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: June 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 99337
(Address of principal executive offices) (ZIP Code)
Registrant' 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 June 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>
Six months ended June 30 June 30
1995 1994
========== ==========
<S> <C> <C>
Sales $ 739,626 $ 567,724
Other revenue 115,782 65,004
Gross profit 454,725 349,744
Net income before taxes 195,205 85,577
after taxes 113,005 56,481
Earnings per share before taxes
Primary $ 0.04 $ 0.02
Fully diluted 0.04 0.02
Earnings per share after taxes
Primary $ 0.02 $ 0.01
Fully diluted 0.02 0.01
Weighted average shares outstanding
Primary 5,357,078 5,371,667
Fully diluted 5,357,078 5,371,667
Total assets $ 1,823,940 $ 1,561,008
Long-term debt and capital
lease obligations $ 0 $ 0
Shareholders' equity $ 1,722,476 $ 1,476,724
Shareholders' equity per share
$ 0.34 $ 0.29
Working Capital $ 1,608,048 $ 1,370,793
Current ratio 19 : 1 17 : 1
Equity to total assets 94% 95%
</TABLE>
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<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
BALANCE SHEET
(as prepared by Management)
(Unaudited)
<CAPTION>
June 30 December 31
ASSETS 1995 1994
========== ===========
<S> <C> <C>
Current Assets
Cash $ 10,616 $ 66,032
Money market investment 519,290 400,935
Marketable securities 114,049 98,120
Certificate of Deposit 103,870 203,000
Bankers Acceptance-SFNB 400,000 100,000
Accounts receivable 185,415 170,466
Allowance for Uncollectibles ( 4,014) ( 6,155)
Inventory 356,110 423,932
Accrued interest 6,909 1,922
Prepaid insurance 1,305 3,073
Prepaid expenses 625 -
Prepaid federal Income Taxes - 16,471
Note receivable (current) 4,787 5,249
--------- ----------
Total Current Assets $1,698,962 $ 1,483,045
--------- ----------
Property & Equipment
Leasehold improvements $ 13,544 $ 13,544
Laboratory equipment 214,672 192,413
Furniture & fixtures 15,017 15,017
Dies and molds 17,255 17,255
--------- ----------
$ 260,488 $ 238,229
Less accumulated depreciation ( 144,856) ( 134,110)
--------- ----------
Total Property & Equipment
$ 115,632 $ 104,119
--------- ----------
Other Assets
Patent costs, Net $ 1,205 $ 1,259
Deposits 653 837
Capitalized Software 61,143 61,143
Less Accumulated Amortization ( 53,655) ( 52,791)
--------- ----------
Total Other Assets $ 9,346 $ 10,448
--------- ----------
TOTAL ASSETS $1,823,940 $ 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
June 30 December 31
1995 1994
========== ===========
<S> <C> <C>
Current Liabilities
Accounts payable $ 42,555 $ 22,351
Accrued excise taxes 751 1,796
Accrued payroll - 896
Accrued payroll taxes 1,763 1,207
Accrued vacation pay 8,384 6,947
Accrued 401(k) withholding 2,061 -
Accrued federal income tax 35,400 -
---------- ----------
Total Current Liabilities $ 90,914 $ 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 &
June 30, 1995 $ 5,007 $ 5,007
Additional paid-in capital 918,057 918,057
Unrealized Gain (Loss)-Market Sec. - ( 53,913)
Retained earnings 799,412 686,407
---------- ----------
$ 1,722,476 $ 1,555,558
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,823,940 $ 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 Six Months Ended
June 30 June 30 June 30 June 30
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SALES $477,487 $ 305,074 $ 739,626 $ 567,724
--------- --------- --------- ---------
COST OF SALES
Beginning Inventory $401,548 $ 411,627 $ 423,932 $ 386,201
Purchases & allocated
costs 132,495 130,885 217,079 258,053
--------- --------- --------- ---------
$534,043 $ 542,512 $ 641,011 $ 644,254
Ending Inventory 356,110 426,274 356,110 426,274
--------- --------- --------- ---------
Total Cost of Sales $177,933 $ 116,238 $ 284,901 $ 217,980
--------- --------- --------- ---------
Gross Profit $299,554 $ 188,836 $ 454,725 $ 349,744
--------- --------- --------- ---------
OPERATING EXPENSES
Finance/Admin $ 38,765 $ 41,215 $ 107,730 $ 110,194
Research & Devel 14,076 29,085 32,827 58,416
Marketing 55,237 47,907 91,991 89,127
Customer Service 10,690 14,586 23,188 25,312
--------- --------- --------- ---------
Total Operating Expense $118,768 $ 132,793 $ 255,736 $ 283,049
--------- --------- --------- ---------
OPERATING INCOME $180,786 $ 56,043 $ 198,989 $ 66,695
--------- --------- --------- ---------
Other Income (Expenses)
Interest Income $ 13,863 $ 6,295 $ 25,020 $ 12,666
Loss-asset disposition - ( 753) - ( 753)
Loss-Securities ( 46,558) - ( 46,558) -
Engineering Services 48,475 33,482 90,762 52,338
Engineering Support ( 37,211) ( 30,137) ( 73,008) ( 45,369)
--------- -------- ------- --------
Net Other Income $( 21,431) $ 8,887 $( 3,784) $ 18,882
--------- -------- ------- --------
NET INCOME BEFORE TAX $159,355 $ 64,930 $ 195,205 $ 85,577
Provision for income tax 70,010 22,077 82,200 29,096
--------- -------- ------- --------
Net Income $ 89,345 $ 42,853 $ 113,005 $ 56,481
========= ======== ======= ========
Earnings per Share
Primary $ 0.02 $ 0.01 $ 0.02 $ 0.01
Fully Diluted 0.02 0.01 0.02 0.01
<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>
SIX MONTHS ENDED June 30, 1995 June 30, 1994
------------- -------------
<S> <C> <C>
CASH FLOWS PROVIDED (USED) IN
OPERATING ACTIVITIES:
Net income $ 113,005 $ 56,481
Noncash expenses included in income:
Depreciation 10,746 8,581
Amortization 918 54
Deferred income tax liability 1,693 --
Loss-asset disposition -- 753
Realized Loss/Impair securities 46,558 --
Decrease (Increase) in Current Assets:
Additions to short-term investments -- ( 5,424)
Accounts receivable, net ( 17,090) 87,320
Inventory 67,822 ( 40,073)
Prepaid income taxes 16,471 --
Prepaid expenses 1,143 --
Accrued interest ( 4,987) --
Other current assets -- 634
Increase (Decrease) in Current Liabilities:
Accounts payable, accrued expenses
and other current liabilities 22,317 7,471
Accrued federal income taxes 35,400 ( 59,584)
-------- --------
$ 293,996 $ 56,213
-------- --------
CASH FLOWS PROVIDED (USED) IN
INVESTING ACTIVITIES:
Additions to property and
equipment $ ( 22,259) $ ( 9,313)
Additions to capitalized software -- --
Refund of Deposits 184 --
Marketable Securities ( 8,574) --
-------- ---------
$ ( 30,649) $( 9,313)
-------- ---------
CASH FLOWS PROVIDED (USED) IN
FINANCING ACTIVITIES:
Proceeds from issuance of
common stock -- 16,500
Proceeds from Note Receivable 462 622
-------- ---------
$ 462 $ 17,122
-------- ---------
<FN>
(See "Notes to Financial Statements")
</TABLE>
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
(continued)
(as prepared by Management)
(Unaudited)
<CAPTION>
Six months Ended June 30 June 30
1995 1994
----------- ----------
<S> <C> <C>
Net increase in cash and
cash equivalents $ 263,809 $ 64,022
Cash and cash equivalents at
beginning of period 769,967 618,449
---------- ----------
Cash and Cash equivalents at
ending of period $1,033,776 $ 682,471
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Cash paid year to date:
Interest $ 0 $ 0
======== =======
Federal income taxes $ 30,329 $ 88,680
======== =======
Cash and Cash Equivalents:
Cash $ 10,616 $ 167,627
Money market account 519,290 514,844
Certificates of Deposit 103,870 --
Banker Acceptances 400,000 --
-------- --------
$1,033,776 $ 682,471
========= ========
<FN>
(See "Notes to Financial Statements")
</TABLE>
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
June 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 six month periods ended June 30, 1995 and
June 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 operations for the three and six month periods ended
June 30, 1995 and June 30, 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 Company uses the reserve
method to record the allowance for uncollectible accounts. The amount
included in the Allowance for Uncollectible Accounts consists of
$4,014 as of June 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:
June 30 December 31
1995 1994
----------- --------------
Parts $ 218,162 $ 245,569
Work in progress 23,381 30,553
Finished goods 114,567 147,810
--------- ---------
$ 356,110 $ 423,932
========= ========
<PAGE>
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.
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 that are 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 on stock options and
restricted stock awards. The primary weighted average number of
common shares outstanding was 5,357,078 and 5,371,667 for the quarters
ended June 30, 1995 and June 30, 1994, 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 expense for the
periods presented is as follows:
1994 $ 288
1995 (through June 30) 864
<PAGE>
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.
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 to the Financial Statements. The
provision for Federal Income Taxes consisted of:
June 30 December 31
1995 1994
---------- ------------
Provision attributable to
current period net income $ 82,200 $ 93,529
Deferred -- ( 11,370)
---------- ------------
Provision for Income Taxes $ 82,200 $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.
<PAGE>
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 $8,384 had been accrued as of June 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
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 (2
quarters) = $10,714; 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:
Six Months Ended
June 30 June 30
1995 1994
---------- -----------
Export sales $ 133,760 $ 94,513
Percent of sales 16% 15%
The geographic distribution of foreign sales for the first six months
of 1995 and 1994 is as follows:
Percent of Foreign Sales
June 30 June 30
1995 1994
--------- ----------
COUNTRY
Canada 28% 73%
Croatia/Slovenia 28% 6%
Chile 16% --
Mexico 10% 10%
Brazil 9% --
Taiwan 9% --
Singapore less than 1% 4%
Thailand/Indonesia -- 6%
Venezuela -- 1%
<PAGE>
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.
NOTE 9 - STOCK OPTIONS
On July 12, 1991, stock options to purchase shares of the Company's
common stock were granted at an initial exercise price of $0.33 per
share, subject to adjustment from time to time. Options may be
exercised any time during the period from 9:00 am (Pacific Time) July
12, 1991, through 5:00 pm (Pacific Time) July 12, 1994. Following is
a summary of transactions:
Shares Under Option
Outstanding as of 6-30-94 150,000
Granted during year 0
Canceled during the year ( 150,000)
Exercised during the year 0
--------
Outstanding as of 6-30-95 0
========
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 6-30-94 125,000
Granted during year 0
Canceled during the year 0
Exercised during the year 0
--------
Outstanding as of 6-30-95 125,000
========
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 6-30-94 150,000
Granted during year 0
Canceled during the year 0
Exercised during the year 0
--------
Outstanding as of 6-30-95 150,000
========
<PAGE>
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 tree 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 6-30-94 0
Granted during year 175,000
Canceled during year 0
Exercised during year 0
--------
Outstanding as of 6-30-95 175,000
=======
Stock options must be exercised within 90 days after termination of
employment. During the 12 months ended June 30, 1995, 150,000 shares
under option expired, Unexercised. At June 30, 1995 there were
450,000 shares reserved for future exercises.
NOTE 10 - EMPLOYEE PROFIT SHARING BONUS PROGRAM (NON-QUALIFIED)
The Company makes contributions to the 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.
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. At June 30, 1995 the
Company had cash and cash equivalents with Seattle First National Bank
with a combined balance of $923,677 which is $823,677 in excess of the
F.D.I.C. insured amount. Additionally, at June 30, 1995, the Company
had cash deposits with American National Bank with a combined balance
of $104,556 which is $4,556 in excess of the F.D.I.C. insured amount.
The Company has invested $114,049 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. The
amounts discussed above 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. Receivable accounts in the amount of
$2,141 were expensed as uncollectible during the quarter ending June
30, 1995.
The largest sales concentration for the period ending June 30, 1995
resulted from sales to entities of the United States Government.
Sales to the United States Government were $185,552, which is 22% of
the total product sales, as of June 30, 1995. No other sales to a
single customer comprised 10% or more of total product sales as of
June 30, 1995.
<PAGE>
NOTE 12 - RELATED PARTY TRANSACTIONS
For the six and twelve month periods ended June 30, 1995 and December
31, 1994, services in the amount of $24,006 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 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 June 30, 1995, the Company has not contracted for any services
from Remtron, Inc.
NOTE 13 - MARKETABLE SECURITIES
The Company has adopted 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 principals 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
year's results. 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 June 30, 1995:
June 30, December 31,
1995 1994
--------- ------------
Aggregate fair value of
marketable securities $ 114,049 $ 98,120
Gross unrealized holding gains -- --
Gross unrealized holding losses -- 55,606
Gross realized loss due to impairment in
Marketable Securities 46,558 --
Amortized cost basis 160,607 153,726
Changes in marketable securities for the period ended June 30, 1995
are as follows:
June 30, December 31,
1995 1994
--------- -----------
Cost $ 152,033 $ 142,591
Purchase of shares -- --
Dividends and capital gains
reinvested 8,574 11,135
Sale of securities -- --
Unrealized loss -- (55,606)
Realized loss due to impairment in ( 46,558) --
Marketable Securities
Fair market value $114,049 $ 98,120
======= =======
<PAGE>
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. A tentative settlement
of the litigation is currently being negotiated, and therefore the
amount or timing of any settlement cannot be predicted at the time of the
filing.
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 new
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 Operations
GROSS SALES: Operations of the Corporation were sustained solely from
the revenues received through sales. Total revenues from the sale of
EST products and services for the second quarter of 1995 were
$525,962, reflecting a 55% increase from the $338,556 in gross
revenues in the second quarter of 1994. Domestic commercial sales
increased to $293,000 in the second quarter of 1995 as compared to
$155,000 for the second quarter of 1994. This increase is attributable
to the processing of larger customer orders, as well as an increase in
orders received. The Company also experienced a general increase in
its Export sales. U.S. Government sales were effected by the
processing of an order for the United States Marine Corps in the
amount of $122,000, which had been pending since the fourth quarter of
1994. The increase in engineering services billed is a result of an
increase in the amount of large customer site surveys, and a general
increase in requests for engineering services.
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 second quarter of 1995 and
1994 are as follows:
For the second quarter of
1995 1994
-------- -------
Domestic Sales 55% 45%
Export Sales 16% 11%
U.S. Government Sales 29% 44%
A percentage breakdown of EST's product sales categories for the
second quarter of 1995 and 1994 are as follows:
For the second quarter of
1995 1994
-------- -------
ESTeem Model 84SP/85SP 2% less than 1%
ESTeem Model 85 7% 7%
ESTeem Model 95 26% 37%
ESTeem Model 96 34% 23%
ESTeem Model 98 1% 7%
PEM and PEM-CPU 1% -
ESTeem Accessories 19% 14%
Factory Services 1% 2%
Site Support 9% 10%
Other - -
<PAGE>
The majority of the Company's domestic sales in the second 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 second 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 second 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 be primarily for 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 difficulty to
predict.
BACKLOG: The Corporation had no backlog at June 30, 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
second quarters of 1995 and 1994 were 37% and 38% of gross sales
respectively. Cost of Sales variations are attributed to the type of
product sold and the size of the order. Larger orders grant lower
sales prices because of volume discounting, thus reducing the margin
of profit.
OPERATING EXPENSES: Operating expenses for the second quarter of 1995
were $14,025 lower than the second quarter of 1994. The following is
a delineation of operating expenses:
For the quarter ended: June 30 June 30 Increase
1995 1994 (Decrease)
---------- --------- -----------
Finance/Administration $ 38,765 $ 41,215 $ ( 2,450)
Research/Development 14,076 29,085 (15,009)
Marketing 55,237 47,907 7,330
Customer Service 10,690 14,586 ( 3,896)
-------- -------- --------
Total Operating Expenses $118,768 $132,793 $ (14,025)
======== ======= =======
FINANCE AND ADMINISTRATION: Finance and Administration expenses
reflect costs associated with maintaining the Corporation's records,
maintaining licensing requirements and providing administrative
support. During the second quarter of 1995 Finance and Administration
expenses decreased $2,450 over the second quarter of 1995. The
decrease is attributable to wage structure changes within the Finance
and Administration Department.
<PAGE>
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 second quarter of 1995, Research and Development expenses decreased
$15,009 as compared to the same period in 1994. The decrease is attributable
to a general reduction in subcontracted Research and Development expertise
from the same period in 1994. This reduction 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 a new
generation of ESTeem products. Management estimates that 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 Corporation'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 Allen-Bradley Automation Fair throughout the
year. During the second quarter of 1995, marketing expenses increased
$7,330 over the same period in 1994. This increase is attributable to
increased tradeshow attendance and increased advertising projects, and
the fees charged for these endeavors.
CUSTOMER SERVICE: Customer service expenses reflect costs associated
with after-sale customer support. Customer service expenses decreased
by $3,896 in the second quarter of 1995 as compared with the same
period of 1994. The decrease is attributable mainly to decreased
travel costs incurred by the department during the second quarter of
1995.
INTEREST AND DIVIDEND INCOME: The Corporation earned $13,863 in
interest and dividend income during the quarter ending June 30, 1995
as compared to $6,295 for the second 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 ended June 30, 1995.
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 increased to $37,211 for the quarter ended June 30, 1995, as
compared to $30,137 for the same period of 1994. This increase is
attributable to an increase in large customer site surveys and a
general increase in requests for engineering services for year to date
1995.
NET INCOME: The Corporation had a net profit of $89,345 for the
second quarter of 1995, compared to a $42,853 net profit for the same
quarter of 1994. The net profit increase is attributed to increased
revenues from product sales, engineering services, and interest
income, as well decreased operating expenses, as compared to the same
quarter of 1994.
<PAGE>
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 June 30, 1995, the Corporation's inventory
decreased $67,822 over the inventory level at December 31, 1994. This
decrease is attributable to the processing of a large U.S. Government
order which was pending since fourth quarter 1994, as well as other
large domestic orders, and a conservative procurement strategy. The
breakdown of the segments of inventory is discussed in NOTE 1 to the
financial statements.
B. Financial Condition as of June 30, 1995.
The Corporation's current asset to current liabilities ratio at June
30, 1995 was 19:1 compared to 45:1 at December 31, 1994. The ratio
decrease is primarily attributable to an increase in federal income
taxes payable, and an increase in trade accounts payable due to timing
differences.
C. Liquidity and Capital Resources
The Company's working capital increased by $158,200 during the first
six months of 1995. A delineation of the changes is as follows:
June 30 December 31 Increase
1995 1994 (Decrease)
---------- ------------ ----------
Cash $ 10,616 $ 66,032 $ ( 55,416)
Money Market 519,290 400,935 118,355
Marketable Securities(net) 114,049 98,120 15,929
Certificate of Deposit 103,870 203,000 ( 99,130)
Bankers Acceptances 400,000 100,000 300,000
Accounts receivable(net) 181,401 164,311 17,090
Inventory 356,110 423,932 ( 67,822)
Accrued interest 6,909 1,922 4,987
Note rec. (Current) 4,787 5,249 ( 462)
Prepaid expenses 1,930 3,073 ( 1,143)
Prepaid income tax 0 16,471 ( 16,471)
--------- --------- --------
$1,698,962 $ 1,483,045 $ 215,917
--------- --------- --------
Current liabilities $ 90,914 $ 33,197 $ 57,717
--------- --------- --------
Working capital $1,608,048 $ 1,449,848 $ 158,200
========= ========= ========
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 June 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 six months of 1995, with the majority of idle
cash being put into Banker Acceptance short term investments and money
market accounts. The reason for the change is so these resources will
earn improved rates of return.
<PAGE>
The Company holds an investment in marketable securities in the Piper
Jaffray Institutional Government Fund. Public information indicates
that Piper Jaffray has 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 has reached the conclusion that the
decline in the value of this investment should be considered other than
temporary. A write down of $46,558 was realized due to the other than
temporary decline in the value of the Company's investment for the quarter
ended June 30, 1995, as is outlined in paragraph 16 of 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 June 30, 1995, the Corporation's accounts receivable were $181,401.
The aging of the accounts receivable is as follows:
Days Percent
0-30 99%
31-60 0%
61-90 1%
over 90 0%
For the quarter ended June 30, 1995, Accounts in the amount of $2,141
were written off as uncollectible, due to third party litigation
surrounding the customers, and poor response on collection attempts.
The remaining allowance for uncollectible accounts of $4,014 is
considered to be adequate to cover any potential uncollectibles
through year end due to past experience with low occurrence of account
write-offs. Management believes that all of the Corporation's
remaining accounts receivable amounts existing as of June 30, 1995 are
collectible.
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 June 30, 1995 the
unpaid balance of the note was $4,787. 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.
Inventory levels as of June 30, 1995 were $356,110, a decrease from
the December 31, 1994 level of $423,932. This is a result of customer
order shipments reducing inventory stocks, and a conservative
purchasing strategy on the part of the Company.
Prepaid federal income taxes decreased from $16,471 as of December 31,
1994 to a federal income taxes payable liability of $35,400 at June
30, 1995. This is a result of taxes incurred during the first half of
the year being applied against a tax overpayment which existed as of
December 31, 1994.
As of June 30, 1995 the Corporation's current liabilities were
$90,914, an increase of $57,717 from December 31, 1994. This increase
is attributable to an increase in federal income taxes payable and
timing differences between periods for trade accounts payable. As of
the end June 30, 1995, all of the Corporation's accounts payable were
within agreed terms.
<PAGE>
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. It is Management's opinion that sales under the AIT
contract will be minimal for 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.
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 $17,195 for capital assets during the quarter
ended June 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 fiscal
year 1995, which will include additional equipment and outside
professional expertise.
E. Inflation
The Corporation experienced minimal, if any, impact from inflation
during the second 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 tentative settlement is being negotiated,
the final details of which cannot be predicted at the time of this filing.
Item 4. Submission of Matters to the Securities Holders
At the Company's Annual Stockholder Meeting on June 2, 1995, in
Kennewick, Washington the following items were voted on by the stockholders
with the following outcomes:
Item #1 Election of John L. Schooley as a Director of the Company.
Votes for: 3,063,536 Votes against: 1,600 Abstaining: 24,000
Item #2 Ratification of Robert Moe & Associates, P.S. as independent
auditors of the Corporation for the fiscal year ending December 31,
1995.
Votes for: 3,053,636 Votes against: 3,800 Abstaining: 31,700
Item #3 Ratification and approval of issuance of stock option
bonuses to certain officers, directors and employees.
Votes for: 2,876,780 Votes against: 160,156 Abstaining: 52,200
Item #4 Authorization of proxy to vote upon other matters as may
properly come before the annual meeting. (No such issues were brought
before the meeting)
Votes for: 2,916,457 Votes against: 66,279 Abstaining: 106,400
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 June 2, 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.
By: T.L. KIRCHNER
Date: August 8, 1995 Name: T.L. Kirchner
Title: Director/President
(Principal Executive Officer)
By: ROBERT SOUTHWORTH
Date: August 8, 1995 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 JUNE 30, 1995.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 1,033,776
<SECURITIES> 114,049
<RECEIVABLES> 185,415
<ALLOWANCES> 4,014
<INVENTORY> 356,110
<CURRENT-ASSETS> 1,698,962
<PP&E> 260,488
<DEPRECIATION> 144,856
<TOTAL-ASSETS> 1,823,940
<CURRENT-LIABILITIES> 90,914
<BONDS> 0
<COMMON> 5,007
0
0
<OTHER-SE> 1,717,469
<TOTAL-LIABILITY-AND-EQUITY> 1,823,940
<SALES> 739,626
<TOTAL-REVENUES> 855,408
<CGS> 284,901
<TOTAL-COSTS> 357,909
<OTHER-EXPENSES> 255,736
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 195,205
<INCOME-TAX> 82,200
<INCOME-CONTINUING> 113,005
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 113,005
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
