U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of the SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended DECEMBER 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 (No Fee Required)
For the transition period to
---------- ----------
Commission file number 2-92949-S
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
(Name of small business issuer in its charter)
WASHINGTON 91-1238077
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
415 N. QUAY ST., KENNEWICK , WASHINGTON 99336
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (509) 735-9092
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required 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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulations S-B is met contained in this form, and no
disclosure will be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. [ ] Not applicable [X]
State issuer's revenues for its most recent fiscal year. $1,731,949.
----------
On January 23, 1996 the aggregate market value, based on the average
of the bid and asked Price, of the voting stock held by nonaffiliates
of the registrant was $2,000,990.
The number of shares outstanding of the registrant's common stock as
of January 23, 1996: 5,006,667 shares.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into Parts I,
II, III, and IV of this report: (1) Form S-18, effective Nov. 5, 1984,
Commission File No. 2-92949-S; (2) Form 8-K, filed March 15, 1985,
Commission File No. 2-92949-S; Forms 8-K dated July 12, 1991,
December 14, 1992, December 10, 1993, Form 8-K/A, dated February 3, 1995,
and Form 8-K, dated June 2, 1995.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
PART I
ITEM 1
BUSINESS
Electronic Systems Technology, Inc. ("EST" or the "Company") specializes
in the manufacturing and development of wireless modem products. The
Company uses its research and development, manufacturing, and marketing
efforts to produce and market the Company's line of ESTeem Wireless Modem
products and accessories. The Company offers a product line which
provide innovative communication solutions for applications not served by
existing conventional communication systems. The product line is offered
in the growing markets for process automation in commercial, industrial,
and government arenas domestically, as well as internationally. The
Company's product line is marketed through direct sales, sales
representatives, Original Equipment Manufacturers (OEM's), and domestic,
as well as foreign, resellers.
The Company was incorporated in the State of Washington in February,
1984, and was granted a U.S. Patent for the "Wireless Computer Modem" in
May 1987, and the Canadian patent in October 1988. During the past three
years, the Company has continually refined its product line in response
to customer needs, as well as developing a new generation of faster, more
flexible, ESTeem products which are scheduled for completion in early
1996. The Company has continued to expand its customer base, particularly
in the industrial controls arena with its efforts to team with all major
programmable logic controller (PLC) hardware vendors. This cooperation
with PLC vendors has resulted in the Company being recommended as the
"Wireless Computer Modem" supplier for several networks of distributors
for the PLC industry. The Company has also been included as hardware
provider on Government programs such as the Core Automated Maintenance
System (CAMS) for the U.S. Air Force, and Automatic Identification
Technology (AIT) for the U.S. Army. In 1995, the Company had increased
sales to the Supervisory Control and Data Acquisition (SCADA)
marketplace, with involvement in several water and wastewater treatment
projects.
PRODUCTS AND MARKETS
EST's product line is a family of narrow band, packet burst, VHF & UHF FM
radio modems provide communication links between computers, peripherals,
and instrumentation controls using radio frequency waves.
Increasing computer applications in the business and industrial
environment are continuously placing new requirements on data transfer.
Prior to the invention of the ESTeem modem, the majority of data
transfers used telephone modems or direct cable connections. Both of
these alternatives had a costly side effect. When utilizing telephone
modems, there is a monthly charge for the use of telephone lines. When
using direct cable connections the cost of installing cable systems will
usually cost as much or more than the cost of the communication system.
ESTeem wireless modem products provide a "Wireless Solution" by
eliminating the need for conventional hardwiring and leased phone lines.
All of the ESTeem models ("ESTeems") come with the industry standard
asynchronous communications ports to give the user a new dimension to
"Local Area Networking". As many as 253 devices can be interfaced on a
single frequency. ESTeem wireless modems have over one hundred internal
software commands to allow the user to easily configure the unit for any
<PAGE>
application or use. The ESTeem setup parameters are saved in its own
non-volatile memory.
ESTeem Modems work on a packet burst communications concept. Packet
systems, whether hardwired or radio, share the same principle of
operation; data is taken from a standard RS-232C or RS-422 asynchronous
port and is transmitted in "Electronic Packets" (i.e. electronic packets
of information). The size of the packet can be defined by the user from
1 to 1010 bytes of information. Once a packet of data is formed, it is
transmitted in a "burst," from one ESTeem to another, hence the term
"packet burst communications." ESTeem Modems provide data accuracy of
greater than one part in 100 million. The ESTeems have frequency agility
in the VHF and UHF frequency ranges. Internal Digi-Repeater features
allow the user to increase operating range by relaying transmission
through a maximum of three ESTeems to reach the destination ESTeem. An
ESTeem can operate as an operating node, a repeater node, or both
simultaneously, for added flexibility.
"Private Data Communications" is provided by the use of the ESTeem
firmware, Synchronous Data Link Control (SDLC), bit compression, and
Manchester encoding techniques. The user can define over four different
security code and communications parameter groups that allow
communication access to the "Radio Area Network". If higher security is
required, the ESTeem is compatible with asynchronous Data Encryption
Standard (DES) encryption devices.
PRODUCT APPLICATIONS
Some of the major applications and/or industries for which the ESTeem
products are being utilized are as follows:
Water and Waste Water Industry Transportation
Industrial Process Control Overhead Crane Control
Remote Data Acquisition (SCADA) Shop Floor Manufacturing
Law Enforcement/Public Safety Intra-Office/Building Computer
Networking
Petroleum Industry Federal
Oil and Gas Pipelines Ground Mobile Communications
Offshore Production Ship to Shore Communications
On-shore Production Flight Line Maintenance
Tank Farm
PRODUCT LINES
VHF RADIO MODEM PRODUCTS: Operating in the mid 60-70 MHz band of the VHF
RF spectrum. The ESTeem VHF radio modem products are the ESTeem Model 85
and Model 95.
The standard production units of the ESTeem Model 85 and 95 are
configured to operate in the lower 70 MHz spectrum. The frequency and
receiver sensitivity of the Model 85 ESTeem is field adjustable via
switches on the rear of the unit. The Model 95 ESTeem has the same
features as the Model 85 with the following additional technical
<PAGE>
enhancements: software frequency agility, software selectable receiver
sensitivity, and received signal strength option. Listed below are the
major markets for these products:
Domestic: Industrial control, SCADA, and inventory control.
International: Telephone by-pass, industrial control, and SCADA.
Federal: Inventory and command control.
UHF RADIO MODEM PRODUCTS: Operating in the lower 400 MHz federal radio
band, and the mid to upper 400 MHz commercial radio band of the UHF RF
spectrum. The ESTeem UHF radio modem products are the ESTeem Model 96F,
98F, and 96C.
The UHF radio modem products, ESTeem Models 96F, 98F, and 96C, have
the same features as the VHF radio modem products, but were designed to
operate in the lower 400 and upper 400 MHz areas of the UHF RF spectrum.
The ESTeem Model 96F is designed to operate in the lower 400 MHz United
States Federal radio frequency bands. The ESTeem Model 98F is a variant
of the Model 96F designed to operate in extreme vibration environments,
used mainly by the U.S. Federal Government for command control
applications. The ESTeem Model 96C was designed to operate in business
radio bands of upper 400 MHz. All of the UHF radio modem products have
the additional following technical capabilities: software frequency
agility, software selectable receiver sensitivity, and RF output power
from two to four watts depending on customer licensing. Listed below are
the major markets for these products:
Domestic: Industrial control, SCADA, and inventory control.
International: Telephone by-pass, industrial control and SCADA.
Federal: Inventory and command control.
SPECIALTY MODEM PRODUCTS: Network enhancing products using ESTeem modem
technology. The ESTeem specialty modem products are the ESTeem Model
84SP, 85SP and Port Expansion Module.
The ESTeem Models 84SP and 85SP are special purpose versions of the
ESTeem Model 85 without the radio transceiver circuitry. In place of the
transceiver card is a universal interface card that allows the use of a
customer's full- or half-duplex radio transceiver, turning it into a
packet burst communications device. The technical name for these devices
is "packet node controller". The Model 85SP is a lower cost version of
the 84SP and contains only the necessary circuitry for interfacing to
direct digital modulated radios. These products were originally designed
to provide product sales, when interfaced to another manufacturer's
transceiver, in radio frequency spectrums in which EST does not
manufacturer transceivers. The major market for these products are
civilian SCADA and public safety applications.
The ESTeem Port Expansion Module (PEM) is designed to allow a single
ESTeem product to have up to eight independent RS-232/422 communications
ports. The PEM is designed with the proper input/output interfaces to be
cascaded to additional PEM modules to increase the communications ports
in multiple groups of eight. The major market for this product is main
frame to remote terminal applications in the Domestic, Foreign, and
Federal markets.
ADDITIONAL PRODUCTS AND SERVICES
The Company also sells various accessories for its ESTeem product lines.
<PAGE>
Accessories are purchased from other manufacturers and resold by EST to
support the application of ESTeem wireless modem products. Antennas,
power supplies and cable assemblies are examples of such items. The
Company also provides Factory Services, such as repair and upgrade of
ESTeem products. To assist in the application of ESTeem wireless modems
the Company provides professional services, site survey testing, system
start-up, and custom engineering, which are billed to customers at a
standard rate, plus expenses.
RESEARCH AND DEVELOPMENT AND NEW PRODUCTS
Due to the rapidly changing technology environment of the communications
industry, specifically the markets in which the Company's products
compete, standards and technologies are subject to rapid and unexpected
changes. This environment results in the Company continually being
required to update and enhance its existing products, as well as develop
new products in order to remain competitive. Research and Development
expenditures for new product development and improvements of existing
products by the Company for 1995 and 1994 were $85,265 and $102,918,
respectively. None of the Company's research and development expenses
are directly paid for by any of the Company's customers. In 1995, the
Company contracted with an independent engineering company specializing
in radio design, when that expertise was required. During 1994, the
Company had contracted this service with Remtron, Inc. The President of
Remtron is a Director of the Company. Remtron did not perform any
services for the Company in 1995.
The Company has under development a new generation of ESTeem products
scheduled for release in the second quarter of 1996. These products
are planned to replace existing product lines in the VHF and UHF radio
modem product categories. Development has recommenced on a line of
radio modem products, scheduled for release in late 1996 or early 1997.
These products are targeted for applications within the Industrial
Control and Federal markets. The products described above are currently
under development and have to date not received required FCC Type
Acceptance. The Company plans on continued research and development
expenditures and to undertakes new development and improvement projects
as they become necessary.
MARKETING AND CUSTOMERS
The majority of the Company's products are sold and distributed directly
from the Company's facility through direct sales to the end users of the
ESTeem products. The remainder of the Company's sales are through non-
exclusive, non-stocking Resellers, and Original Equipment Manufacturers
(OEM's). Normally, ninety-five percent of the Company's products are
distributed through direct sales and five percent are through Reseller
and OEM entities. The Company carries a minimal amount of backlog, if
any. Customers generally place orders on an "as needed basis". Shipping
dates for most products are generally within 5 working days after receipt
of an order. As of December 31, 1995, the Company had a backlog of
$35,962, for orders placed late in December. The majority of these
orders were shipped within the first week of January, 1996.
During 1995, the Company advertised in trade publications targeted at
users of control, instrumentation, and automation systems worldwide. The
Company's advertising is targeted toward customers using Programmable
<PAGE>
Logic Controllers (PLCs). There are approximately twenty five major PLC
manufacturers worldwide.
The Company is continuing its Government sales activities which are
directed towards all branches of the United States Armed Services.
Examples of projects the Company's products are included in are flight-
line maintenance for the United States Air Force, flight-line lighting
for the United States Navy, command and inventory control for the United
States Marine Corps, and the Automatic Identification Technology program
for the United States Army.
For the year ended December 31, 1995, the largest sales concentration
were to entities of the United States Government, which amounted to 26%
of total product sales for the year. Foreign sales were 15% of total
revenues for 1995. No other sales to a single customer comprised 10% or
more of total product sales as of December 31, 1995. (See "Management
Discussion and Analysis of Operations and Financial Conditions", and
"Financial Statements")
The Company has a General Services Administration (GSA) contract to sell
goods to the U.S. Government. This contract is a fixed price, indefinite
quantity and delivery agreement. The current contract runs through March
31, 1996. A renewal GSA contract is being negotiated. If awarded the
new GSA contract period is expected to extend through March 31, 1997.
The Company participates in Government programs with contracts
administered by UNISYS Corporation and Intermec Corporation. Both
contracts are fixed price, indefinite quantity and delivery agreement.
The current UNISYS contract expires September 30, 1997 and the current
Intermec contract expires September 30, 1999.
COMPETITION
The Company's competition varies according to the market in which the
Company's products are competing. All of the markets in which the
Company's products are sold are highly competitive. Listed below are the
markets the Company's products compete in and competition in those
markets:
Major Market Major Competitors
Remote Data Acquisition, Aerotron-Repco, GRE America,
Industrial Control, Shop Floor Johnson, Maxon, Microwave Data
Manufacturing, Overhead Crane Systems, Motorola, Metricom, and
Control. Proxim.
Computer Networking inter Aironet Wireless Communications,
and intra building. Cylink, Digital Wireless,
Metricom, and Proxim.
Radio Area Networking of hand Intermec, LXE, Norand, Symbol/MSI,
held data collection terminals and Telxon.
and bar coding.
Federal applications. Data Radio, Datron, Harris,
Lockheed Martin, Magnavox,
Motorola, Siemens, Watkins-Johnson,
and California Microwave
<PAGE>
Management believes the ESTeem products compete favorably in the market
because of performance, price, and adaptable to a wide range of
applications. The Company's major limitation in competing with other
manufacturers is its limited marketing budget.
PATENTS, TRADEMARKS, AND PROPRIETARY INFORMATION
EST was granted a United States patent in 1987 for a "Wireless Computer
Modem". In 1988, EST was granted a Canadian Patent for a "Wireless
Computer Modem". Both patents have lives of 17 years. Trademark for the
ESTeem Wireless Modem was granted in 1985.
To protect the Company against unauthorized disclosure of proprietary
information belonging to the Company, all employees, dealers,
distributors, original equipment manufacturers, sales representatives and
other persons having access to confidential information regarding Company
products or technology are required to sign non-disclosure agreements.
GOVERNMENT REGULATION
For operation in the United States, the ESTeem RF Modems require Federal
Communications Commission (FCC) Type Acceptance. The FCC Type Acceptance
is granted for devices which demonstrate operation within performance
criteria mandated, observed, and tested by the FCC. All of the Company's
products requiring FCC Type Acceptance have been granted such acceptance.
For operation in Canada, the ESTeem RF Modems require Canadian Department
of Communications (DOC) Type Acceptance. The DOC Type Acceptance is
granted for devices which demonstrate operation within performance
criteria mandated, observed, and tested by the DOC. To date the ESTeem
Models 85, 96C, and 96F have applied for and have been granted type
acceptance in Canada.
SOURCE OF SUPPLY AND MANUFACTURING
The Company purchases certain components necessary for the production of
its products from sole suppliers. Key components for the Company's
products are supplied by the Motorola Corporation, purchased through a
number of distributors. The components provided by Motorola could be
replaced or substituted by other products, if it became necessary to do
so. It is possible that if this action became necessary, a material
interruption of production and/or material cost expenditures involved
with locating and qualifying replacement components could take place.
For the new generation of products in development, discussed in research
and development above, the Company is implementing a component
configuration with surface mount component technology. The Company is
not experienced with surface mount component technology and expects to
incur expenses related to training of its employees and equipping its
facility to effectively produce the new generation of products
containing surface mount technology components.
A Approximately 20% of the inventory at December 31, 1995 consisted of
parts that have lead times ranging from 16 to 40 weeks. Some of these
parts are maintained at high levels to assure their availability to meet
expected production requirements, and accordingly, account for a
significant portion of the inventory dollar amount. Based on past
experience with component availability, current distributor
relationships, and current inventory levels, the Company foresees no
anticipated shortages of materials used in production.
<PAGE>
The Company contracts with Manufacturing Services, Inc., in Kennewick,
Washington, for assembly of the Company's products, using material
purchased by the Company. By contracting with Manufacturing Services,
Inc., the Company is able to avoid staff fluctuations associated with
staffing its own manufacturing operation. The President of Manufacturing
Services, Melvin H. Brown, is a Director of the Company. Management
believes all prices for services, provided by Manufacturing Services,
Inc., were as favorable as could be obtained from comparable
manufacturing services companies. (see discussion of related party
transactions in Management Discussion and Analysis of Operations and
Financial Condition.)
EMPLOYEES
As of December 31, 1995, the Company employed a staff of 11 persons on a
full time basis, 2 in marketing, 2 in technical support, 4 in
engineering/manufacturing, and 3 in Finance and Administration. The
Company employs part-time labor on an as needed basis, usually in
engineering/manufacturing. At year end 1995 the Company employed 1 part-
time employee. None of the Company's employees are represented by a
labor union and the Company believes it has good relations with its
employees.
ITEM 2.
PROPERTIES
EST does not own any real property, plants, mines, or any other
materially important physical properties. The Company's administrative
offices and laboratories are located in leased facilities at 415 N. Quay
Street, Kennewick, Washington. The Company leases its office and
laboratory space in a lease agreement with The Port of Kennewick in
Kennewick, Washington for approximately 6,300 square feet of office and
laboratory space. The total monthly lease cost is $1,785.69, including
a leasehold tax of $203.19. The lease covers a period of three years
which expires November 30, 1996.
The Company also owns miscellaneous assets, such as computer equipment,
laboratory equipment, and furnishings. The Company doe not have any real
estate holdings, nor investments in real estate. The Company maintains
insurance in such amounts and covering such losses, contingencies and
occurrences that the Company deem adequate to protect if and its
property. Insurance coverage includes a comprehensive liability policy
covering legal liability for bodily injury or death of persons, and for
property owned by, or under the control of the Company, as well as damage
to the property of others. The Company maintains key man life insurance
protecting the Company in the event of the death of its President. The
Company also maintains fidelity insurance which provides coverage of all
its employees.
ITEM 3.
LEGAL PROCEEDINGS
No proceedings are identified to proceedings that involve primarily a
claim for damages as the amounts involved, exclusive of interest and
costs, which exceed 10% of the current assets of the Company. The
Company's Form 8-K/A dated February 9, 1996, as filed with the Securities
and Exchange Commission, is incorporated herein by reference.
<PAGE>
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 was an
amended consolidated class action complaint originally filed on October
5, 1994, as "In Re: Piper Funds, Inc., Institutional Government Income
Portfolio Litigation", Civ. File No. 3-94-587, in the United States
District Court, District of Minnesota. At the time of this filing a
final settlement of the litigation had been approved by the court, and
the Company, as a member of the class, will be party to settlements as
are outlined in the class action final settlement.
In a related manner , the Company was notified on January 15, 1996 of a
Notice of Pendancy of Class Action against KPMG Peat Marwick, LLP, Civ.
File No. 3-94-1073, filed in the United States District Court, District
of Minnesota. KPMG Peat Marwick was the auditor for the Piper Jaffray
managed Institutional Government Income Portfolio described above. The
Company has decided to remain part of the class action against KPMG Peat
Marwick at the present time.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters for shareholder approval during
the fourth quarter of 1995 fiscal year ending December 31, 1995.
<PAGE>
PART II
ITEM 5.
MARKET INFORMATION FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established market for trading the Common Stock of the
Company. The Common Stock is not regularly quoted in the automated
quotation system of a registered securities system or association. The
Common Stock of the Company is traded on the "over-the-counter" market
and is listed on the electronic bulletin board under the symbol of
"ELST". The following table illustrates the average high/low price of
the Common Stock for the last two (2) fiscal years. The "over-the-
counter" quotations do not reflect inter-dealer prices, retail mark-ups,
commissions or actual transactions.
Bid Ask
High Low High Low
Fiscal year ended December 31, 1995
First Quarter 5/16 3/32 3/8 11/32
Second Quarter 9/32 3/32 11/32 9/32
Third Quarter 13/32 1/8 1/2 9/32
Fourth Quarter 13/32 1/8 53/100 15/32
Fiscal year ended December 31, 1994
First Quarter 1/2 1/4 3/4 7/16
Second Quarter 11/32 1/4 1/2 3/8
Third Quarter 13/32 5/16 9/16 1/2
Fourth Quarter 5/16 7/32 1/2 5/16
The above data was compiled from information obtained from the National
Quotation Bureau, Inc. daily quotation service.
The approximate number of record holders of common stock of the Registrant
as of January 23, 1996 was 704 persons/entities.
Electronic Systems Technology Inc. has never paid a cash dividend and the
Board of Directors does not anticipate declaring cash dividends in the
foreseeable future.
ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Management's discussion and analysis is intended to be read in
conjunction the Company's audited financial statements the integral notes
thereto. The following statements may be forward looking in nature and
actual results may differ materially.
RESULTS OF OPERATIONS
GENERAL: The Company is specializes in the manufacturing and development
of wireless modem products. The Company offers a product line which
provide innovative communication solutions for applications not served by
existing conventional communication systems. The Company offers its
product lines in the growing markets for process automation in
commercial, industrial, and government arenas domestically, as well as
internationally. The Company markets its products through direct sales,
sales representatives, Original Equipment Manufacturers (OEM's), and
domestic, as well as foreign, resellers. Operations of the Company are
<PAGE>
sustained solely from revenues received through sales of its products and
services.
FISCAL YEAR 1995 vs. FISCAL YEAR 1994
GROSS REVENUES: Total revenues for the fiscal year 1995 were $1,731,949
reflecting a 29% increase from the $1,340,380 total revenues for fiscal
year 1994. The increase is attributable primarily to increased sales in
1995, to $1,535,071 as compared to 1994 sales of $1,197,720. Throughout
1995 the Company experienced increases in both customer orders of large
quantity, and in total customer orders processed. Management feels 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. The Company's revenues fall into three major customer
categories, Domestic, Export, and U.S. Government Sales. (See Note 6 to
Financial Statements.)
In 1995, a majority of the Company's domestic sales were for Supervisory
Control and Data Acquisition (SCADA) applications and Industrial Controls
applications. An example of a SCADA system is a city's water treatment
operation. An example of an Industrial Control system is a
manufacturer's remote control crane operation. It is Management's
opinion that these applications will continue to provide the largest
portion of the Company's revenues in the foreseeable future. The
percentage reduction in domestic sales is due primarily to an offsetting
increase in sales to the U.S. Government in 1995.
In 1995, the Company had $223,800 in foreign export sales, amounting to
15% of total product sales for the year. For year end 1994, foreign
export sales were $244,325, or 19% of total product sales for the year.
It is Management's opinion that the reduction in overall foreign export
sales is due to fewer purchases from customers in Asia. The reason for
the decrease in Asian sales volume is unknown, though potential customer
contacts were active during the year. Products purchased by foreign
customers were used primarily for Industrial Control applications. It is
Management's opinion foreign sales will continue to be strong in the
Industrial Control arena. Other than sales through foreign distributors,
management believes a majority of the Company's export sales have been
obtained as a result of advertisements in INDUSTRIAL & CONTROL SYSTEMS
magazine. The geographic composition of the Company's foreign export
sales for 1995, and 1994 are shown in Note 6 to the Financial Statements.
(See Note 6 to Financial Statements.)
In 1995 products purchased by U.S. Government agencies or by U.S.
Government contractors amounted to $396,567 or 26%, of total product
sales compared with 1994 levels of $215,000, or 18%, of total product
sales. The increase in U.S. Government sales are primarily the result of
three factors; 1) Sales to the U.S. Marine Corps (USMC), an order which
had been postponed by the USMC in late 1994. 2) Unexpected sales under
the Company's AIT subcontract with the Intermec Corporation. 3) Sales in
the fourth quarter under the Company's CAMS subcontract with the Unisys
Corporation, the last order for which came in fourth quarter 1993, and
unusually weighted the U.S. Government sales for that fiscal year.
Products purchased by the U.S. Government were utilized in three primary
applications: Inventory Control, PC/PC (Personal Computer) networking,
and Command Control. The major application for EST products is in
Command Control applications, with Inventory Control second and PC/PC
<PAGE>
networking third. It is Management's opinion that in the future Command
Control applications will exceed PC/PC networking applications and
inventory control applications. Due to the uncertainty of the nature of
U.S. Government purchasing in general, and specifically the AIT, CAMS,
and other programs the Company's products are involved in, Management
does not base liquidity, profitability, or material purchase projections
on anticipated sales.
As of December 31, 1995, the Company had a backlog of $35,962, for orders
placed late in December. The majority of these orders were shipped
within the first week of January, 1996. The Company carries a minimal
amount of backlog, if any. Customers generally place orders on an "as
needed basis". Shipment for most of the Company's products is generally
made within 5 working days after receipt of customer orders.
COST OF SALES: Cost of Sales, as a percentage of gross sales, for the
years of 1995 and 1994 remained steady at 39%. Cost of Sales variations
that occur are normally attributed to the type of product sold and the
size of the order. Larger orders grant lower sales prices, reducing the
margin of profit.
INVENTORY: The Company's year-end inventory values for 1995 and 1994
were as follows:
1995 1994
Parts $198,487 $245,569
Work in Progress --0-- 30,553
Finished goods 98,550 147,810
-------- --------
TOTAL $297,037 $423,932
======== ========
The majority of the Company's material purchases are handled with
scheduled purchase orders. A scheduled purchase order is an order where
materials are purchased over a time period negotiated with the supplier,
generally from 2 months to 12 months. Shipments are made monthly or on
an as-needed basis. By using this method, the Company is able to obtain
volume discounts on purchases and also assure that materials will be
available when needed. Volume discounts generally provides cost savings
of 25% or more. If the Company's sales are less than anticipated,
inventory over-stocking can occur. The Company's objective is to keep
inventory levels as low as possible to provide maximum cash liquidity,
while at the same time, meet production and delivery requirements. The
Company must also take into consideration that significant portion of
ESTeem component parts have lead times ranging from 16 to 40 weeks. Based
on past experience with component availability, current distributor
relationships, and current inventory levels, the Company foresees no
anticipated shortages of materials used in production.
For year end 1995, purchases and costs allocated to cost of goods sold
were $475,691 as compared to $503,111 in 1994. This overall reduction is
a result of the Company utilizing its inventory stocks to fill customer
orders, particularly large U.S. Government orders. This is reflected in
the overall reduction of inventory value at year end 1995 to $297,037
down from 1994 year end levels of $423,932.
OPERATING EXPENSES: Operating expenses, prior to allocation of expenses
to Cost of Sales and Engineering Services, increased in 1995 to $839,793
<PAGE>
from 1994 levels of $743,816. Material changes in expenses is comprised
of the following components: Advertising expenses increased to $50,619
in 1995 from 1994 levels of $35,848 due to the Company expanding its
advertising exposure, as well as increases in fees charged by publishing
companies for EST's advertising. Sales commissions increased from 1994
levels of $17,925 to $31,974 in 1995 due to increased sales to the U.S.
Government, which are directly related to the sales commissions paid by
the Company. Depreciation expense on the Company's assets increased from
1994 levels of $21,160 to $25,379 in 1995 due to increased depreciable
assets acquired by the Company for internal networking, manufacturing,
and research and development use. Supplies expenses increased to $12,383
in 1995, from 1994 levels of $9,601 due to increased requirements
resulting from elements such as increases in production and
research/development projects. Printing expenses increased from 1994
level of $6,750 to $13,104 at year end 1995, due mainly to increased
demand for customer support and marketing related material, such as
owners manuals, brochures, and technical bulletins, as well as increased
shareholder mailings. Professional services decreased from 1994 levels
of $61,338 to $46,113 at year end 1995 due to timing differences in
amounts paid for engineering services to outside third parties. In 1994,
the Company had contracted with Remtron, Inc. for these services, whereas
in 1995, engineering expertise was not required on development projects
until late in the year.
Salaries increased to $391,826 in 1995, an increase from 1994 levels of
$381,243. This increase is a result of increases in wages and benefits
costs, as well as higher accrued vacation benefits from a more tenured
employee base, in comparison with figures for 1994. Trade show expenses
decreased from 1994 levels of $10,017 to $8,688 in 1995, due to discounts
on tradeshow fee earned by the Company by being a returning participant
at the attended tradeshows.
Bad Debt expense was recorded, and Accounts Receivable reduced in the
amount of $57,204 for 1995 for amounts owed to the Company by Diversified
Engineering, but unpaid. The Company is examining possible legal options
to expedite collection of amounts owed to the Company. There was also a
downward adjustment to the allowance for doubtful accounts to $1,284 for
1995 due to the Company's prior history of low accounts write-offs,
leading to a net bad debt expense of $54,474 for 1995. The Company's
Form 8-K dated February 9, 1996, as filed with the Securities and
Exchange Commission, is incorporated herein by reference.
FISCAL YEAR 1994 vs. FISCAL YEAR 1993 RESULTS
During the period between the end of 1993 and the end of 1994, product
sales decreased from $1,444,039 in 1993 to $1,197,720 due to domestic
customers delaying purchases related to planned site expansions, and a
drop in U.S. Government purchasing from 1993, which had included a sale
to the UNISYS Corporation which unusually weighted U.S. Government sales
in fiscal year 1993. It is Management's opinion that the reduction in
sales revenue in 1994 was due to unforeseen changes in the economy, and
not the result of known events or unusual trends.
Operating expenses increased in 1994 to $743,816, from 1993 levels of
$701, 366. The material changes in expenses for year end 1994 were
comprised of the following components: Amortization decreased from
$1,828 in 1993 to $397 in 1994 as capitalized software assets became
completely amortized. Sales commissions decreased to $17,925 in 1994,
from $34,098 in 1993 due to a drop in commissioned sales to the U.S.
<PAGE>
Government in 1994. Depreciation increased to $21,160 due to the
increased level of depreciable equipment. Material and supplies
decreased from $18,471 in 1993 to $9,601 in 1994 due to supplies
requirements dropping as related to sales volume and a more conservative
supply purchasing strategy employed by the Company. Office and
Administration expenses increased from $14,427 in 1994, up from $9,700 in
1993 due to increased Company mailings, and enhancements to
administrative information networks. Professional service fees increased
from $42,140 in 1993 to $61,338 in 1994, due to general increases in
legal and audit fees, and the subcontracting of engineering expertise for
research and development projects. Rent and Utilities expense increased
to $25,733 in 1994 as a result of the Company leasing additional footage
in the building it is currently utilizing. Trade show expenses increased
to $10,017 in 1994, due to the Company's increased attendance at trade
shows in 1994. Salaries increased from $344,864 in 1993 to $381,243 in
1994 due mainly to increases in wages and related benefit expenses.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company's working capital was $1,723,823
compared with $1,449,848 at December 31, 1994. The increase is primarily
attributable to the Company's 1995 after-tax profit of $267,709. The
Company's operations rely solely on the income generated from sales. The
Company's major capital resource requirement is for maintaining adequate
inventory levels. Long lead times for some of the critical components,
ranging from 16 to 40 weeks, force the Company to maintain higher than
normal inventory levels. It is Management's opinion that the Company's
working capital as of December 31, 1995 is adequate for expected resource
requirements for the next twelve months.
The Company's current asset to current liability ratio at December 31,
1995 was 14:1 compared to 45:1 at December 31, 1994. The ratio change is
attributable primarily to the Company having higher trade accounts
payable and federal income tax liability at year end 1995 than recorded
for 1994, a less profitable year for the Company, therefore resulting in
a comparatively lower federal income tax liability.
The Company's cash resources at December 31, 1995, including cash in the
bank and cash equivalent liquid assets, were $1,162,726, reflecting an
increase from cash resources of $769,967 for year end 1994. Cash flows
from operating activities were provided by net income of $267,709, a
decrease in inventory of $126,895, depreciation of $25,379, and non-cash
loss on impaired marketable securities of $49,953. Cash flows were
primarily offset by increases to investments with terms greater than 90
days of $102,000, and purchases of capital equipment totaling $68,373 in
1995.
Cash and short term investments of the Company changed in holding amounts
from year end 1994 to year end 1995, with the majority of the Company's
idle cash being invested in commercial paper short term investments,
certificates of deposit, and money market accounts. The change in
investment strategy by the Company is so that the Company's liquid
resources may earn improved rates of return.
The Company holds an investment in marketable securities in the Piper
Jaffray Institutional Government Fund (the "Fund"). Public information
indicates Piper Jaffray suffered losses due to derivatives in is
Institutional Government Income Portfolio Mutual Fund. Write downs in
the value of the Company's investment in this Fund totaling $49,953 in
<PAGE>
1995 were realized due to the other than temporary decline in value of
the investment, treatment for which is outlined in paragraph 16 of
Statement of Financial Accounting Standard (SFAS) 115. As of December
31, 1995, the Company's investment in the Fund was valued, net of
realized losses, at $121,117. Management is currently examining the
feasibility of continuing to hold the Company's investment in the Fund.
The Company's trade accounts receivable, adjusted for uncollectible
accounts, at December 31, 1995 were $157,920, compared to $164,311 for
1994. The decrease is attributable to the bad debt reduction of accounts
receivable made at year end for amounts owed the Company by Diversified
Engineering. Bad Debt expense was recorded in the amount of $57,204 for
1995 for amounts owed to the Company by Diversified Engineering, which
had not been paid the Company as of December 31, 1995. Management
believes that all of the Company's accounts receivable as of December 31,
1995 are collectible.
Aging of accounts receivable, as of December 31, 1995, is as follows:
Category Amount Percentage
----------- ---------- ------------
Current $97,135 61%
1-30 past 39,075 25%
31-60 past 22,828 14%
61-90 past nil - 0 -
91-120 past nil - 0 -
over 120 - 0 - - 0 -
The balances in the past due categories are considered to be at normal
levels for the Company. The Company believes it's level of risk
associated with customer receipts on export sales is minimal. Foreign
shipments are made only after payment has been received or only if
irrevocable letter of credit terms have been pre-arranged. Foreign
orders are generally filled as soon as they are received, therefore,
foreign exchange rate fluctuations do not impact the Company.
On May 31, 1991, the Corporation received a Promissory Note from Western
Data Com in the amount of $31,491 to cover it's outstanding accounts
receivable balance. The note bears interest at 12% per annum payable at
$1,500 per month until paid in full. At December 31, 1995 the unpaid
balance of the note was $3,449. 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 December 31, 1995 were $297,037, a decrease from
December 31, 1994 level of $423,932. This decrease in inventory is a
result of increased customer orders in 1995 reducing inventory stocks,
and a conservative purchasing strategy on the part of the Company.
Outlays for capital expenditures during fiscal year 1995 amounted to
$68,373. These expenditures were primarily for equipment used for
research/development, manufacturing, and computer upgrades. The Company
intends on investing in additional capital equipment as it is deemed
necessary to support development and/or manufacture of or the near future
consist of additional laboratory equipment to be used for developing
improved software internal to the ESTeem Modem.
As of December 31, 1995, the Company's current liabilities were $133,592,
an increase of $100,395 over the 1994 year end levels of $33,197. The
<PAGE>
increase is primarily attributable to increases in federal income tax
payable on net income earned by the Company, increases in trade accounts
payable due to year end purchasing activity, and increases in accrued
vacation benefits due to a more tenured work force at year end 1995. All
of the Company's accounts payable at year end were current.
Differences between the provision for income taxes and income taxes
computed using the Federal income tax rate resulted in a deferred tax
asset of $5,287 at year end 1995, compared with a $8,857 deferred tax
liability for year end 1994. The primary components of the deferred tax
asset were amounts provided by the Company's accrued vacation benefits
payable and realized loss on impaired marketable securities as of year
end 1995.
The Company's subcontract, administered by 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 1995 were $123,427. It is Management's opinion that sales
under the UNISYS contract are impossible to predict due to the
uncertain nature of U.S. Government purchasing.
The Company's AIT subcontract, administered by 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 1995 were $62,703. It is Management's opinion that sales
under the AIT contract are impossible to predict due to the uncertain
nature of U.S. Government purchasing.
The Company has a General Services Administration (GSA) contract to sell
goods to the U.S. Government. This contract is a fixed price, indefinite
quantity and delivery agreement. The current contract runs through March
31, 1996. A renewal GSA contract is being negotiated. If awarded the
new GSA contract period would extend through March 31, 1997. Management
expects its GSA contract to be renewed. Based on previous years
activity, the Company expects the majority of U.S. Government
purchases to be placed 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 1996 will be under this contract.
With the possible exception of orders from the Company's 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.
<PAGE>
The Company's operations were not adversely effected by inflation during
1995. No adverse affect is anticipated during 1996.
FORWARD LOOKING STATEMENTS: The above discussion may contain forward
looking statements that involve a number of risks and uncertainties. In
addition to the factors discussed above, among other factors that could
cause actual results to differ materially are the following: competitive
factors such as rival wireless architectures and price pressures;
availability of third party component products at reasonable prices;
inventory risks due to shifts in market demand and/or price erosion of
purchased components; change in product mix, and risk factors that are
listed in the Company's reports and registrations statements filed with
the Securities and Exchange Commission.
ITEM 7.
FINANCIAL STATEMENTS
See Exhibit 1, Financial Statements and Financial Statement Schedules.
Such Financial Statements and Schedules are incorporated herein by
reference.
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
NONE
<PAGE>
PART III
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS:
The following table sets forth the names and ages of all directors of the
Company as of December 31, 1995; as well as term in office and principal
occupation of each director.
Name of Director Term in Office Age Principal Occupation
- ------------------ -------------- ------ ---------------------
T.L. Kirchner 06/05/93 - 06/07/96 47 President of the Company
Melvin H. Brown 06/04/94 - 06/06/97 65 President of
Manufacturing Services,
Inc.
Arthur Leighton 06/04/94 - 06/06/97 72 Consultant
Robert Southworth 06/04/94 - 06/06/97 52 Patent Attorney for U.S.
Dept. of Energy
John H. Rector 06/05/93 - 06/07/96 79 Consultant
John L. Schooley 06/02/95 - 06/05/98 56 President of Remtron,
Inc.
Management believes that there are no agreements or understanding between
the directors and suppliers or contractors of the Company, except the
agreements with Manufacturing Services, Inc. and with Remtron, Inc. as
described elsewhere in this report.
IDENTIFICATION OF EXECUTIVE OFFICERS
The following table sets forth the names and ages of all executive
officers of the Company as of December 31, 1995; all positions by such
persons; term of office and the period during which he has served as
such; and any arrangement of understanding between him and any other
person(s) pursuant to which he was elected as an officer:
Name of Officer Age Position Term of Office Period of Service
- ---------------- ----- -------- -------------- -----------------
T. L. Kirchner 47 President 3 Years 02/10/84- Present
Robert Southworth 52 Sec/Treas 3 Years 12/11/92- Present
There are no family relationships, whether by blood, marriage, or
adoption, between any of the Directors or Executive Officers of the
Company.
<PAGE>
The following is a brief description of the business experience during
the last five years of each director and/or executive officer of the
Company.
T.L. KIRCHNER. Mr. Kirchner is founder, President and a Director of the
Company. During the last five years Mr. Kirchner devoted 100% of his
time to the Management of the Company. His primary duties were to
oversee the Management and Marketing functions of the Company. Mr.
Kirchner does not serve as a director for any other company registered
under the Securities Exchange Act.
MELVIN H. BROWN. Mr. Brown is a Director of the Company. During the
last five years Mr. Brown has been the owner and president of
Manufacturing Services, Inc. Manufacturing Services provides services
in packaging design, printed circuit board layout, prototyping,
production runs, verification of documentation testing, burn-in, quality
control, and repetitive volume production. Manufacturing Services
provides electronic manufacturing and quality control testing services
for Electronic Systems Technology. Mr. Brown does not serve as a
director for any company registered under the Securities Exchange Act.
ROBERT SOUTHWORTH. Mr. Southworth is a Director and the
Secretary/Treasurer of the Company. Since 1980, Mr. Southworth has been
employed with the U. S. Department of Energy as a Senior Patent Attorney
in Richland, Washington. His primary duties with the Department of
Energy include the preparation and prosecution of domestic and foreign
patent applications in such fields as nuclear reactors, fuel
reprocessing, waste management and energy related fields of solar, wind,
and fossil fuels. Mr. Southworth does not serve as a director of any
company which is registered under the Securities Exchange Act.
ARTHUR LEIGHTON. Mr. Leighton is a Director of the Company. Mr.
Leighton served as President of Kraft Industries through mid 1986. Since
then he has been working as an independent Management Consultant. Mr.
Leighton does not serve as director of any company which is registered
under the Securities Exchange Act.
JOHN H. RECTOR. Mr. Rector is a Director of the Company. Mr. Rector
founded Western Sintering, located in Richland, Washington. Western
Sintering, a powdered metal parts manufacturer, is an Original Equipment
Manufacturer (OEM). Mr. Rector is the former President of Western
Sintering, Inc. Mr. Rector recently retired as President of Western
Sintering, but is still acting in an advisory position to its officers
and directors. Mr. Rector does not serve as director of any company
which is registered under the Securities Exchange Act.
JOHN L. SCHOOLEY. Mr. Schooley is a Director of the Company. During the
past five years, Mr. Schooley has been the owner and President of
Remtron, Inc. in San Diego, California. Remtron, Inc. is a manufacturer
of advanced radio control and telemetry systems for the industrial
market. Remtron, Inc. has provided research and development services for
Electronic Systems Technology. Mr. Schooley does not serve as director
of any other company which is registered under the Securities Act.
ITEM 10.
EXECUTIVE COMPENSATION
The Company's named compensated executive officer is T.L. Kirchner,
President and CEO. The Company did not have any compensated executive
<PAGE>
officers other than the CEO as of December 31, 1995.
The information specified concerning the compensation of the named
executive officers for each of the Registrant's last three completed
fiscal years is provided in the following Summary Compensation Table:
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Options All
Name and Other Restr- Under- Other
Principal Annual icted lying LTIP Compen-
Position Year Salary Bonus Compen- Stock SARs Payouts sation
sation Awards
($) ($)(1) ($)(2) ($) (#) ($) ($)(3)
- ---------------------------------------------------------------------
T.L. 1995 67,800 5,356 1,406 0 25,000 0 5,025
Kirchner 1994 67,800 8,103 578 0 0 0 6,368
President 1993 63,800 6,000 471 0 25,000 0 9,857
& CEO
(1) Includes amounts paid under the Non-qualified Employee Profit Sharing
Bonus
(2) Other Annual Compensation includes Accrued Vacation Pay
(3) All Other Compensation consists of premiums paid for Group Health
Insurance and Key Man Insurance
The information specified concerning the stock options of the named
executive officers during the fiscal year ended December 31, 1995 is
provided in the following Option/SAR Grants in the Last Fiscal Year Table:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants (4)
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or base Expiration
Name Granted #(4) Fiscal Year Price($/Sh) Date
- -----------------------------------------------------------------------
T.L. Kirchner 25,000 14.2% .31 2/2/98
(4) This table does not include Stock Options granted previously. Forms 8-K
and 8-K/A, dated 12/10/93 and 2/3/95, respectively, are incorporated herein
by reference.
The information specified concerning the stock options of the named executive
officers during the fiscal year ended December 31, 1995 is provided in the
following Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal
Year-End Options/SAR Values Table:
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-money
Options/SARs Options/SARs
at FY-End(#) at FY-End ($)
Number of
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized($) Unexercisable Unexercisable
- ---------------------------------------------------------------------
T.L. Kirchner 0 0 50,000 0
The Company does not currently have a Long-Term Incentive Plan ("LTIP").
Compensation to outside directors is limited to reimbursement of
out-of-pocket expenses that are incurred in connection with the directors
duties associated with the Company's business. There is currently no other
compensation arrangements for the Company's directors. (See Item 11 and Item
12 for Stock Options granted in previous years.)
The Company currently does not hold any Employment Contracts nor Change of
Control Arrangements with any parties.
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of December 31, 1995, the amount and
percentage of the Common Stock of the Company, which according to information
supplied by the Company, is beneficially owned by each person who, to the
best knowledge of the Company, is the beneficial owner (as defined below) of
more than five (5%) of the outstanding common stock.
Amount &
Nature of
Title Name & Address Beneficial Percent
of of of of
Class Beneficial Owner(5) Ownership(6) Class
- -------------------------------------------------------------------------
Common T.L. Kirchner 403,488 (7) 8.1%
415 N. Quay Street.
Kennewick, WA 99336
- ------------------------------------------------------------------
(5) Under Rule 13d-3, issued by the Securities and Exchange Commission, a
person is, in general, deemed to "Beneficially own" any shares if such person
directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares (a) voting power, which includes the
power to vote or to direct the voting of those shares and/or (b) investment
power, which included the power to dispose, or to direct the disposition of
those securities. The foregoing table gives effect to shares deemed
beneficially owned under Rule 13d-3 based on the information supplied to the
Company. The persons named in the table have
<PAGE>
sole voting power and investment power with respect to all shares of Common
Stock beneficially owned by them.
(6) The beneficial owner listed above has stock options giving the right to
acquire 50,000 shares of Electronic Systems Technology, Inc. Common Stock:
Options for 25,000 shares were granted December 10, 1993; Options for 25,000
shares were granted February 3, 1995. Forms 8-K and 8-K/A, dated January 28,
1994 and February 3, 1995, respectively, are incorporated herein by
reference.
(7) Does not include options granted. See footnote (6) above.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of January 18, 1995, amount and percentage
of the Common Stock of the Company, which according to information supplied
by the Company, is beneficially owned by management, including officers and
directors of the Company.
Title Name Amount & Nature Percent
of of of of
Class Beneficial Owner Beneficial Ownership Class
- -------------------------------------------------------------------------
Common T.L. Kirchner 403,488 (1) 8.1%
(Officer & Director)
Common Robert Southworth 4,000 (1) 0.1%
(Officer & Director)
Common Melvin H. Brown (Director) 76,500 (1) 1.5%
Common Arthur Leighton (Director) 59,000 (1) 1.2%
Common John H. Rector (Director) 3,000 0.1%
Common John L. Schooley (Director) 10,000 0.2%
(1) Does not include stock options. See below.
On various dates, the Company's Board of Directors has approved Stock Option
Bonuses for Directors and Employees. The following is a summary of the Stock
Option bonuses currently outstanding: Options are exercisable at fixed
prices. Options may not be exercised in blocks of less than 5,000 shares.
Options not exercised expire three years after approval date or 90 days
following termination of employment/board membership, whichever occurs first.
In the event of acquisition, merger, recapitalization or similar events of
the Company, the optionee will receive equivalent shares or will have a 10-
day window in which to exercise the options. Option grants are not
transferable or assignable except to the optionee's estate in the event of
the optionee's death. The Company's Form 8-K/A, dated February 3, 1995,
and Form 8-K, dated December 10, 1993, are incorporated by reference.
<PAGE>
Recipients of Stock Options currently unexpired as of 12/31/95 were as
follows:
Exercise Price
Name Option Shares per Share
- -----------------------------------------------------------------
APPROVAL DATE: 2-3-95
George M. Stoltz 25,000 $0.31
David B. Strecker 25,000 0.31
Eric P. Marske 25,000 0.31
Melvin Brown 25,000 0.31
Tom Kirchner 25,000 0.31
Arthur Leighton 25,000 0.31
Robert Southworth 25,000 0.31
APPROVAL DATE: 12-10-93
George M. Stoltz 25,000 $0.60
David B. Strecker 25,000 0.60
Melvin Brown 25,000 0.60
Tom Kirchner 25,000 0.60
Arthur Leighton 25,000 0.60
Robert Southworth 25,000 0.60
Stock options must be exercised within 90 days after termination of
employment/board membership. During 1995, no options were exercised and
125,000 options expired. At December 31, 1995 there were 325,000 shares
reserved for future exercise.
ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
During fiscal year 1995, the Company contracted for services from
Manufacturing Services, Inc. in the amount of $51,974. Manufacturing
Services, Inc. is owned and operated by Melvin H. Brown, who is a Director of
Electronic Systems Technology, Inc. Management believes all prices for
services, provided by Manufacturing Services, Inc., were as favorable as
could be obtained from comparable manufacturing services companies.
During fiscal year 1994, the Company contracted for engineering services from
Remtron, Inc. in the amount of $41,583. Remtron, Inc. is owned and operated
by John L. Schooley, who is also a Director of Electronic Systems Technology,
Inc. For fiscal year 1995, Remtron, Inc., did not provide any services to
Electronic Systems Technology, Inc. In 1995, the Company contracted its
engineering services with a independent third party, unaffiliated with the
Company.
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits filed as part of the Company's 10KSB report for 1995 are listed
below. Certain exhibits have been previously filed with the Securities and
Exchange Commission and are incorporated by reference.
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------
1. Report of Independent Certified Public Accountant
Financial Statements/Financial Statement Schedules
Balance Sheets
Statement of Operations
Statement of Changes in Stockholders Equity
Statement of Cash Flows
Notes to Financial Statements
2. Reports on Form 8-K
During the last quarter of the period covered by this
report, no reports on Form 8-K were filed.
3. Articles of Incorporation and By-Laws filed as Exhibit
2.1 to Form S-18, Registration Statement No. 2-92949-S,
Exhibit ( c ) to Form 8-K, filed March 15, 1985, and
Amendments to By-Laws adopted by Shareholders on
January 14, 1985 are incorporated herein by reference.
4. Instrument defining the rights of security holders
including indentures.
Exhibit II Form S-18 Registration Statement
No. 2-92949-S is incorporated herein by reference.
Forms 8-K dated July 12, 1991, December 14, 1992,
December 10, 1993, and Form 8-K/A, dated February 3,
1995, are incorporated herein by reference.
11. Statement re-computation of per share earnings.
13. Annual report to security holders, Form 10-Q or
Quarterly report to security holders. N/A
22. Published report regarding matters submitted to vote of
security holders. N/A
24. Consents of experts and counsel
27. Financial Data Schedule
99. Additional Exhibits
Form 8-K, dated June 2, 1995, is incorporated herein by
reference.
99.3 Form 8-K/A, dated February 9, 1996
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
By: T.L. KIRCHNER
T.L. Kirchner, Director/President
(Principal Executive Officer)
Date: February 9, 1996
In accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
T. L. KIRCHNER Director/President February 9, 1996
T.L. Kirchner
ROBERT SOUTHWORTH Director/Secretary/ February 9, 1996
Robert Southworth Treasurer
MELVIN BROWN Director February 9, 1996
Melvin H. Brown
ARTHUR LEIGHTON Director February 9, 1996
Arthur Leighton
JOHN RECTOR Director February 9, 1996
John H. Rector
Director
John L. Schooley
EXHIBIT 1 - FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
ACCOUNTANTS' REPORT ON THE FINANCIAL STATEMENTS 2
BALANCE SHEETS 3 - 4
STATEMENT OF OPERATIONS 5 - 6
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 7
STATEMENT OF CASH FLOWS 8 - 9
NOTES TO FINANCIAL STATEMENTS 10 - 19
-1-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Electronic Systems
Technology, Inc.
415 N. Quay, Suite 4
Kennewick, WA 99336
We have audited the accompanying balance sheets of ELECTRONIC SYSTEMS
TECHNOLOGY, INC. as of December 31, 1995 and 1994, and the related statements
of operations, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ELECTRONIC SYSTEMS
TECHNOLOGY, INC. as of December 31, 1995 and 1994 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles.
ROBERT MOE & ASSOCIATES, P.S.
Spokane, Washington
February 8, 1996
-2-
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
BALANCE SHEETS
December 31, 1995 and 1994
<CAPTION>
ASSETS
1995 1994
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash $ 15,765 $ 66,032
Money market investment 444,335 400,935
Certificate of Deposit 504,626 203,000
Bankers acceptance - SFNB 100,000
Commercial paper 300,000
Marketable securities 121,117 98,120
Accounts receivable, net of allowance
for uncollectables of $1,284-1995
and $6,155-1994 157,920 164,311
Inventory 297,037 423,932
Accrued interest 3,745 1,922
Prepaid insurance 3,034 3,073
Prepaid expenses 1,100
Prepaid Federal income taxes 16,471
Deferred tax asset 5,287
Current portion of note receivable 3,449 5,249
--------- ---------
Total current assets 1,857,415 1,483,045
--------- ---------
PROPERTY & EQUIPMENT
Leasehold improvements 13,544 13,544
Laboratory equipment 254,931 192,413
Furniture & fixtures 15,017 15,017
Dies & molds 17,255 17,255
--------- ---------
300,747 238,229
Less accumulated depreciation 155,504 134,110
--------- ---------
145,243 104,119
--------- ---------
OTHER ASSETS
Patent costs, net of amortization
of $700-1995 and $591-1994 1,150 1,259
Deposits 340 837
Capitalized software cost of
$61,143-1995 net amortization of $54,519;
$61,143-1994 net amortization of
$52,791 6,624 8,352
--------- ---------
8,114 10,448
--------- ---------
TOTAL ASSETS $2,010,772 $1,597,612
========= =========
</TABLE>
-3-
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
BALANCE SHEETS
December 31, 1995 and 1994
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
-------- --------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 56,493 $ 22,351
Accrued payroll 5,199 896
Accrued payroll taxes 1,113 1,207
Accrued excise taxes payable 410 1,796
Accrued vacation pay 11,712 6,947
Federal income taxes payable 58,665
-------- -------
Total current liabilities 133,592 33,197
DEFERRED TAX LIABILITY 8,857
-------- -------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value,
50,000,000 shares authorized,
5,006,667-1995 and 5,006,667-1994
shares issued and outstanding 5,007 5,007
Additional paid-in capital 918,057 918,057
Unrealized loss, marketable securities (53,913)
Retained earnings 954,116 686,407
--------- ---------
1,877,180 1,555,558
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,010,772 $1,597,612
========= =========
<FN>
The accompanying notes are an integral part of this statement
</TABLE>
-4-
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
<CAPTION>
STATEMENT OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
SALES $1,535,071 $1,197,720 $1,444,039
--------- --------- ---------
COST OF SALES
Beginning inventory 423,932 386,201 325,434
Purchases and allocated costs 475,691 503,111 658,514
--------- --------- ---------
899,623 889,312 983,948
Ending inventory 297,037 423,932 386,201
--------- --------- ---------
602,586 465,380 597,747
--------- --------- ---------
GROSS PROFIT 932,485 732,340 846,292
--------- --------- ---------
OPERATING EXPENSES
Advertising 50,619 35,848 38,322
Amortization 1,837 397 1,828
Bad Debts 54,474
Commissions-sales 31,974 17,925 34,098
Dues & Subscriptions 7,700 6,009 7,955
Depreciation 25,379 21,160 14,716
Insurance 6,911 5,176 5,504
Materials & supplies 12,383 9,601 18,471
Office & administration 16,628 14,427 9,700
Printing 13,104 6,750 5,726
Professional services 46,113 61,338 42,140
Rent & utilities 25,895 25,733 13,421
Repair & maintenance 6,992 4,863 4,827
Salaries 391,826 381,243 344,864
Taxes 74,333 80,594 87,709
Telephone 11,159 10,571 11,126
Trade shows 8,688 10,017 2,859
Travel expenses 53,778 52,164 56,881
Warranty expenses 1,219
--------- --------- --------
839,793 743,816 701,366
Expenses allocated to
cost of sales (280,650) (255,710) (251,587)
--------- --------- --------
559,143 488,106 449,779
--------- --------- --------
OPERATING INCOME 373,342 244,234 396,513
--------- --------- --------
<FN>
The accompanying notes are an integral part of this statement
</TABLE>
-5-
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
<CAPTION>
STATEMENT OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
(continued)
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
OTHER INCOME
Interest income 58,359 27,750 24,603
Site support reimbursement-
net of allocated costs 24,259 19,667 23,270
Loss on disposition of assets (1,870) (812) (1,214)
Realized loss on marketable
securities due to impairment (49,953)
Unrealized loss on marketable
securities (4,980)
-------- -------- -------
30,795 46,605 41,679
-------- -------- -------
INCOME BEFORE PROVISION FOR
FEDERAL INCOME TAXES 404,137 290,839 438,192
PROVISION FOR FEDERAL
INCOME TAXES 136,428 104,899 144,970
-------- -------- -------
NET INCOME $ 267,709 $ 185,940 $ 293,222
======== ======== =======
EARNINGS PER SHARE $ .05 $ .04 $ .06
======== ======== =======
<FN>
The accompanying notes are an integral part of this statement
</TABLE>
-6-
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
<CAPTION>
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for December 31, 1992 through December 31, 1995
Common Stock Additional Loss on Retained
------------ Paid-In Marketable Earnings
Amount Shares Capital Securities (Deficit) TOTAL
--------- ------ ------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1992 4,956,667 4,957 $ 901,607 $203,958 $1,110,522
NET INCOME
December 31, 1993 293,222 293,222
--------- ------ ------- -------- --------- ---------
Balance at
December 31, 1993 4,956,667 4,957 901,607 497,180 1,403,744
Stock options
Exercised
June 2, 1994 at $.33 50,000 50 16,450 16,500
Unrealized loss in
marketable securities (50,626) (50,626)
Cumulative effect of change
in accounting principle;
unrealized loss in marketable
securities; net of income
tax effect. (3,287) 3,287
NET INCOME
December 31, 1994 185,940 185,940
--------- ------- --------- -------- ------- ---------
Balance at
December 31, 1994 5,006,667 $ 5,007 $ 918,057 $ (53,913) $686,407 $1,555,558
Unrealized holding loss
reclassified to realized
loss due to impairment 53,913 53,913
NET INCOME
December 31, 1995 267,709 267,709
--------- ------- --------- -------- ------- ---------
5,006,667 $ 5,007 $ 918,057 $ 0 $954,116 $1,877,180
========= ======= ========= ======== ======= =========
</TABLE>
-7-
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
<CAPTION>
STATEMENT OF CASH FLOWS
for the twelve months ended December 31, 1995, 1994 and 1993
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS PROVIDED (USED) IN
OPERATING ACTIVITIES:
Net income $ 267,709 $ 185,940 $ 293,222
Noncash expenses included
in income:
Depreciation 25,379 21,160 14,716
Amortization 1,837 397 1,828
Deferred income taxes (17,035) 11,370 (1,980)
Unrealized loss on marketable
securities 4,980
Loss on disposition of assets 1,870 812 1,214
Realized loss/impaired securities 49,953
Decrease (increase) in Current Assets:
Accounts receivable, net 6,391 114,907 (18,483)
Inventory 126,895 (37,731) (60,767)
Other current assets 13,587 (18,712) 24,345
Increase (decrease) in Current Liabilities:
Accounts payable, accrued expenses
and other current liabilities 41,730 (27,750) 16,646
Federal Income Taxes Payable 59,863 (75,450) 75,450
-------- -------- --------
Net Cash Provided By
Operating Activities 578,179 174,943 351,171
-------- -------- --------
CASH FLOWS PROVIDED (USED) IN
INVESTING ACTIVITIES:
Deposit 497 (497)
Capitalized software (8,640)
Proceeds received from sale of fixed assets 100
Additions to property & equipment (68,373) (30,533) (30,033)
Certificates of deposit-over 3 months (102,000) 104,716
Institutional Governmental Income Fund (17,344) (11,134) (142,592)
-------- ------- --------
Net Cash Used In
Investing Activities (187,220) (42,064) (76,549)
-------- ------- --------
<FN>
The accompanying notes are an integral part of the financial statements
</TABLE>
-8-
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
<CAPTION>
STATEMENT OF CASH FLOWS
for the twelve months ended December 31, 1995, 1994 and 1993
(CONTINUED)
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS PROVIDED (USED) IN
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 16,500
Proceeds from note receivable 1,800 2,139 3,446
-------- ------- --------
Net Cash Provided By
Financing Activities 1,800 18,639 3,446
-------- ------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 392,759 151,518 278,068
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 769,967 618,449 340,381
-------- ------- --------
CASH AND CASH EQUIVALENTS AT
ENDING OF PERIOD $1,162,726 $769,967 $618,449
========= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION:
Cash paid during the year for:
Interest
Income taxes $ 77,129 $185,450 $ 71,500
========= ======= =========
Cash and Cash equivalents:
Cash $ 15,765 $ 66,032 $146,851
Money Market 444,335 400,935 471,598
Certificates of deposit (under 3
month maturity) 402,626 203,000
Commercial paper (under 3
month maturity) 300,000
Bankers acceptance 100,000
--------- ------- --------
$1,162,726 $769,967 $618,449
========= ======= ========
<FN>
The accompanying notes are an integral part of the financial statements
</TABLE>
-9-
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1- 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 will allow communication
between peripherals via radio frequency waves.
ACCOUNTING ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
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 for recording allowance for uncollectible accounts. The amount
included in Allowance for Uncollectible Accounts consists of $1,284 as of
December 31, 1995 and $6,155 as of December 31, 1994.
INVENTORY: Inventories are stated at lower of cost or market with cost
determined using the FIFO (first in, first out) method. Inventories
consisted of the following:
1995 1994 1993
-------- ------- --------
Parts $ 198,487 $ 245,569 $ 199,632
Work in progress 30,553 56,154
Finished goods 98,550 147,810 130,415
-------- ------- --------
$ 297,037 $ 423,932 $ 386,201
======== ======= ========
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
purposes of computing depreciation is five to seven years. The useful life
for leasehold improvements is thirty-one and a half years. The Company
periodically reviews its long-lived assets for impairment and, upon
indication that the carrying value of such assets may not be recoverable,
recognizes an impairment loss by a charge against current operations.
-10-
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 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. Research and development expenditures for new product
development and improvements of existing products by the Company for 1995
and 1994 were $85,265 and $102,918, respectively.
EARNINGS (LOSS) PER COMMON SHARE: Primary earnings (loss) per common
share are based on the weighted average number of shares outstanding during
the period after consideration of the diluted effect of stock options and
restricted stock awards. The primary weighted average number of common
shares outstanding was 5,433,174, 5,360,982, and 5,345,844 for the years
ended December 31, 1995, 1994, and 1993 respectively. Also, fully diluted
earnings per common share assume conversion of dilutive 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 product's technological feasibility has been
established, be capitalized. During 1986 the Company adopted this
statement as permitted by the 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 Company 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.
-11-
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Amortization of capitalized software costs charged to expenses for periods
presented is as follows:
1986 $3,234
1987 4,865
1988 9,080
1989 10,501
1990 9,527
1991 7,358
1992 6,219
1993 1,719
1994 288
1995 1,728
CASH AND CASH EQUIVALENTS: Cash and cash equivalents generally consist
of cash, certificates of deposit, time deposits, commercial paper and other
money market instruments. The Company invests its excess cash in deposits
with major banks, and commercial paper of investment grade companies and,
therefore bears minimal risk. These securities have original maturity
dates not exceeding three months. Such investments are stated at cost,
which approximates fair value, and are considered cash equivalents for
purposes of reporting cash flows.
ADVERTISING COSTS: Costs incurred for producing and communicating
advertising are expensed when incurred.
2- FEDERAL INCOME TAXES
Effective as of January 1, 1992 the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109 Accounting for Income Taxes
which establishes generally accepted accounting principles for the
financial accounting 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 Company and past and current tax returns. The
change had no effect on prior years results.
-12-
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
2- FEDERAL INCOME TAXES (continued)
<CAPTION>
The provision for Federal Income Taxes consisted of:
1995 1994 1993
------- -------- -------
<S> <C> <C> <C>
Currently payable $152,265 $ 93,529 $146,950
Deferred (15,837) 11,370 (1,980)
------- ------- -------
Provision for Federal Income
Taxes $136,428 $104,899 $144,970
======= ======= =======
<CAPTION>
The components of the net deferred tax (asset) liability at December 31,
were as follows:
1995 1994 1993
------- ------- ------
<S> <C> <C> <C>
Depreciation $ 16,116 $ 12,899 $ 9,038
Accrued vacation payable (3,982) (1,949) (2,739)
Allowance for uncollectible
accounts receivable (437) (2,093) (2,093)
Unrealized loss on marketable
securities (1,693)
Realized loss due to impairment
of marketable securities (16,984)
-------- ------- -------
$ (5,287) $ 8,857 $ 2,513
======== ======= =======
<CAPTION>
The differences between the provision for income taxes and income taxes
computed using the U.S. federal income tax rate were as follows:
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Amount computed using the
statutory rates $152,265 $ 93,529 $146,950
Increase (reduction):
Investment tax credit and
research credit carryforward 0 0 0
Deferred tax (asset) liability (15,837) 11,370 (1,980)
------- ------- -------
Provision for Federal Income
Taxes $136,428 $104,899 $144,970
======= ======= =======
</TABLE>
-13-
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
3- 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 $.30 per share was
arbitrarily determined by the underwriter.
4- COMPENSATED ABSENCES
FASB Statement No. 43 requires employers to accrue a liability for
employees' compensation for certain future absences. Liabilities for
vacation pay in the amounts of $11,712 and $6,947 have been accrued as of
December 31, 1995 and 1994, respectively.
5- LEASES
The Company has no obligation under capital lease arrangements.
The Company rents its facility under a three (3) year operating lease
commencing on the 1st day of December, 1993. The Company leases the
facility from the Port of Kennewick, who with the assistance of federal
economic development funds (EDA), 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
1995, 1994 and 1993 were as follows: 1995=$21,428; 1994-$21,428;
1993=$9,745.
The following is a schedule of estimated future minimum rental payments
required under the above operating leases over the next five succeeding
fiscal years:
Year ending December 31, Amount
----------------------- ------
1996 19,643
1997 -0-
1998 -0-
1999 -0-
2000 -0-
-14-
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
6- FOREIGN SALES
The Company's revenues fall into three major customer categories,
Domestic, Export, and U.S. Government Sales. A percentage breakdown of
E.S.T.'s major customer categories for the years of 1995 and 1994 are as
follows:
1995 1994
-------- -------
Domestic Sales 59% 63%
Export Sales 15% 19%
U.S. Government Sales 26% 18%
The geographic distribution of foreign sales for 1995 and 1994 is as
follows:
1995 1994
-------- -------
Canada 37% 56%
Croatia/Slovenia 30% 9%
Brazil 11% 1%
Mexico 6% 5%
Taiwan 5% 10%
Chile 4% --
Israel 4% 3%
Costa Rica 2% --
Singapore less than 1% 2%
Thailand/Indonesia less than 1% 3%
Venezuela less than 1% less than 1%
Egypt -- 6%
Kuwait -- 5%
7- PROFIT SHARING AND SALARY DEFERRAL 401-K PLAN
The Company sponsors a Profit Sharing Plan 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.
8- 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 $.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, beginning of year 125,000
Granted during year 0
Canceled during year (125,000)
Exercised during the year 0
--------
Outstanding, end of year 0
========
-15-
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
8- STOCK OPTIONS (continued)
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 $.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, beginning of year 150,000
Granted during year 0
Canceled during year 0
Exercised during year 0
--------
Outstanding, end of year 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, beginning of year 0
Granted during year 175,000
Canceled during year 0
Exercised during year 0
-------
Outstanding, end of year 175,000
=======
After termination of employment, stock options may be exercised within
90 days. During the 12 months ended December 31, 1995 125,000 shares
under option expired and no shares under option were exercised. At
December 31, 1995 there are 325,000 shares reserved for future exercises.
9- EMPLOYEE PROFIT SHARING BONUS PROGRAM (NON-QUALIFIED)
On December 11, 1992 the Board of Directors revised the Employee
Profit Sharing bonus Program as follows. The Company makes contributions
to the Program in accordance with the following formula: After the
Company's "net profit before tax" reaches $100,000, the Company sets
aside $10,000 for the Program. Thereafter, the Company adds 8% of the
"net profit before tax" to the Program.
NET PROFIT COMPENSATION TO FUND
---------- --------------------
100,000 $10,000 + 8% Of amount over
$100,000 NET PROFIT
-16-
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
10- 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 December 31, 1995 the
Company had cash and cash equivalents with Seattle First National Bank
with a combined balance of $649,335 which is $549,335 in excess of the
F.D.I.C. insured amount. At December 31, 1995 the Company held
commercial paper in the amount of $300,000 which was not F.D.I.C.
insured. At December 31, 1995 the Company had cash deposits with Pioneer
Bank with a balance of $101,319 which is $1,319 in excess of the
F.D.I.C. insured amount. At December 31, 1995 the Company had cash
deposits with WestOne Bank with a balance of $101,307 which is $1,307 in
excess of the F.D.I.C. insured amount. Additionally, at December 31,
1995, the Company had cash deposits with American National Bank with a
combined balance of $107,169 which is $7,169 in excess of the F.D.I.C.
insured amount. The Company holds an investment in marketable securities
in the Piper Jaffray Institutional Government Fund (the "Fund"). Write
downs in the value of the Company's investment in this Fund totaling
$49,953 in 1995 were realized due to the other than temporary decline in
value of the investment, treatment for which is outlined in paragraph 16
of Statement of Financial Accounting Standard (SFAS) 115. As of December
31, 1995, the Company's investment in the fund was valued, net of
realized losses, at $121,117. 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.
The Company purchases certain key components necessary for the
production of its products from sole suppliers. The components provided by
this supplier could be replaced or substituted by other products, if it
became necessary to do so. It is possible that if this action became
necessary, a material interruption of production and/or material cost
expenditures could take place.
11- RELATED PARTY TRANSACTIONS
For the years ended December 31, 1995, 1994, and 1993 services in
the amount of $51,974, $50,788, and $93,304, respectively, were contracted
with a manufacturing process company of which the owner/president is a
member of the Board of Directors of Electronic Systems Technology, Inc.
During fiscal year 1994, the Company contracted services with an
engineering firm in the amount of $41,583. This firm is owned and operated
by a Director of Electronic Systems Technology, Inc. For fiscal year 1995,
this firm did not provide any services to Electronic Systems Technology,
Inc.
-17-
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
12- 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' securities. All the marketable
securities held by the Company consists of "available-for-sale", as defined
by SFAS No. 115. The basis on which cost is 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 December 31, 1995 and 1994:
1995 1994
-------- --------
Aggregate fair value of marketable
securities $121,117 $ 98,120
Gross unrealized holding gains -- --
Gross unrealized holding losses -- 55,606
Gross unrealized loss due to impairment
in marketable securities 49,953 --
Amortized cost basis 171,070 153,726
Changes in marketable securities for the period ended December 31, 1995
and 1994 are as follows:
Cost $153,726 $142,591
Purchase of shares -- --
Dividends and capital gains
reinvested 17,344 11,135
Sale of securities -- --
Unrealized loss -- (55,606)
Realized loss due to impairment
in marketable securities (49,953) --
-------- -------
Fair market value $121,117 $ 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 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
-18-
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
12- MARKETABLE SECURITIES (continued)
suit is the firm of Schatz, Paquin, Lockridge, Grindal, & Holstein, with
co-counsel of the firm of Head, Seifier & 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 current uncertain nature of this
settlement, amounts or timing of any settlement cannot be predicted at the
time of filing for this report.
13- 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 for
1994.
-19-
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
<CAPTION>
SELECTED FINANCIAL DATA
For the five years
ended December 31, 1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales $1,535,071 $1,197,720 $1,444,039 $1,232,217 $1,123,734
Gross profit 932,485 732,340 846,292 725,406 696,732
Income (Loss)
before provision
for income taxes 404,137 290,839 438,192 323,555 315,120
Provision for
income taxes 136,428 104,899 144,970 60,402 0 0
Net income (Loss) 267,709 185,940 293,222 263,153 315,120
Net income (Loss)
per share .05 .04 .06 .05 .06
Weighted average
number of shares
outstanding 5,433,174 5,360,982 5,345,844 5,289,188 5,112,174
Total Assets 2,010,772 1,597,612 1,540,141 1,154,823 941,699
Long-term debt and
capital lease
obligations 0 0 0 0 0
Stockholders'
equity 1,877,180 1,555,558 1,403,744 1,110,522 847,369
Stockholders'
equity per
share .37 .31 .28 .22 .17
Working capital 1,723,823 1,449,848 1,297,738 1,025,431 751,287
Current Ratio 13.9:1 44.9:1 10.5:1 24.2:1 12.2:1
Equity to
total assets 93% 97% 91% 96% 90%
</TABLE>
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
<CAPTION>
SCHEDULE I - MARKETABLE SECURITIES AND OTHER INVESTMENTS
December 31, 1995 and 1994
Amount
Carried
Units or Market in the
Name and Issuer and Principal Value at Balance
Title of Issue Amount Cost Dec. 31, Sheet(1)
- ------------------------- ---------- -------- -------- --------
<S> <C> <C> <C> <C>
1995 Piper Jaffray;
Institutional Government
Income Portfolio $ 15,311 $171,069 $121,116 $121,116
1994 Piper Jaffray;
Institutional Government
Income Portfolio $ 13,118 $153,726 $ 98,120 $ 98,120
<FN>
(1) Included in the caption "Marketable Securities" in the balance sheet at
December 31, 1995 and 1994.
</TABLE>
<PAGE>
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS.
EARNINGS (LOSS) PER COMMON SHARE: Primary earnings (loss) per common
share are based on the weighted average number of shares outstanding
during the period after consideration of the diluted effect of stock
options and restricted stock awards. The primary weighted average number
of common shares outstanding was 5,433,174, 5,360,982, and 5,345,844 for
the years ended December 31, 1995, 1994, and 1993 respectively. Also,
fully diluted earnings per common share assume conversion of dilutive
securities when the result is dilutive.
EXHIBIT 24 - CONSENTS OF EXPERTS AND COUNSEL
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Electronic Systems
Technology, Inc.
415 N. Quay, Suite 4
Kennewick, Wa. 99336
We hereby consent to the use of our opinion, dated February 8, 1996 on
the financial statements of ELECTRONIC SYSTEMS TECHNOLOGY, INC. for the
year ended December 31, 1995 in the Form 10-KSB included herein.
ROBERT MOE & ASSOCIATES, P.S.
Spokane, Washington
February 26, 1996
<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 10KSB, FOR
DECEMBER 31, 1995.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,162,726
<SECURITIES> 121,117
<RECEIVABLES> 122,401
<ALLOWANCES> 1,284
<INVENTORY> 297,037
<CURRENT-ASSETS> 1,857,415
<PP&E> 300,747
<DEPRECIATION> 155,504
<TOTAL-ASSETS> 2,010,772
<CURRENT-LIABILITIES> 133,592
<BONDS> 0
<COMMON> 5,007
0
0
<OTHER-SE> 1,872,173
<TOTAL-LIABILITY-AND-EQUITY> 2,010,772
<SALES> 1,535,071
<TOTAL-REVENUES> 1,617,689
<CGS> 602,586
<TOTAL-COSTS> 602,586
<OTHER-EXPENSES> 559,143
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 404,137
<INCOME-TAX> 136,428
<INCOME-CONTINUING> 267,709
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 267,709
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
EXHIBIT 99.3-THE COMPANY'S FORM 8-K/A DATED FEBRUARY 9, 1996
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT (AMENDED)
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: February 9, 1996
ELECTRONIC SYSTEMS TECHNOLOGY INC.
(A Washington Corporation)
Commission File no. 2-92949-S
IRS Employer Identification no. 91-1238077
415 N. Quay St. #4
Kennewick WA 99336
(Address of principal executive offices)
Registrant's telephone number, including area code:(509) 735-9092
<PAGE>
ITEM 5. OTHER EVENTS
In preparation of year end financial statements, bad debt expense will
be incurred, and the Company's accounts receivable balance will be
reduced, in the amount of $57,204 for amounts owed to the Company by
Diversified Engineering, of Richmond, Virginia. Due to lack of payment
on the part of Diversified Engineering, it was considered necessary by
Management to reduce the Company's accounts receivable balance for
those amounts not paid by Diversified.
The Company's products, with a value of $57,204, were provided to
Diversified in the summer of 1995 for installation in a water treatment
plant project. To date the Company has not received any payments. The
Company has retained counsel, and is examining legal options to
expedite collection of the amounts owed to the Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
T.L. KIRCHNER
By: T.L. Kirchner
President
Date: MAR 15 1996
