UNITED STATES SECURITIES AND EXCHANGE COMMISSIONS
WASHINGTON D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1995
Commission File Number: 2-92949-S
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1238077
(State of Incorporation) (I.R.S. Employer Identification No.)
415 N. Quay St., #4 Kennewick WA 99336
(Address of Principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (509) 735-9092
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
The number of shares outstanding of common stock as of September 30, 1995
was 5,006,667.
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
(as prepared by Management)
(Unaudited)
SELECTED FINANCIAL DATA
<CAPTION>
Nine months ended Sept 30 Sept 30
1995 1994
========== ==========
<S> <C> <C>
Sales $1,154,290 $ 889,928
Other revenue $ 153,740 $ 106,998
Gross profit $ 707,353 $ 552,262
Income (Loss) before provisions
for income taxes $ 355,545 $ 205,783
Earnings per common share before taxes
Primary $ .07 $ .04
Fully diluted .07 .04
Earnings per common share after taxes
Primary $ .04 $ .03
Fully diluted .04 .03
Weighted average number of common
shares and common stock equivalents
outstanding for use in determining
Earnings Per Share:
Primary 5,396,256 5,369,612
Fully diluted 5,396,256 5,369,612
Total assets $1,955,667 $1,576,734
Long-term debt and capital
lease obligations $ -0- $ -0-
Shareholders' equity $1,827,893 $1,511,884
Shareholders' equity per share $0.37 $0.30
Working Capital $1,708,249 $1,406,861
Current ratio 16:1 23:1
Equity to total assets 93% 96%
</TABLE>
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<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
BALANCE SHEET
(as prepared by Management)
(Unaudited)
<CAPTION>
ASSETS September 30 December 31
1995 1994
=========== ===========
<S> <C> <C>
Current Assets
Cash $ 15,708 $ 66,032
Money market investment 428,235 400,935
Marketable securities 117,253 98,120
Certificates of Deposit 302,000 203,000
Banker Acceptance-SFNB 300,000 100,000
Accounts receivable 317,179 170,466
Allowance for Uncollectibles ( 4,014) ( 6,155)
Inventory 332,715 423,932
Accrued interest 1,113 1,922
Prepaid insurance 4,539 3,073
Prepaid expenses 6,683 -
Prepaid federal Income Taxes - 16,471
Note receivable (current portion) 4,062 5,249
--------- ---------
Total Current Assets $1,825,473 $1,483,045
--------- ---------
Property & Equipment
Leasehold improvements $ 13,544 $ 13,544
Laboratory equipment 226,233 192,413
Furniture & fixtures 15,017 15,017
Dies and molds 17,255 17,255
--------- ---------
$ 272,049 $ 238,229
Less accumulated depreciation ( 150,742) ( 134,110)
--------- ---------
Total Property & Equipment $ 121,307 $ 104,119
--------- ---------
Other Assets
Patent costs, Net $ 1,178 $ 1,259
Deposits 653 837
Capitalized Software 61,143 61,143
Less Accumulated Amortization ( 54,087) ( 52,791)
--------- ---------
Total Other Assets $ 8,887 $ 10,448
--------- ---------
TOTAL ASSETS $1,955,667 $1,597,612
========= =========
<FN>
(See "Notes to Financial Statements")
</TABLE>
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<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
BALANCE SHEET
(as prepared by Management)
(Unaudited)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30 December 31
1995 1994
============ ===========
<S> <C> <C>
Current Liabilities
Accounts payable $ 29,295 $ 22,351
Refundable deposits 8,496 -
Accrued excise taxes 552 1,796
Accrued payroll - 896
Accrued payroll taxes 1,311 1,207
Accrued vacation pay 9,616 6,947
Accrued 401(k) withholding 1,439 -
Accrued federal income tax 66,515 -
--------- ---------
Total Current Liabilities $ 117,224 $ 33,197
--------- ---------
Deferred Tax Liability $ 10,550 $ 8,857
--------- ---------
Stockholders' Equity
Common stock, $.001 par value
50,000,000 shares authorized,
shares issued and outstanding:
5,006,667-December 31, 1994
5,006,667-September 30, 1995 $ 5,007 $ 5,007
Additional paid-in capital 918,056 918,057
Unrealized Gain (Loss)-Market Sec. ( 407) ( 53,913)
Retained earnings 905,237 686,407
--------- ---------
$1,827,893 $1,555,558
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,955,667 $1,597,612
========= =========
<FN>
(See "Notes to Financial Statements")
</TABLE>
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<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF OPERATIONS
(as prepared by Management)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30 Sept 30 Sept 30 Sept 30
1995 1994 1995 1994
--------- --------- ---------- -------
<S> <C> <C> <C> <C>
SALES $ 414,663 $ 322,204 $1,154,290 $ 889,928
--------- --------- ---------- --------
COST OF SALES
Beginning Inventory $ 356,110 $ 426,274 $ 423,932 $ 386,201
Purchases & Allocated
Costs 138,641 132,845 355,720 390,898
--------- --------- --------- --------
$ 494,751 $ 559,119 $ 779,652 $ 777,099
Ending Inventory 332,715 439,433 332,715 439,433
--------- ---------- --------- --------
Total Cost of Sales $ 162,036 $ 119,686 $ 446,937 $ 337,666
--------- ---------- --------- --------
GROSS PROFIT $ 252,627 $ 202,518 $ 707,353 $ 552,262
--------- ---------- --------- --------
OPERATING EXPENSES
Finance/Administration $ 27,468 $ 27,528 $ 135,199 $ 137,722
Research & Development 23,437 27,239 56,263 85,655
Marketing 45,476 32,682 137,467 121,808
Customer Service 12,870 7,762 36,059 33,074
--------- ---------- --------- --------
Total Operating Expenses $ 109,251 $ 95,211 $ 364,988 $ 378,259
--------- ---------- --------- --------
NET OPERATING INCOME $ 143,376 $ 107,307 $ 342,365 $ 174,003
--------- ---------- --------- --------
OTHER INCOME (EXPENSES)
Interest Income $ 13,730 $ 6,935 $ 38,750 $ 19,601
Loss-asset disposition ( 63) - ( 63) ( 753)
Loss-Mktble Securities - - ( 46,558) -
Engineering Services 24,227 35,059 114,990 87,397
Engineering Support ( 20,931) ( 29,095) ( 93,939) ( 74,465)
--------- ---------- --------- --------
Net Other Income $ 16,963 $ 12,899 $ 13,180 $ 31,780
--------- ---------- --------- --------
NET INCOME BEFORE TAX $ 160,339 $ 120,206 $ 355,545 $ 205,783
Provision for income tax 54,515 40,870 136,715 69,966
--------- ---------- --------- --------
NET INCOME $ 105,824 $ 79,336 $ 218,830 $ 135,817
========= ========== ========= =========
Earnings per Share
Primary $0.02 $0.01 $0.04 $0.03
Fully Diluted $0.02 $0.01 $0.04 $0.03
<FN>
(See "Notes to Financial Statements)
</TABLE>
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<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
(as prepared by Management)
(Unaudited)
<CAPTION>
NINE MONTHS ENDED Sept 30 Sept 30
1995 1994
========== =========
<S> <C> <C>
CASH FLOWS PROVIDED (USED) IN
OPERATING ACTIVITIES:
Net income $ 218,830 $ 135,817
Noncash expenses included in income:
Depreciation 16,632 8,175
Amortization 1,376 81
Deferred income tax liability 1,693 -
Loss-asset disposition 63 753
Realized Loss/Impaired Securities 46,558 -
Decrease (Increase) in Current Assets:
Additions to short-term investments ( 102,000) -
Accounts receivable, net ( 148,854) 95,343
Inventory 91,217 ( 53,232)
Prepaid income taxes 16,471 -
Prepaid expenses ( 8,149) ( 3,992)
Accrued interest 809 -
Other current assets - 240
Increase (Decrease) in Current Liabilities:
Accounts payable, accrued expenses
and other current liabilities 17,512 ( 8,681)
Accrued federal income taxes 66,515 ( 62,866)
-------- --------
$ 218,673 $ 111,638
-------- --------
CASH FLOWS PROVIDED (USED) IN
INVESTING ACTIVITIES:
Additions to property and equipment $( 33,883) $( 8,026)
Additions to capitalized software - -
Refund of Deposits 184 -
Additions to marketable securities ( 12,185) ( 8,240)
-------- --------
$( 45,884) $( 16,266)
-------- --------
CASH FLOWS PROVIDED (USED) IN
FINANCING ACTIVITIES:
Proceeds from Note Receivable $ 1,187 $ 1,801
Payments on debt 0 0
Proceeds from issuance of - 16,500
common stock --------- --------
$ 1,187 $ 18,301
--------- --------
<FN>
(See "Notes to Financial Statements)
</TABLE>
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
(continued)
(as prepared by Management)
(Unaudited)
<CAPTION>
Nine Months Ended Sept 30 Sept 30
1995 1994
------- -------
<S> <C> <C>
Net increase in cash and
cash equivalents $ 173,976 $ 113,673
Cash and cash equivalents at
beginning of period 769,967 618,449
-------- --------
Cash and Cash equivalents at
ending of period $ 943,943 $ 732,122
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Cash paid year to date:
Interest $ - $ -
======== ========
Income taxes 57,729 132,832
======== ========
Cash and Cash Equivalents:
Cash $ 15,708 $ 168,173
Money market account 428,235 563,949
Certificates of Deposit (under 90 days) 200,000 -
Banker Acceptances 300,000 -
-------- --------
$ 943,943 $ 732,122
======== ========
Items not affecting cash flows:
Unrealized loss,
marketable securities $ ( 407) $ ( 44,176)
======== ========
<FN>
(See "Notes to Financial Statements)
</TABLE>
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1995
(as prepared by Management)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The financial statements presented in this Form 10Q are unaudited and
reflect, in the opinion of Management, a fair presentation of
operations for the three and nine month periods ended September 30,
1995 and September 30, 1994. These financial statements should be
read in conjunction with the audited financial statements and notes
thereto included in the Company's Forms 10K and 10K/ASB for the year
ended December 31, 1994 as filed with Securities and Exchange
Commission.
The results of operation for the three and nine month periods ended
September 30, 1995 and September 1994, are not necessarily indicative
of the results expected for the full fiscal year or for any other
fiscal period.
NOTE 2-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ORGANIZATION: The Company was incorporated under the laws of
the State of Washington on February 10, 1984, primarily to develop,
produce, sell and distribute wireless modems that allow communication
between computers and peripherals via radio frequency waves.
REVENUE RECOGNITION: The Company recognizes revenue from product
sales upon shipment to the customer. Revenues from site support are
recognized as the Company performs the services in accordance with
agreement terms.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS: The Corporation uses the
reserve method for recording allowance for uncollectible accounts. The
amount included in Allowance for Uncollectible Accounts consists of
$4,014 as of September 30, 1995 and $6,155 as of December 31, 1994.
Accounts totaling $2,141 were applied against the Allowance for
Uncollectible Accounts for the quarter ending June 30, 1995.
INVENTORY: Inventories are stated at lower of cost or market with
cost determined using the FIFO (first in, first out) method.
Inventories consist of the following:
September 30 December 31
1995 1994
---------- -----------
Parts $ 182,469 $ 245,569
Work in progress 36,694 30,553
Finished goods 113,552 147,810
---------- ----------
$ 332,715 $ 423,932
=========== ==========
PROPERTY AND EQUIPMENT: Property and equipment are carried at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. The useful life of property and
equipment for purpose of computing depreciation is five to seven
years. The useful life for leasehold improvements is thirty-one and
one half years.
<PAGE>
PATENT COSTS: Expenses incurred in connection with the patent have
been capitalized and are being amortized over 17 years.
FEDERAL INCOME TAXES: Effective as of January 1, 1992 the Corporation
adopted Statement of Financial Accounting Standards ("SFAS") No. 109
Accounting for Income Taxes which establishes generally accepted
accounting principles for the financial accounting and measurement and
disclosure principles for income taxes payable or refundable
for the current year and for the future tax consequences of events
that have been recognized in the financial statements of the
Corporation and past and current tax returns. The change had no
effect on prior years' results.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed
as incurred.
EARNINGS PER COMMON SHARE: Primary earnings per common share are
based on the weighted average number of shares outstanding during the
period after consideration of the dilutive effect of stock options and
restricted stock awards. The primary weighted average number of
common shares outstanding for the quarters ended September 30, 1995 and
September 30, 1994 were 5,396,256 and 5,369,612 respectively. Also,
fully diluted earnings per common share assume conversion of derivative
securities when the result is dilutive.
CAPITALIZED SOFTWARE COSTS: In August 1985, the Statements of
Financial Accounting Standards No. 86 was issued by the Financial
Accounting Standards Board (FASB), directing that the costs of
creating a computer software product to be sold, leased or otherwise
marketed, and which are incurred after the products technological
feasibility has been established, be capitalized. During 1986 the
Corporation adopted this statement as permitted by FASB No. 86 and,
accordingly, capitalized all such costs subsequent to 1985. Costs
incurred prior to 1986 are not permitted to be capitalized by FASB No.
86 and the Corporation has not capitalized such costs. All costs
capitalized under FASB No. 86 are required to be amortized over their
estimated revenue-producing lives, not to exceed five years, beginning
on the date the product is available for distribution to customers.
Amortization of capitalized software costs charged to expenses for the
periods presented is as follows:
1994 $ 288
1995 (through Sept 30) 1296
STATEMENT OF CASH FLOWS: The Corporation has adopted Statement of
Financial Accounting Standards No. 95, Statement of Cash Flows. For
purposes of this Statement short term investments which have a
maturity of ninety days or less are considered cash equivalents.
<PAGE>
NOTE 3 - FEDERAL INCOME TAXES
Effective as of January 1, 1992, the Corporation adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes, as discussed in NOTE 1. The provision for Federal Income Taxes
consisted of:
September 30 December 31
1995 1994
------------- -----------
Provision attributable to
current period net income $ 136,715 $ 93,529
Deferred - 11,370
-------- --------
Provision for Income Taxes $ 136,715 $ 104,899
======== ========
The components of the net deferred tax liability at December 31, 1994
were as follows:
December 31
1994
-----------
Depreciation $ 12,899
Accrued vacation payable ( 1,949)
Allowance for uncollectible
accounts receivable ( 2,093)
--------
$ 8,857
========
The difference between the provision for income taxes and income taxes
computed using the U.S. federal income tax rate were as follows:
December 31
1994
-----------
Amount computed using the statutory rates $ 93,529
Amount of deferred tax liability 11,370
--------
Provision for Federal Income Taxes $104,899
========
NOTE 4 - PUBLIC OFFERING OF COMMON STOCK
The Company sold 3,000,000 shares of its unissued common stock to the
public on November 12, 1984. An offering price of $0.30 per share was
arbitrarily determined by the underwriter.
NOTE 5 - ACCRUED VACATION PAY
FASB Statement No. 43 requires employers to accrue a liability for
employees' compensation for certain future absences. A liability for
vacation pay in the amount of $9,616 had been accrued as of September
30, 1995.
NOTE 6 - LEASES
The Company has no obligation under capital lease arrangements. The
Company rents its facility under a three (3) year operating lease
which started on the first day of December, 1993. The Company leases
the facility from the Port of Kennewick, which, with the assistance of
federal (EDA) economic development funds, has constructed a building
<PAGE>
for the purpose of leasing space to new or expanding high tech and
electronic industries. The Company will pay, as rental for 6,275
square feet of building space, the sum of $18,990 per year, payable
monthly in advance at the rate of $1,582.50 per month. A leasehold
tax of $203.20 per month is due in addition to the $1,582.50 monthly
rent. The rental expense for 1994 and 1995 are as follows: 1995 (3
quarters) = $16,071; 1994 (12 months) = $21,428.
The following is a schedule of estimated future minimum rental
payments required under the above operating lease over the next five
succeeding years:
Year ending December 31, Amount
------------------------ ------
1995 21,428
1996 19,643
1997 0
1998 0
1999 0
NOTE 7 - FOREIGN SALES
Sales include foreign export sales as follows:
Nine Months Ended
Sept. 30 Sept. 30
1995 1994
-------- --------
Export sales $ 204,249 $ 185,764
Percent of sales 16% 19%
(includes engineering
services)
The geographic distribution of foreign sales for the first nine months
of 1995 and 1994 is as follows:
Percent of Foreign Sales
Sept. 30 Sept. 30
COUNTRY 1995 1994
- - - ---------- ------ ------
Croatia/Slovenia 32 % 8 %
Canada 30 % 64 %
Chile 12 % --
Brazil 9 % 2 %
Mexico 7 % 4 %
Taiwan 6 % 14 %
Israel 4 % 3 %
Singapore less than 1 % 2 %
Thailand/Indonesia -- 3 %
Venezuela less than 1 % less than 1 %
NOTE 8 - PROFIT SHARING AND SALARY DEFERRAL 401(k) PLAN (QUALIFIED)
The Company sponsors a Profit Sharing and Salary Deferral 401(k) Plan
and Trust. All employees over the age of 21 are eligible. The
Company is not making contributions under the current plan agreement.
<PAGE>
NOTE 9 - STOCK OPTIONS
On December 11, 1992, stock options to purchase shares of the
Company's common stock were granted to individual employees and
directors with no less than three years continuous tenure. The
options have an exercise price of $0.50 per share. Options may be
exercised any time during the period from December 11, 1992 through
December 11, 1995. Following is a summary of transactions:
Shares Under Option
Outstanding as of 9-30-94 125,000
Granted during year 0
Cancelled during the year 0
Exercised during the year 0
--------
Outstanding as of 9-30-95 125,000
========
On December 10, 1993, stock options to purchase shares of the
Company's common stock were granted to individual employees and
directors with no less than three years continuous tenure. The
options have an exercise price of $0.60 per share. Options may be
exercised any time during the period from December 10, 1993 through
December 9, 1996. Following is a summary of transactions:
Shares Under Option
Outstanding as of 9-30-94 150,000
Granted during year 0
Cancelled during the year 0
Exercised during the year 0
--------
Outstanding as of 9-30-95 150,000
========
On February 3, 1995, stock options to purchase shares of the Company's
common stock were granted to individual employees and directors with
no less than three years continuous tenure. The options have an
exercise price of $0.31 per share. Options may be exercised any time
during the period from February 3, 1995 through February 2, 1998.
Following is a summary of transactions:
Shares Under Option
Outstanding as of 9-30-94 0
Granted during year 175,000
Canceled during year 0
Exercised during year 0
-------
Outstanding as of 9-30-95 175,000
=======
After termination of employment, stock options may be exercised within
90 days. On July 12, 1994, 150,000 shares under option, issued on
July 12, 1991, expired and were unexercised. During the 12 months
ended September 30, 1995, no shares under option expired or were exercised.
At September 30, 1995 there were 450,000 shares reserved for future
exercises.
NOTE 10 - EMPLOYEE PROFIT SHARING BONUS PROGRAM (NON-QUALIFIED)
The Company makes discretionary contributions to the Employee Profit
Sharing Bonus Program in accordance with the following formula: When
year end Net Profit Before Tax reaches $100,000, the Company sets aside
$10,000. Additionally, 8% of year end Net Profit Before Tax in excess of
$100,000 is added to the Program.
<PAGE>
NOTE 11 - CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
investments and trade accounts receivable. As of September 30, 1995
the Company had cash and cash equivalents with Seattle First National
Bank with a combined balance of $733,235 which is $633,235 in excess
of the F.D.I.C. insured amount. Additionally, at September 30, 1995,
the Company had cash deposits with American National Bank with a
combined balance of $107,139 which is $7,139 in excess of the F.D.I.C.
insured amount. The Company has invested $117,253 with the investment
firm of Piper Jaffray. The Piper Jaffray investment experienced a
realized loss applied against its invested value in the amount of
$46,558, as is prescribed in Statement of Financial Accounting
Standards (SFAS) No. 115 for the treatment of securities with value
impairments. These amounts are not insured. The Company does a
periodic evaluation of the relative credit standing of each financial
institution which is considered in the Company's investment strategy,
as well as the relative risk and rate of return of the particular
investments.
Concentrations of credit risk with respect to trade accounts
receivable are generally diversified due to the geographic dispersion
of the Company's customer base. For the quarter ending June 30, 1995,
Receivable accounts in the amount of $2,141 were expensed as
uncollectible. No additional amounts were expensed for the quarter
ending September 30, 1995.
The largest sales concentration for the period ending September 30,
1995 resulted from sales to entities of the United States Government.
Sales to the United States Government were $273,473, which is 22% of
the total product sales (including engineering services), as of
September 30, 1995. No other sales to a single customer comprised 10%
or more of total product sales as of September 30, 1995.
NOTE 12 - RELATED PARTY TRANSACTIONS
For the nine and twelve month periods ended September 30, 1995 and
December 31, 1994, manufacturing and assembly services in the amount
of $42,487 and $50,788, respectively, were contracted with
Manufacturing Services, Inc., of which the owner/president, Melvin H.
Brown, is a member of the Board of Directors of Electronic Systems
Technology, Inc.
During the fiscal year 1994, the Company contracted for services from
Remtron, Inc. in the amount of $41,583. Remtron, Inc. is owned and
operated by John L. Schooley, who is a member of the Board of
Directors of Electronic Systems Technology, Inc. As of the quarter
ending September 30, 1995, the Company has not contracted for any
services from Remtron, Inc.
NOTE 13 - MARKETABLE SECURITIES
The Corporation has adopted Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. SFAS No. 115 establishes generally accepted
accounting principles for the financial accounting, measurement and
disclosure principles for (1) investments in equity securities that
have readily determinable fair market value and (2) all investments in
debt securities. The change had no effect on prior years' results.
<PAGE>
All of the marketable securities held by the Company consist of
securities "available-for-sale", as defined by SFAS No. 115. The
securities held determined in computing realized gain or loss is the
specific identification method. A loss was realized during the
quarter ending June 30, 1995, due to an impairment in the value of the
marketable securities held by the Company.
The following information is as of September 30, 1995:
September 30, December 31,
1995 1994
------------ -----------
Aggregate fair value of
marketable securities $ 117,253 $ 98,120
Gross unrealized holding gains -- --
Gross unrealized holding losses 407 55,606
Gross realized loss due to impairment
in Marketable Securities 46,558 --
Amortized cost basis 164,218 153,726
Changes in marketable securities for the period ended September 30,
1995 are as follows:
September 30, December 31,
1995 1994
------------ -----------
Cost $ 152,033 $ 142,591
Purchase of shares -- --
Dividends and capital gains
reinvested 12,185 11,135
Sale of securities -- --
Unrealized loss ( 407) ( 55,606)
Realized loss due to impairment
in Marketable Securities ( 46,558) --
Fair market value $ 117,253 $ 98,120
========= ========
As of March 8, 1995, the Company became aware that it had been
included in a class action suit against the manager of the Company's
marketable securities investments, Piper Jaffray. The suit was
apparently originated due to the losses experienced by investors in
the Institutional Government Fund. The Company did not request a
class action suit, but was included in the class by being an investor
in such fund. The counsel pursuing the class action is the firm of
Schatz, Paquin, Lockridge, Grindal, & Holstein, with co-counsel of the
firm of Head, Seifert & Vander Weide. A settlement of the litigation
has been negotiated, which at the time of filing is undergoing final
court approval, which if granted, will be submitted to the class for
approval. Due to the currently uncertain nature of this settlement,
amounts or timing of any settlement cannot be predicted at the time of
filing for this report.
NOTE 14 - CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1994, the Company changed its method of
accounting for Debt and Equity Securities to conform with requirements
of the Financial Accounting Standards Board. This change was adopted
by the Company as of January 1, 1994, but was not reported on
subsequent filing with the Commission until the Form 10Q for the
quarter ending March 31, 1995. The effect of this change was to
increase net income for 1994 by $3,287, which resulted in an amount of
$0.0006 per share. The cumulative effect of the change of $3,287 is
shown as a one-time credit to income in the 1994 Statement of
Operations.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
A. Results of Operation
GROSS SALES: Operations of the Corporation were sustained solely from
revenues received through sales. Total revenues from the sale of EST
products and services for the third quarter of 1995 were $438,890
reflecting a 23% increase from the $357,263 in gross revenues in the
third quarter of 1994. Domestic commercial sales increased to
$280,479 in the third quarter of 1995 as compared to $233,941 for the
third quarter of 1994. This increase is attributable to the
processing of customer orders of larger unit quantities, as well as an
increase in total orders processed. A trend experienced through most of
1995 year to date. Management believes this trend is due in part to
increased advertising by the Company, increased awareness of wireless
technology options by potential buyers of the Company's products, and
customer referrals from the Company's existing customer base. Foreign
export sales for the third quarter of 1995 declined to $70,490 as compared
to the $91,251 in foreign sales in the same quarter of 1994. This decline
is a result of a large order to Taiwan in third quarter 1994, as well as
fewer foreign sales being processed for the third quarter of 1995.
Year-to-date figures show an increase in foreign sales when compared
with 1994. Sales to U.S. Government programs increased from third quarter
1994 levels of $32,276, to $87,921 for the third quarter of 1995. The
primary reason for this increase were orders processed by the Company under
its AIT subcontract. The decrease in engineering services billed for the
third quarter of 1995 as compared with the same quarter of 1994 is a
result of an decrease in requests for engineering services. Year-to-
date figures reflect an increase in engineering service revenues as
compared to 1994.
The Company's revenues fall into three major customer categories,
Domestic, Export and U.S. Government Sales. A percentage breakdown of
EST's major customer categories for the third quarter of 1995 and 1994
are as follows:
For the third quarter of
1995 1994
------- ------
Domestic Sales 64% 65%
Export Sales 16% 26%
U.S. Government Sales 20% 9%
A percentage breakdown of EST's product sales categories for the third
quarter of 1995 and 1994 are as follows:
For the third quarter of
1995 1994
------- --------
ESTeem Model 84SP/85SP 2% 1%
ESTeem Model 85 14% 15%
ESTeem Model 95 24% 5%
ESTeem Model 96 31% 43%
ESTeem Model 98 2% 8%
PEM and PEM-CPU - -
ESTeem Accessories 20% 14%
Factory Services 1% 2%
Site Support 6% 10%
Other - 2%
<PAGE>
The majority of the Company's domestic sales in the third quarter were
made to Supervisory Control and Data Acquisition (SCADA) applications.
It is Management's opinion that these applications will continue to
provide the largest portion of the Company's domestic revenues in the
foreseeable future. Products purchased by foreign customers in the
third quarter of 1995 were used primarily in Industrial Control
applications. In Management's opinion, these applications will
continue to provide the largest portion of the Company's foreign
revenues in the foreseeable future. Products purchased by U.S.
Government agencies or U.S. Government contractors in the third
quarter of 1995 were utilized primarily in Inventory Control. It is
Management's opinion that, in the future sales to the U.S. Government
will continue to be used in Inventory Control applications.
The Company's revenues have historically fluctuated from quarter to
quarter due to timing factors such as customer order placement and
product shipments to customers, as well as customer buying trends, and
changes in the general economic environment. The procurement process
regarding plant and project automation, or project development, which
usually surrounds the decision to purchase ESTeem products can be
lengthy. This procurement process may involve bid activities
unrelated to the ESTeem products, such as additional systems and
subcontract work, as well as capital budget considerations on the part
of the customer. Because of the complexity of this procurement
process, forecasts in regard to the Company's revenues become
difficult to predict.
BACKLOG: The Corporation had backlog in the amount of $9,596 at
September 30, 1995. This backlog consisted of an order for the United
States Marine Corps, awaiting components, and a foreign order awaiting
final shipment details. Both of these orders were filled during the
first part of October, 1995. Customers generally place orders on an
"as needed basis". Shipment is generally made within 5 working days
after receiving an order.
COST OF SALES: Cost of sales percentages of gross sales for the third
quarters of 1995 and 1994 were 39% and 37% of gross sales
respectively. Cost of Sales variations are attributed to the type of
product sold and the size of orders filled. Larger orders grant lower
sales prices because of volume discounting, thus reducing the margin
of profit.
OPERATING EXPENSES: Operating expenses for the third quarter of 1995
were $14,040 higher than the third quarter of 1994. The following is
a delineation of operating expenses:
For the quarter ended: Sept. 30 Sept. 30 Increase
1995 1994 (Decrease)
--------- --------- ----------
Finance/Administration $ 27,468 $ 27,528 $( 60)
Research/Development 23,437 27,239 ( 3,802)
Marketing 45,476 32,682 12,794
Customer Service 12,870 7,762 5,108
-------- -------- --------
Total Operating Expenses $109,251 $ 95,211 $ 14,040
======== ======== ========
<PAGE>
FINANCE AND ADMINISTRATION: Finance and Administration expenses
reflect costs associated with maintaining the Corporation's records,
licensing requirements and providing administrative support. During
the third quarter of 1995 Finance and Administration expenses
decreased $60 over the third quarter of 1994. Expenditures for
Finance and Administration for the third quarter of 1995 were stable
when compared with expenditures for the same quarter of 1994.
RESEARCH AND DEVELOPMENT: Research and Development expenses reflect
costs associated with development of new products and software, in
addition to improvements of existing products and software. During the
third quarter of 1995, Research and Development expenses decreased
$3,802 over the same period of 1994. The decrease is attributable to a
general reduction in subcontracted Research and Development expertise
from the same period of 1994. The 1994 expenditures contained
development costs for the ESTeem 900 MHz wireless modem, a project
which had since been discontinued due to market changes. The Company
has received increased requests for a product using 'spread spectrum'
technology, rather than a narrow band, packet burst, 900 MHz radio
product which had been under development. Developments from the
previous project are being applied to a new generation of products
currently under development, which includes a product using 'spread
spectrum' technology. The reduction in expenditures experienced in the
third quarter is temporary and does not reflect a trend in expenditures
for the remainder of 1995. Management foresees increased Research and
Development expenditures on a whole during 1995 as the Company
pursues opportunities for the development of the new generation of
ESTeem products. Management estimates approximately $100,000 in
Research and Development costs will be incurred during fiscal year 1995.
MARKETING: Marketing expenses reflect costs associated with product
sales. The Company's marketing program is conducted by direct
sales, non-exclusive distributorships, Original Equipment
Manufacturers (OEM's) and sales representatives. The Company
advertises in INDUSTRIAL & CONTROL SYSTEMS magazine, AB JOURNAL
magazine, and the THOMAS REGISTER. The Company also attends product
trade shows, such as the Allen-Bradley Automation Fair throughout the
year. During the third quarter of 1995, marketing expenses increased
$12,794 over the same period in 1994. This increase is attributable
to increased sales levels resulting in higher sales commissions paid,
increased advertising projects, and associated printing costs. It is
the opinion of Management that increased advertising and marketing
projects are partly responsible for increased sales experienced to date
in 1995.
CUSTOMER SERVICE: Customer service expenses reflect costs associated
with after-sale customer support. Customer service expenses for the
third quarter of 1995 increased by $5,108 when compared to the third
quarter of 1994. The increase is attributable to a lower amount of
department expenses that were billable to customers, as compared to
the same quarter of 1994.
INTEREST AND DIVIDEND INCOME: The Corporation earned $13,730 in
interest and dividend income during the quarter ending September 30,
1995 as compared to $6,935 for the third quarter of 1994. Sources of
this income were savings and money market accounts, short term
investments, and investments in marketable securities.
INTEREST EXPENSE: The Corporation did not incur any interest expense
during the quarter ending September 30, 1995.
<PAGE>
ENGINEERING SUPPORT: Engineering support expenses are the
Corporation's travel, wage, and per-diem costs associated with
engineering services provided at customer sites. Engineering support
costs decreased to $20,931 for the third quarter of 1995, as compared
to third quarter 1994 levels of $29,095. This decrease is
attributable to lower engineering services revenues for the third
quarter of 1995, which is directly related to the expenses incurred in
support of those revenues. Management believes that the decline is a
result of customer delays in project startups in the third quarter of
1995.
NET INCOME: The Corporation had a net profit of $105,824 for the
third quarter of 1995, compared to a $79,336 for the third quarter of
1994. The net profit increase is primarily attributed to increased
sales during the third quarter of 1995.
INVENTORY: Inventories consist of component parts used to assemble
the ESTeem products as well as accessories used in the operation of
the ESTeem products. As of September 30, 1995, the Corporation's
inventory decreased $91,217 over the inventory level at December 31,
1994. This decrease is attributable to the processing of increased
customer orders in the third quarter, as well as a conservative
procurement strategy on the part of the Company. The breakdown of the
segments of inventory is discussed in NOTE 1 to the financial
statements.
B. Financial Condition as of September 30, 1995.
The Corporation's current asset to current liabilities ratio at
September 30, 1995 was 16:1 compared to 45:1 at December 31, 1994. The
ratio decrease is primarily attributable to an increase federal income
taxes payable, refundable deposits held for pending foreign orders,
and an increase in trade accounts payable.
C. Liquidity and Capital Resources
The Company's working capital increased by $258,401 during the first
nine months of 1995. A delineation of the changes is as follows:
Sept. 30 December 31 Increase
1995 1994 (Decrease)
-------- ----------- --------
Cash $ 15,708 $ 66,032 ($ 50,324)
Money Market 428,235 400,935 27,300
Marketable Securities(net) 117,253 98,120 19,133
Certificates of Deposit 302,000 203,000 99,000
Bankers Acceptances 300,000 100,000 200,000
Accounts receivable(net) 313,165 164,311 148,854
Inventory 332,715 423,932 ( 91,217)
Accrued interest 1,113 1,922 ( 809)
Note rec. (Current Port.) 4,062 5,249 ( 1,187)
Prepaid expenses 11,222 3,073 8,149
Prepaid income tax 0 16,471 ( 16,471)
--------- --------- --------
$1,825,473 $1,483,045 $ 342,428
--------- --------- --------
Current liabilities $ 117,224 $ 33,197 $ 84,027
--------- --------- --------
Working capital $1,708,249 $1,449,848 $ 258,401
========= ========= ========
<PAGE>
The Corporation's operations rely solely on the income generated from
sales. It is Management's opinion that the Corporation's working
capital as of September 30, 1995 is adequate for the next twelve
months, assuming operating expenses and material acquisitions average
approximately $70,000 per month.
The cash and short term investments of the Company changed in holding
amounts during the first nine months of 1995, with the majority of
idle cash being but into Banker Acceptance short term investments,
certificates of deposit, and money market accounts. The reason for
the change is so these resources will earn improved rates of return.
The Company holds an investment in marketable securities in the Piper
Jaffray Institutional Government Fund. Public information indicates
Piper Jaffray suffered losses due to derivatives in its Institutional
Government Income Portfolio Mutual Fund. Because of this fact and the
fact that declines in fixed income funds are not expected to reverse in
the near term, Management reached the conclusion that the decline in value
of the investment would be considered other than temporary. A write down
of $46,558 was realized due to the other than temporary decline in value
of the Company's investment for the quarter ending June 30, 1995, as
is outlined in paragraph 16 of FASB 115. As of June 30, 1995, the value of
the investment had recovered to an unrealized loss level of $46,558, up
from the December 31, 1994 level of $55,606. As of September 30, 1995,
the Company's investment had experienced an unrealized loss of $407, which
is reflected in the value of the Marketable Securities investment, as is
required under FASB 115. Due to the current rate of return for investment,
it is Management's intention to continue to hold this investment for the
short-term. The investment in the Institutional Government Fund will be
examined in detail through the end of 1995 as to ascertain the feasibility
of holding the investment.
On September 30, 1995 the Corporation's accounts receivable were
$317,179. The aging of the accounts receivable as of September 30,
1995 is as follows:
Days Percent
------ -------
0-30 55%
31-60 28%
61-90 17%
Over 90 days 0%
In the first nine months of 1995, accounts in the amount of $2,141
were written off as uncollectible. The remaining allowance for
uncollectible accounts of $4,014 is considered to be adequate to cover
potential uncollectibles through the year end due to past experience
with low occurrence of account write-offs. The majority of the accounts
receivable aged in excess of 60 days are the result of a single customer
order involving a construction project, which Management feels will
result in a lengthened collection cycle. Management believes that
all of the Corporation's remaining accounts receivable amounts existing as
of September 30, 1995 are collectible.
Inventory levels as of September 30, 1995 were $332,715, a decrease
from the December 21, 1994 level of $423,932. This a result of
customer order shipments reducing inventory stocks, and a conservative
purchasing strategy on the part of the Company.
<PAGE>
On May 31, 1991 the Corporation received a Promissory Note from
Western Data Com in the amount of $31,491 to cover its outstanding
accounts receivable balance. The Note bears interest at 12% per annum
payable at $1,500 per month until paid in full. At September 30, 1995
the unpaid balance of the note was $4,062. Western Data Com is past
due with it's obligation regarding the note payable. Management
expects to collect the remaining balance due on the note.
Expenses prepaid by the Company as of September 30, 1995 increased to
$11,222 from the December 31, 1994 level of $3,073. This increase is
a result of annual insurance policy renewals in August of 1995, as
well as prepaid fees for tradeshows to be attended later in 1995.
Prepaid federal income taxes decreased from $16,471 as of December 31,
1994 to a federal income taxes payable liability of $66,515 at
September 30, 1995. This is a result of taxes incurred during the
first nine months of the year being applied against a tax overpayment
which existed as of December 31, 1994.
As of September 30, 1995 the Corporation's current liabilities were
$117,224, an increase of $84,027 from December 31, 1994. This
increase is attributable to an increase in federal income taxes
payable, trade accounts payable, and refundable customer deposits for
pending foreign orders. As of September 30, 1995, all of the
Corporation's accounts payable were within agreed terms.
The Company's subcontract with UNISYS, dated December 23, 1993, is a
five year indefinite delivery, indefinite quantity, fixed price
contract through September 1997. Based on the terms of the UNISYS
contract, and contracts of this type in general, Management does not
base liquidity, profitability, or material purchase projections on
anticipated sales. The Company's economic position allows it to
respond to UNISYS orders on an as needed basis. Sales under the
UNISYS contract in 1994 were minimal due to the down sizing of Air
Force military bases. It is Management's opinion that sales to UNISYS
will be minimal for the remainder of the life of the contract.
The Company's AIT subcontract with INTERMEC, dated July 26, 1994, is a
five year indefinite delivery, indefinite quantity, fixed price
contract through September 1999. Based on the terms of the AIT
contract, and contracts of this type in general, Management does not
base liquidity, profitability, or material purchase projections on
anticipated sales. The Company's economic position allows it to
respond to AIT orders on an as needed basis. Sales under the AIT
contract in 1994 were minimal due to the late awarding of the
contract. With the exception of a $50,000 order processed in
September, it is Management's opinion that sales under the AIT
contract will be minimal for the remainder of the 1995 fiscal year.
Based on previous years activity, the majority of all Federal
Government purchases are under the Company's GSA contract. Projections
regarding liquidity, profitability, and material purchases are based
on past history of annual purchases. Historically, Federal Government
sales average approximately 18% of annual sales, but this level cannot
be guaranteed. Due to the uncertain nature of Federal Government
purchasing, procurement of material and production planning is
adjusted quarterly based on demand. It is Management's opinion that
the majority of Federal Government purchases in 1995 will be under
this contract.
<PAGE>
Except for possible orders from UNISYS, AIT, or GSA contracts, and the
impact of planned research and development expenditures, Management is
unaware of any known trend which would reasonably be likely to have a
material effect on the Company's liquidity, results of operations, or
financial condition.
D. Capital Expenditures
The Corporation expended $11,561 for capital assets during the quarter
ended September 30, 1995. These expenditures consist primarily of
hardware used in Research and Development. Management anticipates
expending approximately $100,000 on Research and Development projects
for the 1995 fiscal year, which will include additional equipment and
outside professional expertise.
E. Inflation
The Corporation experienced minimal, if any, impact from inflation
during the third quarter of 1995.
<PAGE>
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company was notified on March 8, 1995 that it was included in a
class action against Piper Jaffray. Piper Jaffray is the manager of
the Company's marketable securities fund which experienced losses as
described in Note 13 to the financial statements. This litigation is
an Amended Consolidated Class Action Complaint orginally filed on
October 5, 1994. The class action was filed under the title IN RE:
PIPER FUNDS, INC. INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO LITIGATION
in the United States District Court, District of Minnesota. The
primary defendants are Piper Jaffray Companies Inc. and Piper Capital
Management Incorporated. The counsel for the class action plaintiffs
is the firm of Schatz, Paquin, Lockridge, Grindal & Holstein with co-
cousels of Head, Seifert, & Vander Weide. A settlement of the
litigation has been negotiated, which at the time of filing is
undergoing final court approval, which if granted, will be submitted
to the class for approval. Due to the currently uncertain nature of
this settlement, amounts or timing of any settlement cannot be
predicted at the time of filing for this report.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K dated August 10, 1995 is incorporated herein by reference.
Form 8-K dated August 11, 1995 is incorporated herein by reference.
Exhibit Index Reference
Form 10-QSB
Exhibit Number Notes to Financial Statements
4. Instruments defining the Rights of Security Holders including
indentures.
Forms 8-K dated Jul 12, 1991, Dec 14, 1992, and Dec 10, 1993,
are incorporated herein by reference.
Form 8-K/A dated Feb 3, 1995 is incorporated herein by reference.
11. Statement Re: computation of per share earnings. Note 2 to
Financial Statements
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
Date: November 2, 1995 By: T.L. KIRCHNER
Name: T.L. Kirchner
Title: Director/President
(Principal Executive Officer)
Date: November 2, 1995 By: ROBERT SOUTHWORTH
Name: Robert Southworth
Title: Director/Secretary/Treasurer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM, BALANCE
SHEET, STATEMENT OF OPERATIONS, AND STATEMENT OF CASH FLOWS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10QSB, FOR SEPTEMBER 30, 1995.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 943,943
<SECURITIES> 117,253
<RECEIVABLES> 317,179
<ALLOWANCES> 4,014
<INVENTORY> 332,715
<CURRENT-ASSETS> 1,825,473
<PP&E> 272,049
<DEPRECIATION> 150,742
<TOTAL-ASSETS> 1,955,667
<CURRENT-LIABILITIES> 117,224
<BONDS> 0
<COMMON> 5,007
0
0
<OTHER-SE> 1,822,886
<TOTAL-LIABILITY-AND-EQUITY> 1,955,667
<SALES> 1,154,290
<TOTAL-REVENUES> 1,308,030
<CGS> 446,937
<TOTAL-COSTS> 540,876
<OTHER-EXPENSES> 364,988
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 355,545
<INCOME-TAX> 136,715
<INCOME-CONTINUING> 218,830
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 218,830
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
