Notes 2 and 8) 1,384,265 1,842,940
Net investment in installment sales contracts (Note 3) 157,579 77,123
Refundable income taxes -- 212,859
Deferred income tax benefits (Note 7) -- 78,000
Prepaid expenses and other current assets 166,051 143,393
-----------------------
Total current assets 5,156,211 3,934,664
PROPERTY, PLANT AND EQUIPMENT (Notes 4 and 8) 1,628,448 1,721,026
NET INVESTMENT IN INSTALLMENT SALES CONTRACTS (Note 3) 772,685 389,778
EXCESS OF COST OVER NET ASSETS ACQUIRED, less accumulated
amortization of $387,898 in 1998 and $349,793 in 1997 (Note 7) 881,422 1,052,041
-----------------------
Total Assets $8,438,766 $7,097,509
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility (Note 8) $1,300,000 $ 225,000
Accounts payable 173,958 84,964
Accrued expenses (Note 6) 704,105 637,927
Income taxes payable 50,750 --
Deferred revenue 168,068 132,328
-----------------------
Total current liabilities 2,396,881 1,080,219
LONG-TERM LIABILITIES (Note 5) 52,393 126,760
-----------------------
Total liabilities 2,449,274 1,206,979
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 20,089 20,089
Class B common stock, authorized 10,000,000 shares,
par value $.01, issued and outstanding 499,998 shares
in 1998 and 500,000 shares in 1997 5,000 5,000
Additional paid-in capital 3,335,349 3,335,353
Retained earnings 2,629,054 2,530,088
-----------------------
Total stockholders' equity 5,989,492 5,890,530
-----------------------
Total Liabilities and Stockholders' Equity $8,438,766 $7,097,509
=======================
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE> 15
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 179,324 $ (677,339) $ 256,566
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 373,038 387,473 438,031
Issuance of common stock -- 11,875 --
Deferred income taxes 210,500 243,200 46,200
(Gain) loss from sale of equipment 4,573 5,654 (941)
Changes in operating assets and liabilities:
Accounts receivable (1,509,453) 222,299 (32,120)
Inventories 458,675 591,432 61,450
Net investment in installment sales contracts (463,363) (428,764) (38,137)
Prepaid expenses and other assets (22,658) 10,049 (90,171)
Accounts payable and accrued expenses 80,805 (132,419) (220,868)
Income taxes 263,609 (413,198) 401,411
Deferred revenue 35,740 (64,051) 95,442
-----------------------------------------
Total adjustments (568,534) 433,550 660,297
-----------------------------------------
Net cash provided by (used in) operating activities (389,210) (243,789) 916,863
=========================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (247,114) (233,140) (167,411)
Proceeds from sale of equipment 200 -- 15,027
Purchase and retirement of common stock (4) -- --
-----------------------------------------
Net cash used in investing activities (246,918) (233,140) (152,384)
=========================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (80,358) (260,474) (260,474)
Borrowings on revolving credit facility, net 1,075,000 225,000 --
-----------------------------------------
Net cash provided by (used in) financing activities 994,642 (35,474) (260,474)
=========================================
Net increase (decrease) in cash and cash equivalents 358,514 (512,403) 504,005
Cash and cash equivalents at beginning of year 489,573 1,001,976 497,971
-----------------------------------------
Cash and cash equivalents at end of year $ 848,087 $ 489,573 $ 1,001,976
=========================================
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 7,027 $ 85,998 $ 56,533
Cash received from income tax refunds 266,636 -- 342,744
Cash paid for interest expense 63,018 16,904 1,859
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 16
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock (Note 11)
------------------------------------------------
Class A Class B
------- ------- Additional Total
Number Number Paid-in Retained Stockholders'
of Shares Amount of Shares Amount Capital Earnings Equity
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
PURCHASE AND RETIREMENT
OF COMMON STOCK -- -- (2) -- (4) -- (4)
NET EARNINGS -- -- -- -- -- 179,324 179,324
CASH DIVIDENDS PAID:
$.04 PER CLASS A COMMON SHARE -- -- -- -- -- (80,358) (80,358)
----------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1998 2,008,949 $ 20,089 499,998 $ 5,000 $ 3,335,349 $ 2,629,054 $ 5,989,492
=============================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 17
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
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.
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.
15
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
Certain sales under installment sales contracts 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 unearned revenue. The unearned
revenue is amortized over the term of each agreement using the
effective interest method.
Revenue from installment sales contracts, operating leases and services
were approximately 29%, 35%, and 28% of total revenue in 1998, 1997 and
1996, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs related to the design and development of
new products are expensed as incurred.
SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of a
Business Enterprise and Related Information." SFAS No. 131, which
supercedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," 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. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS No. 131 did not affect the results of
operations or financial position of the Company, but did affect the
disclosures of the segment information. See Note 14 for the Company's
disclosures related to SFAS No. 131.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
which is required to be adopted in years beginning after June 15, 1999.
Because the Company has not used derivatives in the past and does not
expect to do so in the future, the Company does not anticipate that the
adoption of SFAS No. 133 will have an effect on its results of
operations or financial position.
2. INVENTORIES
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
--------------------------
<S> <C> <C>
Raw materials and supplies $ 437,349 $ 611,561
Work-in-process and finished goods 559,674 784,518
Maintenance and demo parts 532,502 620,133
Reserve for obsolescence (145,260) (173,272)
--------------------------
Total inventories $ 1,384,265 $ 1,842,940
==========================
</TABLE>
3. INSTALLMENT SALES CONTRACTS
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 2005.
Following is a summary of the components of the Company's net
investment in installment sales contracts at December 31:
<TABLE>
<CAPTION>
1998 1997
--------------------------
<S> <C> <C>
Total minimum lease payments to be received $ 1,582,037 $ 825,230
Unearned revenue (651,773) (358,329)
--------------------------
Net investment in installment sales contracts $ 930,264 $ 466,901
=========================-
</TABLE>
16
<PAGE> 19
ELECTRONIC TELE-COMMUNICATIONS, 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, 1998 are as follows:
<TABLE>
<CAPTION>
Year Lease Payments
- ---- --------------
<S> <C>
1999 $ 389,886
2000 377,706
2001 348,643
2002 253,284
2003 153,483
Thereafter 59,035
----------
Total minimum lease payments to be received $1,582,037
==========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land $ 289,290 $ 289,290
Buildings and improvements 1,612,788 1,614,218
Equipment and furniture 3,280,006 3,133,043
--------------------------
5,182,084 5,036,551
Accumulated depreciation and amortization (3,553,636) (3,315,525)
--------------------------
Net property, plant and equipment $ 1,628,448 $ 1,721,026
==========================
</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, 1998 are as follows:
<TABLE>
<CAPTION>
Net
Rental Sublease Rental
Year Payments Rentals Payments
- ---- ----------------------------------------
<S> <C> <C> <C>
1999 $ 571,400 $ 171,200 $ 400,200
2000 336,700 73,100 263,600
----------------------------------------
Total minimum lease payments $ 908,100 $ 244,300 $ 663,800
========================================
</TABLE>
Included in minimum lease payments are certain payments for abandoned
leases. A liability of $117,500 and $180,400 at December 31, 1998 and
1997, respectively, for those payments is included in accrued expenses
and long-term liabilities.
Rent expense consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Total rent expense $ 612,006 $ 606,664 $ 613,772
Amounts received under sublease rentals (234,021) (238,980) (236,529)
-------------------------------------
Net rent expense $ 377,985 $ 367,684 $ 377,243
=====================================
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Accrued wages and benefits $365,501 $295,046
Product warranty reserve 108,475 89,384
Other accrued expenses 230,129 253,497
-----------------------
Total accrued expenses $704,105 $637,927
=======================
</TABLE>
17
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
7. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Current:
Federal $ -- $(332,200) $ 80,200
State 4,000 5,000 35,000
----------------------------------
Total current 4,000 (327,200) 115,200
Deferred 88,900 6,800 67,800
Change in valuation reserve 121,600 236,400 (21,600)
----------------------------------
Income tax expense (benefit) $ 214,500 $ (84,000) $ 161,400
==================================
</TABLE>
A reconciliation of income taxes at the United States statutory rate to
the effective tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% (34.0)% 34.0%
State income taxes net of Federal benefit 0.7 0.4 5.5
State effect of change in deferred tax assets 1.4 (2.6) (2.2)
Amortization of goodwill and acquisition costs 3.3 1.5 3.3
Change in deferred income tax valuation allowance 30.9 31.1 (5.2)
Reversal of previously recorded tax liability (18.1) - -
Other 2.3 (7.4) 3.2
-------------------------------
Effective tax rate 54.5% (11.0)% 38.6%
===============================
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards
of approximately $547,000 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 $185,300 as of
December 31, 1998 and $317,800 as of December 31, 1997, 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 $433,000 and
$311,400 at December 31, 1998 and 1997, 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>
1998 1997
-------------------------
<S> <C> <C>
Deferred tax liabilities:
Excess of tax over book depreciation $ (18,200) $(122,800)
Deferred tax assets:
Acquired net operating loss carryforwards 185,300 317,800
Inventories 205,000 232,300
Allowance for doubtful accounts 40,800 46,200
Restructuring charge 44,600 68,500
Accrued charges and other 160,800 165,200
------------------------
Total deferred tax assets 636,500 830,000
------------------------
Net deferred tax asset before valuation reserve 618,300 707,200
Valuation reserve (618,300) (629,200)
------------------------
Net deferred tax asset $- $ 78,000
========================
</TABLE>
18
<PAGE> 21
ELECTRONIC TELE-COMMUNICATIONS, 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 (7.75% at December 31, 1998), or LIBOR plus margin (7.26% at
December 31, 1998). 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, 1998, the Company had borrowings of $1,300,000 on
the revolving credit facility. This amount has been classified as
current as the Company repaid the entire balance in January 1999.
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 $86,500 in 1998, $87,900
in 1997, and $97,000 in 1996.
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, 1998, 16,700 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
measurement date, 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>
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.5% 6.3% 6.3%
Expected dividend yield 6.4% 6.9% 4.2%
Volatility factor of the expected market price of
the Company's common stock 0.54 0.54 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
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>
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Pro forma net income (loss) $175,260 $(681,362) $253,909
Pro forma earnings (loss) per share:
Class A common $ 0.08 $ (0.26) $ 0.12
Class B common $ 0.04 $ (0.34) $ 0.04
====================================
</TABLE>
Transactions with respect to the Company's stock option plan were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------------------------------------------------------
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 139,600 $5.41 133,800 $5.14 141,600 $4.75
Granted 12,200 2.88 17,600 1.75 42,700 1.50
Forfeited (18,000) 5.74 (9,800) 4.64 (33,000) 4.45
Outstanding at end of year 133,800 5.14 141,600 4.75 151,300 3.90
Exercisable at end of year 97,320 5.62 101,440 5.49 91,440 5.16
Weighted average fair value of
options granted during the year 1.04 0.54 0.47
-------------------------------------------------------------------
</TABLE>
Exercise prices for options outstanding as of December 31, 1998, ranged
from $1.50 to $8.50. Additional information related to these options
segregated by exercise price range is as follows:
<TABLE>
<CAPTION>
Exercise Price Range
$1.50 to $3.00 to $5.25 to
$2.99 $5.24 $8.50
--------------------------------------
<S> <C> <C> <C>
Options outstanding 70,100 39,300 41,900
Weighted average exercise price of options outstanding $1.95 $4.75 $6.36
Weighted average remaining contractual life of options outstanding 7.1 years 1.1 years 3.3 years
Options exercisable 13,360 39,300 38,780
Weighted average exercise price of options exercisable $2.66 $4.75 $6.44
--------------------------------------
</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.
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.
20
<PAGE> 23
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
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>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Net earnings (loss) $ 179,324 $ (677,339) $ 256,566
Less dividends paid:
Class A common 80,358 240,474 240,474
Class B common -- 20,000 20,000
------------------------------------------
Undistributed earnings (loss) $ 98,966 $ (937,813) $ (3,908)
Denominator for basic and diluted earnings per share:
Weighted average shares:
Class A common 2,008,949 2,004,751 2,003,949
Class B common 499,998 500,000 500,000
------------------------------------------
Total 2,508,947 2,504,751 2,503,949
Calculation of basic and diluted earnings (loss) per share:
Class A common:
Distributed earnings $ 0.04 $ 0.12 $ 0.12
Undistributed earnings (loss) 0.04 (0.37) 0.00
------------------------------------------
Basic and diluted earnings (loss) per share $ 0.08 $ (0.25) $ 0.12
Class B common:
Distributed earnings $ 0.00 $ 0.04 $ 0.04
Undistributed earnings (loss) 0.04 (0.37) 0.00
------------------------------------------
Basic and diluted earnings (loss) per share $ 0.04 $ (0.33) $ 0.04
==========================================
</TABLE>
Options to purchase shares of Class A common stock under the Company's
Nonqualified Stock Option Plan were outstanding. 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. ENTERPRISE INFORMATION
The Company operates as one reportable segment.
GEOGRAPHIC INFORMATION
Geographic information related to the Company's revenues and long-lived
assets are as follows:
<TABLE>
<CAPTION>
Revenues (a) Long-Lived Assets
Year-ended December 31, December 31,
1998 1997 1996 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
United States $12,700,166 $10,259,107 $10,961,469 $ 1,628,448 $ 1,721,026
Philippines -- 986,289 1,411,607 -- --
Other countries 449,828 391,068 540,754 -- --
---------------------------------------------------------------------------------
Total $13,149,994 $11,636,464 $12,913,830 $ 1,628,448 $ 1,721,026
================================================================================
</TABLE>
(a) Revenues are attributed to countries based on the location of customers.
MAJOR CUSTOMERS
One customer accounted for 16% of sales in 1998. The amount due from
the customer at December 31, 1998 was approximately $1,589,400. Another
customer accounted for 13% and 23% of sales in 1997 and 1996,
respectively. The amount due from the customer was approximately
$72,400 at December 31, 1997. In addition, a different customer
accounted for 11% of sales in 1996.
21
<PAGE> 24
ELEVEN YEAR REVIEW OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net sales $ 13,149,994 $ 11,636,464 $ 12,913,830 $ 12,902,268 $ 16,262,639
Cost of products sold 7,122,327 6,644,969 6,503,886 6,159,220 7,674,331
---------------------------------------------------------------------------------
Gross profit 6,027,667 4,991,495 6,409,944 6,743,048 8,588,308
General and administrative 1,421,910 1,642,345 1,661,419 1,691,228 1,847,018
Marketing and selling 2,350,465 2,274,716 2,332,151 2,784,829 2,753,570
Research and development 1,751,603 1,784,590 1,980,856 2,533,422 2,537,056
Other income (expense) (109,865) (51,183) (17,552) (40,985) (87,722)
---------------------------------------------------------------------------------
Earnings (loss) before income taxes 393,824 (761,339) 417,966 (307,416) 1,362,942
Income taxes 214,500 (84,000) 161,400 (76,700) 401,000
---------------------------------------------------------------------------------
Net earnings (loss) $ 179,324 $ (677,339) $ 256,566 $ (230,716) $ 961,942
=================================================================================
PER SHARE DATA:
Weighted average
shares outstanding 2,508,947 2,504,751 2,503,949 2,503,949 2,508,043
Basic and diluted earnings (loss)
per share:
Class A common $ 0.08 $ (0.25) $ 0.12 $ (0.08) $ 0.40
Class B common $ 0.04 $ (0.33) $ 0.04 $ (0.16) $ 0.32
Shares outstanding at year end 2,508,947 2,508,949 2,503,949 2,503,949 2,503,949
Book value per share $ 2.39 $ 2.35 $ 2.72 $ 2.72 $ 2.92
Cash dividends paid per share $ 0.04 $ 0.12 $ 0.12 $ 0.12 $ 0.12
OTHER DATA:
Working capital $ 2,759,330 $ 2,854,445 $ 4,035,932 $ 3,880,097 $ 4,099,811
Current ratio 2.2 3.6 4.5 5.0 3.7
Total assets $ 8,438,766 $ 7,097,509 $ 8,195,256 $ 8,124,251 $ 9,221,623
Total long-term obligations $ -- $ -- $ -- $ -- $ --
Stockholders' equity $ 5,989,492 $ 5,890,530 $ 6,816,468 $ 6,820,376 $ 7,311,566
After tax return on sales 1.4% (5.8)% 2.0% (1.8)% 5.9%
Return on equity 3.0% (11.5)% 3.8% (3.4)% 13.2%
- -----------------------------------------------------------------------------------------------------------------------
</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."
22
<PAGE> 25
ELECTRONIC TELE-COMMUNICATIONS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 16,854,708 $ 16,314,790 $ 17,897,351 $ 13,102,637 $ 9,869,107 $ 3,269,866
7,723,430 8,076,399 8,542,136 5,352,084 5,179,304 1,754,464
- -------------------------------------------------------------------------------------------------
9,131,278 8,238,391 9,355,215 7,750,553 4,689,803 1,515,402
2,090,129 2,041,188 2,342,440 1,728,570 1,214,545 442,202
2,920,257 3,414,824 3,673,246 2,229,056 1,641,898 580,527
2,469,730 2,577,943 2,473,116 2,087,500 1,234,041 638,602
(154,452) (1,709,390)(1) (566,674) (309,269) (232,140) 181,876
- -------------------------------------------------------------------------------------------------
1,496,710 (1,504,954) 299,739 1,396,158 367,179 35,947
368,000 (728,800)(2) 95,000 492,000 168,700 (1,200)
- -------------------------------------------------------------------------------------------------
$ 1,128,710 $ (776,154) $ 204,739 $ 904,158 $ 198,479 $ 37,147
=================================================================================================
2,512,274 2,530,195 2,508,189 2,296,726 2,295,000 2,295,000
$ 0.47 $ (0.29) $ 0.10 $ 0.41 $ 0.10 $ 0.03
$ 0.39 $ (0.37) $ 0.02 $ 0.33 $ 0.02 $ (0.05)
2,502,149 2,502,149 2,563,238 2,300,000 2,295,000 2,295,000
$ 2.64 $ 2.27 $ 2.71 $ 2.50 $ 2.18 $ 2.18
$ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.08
$ 2,928,946 $ 3,350,661 $ 5,982,277 $ 2,813,104 $ 2,380,702 $ 4,329,206
2.4 2.1 3.2 2.0 2.5 28.0
$ 9,144,744 $ 10,743,754 $ 13,321,905 $ 9,261,853 $ 8,646,024 $ 5,220,946
$ -- $ 1,650,000 $ 3,600,000 $ 766,667 $ 2,066,667 $ --
$ 6,601,234 $ 5,682,739 $ 6,950,118 $ 5,751,300 $ 5,012,517 $ 5,003,538
6.7% (4.8)% 1.1% 6.9% 2.0% 1.1%
17.1% (13.7)% 2.9% 15.7% 4.0% 0.7%
- -------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1998 QUARTERS
---------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $2,646,417 $3,209,765 $3,025,266 $4,268,546 $13,149,994
GROSS PROFIT 1,132,818 1,579,770 1,476,613 1,838,466 6,027,667
NET EARNINGS (LOSS) (244,083) 52,034 20,682 350,691 179,324
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
CLASS A COMMON (0.09) 0.02 0.01 0.14 0.08
CLASS B COMMON (0.13) 0.02 0.01 0.14 0.04
DIVIDENDS PER CLASS A COMMON SHARE 0.04 0.00 0.00 0.00 0.04
STOCK PRICE FOR CLASS A COMMON:
HIGH 2 1/4 2 1 1/2 1 3/8
LOW 1 7/16 1 5/16 7/8 3/8
---------------------------------------------------------------------------
1997 Quarters
---------------------------------------------------------------------------
First Second Third Fourth Total
---------------------------------------------------------------------------
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>
SHAREHOLDER INFORMATION
ANNUAL MEETING OF SHAREHOLDERS
2:00 P.M., Friday, May 7,1999, Merrill Hills Country Club, W270 S3425 Merrill
Hills Road, Waukesha, WI 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, WI 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.
SHAREHOLDERS OF RECORD
As of March 1, 1999, there were approximately 800 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 River Center Drive, Suite 301,
Milwaukee, WI, 53212, Telephone (414) 905-5000.
INDEPENDENT AUDITORS
Ernst & Young LLP, 111 East Kilbourn Avenue, Milwaukee, WI 53202
LEGAL COUNSEL
Quarles & Brady, 411 East Wisconsin Avenue, Milwaukee, WI 53202
24
<PAGE> 27
CORPORATE OFFICERS, DIRECTORS, and COMMITTEE ASSIGNMENTS
OUTSIDE DIRECTORS
[PHOTO] - Richard A. Gabriel, 1,2, Consultant
Dean W. Danner
- A. William Huelsman, 2,4, Investor
- Joanne B. Huelsman, Esq., 1,
Wisconsin State Senator
[PHOTO]
Jeffrey M. Nigl - Peter J. Lettenberger, Esq., 2,
Partner, Quarles & Brady
[PHOTO] INSIDE DIRECTORS
Cynthia K. Carlson
- Bonita M. Danner, P.E., 1,3,
Vice President Engineering
- Dean W. Danner, P.E., 3,4, President and
Chief Executive Officer
[PHOTO]
Hazel Danner - George W. Danner, P.E., 3, Chairman of the Board
- Hazel Danner, 3,4, Corporate Secretary and
Director Human Resources
[PHOTO]
Bonita M. Danner
COMMITTEE ASSIGNMENTS
[PHOTO] 1--Audit Committee
Robert R. Spiering
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
- Jeffrey M. Nigl, C.P.A., Vice President,
Treasurer and Chief Financial Officer
- Cynthia K. Carlson, Vice President Sales
- Hazel Danner, Corporate Secretary and
Director Human Resources
- Bonita M. Danner, P.E., Vice President
Engineering
- Robert R. Spiering, Vice President
Technical Services
- Elaine McTyre, Assistant Corporate Secretary
<PAGE> 28
[ETC LOGO]
CORPORATE OFFICE
1915 MacArthur Road, Waukesha, WI53188
phone: 414-542-5600 fax: 414-542-1524
toll-free: 1-888-746-4382
http://www.etcia.com
<PAGE> 1
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 5, 1999
included in the 1998 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 5, 1999, with
respect to the consolidated financial statements incorporated herein by
reference, and our report included in the preceding paragraph with respect to
the financial statement schedule included in this Annual Report (Form 10-K) of
Electronic Tele-Communications, Inc.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 848,087
<SECURITIES> 0
<RECEIVABLES> 2,707,429
<ALLOWANCES> 107,200
<INVENTORY> 1,384,265
<CURRENT-ASSETS> 5,156,211
<PP&E> 5,182,084
<DEPRECIATION> 3,553,636
<TOTAL-ASSETS> 8,438,766
<CURRENT-LIABILITIES> 2,396,881
<BONDS> 0
25,089
0
<COMMON> 0
<OTHER-SE> 5,964,403
<TOTAL-LIABILITY-AND-EQUITY> 8,438,766
<SALES> 13,149,994
<TOTAL-REVENUES> 13,149,994
<CGS> 7,122,327
<TOTAL-COSTS> 7,122,327
<OTHER-EXPENSES> 5,518,855
<LOSS-PROVISION> 47,600
<INTEREST-EXPENSE> 67,388
<INCOME-PRETAX> 393,824
<INCOME-TAX> 214,500
<INCOME-CONTINUING> 179,324
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 179,324
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
