UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: MAY 1, 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
On MAY 1, 1996, the Company mailed its Annual Report for 1995, and
information pertaining to the Company's June 7, 1996 Annual Shareholder
Meeting, to shareholders of record as of April 12, 1996.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS, AND
EXHIBITS.
Exhibit 22.4 - 1995 Annual Shareholder Report.
Exhibit 22.5 - Proxy
Exhibit 22.6 - Proxy Statement.
<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.
TOM L. KIRCHNER
By: T.L. Kirchner
President
Date: MAY 9, 1996
EXHIBIT 22.4 - 1995 ANNUAL SHAREHOLDERS REPORT
1995 ANNUAL REPORT
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
415 NORTH QUAY STREET
KENNEWICK, WA 99336
<PAGE>
DEAR SHAREHOLDER,
1995 was an exciting year at Electronic Systems Technology. We
launched the development of a new generation of products that will be
released by mid-year 1996, continued to implement our marketing
strategy targeted at the worldwide users of industrial controls,
maintained strong sales to our existing customers, as well as
partnering with new users of our wireless products in both the
commercial and federal markets. The result was an improvement from the
downturn experienced in 1994, and a record sales and revenue
performance, surpassing the previous performance benchmark of year
end 1993.
For the year ending December 31, 1995, EST reported ESTeem product
sales of $1,535,071 compared with $1,197,720 in 1994. Total EST gross
revenues for 1995 were $1,731,949 million as compared to 1994 gross
revenues of $1,340,380 million, an increase of 29%. The Company
reported a net before tax profit of $404,137, compared with net income
before tax in 1994 of $290,839. Net income after tax for 1995 was
$267,709, or $0.05 per share, as compared with net income after tax of
$185,940 or $0.04 per share, in 1994. The Company's net income
performance was hampered by the unfortunate occurrences of devaluation
of a mutual fund investment held by the Company, and the write off of
an account receivable for one of the Company's customers. For the
fifth straight year shareholder equity has increased. At year end
1995, shareholder equity was $0.37 per share, as compared with $0.31
per share in 1994, a 19% increase. Your Company remains very strong
financially, with $2,010,772 in current assets at year end 1995,
compared with $1,597,612 in 1994, cash and short-term investments of
$1.1 million, and without any long-term debt.
Our increased sales revenues for 1995 were a result of increases in
domestic commercial sales, mainly to users of industrial controls, as
well as a return of strong Federal Government sales, a downturn in
which had impacted sales performance in 1994. We are constantly
striving to increase the success of our ESTeem products in new and
existing applications. We are hopeful that the release of our new
generation of ESTeem products this year will reinforce our long
standing position as a leader in innovative communications hardware.
In the interest of our Shareholders, our main goal has been to list the
Company on a major stock exchange to facilitate increased marketability
of EST stock. As stated in previous letters, the Pacific Stock
Exchange (PSE) has been a prime candidate for listing. In 1995, the
PSE changed their listing requirements as shown in Table 1. The major
impact on the Company was changing of the bid price requirement of the
stock from $1.00 to $3.00 per share and the net tangible asset
requirement from $1,500,00 to $2,000,000. Management and the Board of
Directors are taking these changes into consideration in determining
the next course of action to meet these new requirements. In the first
quarter of 1996, the Company announced a plan to repurchase amounts of
its common stock from time to time through purchases on the open
market. It has been our belief that the market value of the Company's
stock has been under valued for some time. Through this stock
repurchase program it is hoped that confidence in the Company's stock
will be improved, and that the shareholders of the Company will be able
to reap the ultimate benefits. It is Management's opinion that
resources allocated for
<PAGE>
accomplishment of the Plan can be expended without detrimental effect
to the Company's research and development, marketing or operations
requirements.
<TABLE>
PACIFIC STOCK EXCHANGE ELECTRONIC
LISTING REQUIREMENTS SYSTEMS
TECHNOLOGY
(selected financial data)
<CAPTION>
CATEGORY LISTING REQUIREMENTS
LATE EARLY 1995 1994
1995 1995 YEAR END YEAR END
<S> <C> <C> <C> <C>
NET TANGIBLE ASSETS $2,000,000 $1,500,000 $1,877,180 $1,598,000
AFTER TAX INCOME $ 100,000 $ 100,000 $ 267,709 $ 186,000
PUBLIC FLOAT(Shares) 500,000 750,000 4,415,979 4,415,979
MARKET VALUE
OF FLOAT $1,500,000 $2,250,000 $2,009,000 $1,589,752
BID PRICE $ 3.00 $ 1.00 $ .41-.50 $ .31-.44
Shareholders 500 750 >770 >770
OPERATING HISTORY 3 YEARS 3 YEARS 11 YEARS 10 YEARS
</TABLE>
A final reminder for our shareholders, all of EST's filing data to the
Security Exchange Commission (SEC) is available from the SEC
information archive on the Internet (http://www.sec.gov).
Additionally, EST has it's Internet web site operational,
(http://www.esteem.com), containing technical and sales information for
our existing and potential customers. We have been pleased with the
response to our web site, as it continues to develop more sales,
technical and shareholder related information will be included.
I speak for the entire Company in expressing our gratitude to our
shareholders and customers for their lasting and continued support, as
we strive to expand upon the strong foundations we have created in
world of wireless communications.
T.L. KIRCHNER
T.L. Kirchner
President
<PAGE>
COMPANY PROFILE
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 (TM) 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
<PAGE>
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 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
The Company's VHF radio modem products operate 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 Model 95 ESTeem has the same features as the Model 85
with the additional technical enhancements of software frequency
agility, software selectable receiver sensitivity, and received signal
strength option. The major markets for these products are in
industrial control, SCADA, and inventory control in the commercial
arena, and inventory and command control for Federal applications.
<PAGE>
The Company's UHF radio modem products operate 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, which 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 Federal and commercial bands of the UHF RF
spectrum. 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. The major markets for these
products are in industrial control, SCADA, and inventory control in the
commercial arena, and inventory and command control for Federal
applications.
The Company's Specialty Modem Products are 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 VHF radio modem, without 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 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.
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.
PRODUCTS FOR THE FUTURE
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. The
Company has under development a new generation of ESTeem products
scheduled for release in the second quarter of 1996.
<PAGE>
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 which are targeted for applications within the Industrial
Control and Federal markets. The Company's strategy for the future
calls for continued product development and improvement of existing
products. The goal of the new products is to penetrate both existing
and new market applications to encourage sales growth for the Company's
products and to maintain the Company's status as a leader in innovative
wireless communications solutions.
MARKETING STRATEGY
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".
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 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. The Company's sales to Government
entities is administered through the Company's General Services
Administration (GSA) contract, and separate project contracts
administered by both the UNISYS and Intermec Corporations, all of
which are fixed price, indefinite quantity and delivery agreements.
The Company's competition varies according to the market or submarket
of the communications industry in which its products are established or
are entering. Due to the broad number of applications in which the
Company's products perform, there is also a resulting broad number of
competition in the electronics and communications industry. All of the
markets in which the Company's products are sold are highly
competitive. Management believes the ESTeem products compete favorably
in these markets 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.
MARKET INFORMATION FOR THE COMPANY'S COMMON STOCK
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.
<PAGE>
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.
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS 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 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
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
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.
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
<PAGE>
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 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
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 recordd 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.
<PAGE>
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 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
<PAGE>
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.
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.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1995
INDEX TO FINANCIAL STATEMENTS
PAGE
ACCOUNTANTS' REPORT ON THE FINANCIAL STATEMENTS 14
BALANCE SHEETS 15 - 16
STATEMENT OF OPERATIONS 17
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 18
STATEMENT OF CASH FLOWS 19 - 20
NOTES TO FINANCIAL STATEMENTS 21 - 28
SELECTED FINANCIAL DATA 29
SCHEDULE I - MARKETABLE SECURITIES AND OTHER INVESTMENTS 30
<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
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
<TABLE>
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 securites 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>
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
<CAPTION>
BALANCE SHEETS
December 31, 1995 and 1994
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
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement
<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
--------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<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
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement
<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>
<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)
-------- ------- --------
</TABLE>
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
<CAPTION>
STATEMENT OF CASH FLOWS
for the twelve months ended December 31, 1995, 1994 and 1993
(Continued)
<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
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
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
-------- -------- --------
$ 97,037 $ 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.
PATENT COSTS: Expenses incurred in connection with the patent
have been capitalized and are being amortized over 17 years.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
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.
The provision for Federal Income Taxes consisted of:
1995 1994 1993
------- ------- -------
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
======= ======= =======
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
2 - FEDERAL INCOME TAXES (continued)
The components of the net deferred tax (asset) liability at
December 31, were as follows:
1995 1994 1993
------- ------ -------
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
======== ======= =======
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
------- -------- --------
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
======= ======= =======
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.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
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-
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%
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
6 - FOREIGN SALES (continued)
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
=======
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
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 175,000
Granted during year 0
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
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
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.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
11 - RELATED PARTY TRANSACTIONS (continued)
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.
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
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
12 - MARKETABLE SECURITIES (continued)
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 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.
<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>
CORPORATE DIRECTORY
DIRECTORS
Tommy L. Kirchner
President
Chief Executive Officer
Electronic Systems Technology Inc.
Robert Southworth
Patent Attorney
U.S. Department of Energy
Melvin H. Brown
President
Chief Executive Officer
Manufacturing Services, Inc.
Arthur Leighton
Retired President
Chief Executive Officer
Kraft Systems Inc.
John H. Rector
Retired President
Chief Executive Officer
Western Sintering Company Inc.
John L. Schooley
President
Chief Executive Officer
President of Remtron, Inc.
EXECUTIVE OFFICERS
T. L. Kirchner
President
Chief Executive Officer
Robert Southworth
Secretary
CORPORATE HEADQUARTERS
Electronic Systems Technology, Inc.
415 N. Quay Street
Kennewick, Washington 99336
(509) 735-9092
(509) 783-5475 (Facsimile)
INDEPENDENT AUDITORS
Robert Moe and Associates
305 IBM Building
West 201 North River Drive
Spokane, Washington 99201
<PAGE>
TRANSFER AGENT
TranSecurities International
East 12525 Mission Avenue
Spokane, Washington 99216
The Transfer Agent should be contacted for questions regarding changes
in address, name, or ownership, lost certificates, and consolidation
of account. When corresponding with the Transfer Agent, shareholders
should state the exact name(s) in which the stock is registered and
certificate number of the certificate(s).
FORM 10-K
A copy of the Company's Form 10-KSB, as filed with the Securities and
Exchange Commission , is available upon request.
CORPORATE AND INVESTOR INFORMATION
Please direct inquiries to:
Investor Relations Department
Electronic Systems Technology, Inc.
415 N. Quay Street
Kennewick, Washington 99336
ANNUAL MEETING
The annual meeting of stockholders of Electronic Systems Technology,
Inc. will be held at 3:00 p.m. on June 7, 1995, at:
Cavanaugh's Motor Inn
1101 N. Columbia Center Blvd.
Kennewick, Washington 99336
All stockholders are encouraged to attend.
EXHIBIT 22.5 - PROXY
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
(509) 735-9092 415 N. QUAY STREET KENNEWICK, WASHINGTON 99336
P The undersigned hereby revokes all previous proxies for his stock and
R appoints T.L. Kirchner, with power of substitution, to represent and
O to vote on behalf of the undersigned all of the shares of Electronic
X Systems Technology, Inc. which the undersigned is entitled to vote at
Y the Annual Meeting of the shareholders to be held at Cavanaugh's
Motor Inn at Columbia Center, Kennewick, Washington on June 7, 1996
at 3:00 p.m. PDT, including any adjournments thereof.
1. Election of Directors
Tom L. Kirchner
For__________ Against__________ Abstain__________
John H. Rector
For__________ Against__________ Abstain__________
TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THAT
NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.
_______________________________________________________________________
_______________________________________________________________________
2. To ratify Robert Moe & Associates, P.S. as independent auditors of
the Corporation for the fiscal year ending December 31, 1996.
For__________ Against__________ Abstain__________
3. To ratify and approve the issuance of Stock Option Bonuses to
certain officers, directors and employees.
For__________ Against__________ Abstain__________
4. To ratify and approve adoption of the 1996 Stock Option Plan.
For__________ Against__________ Abstain__________
5. In his discretion the proxy is hereby authorized to vote upon such
other matters as may properly come before the meeting.
For__________ Against__________ Abstain__________
(To be signed on the other side.)
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. WHEN
PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1, 2, 3, 4 AND 5.
Please sign exactly as your name appears on the proxy. When shares are
held by joint tenants, both should sign. When signing as attorney, as
executor, administrator, trustee, or guardian, please give title as
such. If a corporation, please sign in corporate name by President or
other authorized officer. If a partnership, please sign in partnership
name by authorized person.
__________________________________________
Signature
__________________________________________
Signature if held jointly
Date:_______________________
Please return this proxy in the envelope provided.
I will __________ or will not __________ attend the meeting.
(Over)
<PAGE>
APPENDIX:
Item no. 1: (graphic material not included in electronic filing format)
The above proxy was mailed to shareholders on two-sided, heavy stock,
measuring 8.5 x 3.25 inches.
EXHIBIT 22.6 - PROXY STATEMENT
NOTICE OF ANNUAL MEETING
JUNE 7, 1996
To The Stockholders of Electronic Systems Technology, Inc.:
The Annual Meeting of Stockholders of Electronic Systems Technology,
Inc. (EST), a Washington Corporation, will be held at Cavanaugh's Motor
Inn at Columbia Center, Kennewick, Washington on Friday, June 7, 1996 at
3:00 p.m. PDT for the following purposes:
1. To re-elect certain members of the Board of Directors
2. To ratify the selection of the independent auditors of the Corporation
3. To ratify and approve Stock Option Bonuses
4. To ratify and approve the adoption of the 1996 Stock Option Plan
5. To transact such other business as may properly come before the
meeting or any adjournments thereof.
Stockholders of record at the close of business on April 12, 1996 are
entitled to notice of and to vote at the meeting.
By order of the Board of Directors,
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
T.L. KIRCHNER
T.L. Kirchner, President
April 29, 1996 / Approximate Date of mailing to Stockholders
IMPORTANT: Whether or not you plan to attend the meeting, please execute
and return the enclosed proxy. A return envelope is enclosed for your
convenience. Prompt return of the proxy will assure a quorum and save the
Company unnecessary expense. At least ten (10) days before the meeting of
stockholders, a complete record of the stockholders of the Company entitled
to vote at such meeting, or any adjournment thereof, will be on file at the
place of business of the Company at 415 N. Quay St., Kennewick, Washington
99336, and shall be produced and kept open at the time and place of the
meeting. During all times referred to above, the records shall be subject
to the inspection of any shareholder for the purposes of the meeting.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
415 N. QUAY STREET
KENNEWICK, WASHINGTON 99336
(509) 735-9092
PROXY STATEMENT
RELATING TO
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 7, 1996
INTRODUCTION
This Proxy Statement is being furnished by the Board of Directors of
Electronic Systems Technology, Inc. a Washington corporation (the
"Corporation"), to holders of shares of the Corporation's Common Stock
("Common Stock") in connection with the solicitation by the Board of
Directors of proxies to be voted at the Annual Meeting of Shareholders of
the Corporation to be held on Friday, June 7, 1996 and any adjournment or
adjournments thereof (the "Annual Meeting") for the purposes set forth in
the accompanying Notice of the Annual Meeting. This Proxy Statement is
first being mailed to shareholders on or about April 29, 1996. The Annual
Report of the Company for the year ending December 31, 1995 was mailed to
stockholders prior to the mailing of this Proxy Statement. Such Annual
Report does not form any part of the material for solicitation of proxies.
PURPOSES OF ANNUAL MEETING
ELECTION OF DIRECTORS
At the Annual Meeting, shareholders entitled to vote (see "Voting at
Annual Meeting") will be asked to consider and take action on the
election of two directors to the Corporation's Board of Directors to
serve for a three year term. See "Election of Directors."
RATIFICATION OF AUDITORS
At the Annual Meeting, shareholders will be asked to ratify the selection
of Robert Moe & Associates, P.S. as independent auditors of the Corporation
for the fiscal year ending December 31, 1996. See "Approval of Auditors."
RATIFICATION OF STOCK OPTION BONUSES
At the Annual Meeting, shareholders will be asked to ratify certain Stock
Option Bonuses approved by the Board of Directors on February 9, 1996 to
certain officers, directors, and employees. See "To ratify and approve the
Issuance of Stock Option Bonuses to certain officers, directors, and
employees."
RATIFICATION OF ADOPTION OF THE 1996 STOCK OPTION PLAN
At the Annual Meeting, shareholders will be asked to ratify the Stock
Option Plan, approved by the Board of Directors on April 12, 1996 to be
administered by the Board of Directors as outlined in the Plan. See "To
ratify and approve adoption of the 1996 Stock Option Plan."
OTHER BUSINESS
To transact other matters as may properly come before the annual meeting or
any adjournment or adjournments thereof.
<PAGE>
VOTING AT ANNUAL MEETING
GENERAL
The close of business on the Date of April 12, 1996 has been fixed as the
record date for determination of the shareholders entitled to notice of,
and to vote at, the Annual Meeting (the "Record Date"). As of the Record
Date, there were issued and outstanding 5,006,667 shares of Common Stock
entitled to vote. A majority of such shares will constitute a quorum for
the transaction of business at the Annual Meeting. The holders of record
on the Record Date of the shares entitled to be voted at the Annual Meeting
are entitled to cast one vote per share on each matter submitted to a vote
at the Annual Meeting. All action proposed herein may be taken upon a
favorable vote of the holders of a majority of such shares of Common Stock
represented at the Annual Meeting provided a quorum is present at the
meeting in person or by proxy.
PROXIES
Shares of Common Stock which are entitled to be voted at the Annual
Meeting and which are represented by properly executed proxies will be
voted in accordance with the instructions indicated in such proxies. If no
instructions are indicated, such shares will be voted: (1) FOR
election of two individuals to the Corporation's Board of Directors, (2)
FOR the ratification of the selection of independent auditors; (3) FOR the
ratification and approval of the issuance of Stock Option Bonuses to
certain officers, directors, and employees; (4) FOR the ratification and
approval of the Stock Option Plan; and (5) AT the discretion of the proxy
holder, any other matters which may properly come before the Annual
Meeting. A shareholder who has executed and returned a proxy may revoke it
at any time before it is voted at the Annual Meeting by executing and
returning a proxy bearing a later date, by giving written notice of
revocation to the Secretary of the Corporation, or by attending the Annual
Meeting and voting in person. A proxy is not revoked by the death or
incompetence of the maker unless, before the authority granted thereunder
is exercised, written notice of such death or incompetence is received by
the Corporation from the executor or administrator of the estate or from a
fiduciary having control of the shares represented by such proxy.
The indication of an abstention on a proxy or the failure to vote either by
proxy or in person will be treated as neither a vote "for" nor "against"
the election of any director. Each of the other matters must be approved
by the affirmative vote of a majority of shares present in person or
represented by proxy at the meeting and entitled to vote. Abstention from
voting will have the practical effect of voting against these matters since
it is one less vote for approval. Broker non-votes, shares held by brokers
or nominees for the accounts of others as to which voting instructions have
not been given, will be treated as shares that are present for determining
a quorum, but will not be counted for purposes of determining the number of
votes cast with respect to a proposal. Brokers and nominees, under
applicable law, may vote shares for which no instructions have been given
in their discretion in the election of directors.
The Corporation will bear all the costs and expenses relating to the
solicitation of proxies, including the costs of preparing, printing and
mailing this Proxy Statement and accompanying material to shareholders.
In addition to the solicitation of proxies by use of the mails, the
directors, officers, and employees of the Corporation, without additional
compensation, may solicit proxies personally or by telephone or telegram.
<PAGE>
1. ELECTION OF DIRECTORS
It is intended that the proxies solicited hereby will be voted for
election of the nominee for director listed below, unless authority to do
so has been withheld. The Board of Directors knows of no reason why its
nominees will be unable to accept election. However, if any nominee
becomes unable to accept election, the Board will either reduce the number
of directors to be elected or select substitute nominees. If substitute
nominees are selected, proxies will be voted in favor of such nominees.
The Board of Directors is divided into three classes, with the terms of
office of each class ending in successive years. The terms of directors of
Class II expire with the 1998 Annual Meeting, the terms of directors of
Class III expire with the 1996 Annual Meeting and the terms of directors of
Class I expire with the 1997 Annual Meeting.
NOMINEES
The nominees for Class III directors whose terms, if elected, will expire
in 1999 and certain additional information with respect to each of them is
as follows:
NOMINEE'S NAME, POSITION WITH THE COMPANY, PRINCIPAL OCCUPATION(S), OTHER
DIRECTORSHIPS, AGE, AND OWNERSHIP:
CLASS III - THREE YEAR TERM EXPIRING JUNE 1996
T.L. KIRCHNER: Mr. Kirchner is founder, President and a Director of the
Corporation. During the last five years Mr. Kirchner devoted 100% of his
time to the Management of the Corporation. His primary duties are to
oversee the Management and Marketing functions of the Corporation. Mr.
Kirchner does not serve as a director for any company registered under the
Securities Act.
Age: 47
Shares Beneficially Owned*: 403,488
Percent of Class: 8.1
A Director Since: 1985
* Shares beneficially owned do not include 75,000 shares subject to the
options granted 12-10-93, 2-3-95, and 2-9-96.
JOHN H. RECTOR: Mr. Rector is a Director of the Company. Mr. Rector
founded Western Sintering, Inc., located in Richland, Washington.
Western Sintering, Inc., a powdered metal parts manufacturer, is an
Original Equipment Manufacturer (OEM) for Fortune 500 companies
nationwide. Mr. Rector recently retired as president of Western
Sintering, Inc., but is still acting in an advisory position to the
officers and directors of Western Sintering, Inc. Mr. Rector does not
serve as a director of any company which is registered under the
Securities Act.
Age: 79
Shares Beneficially Owned: 3,000
Percent of Class: 0.1
A Director Since: 1992
MANAGEMENT RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE NOMINEES TO
THE BOARD OF DIRECTORS OF THE COMPANY
<PAGE>
2. RATIFICATION OF AUDITORS
Robert Moe & Associates, P.S., independent public accountants, have again
been selected by the Board of Directors as the independent auditors for the
Corporation for the fiscal year ending December 31, 1996, subject to
approval by the shareholders. Robert Moe & Associates, P. S. has served as
an independent auditor for the Corporation since the fiscal year ended
December 31, 1984. This firm is experienced in the field of accounting and
is well qualified to act in the capacity of auditors. Robert Moe &
Associates, P.S., will not be represented at the annual meeting, but
questions from shareholders will be presented to the auditors for
response.
MANAGEMENT RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" ITEM 2
3. RATIFY AND APPROVE THE ISSUANCE OF STOCK OPTION BONUSES TO CERTAIN
OFFICERS, DIRECTORS, AND EMPLOYEES
The shareholders will be presented at the Annual Meeting with a proposal to
approve and ratify the Corporation's issuance of Stock Option Bonuses (the
"Bonus"). The Bonus was approved by the Board of Directors on February 9,
1996.
At a regular meeting of Board of Directors, held on February 9, 1996, the
Board of Directors authorized Stock Option Bonuses to certain officers,
directors, and employees of the Corporation.
The Board of Directors believes the Corporation's long-term progress is
dependent upon the quality and continuity of Management. The purpose of
the Stock Option Bonus is to aid the Corporation in retaining qualified and
competent employees, directors, and officers. The Board believes the Stock
Option Bonus constitutes an important incentive to directors, employees,
and officers of the Corporation. The essential features of the Stock
Option Bonus are summarized below, but such summary is qualified in its
entirety by the full text of each Stock Option Grant. A total of 200,000
shares of the Corporation's Common Stock will be available for issuance
upon the exercise of the Stock Options granted under the Stock Option
Bonus.
The total number of shares available under the Bonus, the number of
shares subject to outstanding options and the exercise price per share of
Options will be subject to the adjustment upon the occurrence of stock
dividends, stock splits, mergers, consolidations, recapitalization,
combinations or exchanges or stock, or other similar circumstances.
The fair market value of the Corporation's Common Stock on February 9,
1996, as determined by the mean of the Bid and Ask price as reported by
the National Quotation Bureau from several Bulletin Board Makers in the
over-the-counter market, was $0.42 per share. The maximum number of
shares which may be offered upon exercise of Options under the Bonus
constitutes approximately 4% of the Common Stock outstanding on the
record date.
<PAGE>
ELIGIBLE INDIVIDUALS
The Board of Directors authorized and granted Stock Option Bonuses to the
following employees, officers, and directors (without consideration) in
accordance with the conditions delineated below:
NAME STATUS OPTION SHARES
---- ------ -------------
David B. Strecker Employee 25,000
Eric P. Marske Employee 25,000
Jon A. Correio Employee 25,000
Alan B. Cook Employee 25,000
Melvin Brown Director 25,000
Tom Kirchner Director 25,000
Arthur Leighton Director 25,000
Robert Southworth Director 25,000
None of the individuals listed above have exercised any option.
SUMMARY OF OPTIONS
1. To be eligible for a stock option bonus, an employee or a director
must have no less than three years of continuous tenure as of
February 9, 1996.
2. Each option grant will be at an exercise price per share equal to
market price at the time of the grant, i.e. February 9, 1996.
Market price will be the mean of bid and ask prices recorded on the
National Daily Quotation Service "pink sheet" on the effective date
of the option grant. If no activity is reported for that date the
"pink sheet" with closest preceding date with recorded activity
will establish market price.
3. Each grant must be exercised by the optionee not later than three
years (1095 days) from the date of the grant, February 9, 1996.
4. Options must be exercised in minimum blocks of 5,000 shares at any
one time. Options not exercised within the three year (1095 days)
period from option grant will terminate.
5. The Options and underlying Common Stock are subject to Registration
Rights of the recipients of the Options.
EFFECT ON THE CORPORATION
The exercise of an Option under the Bonus Arrangement may result in the
reduction in the per share book value of the outstanding Common Stock if
the book value of the stock at the time of exercise exceeds the exercise
price.
FEDERAL INCOME TAX CONSEQUENCES
The principal tax consequences of the grant and exercise of the Bonus or
what is technically known as Nonqualified Stock Options under current
provisions of the Federal income tax laws, can be summarized as follows:
The grant of the Bonus does not produce taxable income to the recipient
or a tax deduction to the Corporation, except as described below. Upon
<PAGE>
exercise of an Option, the excess of the fair market value of the shares
acquired over the amount paid by the recipient will be taxable to the
recipient as ordinary income.
If the optionee is an officer, director or more than 10% beneficial owner
of the Corporation's Common Stock, no income will be recognized by such
optionee at the time the Bonus is exercised. Instead such recipient will
recognize ordinary income six months after the date of exercise in an
amount equal to the fair market value on the stock at that time less the
amount paid by the recipient. Alternatively, if an election is made
pursuant to Section 83(b) of the Internal Revenue Code within 30 days of
the exercise of the bonus, such a recipient will recognize ordinary income
as of the time of the exercise of the Option in the same manner as other
recipients.
In connection with the exercise of a Stock Option, the Corporation will
be entitled to a deduction for income tax purposes in an amount equal to
the ordinary income taxable to the recipient. The deduction will be
available to the Corporation in the year in which such ordinary income is
recognized. Any additional profit or loss realized by a recipient or
disposition of the shares will not result in any additional tax deduction
to the Corporation.
The Corporation previously granted stock options, which to date remain
unexpired, on December 10, 1993, and on February 3, 1995. A total of
325,000 shares of the Corporation's Common Stock remain available for
issuance upon the exercise of the Stock Options granted on these previous
two dates.
MANAGEMENT RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" ITEM 3
4. RATIFY AND APPROVE ADOPTION OF THE 1996 STOCK OPTION PLAN
GENERAL
At the meeting, there will be presented to the shareholders a proposal
to approve and ratify the adoption by the Board of Directors of a 1996
Stock Option Plan (the "1996 Stock Plan"). The 1996 Stock Plan was
adopted by the Board of Directors on April 12, 1996, subject to
shareholder approval. The 1996 Stock Option Plan provides for the
issuance of Stock Options. Options granted under the 1996 Stock Option
Plan are Nonstatutory Stock Options.
The Board of Directors recommends the adoption of the proposed 1996
Stock Option Plan (the "Plan"). The purpose of the Plan is to promote
the interests of the Company and its stockholders by strengthening the
Company's ability to attract and retain experienced and knowledgeable
officers, directors, and employees, and to encourage them to acquire an
increased proprietary interest in the Company.
The text of the proposed Plan is published in this proxy statement as
Exhibit #1. The following is a summary of the Plan and should be read
together with the full Plan text.
ADMINISTRATION. The Plan would be administered by the Compensation
Committee of the Board of Directors (the "Committee"). The Committee
has full power to select, from among the persons eligible for awards,
the individuals to whom awards will be granted, the number of shares of
stock subject to each option, the dates on which the options will be
<PAGE>
granted, to make any combination of awards to any participant and to
determine the specific terms of each award, subject to the provisions
of the 1996 Stock Plan. The interpretation and construction of any
provision of the 1996 Stock Plan by the administration shall be final
and conclusive. The benefits or amounts that will be received by or
allocated to eligible individuals are undetermined as of the date
herein.
SHARES RESERVED FOR ISSUANCE. The Plan authorized the granting of
nonqualified stock options. The total number of shares which may be
granted under the Plan will not exceed 1,000,000 shares of Common
Stock, subject to stock splits and similar events. Options that are
forfeited or terminated will again be available for grant. Shares may
be authorized but unissued, currently held or reacquired shares.
OPTION PRICE. The Plan provides that the option price per share for
nonqualified stock options will be the market price at time of grant.
Market price is defined as the mean of bid and ask prices recorded on the
National Daily Quotation Service "pink sheet" for the effective date of the
option grant. If no activity is reported for that date the "pink sheet"
with the closest preceding date with recorded activity will establish the
market price. The Plan also provides that each stock option shall expire
no later that 3 years following the grant of the option.
MINIMUM EXERCISE REQUIREMENT. The Plan provides that options must be
exercised in minimum blocks of 5,000 shares at any one time. In the
event of termination of employment or board membership, the optionee
shall have a period of ninety days in which to exercise any options.
MEANS OF EXERCISE. Payment of the option exercise price may be in cash
or check payable to the Company.
TERMINATION. The Plan continues in effect until terminated by the
Board or by stockholders, but such termination will not affect the
terms of any options outstanding at that time. The Board may amend,
terminate or suspend the Plan at any time, provided that no amendment
regarding amount, price or timing of the grants may be made other than
to comport with changes in certain requirements of the Securities Act
of 1933 and/or the Securities Exchange Act and Internal Revenue Code
requirements. Amendments that would materially increase the number of
shares that may be issued, materially modify the requirements as to
eligibility for Plan participants, or materially increase the benefits
to Plan participants must be approved by the stockholders.
NONTRANSFERABILITY. Options granted pursuant to the 1996 Stock Plan
are nontransferable by the participant, other than by will or by the laws
of descent and distribution or a Qualified Domestic Relations
Order, and may be exercised during the lifetime of the participant,
only by the participant.
ADJUSTMENT UPON CHANGES IN CAPITALIZATION. Subject to any required
action by the shareholders of the Company, in the event any change,
such as a stock split or dividend, is made in the Company's
capitalization which results in an increase or decrease in the number
of issued shares of Common Stock without receipt of consideration by
the Company, an appropriate adjustment shall be made in the number of
shares that have been reserved for issuance under the 1996 Stock Plan
(including shares subject to an option or right) and the price per
share covered by each outstanding Stock Option. In the event of the
<PAGE>
proposed dissolution or liquidation of the Company, all outstanding
Stock Options will terminate immediately prior to the consummation of
such proposed action. However, the Board of Directors may, in its
discretion, make provisions for accelerating the exercisability of
shares subject to Stock Options under the 1996 Stock Plan in such
event.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a brief summary of the federal income tax consequences
of transactions under the 1996 Stock Plan based on federal securities
and income tax laws in effect on April 1, 1996. This summary is not
intended to be exhaustive and does not discuss the tax consequences of
a participant's death or provisions of the income tax laws of any
municipality, state or foreign country in which an optionee may reside.
NONSTATUTORY STOCK OPTIONS. Except as noted below, with respect to
Nonstatutory Options, (i) no income is recognized by the optionee at
the time the option is granted; (ii) generally, at exercise, ordinary
income is recognized by the optionee in an amount equal to the
difference between the option exercise price paid for the shares and
the fair market value of the shares on the date of exercise, and the
Company is entitled to a tax deduction in the same amount; and (iii) at
disposition, any gain or loss is treated as capital gain or loss. The
optionee's holding period for long-term capital gain purposes commences
as of the date he or she recognizes ordinary income with respect to an
option exercise. Upon resale of such shares by the optionee any
difference between the sale price and the exercise price, to the extent
not recognized as ordinary income as provided above, will be treated as
capital gain or loss, and will qualify for long-term capital gain or
loss treatment of the shares have been held for more than one year. In
the case of an optionee who is also an employee, any income recognized
upon exercise of a Nonstatutory Stock Option will constitute wages for
which withholding will be required. However, different rules may apply
to restricted stock is purchased or if shares are purchased by an
optionee who is also an officer, director or more than 10% shareholder.
See discussion below of "Special Rules Applicable to Corporate Insiders
and Restricted Stock Purchases."
CAPITAL GAINS. Generally, under law in effect as of April 1, 1996, net
capital gain (net long-term capital gain minus net short-term capital loss)
is taxed at a maximum rate of 28%. Capital losses are allowed in full
against capital gains plus up to $3,000 of other income.
SPECIAL RULES APPLICABLE TO CORPORATE INSIDERS AND RESTRICTED STOCK
PURCHASES. Generally, individuals subject to Section 16(b) of the
Exchange Act ("Insiders") and individuals who purchase stock may have
their recognition of compensation income and the beginning of their
capital gains holding period deferred for up to six months after option
exercise (for Insiders), or until the restriction lapse (for restricted
stock purchases)(the "Deferral Date"), with the excess of the fair
market value of the stock determined as of the Deferral Date over the
purchase price being taxed as ordinary income, and the tax holding
period for any subsequent gain or loss beginning on the Deferral Date.
However, an Insider or restricted stock purchaser who so elects under
Code Section 83(b) on a timely basis may instead be taxed on the
difference between the excess of the fair market value on the date of
transfer over the purchase price, with the tax holding period beginning
on such date.
<PAGE>
EFFECT ON THE CORPORATION The exercise of an Option under the above
described Stock Bonus Arrangements, as may be granted by the Committee
under the plan, may result in the reduction in the per share book value of
the outstanding Common Stock if the book value of the stock at the time of
exercise exceeds the exercise price.
The affirmative vote of the holders of record of a majority of shares
of common stock present in person or represented by proxy and entitled
to vote at the meeting is necessary to adopt the Plan.
MANAGEMENT RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" ITEM 4.
5. OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors is not
aware of any matters that will be presented for action at the Annual
Meeting other than those described above. Should other business properly
be brought before the Annual Meeting, it is intended that the
accompanying Proxy will be voted thereon in the discretion of the persons
named as proxies.
MEMBERS OF BOARD OF DIRECTORS CONTINUING IN OFFICE:
CLASS I - THREE YEAR TERM EXPIRING JUNE 1997
MELVIN H. BROWN: Mr. Brown is a Director of the Corporation. In his
primary occupation he is the president and founder of Manufacturing
Services, Inc. Manufacturing Services is a full service Company
providing 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 manufacturing and quality control testing
services for Electronic Systems Technology, Inc. EST purchased
approximately $52,000 of these services from Manufacturing Services
during 1995. (See Related Party Transactions below.) Mr. Brown does not
serve as a director of any company which is registered under the
Securities Act.
Age: 65
Shares Beneficially Owned*: 76,500
Percent of Class: 1.5
A Director Since: 1985
* Shares beneficially owned do not include 75,000 shares subject to the
options granted 12-10-93, 2-3-95, and 2-9-96.
<PAGE>
ARTHUR LEIGHTON: Mr. Leighton is a Director of the Corporation. In his
primary occupation he has held senior management positions throughout his
professional career. Until his retirement in 1986, he was president of
Kraft Systems of Vista, California. During his presidency, Kraft Systems
was engaged in the research, development, production and marketing of
industrial control products and radio control equipment. Mr. Leighton does
not serve as a director of any company which is registered under the
Securities Act.
Age: 72
Shares Beneficially Owned*: 59,000
Percent of Class: 1.2
A Director Since: 1985
* Shares beneficially owned do not include 75,000 shares subject to the
options granted 12-10-93, 2-3-95, and 2-9-96
ROBERT SOUTHWORTH: Mr. Southworth is a Director of the Corporation. In
his primary occupation he is a Senior Patent Attorney with the United
States Department of Energy in Richland, Washington, and is responsible,
among other duties, for preparing and prosecuting domestic and foreign
patent applications in such fields as nuclear reactors, fuel reprocessing,
waste management and energy fields of solar, wind, and fossil fuels. Mr.
Southworth received a degree in Chemical and Petroleum Refining Engineering
from the Colorado School of Mines in 1968, a Masters of Business
Administration from the University of Colorado in 1973, and a Law Degree
from the University of Denver in 1976. Mr. Southworth has not been engaged
in any legal matters concerning the Company. Mr. Southworth does not serve
as a director for any company registered under the Securities Act.
Age: 52
Shares Beneficially Owned*: 4,000
Percent of Class: 0.1
A Director Since: 1985
* Shares beneficially owned do not include 75,000 shares subject to the
options granted 12-10-93, 2-3-95, and 2-9-96.
CLASS II - THREE YEAR TERM EXPIRING JUNE 1998
JOHN L. SCHOOLEY: Mr. Schooley is a Director of the Corporation. In his
primary occupation he is the president and founder of Remtron, Inc.
Remtron, located in Escondido, California, is a manufacturer of advance
radio control and telemetry systems for the industrial market. Prior to
founding Remtron, Mr. Schooley was Vice President of Engineering for Kraft
Systems. Mr. Schooley holds a Bachelor of Science Degree in Electrical
Engineering and served as a Captain in the U.S. Air Force from 1961 to
1968. During 1994, EST purchased research and development services of
$42,000 from Remtron. In 1995, the Company contracted services of this
nature with an independent third party, unaffiliated with the Company.
(See Related Party Transactions below.) Mr. Schooley does not serve as a
director of any company which is registered under the Securities Act.
Age: 56
Shares Beneficially Owned: 10,000
Percent of Class: 0.2
A Director Since: 1993
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of March 1, 1996, amount and
percentage of the Common Stock of the Company, which according to
information supplied by the Company, is beneficially owned by management,
including officers and directors of the Company.
TITLE NAME AMOUNT & NATURE PERCENT
OF OF OF OF
CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- - ----- ---------------- -------------------- -----
Common T.L. Kirchner 403,488 * 8.1%
(Officer & Director)
Common Robert Southworth 4,000 * 0.1%
(Officer & Director)
Common Melvin H. Brown 76,500 * 1.5%
(Director)
Common Arthur Leighton 59,000 * 1.2%
(Director)
Common John H. Rector 3,000 0.1%
(Director)
Common John L. Schooley 10,000 0.2%
(Director)
* Shares beneficially owned do not include shares subject to the
options granted 12-10-93, 2-3-95 and 2-9-96.
REMUNERATION OF EXECUTIVE OFFICERS
(A) NAMED EXECUTIVE OFFICERS
The Corporation's named executive officers are: T.L. Kirchner, President
and CEO.
The Registrant's four most highly compensated executive officers other
than the CEO who served as executive officers as of December 31, 1995
are:
None
<PAGE>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Options All
Name and Other Restr- Under- Other
Principal Annual icted lying LTIP Compen-
Position Year Salary Bonus Compen- Stock SARs Payouts sation
sation Awards
($) ($)(1) ($)(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 on
12/10/93.
<PAGE>
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:
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").
The Company currently does not hold any Employment Contracts nor Change
of Control Arrangements with any parties.
STOCK OPTION BONUSES
On February 9, 1996, the Company's Board of Directors approved Stock
Option Bonuses for Directors and Employees with no less than three years
continuous tenure as of February 9, 1996. These options expire three (3)
years from February 9, 1996 or 90 days following termination of employment
or board membership. The recipients of the Stock Option
Bonuses are as follows:
- - ---------------------------------------------------------------------------
Name Option Shares (5) Exercise Price per Share
- - ---------------------------------------------------------------------------
Employees:
David B. Strecker 25,000 $0.42
Eric P. Marske 25,000 $0.42
Jon A. Correio 25,000 $0.42
Alan B. Cook 25,000 $0.42
Directors:
Melvin Brown 25,000 $0.42
Tom Kirchner 25,000 $0.42
Arthur Leighton 25,000 $0.42
Robert Southworth 25,000 $0.42
(5) This table does not include Stock Options granted December 10, 1993
and February 3, 1995.
The Corporation has no other bonus, profit sharing, or other arrangement
with any officer, director, or employee to issue cash, stock, restricted
stock, phantom stock, stock options, stock appreciation rights, warrants or
other forms of securities, except for stock options granted on December
10, 1993 and February 3, 1995. A total of 325,000 shares of the
<PAGE>
Corporation's Common Stock are available for issuance upon the exercise of
those Stock Options.
CHANGE OF CONTROL ARRANGEMENT
There are currently no Change of Control arrangements in place.
CERTAIN INFORMATION REGARDING THE BOARD OF DIRECTORS
During the fiscal year ended December 31, 1995 the Board of Directors
held three meetings. All directors were in attendance at such meetings,
except as follows: Mr. Schooley was absent from the February 3, 1995,
March 31, 1995 and June 2, 1995 meetings.
COMMITTEES
There are no Compensation, Audit or Nominating Committees. However, from
time to time, the Board has established a Stock Option Bonus Committee.
The sole purpose of this committee was to research and make
recommendations to the Board of Directors regarding one-time grants of
Stock Option Bonuses. The Committee met prior to, and made its
recommendations at the February 9, 1996 meeting of the Board of
Directors.
RELATED PARTY TRANSACTIONS
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 an independent third party,
unaffiliated with the Company.
COMPENSATION OF DIRECTORS
Director compensation is limited to reimbursement of out-of-pocket
expenses that are incurred in connection with the directors duties
associated with the Corporation's business.
SHAREHOLDER PROPOSALS AND OTHER MATTERS
The Corporation's next annual meeting will be held on June 7, 1997. A
Stockholder who desires to have a qualified proposal considered for
inclusion in the Proxy Statement for that meeting must notify the
Secretary of the terms and content of the proposal no later than March
15, 1997. The Corporation's By-Laws outline the procedures including
notice provisions, for stockholder nomination of directors and other
stockholder business to be brought before stockholders at the Annual
Meeting. At the time of submission of such proposal a stockholder must
<PAGE>
have been of record or beneficial owner of at least 1% of the outstanding
shares or $1,000 worth of stock in the Corporation, and have held such
stock for at least one year and through the date on which the meeting is
held. A copy of the pertinent By-Law provisions are available upon written
request to Robert Southworth, Secretary, Electronic Systems Technology,
Inc., 415 North Quay Street, Kennewick, Washington 99336.
FORM 10-KSB
Any shareholder of record may obtain a copy of the Corporation's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995 (the
"Form 10-KSB"), without cost, upon written request to the Secretary of
the Corporation. The Form 10-KSB is not part of the proxy solicitation
material for the Annual Meeting.
By Order of the Board of Directors
T.L. KIRCHNER
T.L. Kirchner
President
APRIL 29, 1996
(Date)
<PAGE>
PROXY STATEMENT EXHIBIT #1 - 1996 STOCK OPTION PLAN AS ADOPTED BY BOARD
OF DIRECTORS ON APRIL 12, 1996
ELECTRONIC SYSTEMS TECHNOLOGY
1996 STOCK OPTION PLAN FOR DIRECTORS, OFFICERS, AND EMPLOYEES
1. PURPOSE. The purpose of this plan is to promote the interests of
the Company and its stockholders by strengthening the Company's
ability to attract and retain the services of experienced and
knowledgeable officers and directors and by encouraging such
officers and directors to acquire an increased proprietary
interest in the Company, as well as to attract, retain, and
stimulate the performance of selected employees, and giving such
directors and employees the opportunity to acquire a proprietary
interest in the Company's business and an increased personal
interest in this continued success and progress as well as
increase the productivity of those individuals whom the Committee
deem to have the potential to contribute to the success of the
Company.
2. DEFINITIONS. Unless otherwise indicated, the following words when
used herein shall have the following meanings:
a. "Board of Directors" shall mean the Board of Directors of the
Company.
b. "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
c. "Common Stock" shall mean the Company's Common Stock ($0.001
par value) and any share or shares of the Company's stock
hereafter issued or issued in substitution for such shares.
d. "Company" shall mean Electronic Systems Technology, Inc., a
Washington Corporation.
e. "Director" shall mean a member of the Board of Directors.
f. "Employee" shall mean any person (including officers of the
Company), who is employed by the Company or any parent or
subsidiary of the Company.
g. "Nonqualified Stock Option" shall mean any option granted to
an eligible employee under the Plan which is not an Incentive
Stock Option.
h. "Option" shall mean and refer to Nonqualified Stock Options.
i. "Optionee" shall mean any employee who is granted an Option
under the Plan. "Optionee" shall also mean the personal
representative of an Optionee and any other person who
acquires the right to exercise an Option by bequest or
inheritance or pursuant to a qualified domestic relations
order. (QDRO).
j. "Subsidiary" shall mean a subsidiary corporation of the
Company as defined in Section 425(f) of the Code.
k. "Years of Service" shall mean twelve (12) consecutive Months
<PAGE>
of Service, except that the Committee shall be empowered to
disregard such 12 month requirement. "Months of Service"
shall mean a calendar month during any part which any
employee, consultant, or advisor completed an Hour of
Service. "Hour of Service" shall mean each hour for which a
director or employee is directly or indirectly compensated or
entitled to compensation.
3. ADMINISTRATION.
a. This plan shall be administered by the Compensation Committee
of the Board of Directors (the "Committee"). Except for the
terms and conditions explicitly set forth in this Plan, the
Committee shall have the authority, in its discretion, to
determine all matters relating to the options to be granted
under this plan, including selection of the individuals to be
granted options, the number of shares to be subject to each
grant, the date of grant, the termination of the options, the
option term, vesting schedules, and all other terms and
conditions thereof. Grants under this plan to employees need
not be identical in any respect, even when made
simultaneously. The Committee will also determine and
approve the granting of options to selected eligible
individuals.
b. Options shall be evidenced by written agreements which shall
contain such terms and conditions as may be determined by the
Committee. Each agreement shall be signed on behalf of the
Company by an officer or officers delegated such authority by
the Committee using either manual or facsimile signature.
c. All decisions made by the Committee pursuant to the
provisions of this Plan and all determinations and selections
made by the Committee pursuant to such provisions and related
orders or resolutions of the Board of Directors shall be
final and conclusive.
4. ELIGIBILITY AND PARTICIPATION. The group of employees, officers,
and directors eligible to receive options shall consist of those
employees, directors, officers and other key employees with no
less than three years continuous tenure with the Company. At the
discretion of the Committee, eligible individuals from this group
may be selected to receive options.
5. SHARES SUBJECT TO THIS PLAN.
a. The stock to be offered under the Plan shall be shares of the
Company's authorized Common Stock and may be unissued shares
or shares now held subsequently acquired by the Company as
treasury shares, as the Board of Directors may from time to
time determine. Subject to adjustment as provided in Section
12 hereof, the aggregate number of shares to be delivered
under this Plan shall not exceed one million (1,000,000)
shares.
If an option expires, is surrendered in exchange for another
option, or terminates for any reason during the term of this
Plan prior to its exercise in full, the shares subject to but
not delivered under such option shall be available for
<PAGE>
options thereafter granted and for replacement options which
may be granted in exchange for such surrendered or terminated
options.
6. TERMS OF OPTION PERIOD. The term during which options may be
granted under this Plan shall expire as set in the discretion of
the Committee, and the option period during which each option may
be exercised shall, subject to the provisions of Section 13
hereof, be such period as determined by the Committee, up to a
maximum of no later than 3 years (1095 days) following the grant
date of the option.
7. OPTION PRICE. The price at which shares may be purchased upon
exercise of a particular option shall be such price per share
equal to market price at the time of grant. Market price will be
the mean of bid and ask prices on the National Daily Quotation
Service "pink sheet" for the effective date of the option granted
by the Committee. If no activity is reported for that date the
"pink sheet" with the closest preceding date with recorded
activity will establish market price.
8. MEANS OF EXERCISE. Payment of the option exercise price by the
Optionee may be in cash or check payable to the Company.
9. VESTING; EXERCISE OF OPTIONS AND RIGHTS.
a. Vesting: Exercisability. Subject to the provisions of
paragraph g. herein, an option shall vest and become
nonforfeitable and exercisable, immediately upon issuance by
the Committee and receipt of written option agreement signed
by the Optionee.
Notwithstanding the above, all eligible employees, directors,
and officers of ELECTRONIC SYSTEMS TECHNOLOGY as of the date
of adoption of this plan shall receive credit for prior years
of service as an employee, director, or officer of the
Company in respect to determining eligibility for granting of
options by the Committee.
b. Each option granted shall be exerciseable in whole or in part
at any time or from time to time during the option period as
the Committee may determine, provided that the election to
exercise an option shall be made in accordance with
applicable Federal laws and regulations.
c. Options will be exercisable in minimum blocks of 5,000 shares
at any one time. No option may at any time be exercised with
respect to a fractional share and no fractional shares shall
be issued.
d. As a condition to the exercise of a Non-Qualified Stock
Option, optionees shall make such arrangements as the
Committee may require for the satisfaction of any federal,
state, or local withholding tax obligations that may arise in
connection with such exercise.
e. No shares shall be delivered pursuant to the exercise of any
option, in whole or in part, until qualified for delivery
under such securities laws and regulations as may be deemed
<PAGE>
by the Committee to be applicable thereto and until, in the
case of the exercise of an option, payment in full of the
option price thereof is received by the Company in cash or
check. No holder of an option, or his/her legal
representative, legatee, or distributee, shall be or be
deemed to be a holder of any shares subject to such option
unless and until he/she has received a certificate or
certificates therefor.
f. Notwithstanding any vesting requirements contained in any
Option, all outstanding Options shall become immediately
exerciseable (1) following the first purchase of Common Stock
pursuant to a tender offer or exchange offer (other than an
offer made by the Company) for all or part of the Common
Stock, (2) at such time as a third person, including a
"group" as defined in Section 13(d) of the Securities
Exchange Act of 1934, becomes the beneficial owner of shares
of the Company having 25% or more of the total number of
votes that may be cast for the election of Directors of the
Company, (3) on the date on which the shareholders of the
company approve (i) any agreement for a merger or
consolidation on which the Company will not survive as an
independent, publicly owned corporation or (ii) any sale,
exchange or other disposition of all or substantially all of
the Company's assets. The Committee's reasonable
determination as to whether such an event has occurred shall
be final and conclusive.
g. Notwithstanding any provisions of the agreement to the
contrary, the right of any Employee to receive any benefits
hereunder shall terminate and shall be forever forfeited if
such employee's employment with the Company or status as a
director or officer is terminated because of his/her fraud,
embezzlement, dishonesty, or breach of fiduciary duty. In
such an event, all unexercised options shall be deemed null
and void. This Section shall be inapplicable to any such
termination of employment or status as a director or officer
occurring after the Plan has been terminated.
10. TRANSFERABILITY OF OPTIONS. The right of any optionee to exercise
an option granted under the Plan shall, during the lifetime of
such optionee, be exerciseable only by such optionee or pursuant
to a qualified domestic relations order as defined by the Internal
Revenue Code of 1986, as amended, or Title I of the Employee
Retirement Income Security Act, or the rules thereunder and shall
not be assignable or transferable by such optionee other than by
will or the laws of descent and distribution or a qualified
domestic relations order (QDRO).
11. TERMINATION OF RELATIONSHIP. The terms and conditions under which
an option may be exercised after the termination of relationship
with the Company and Optionee shall be as follows:
a. Immediately following the termination of relationship with
the Company, the Optionee shall have a period of ninety (90)
days in which to exercise any options which the Optionee has
been granted, except under the conditions set forth in
<PAGE>
paragraphs b. and c. below, which shall supersede the
provisions of paragraph a.
b. If recapitalization and/or similar events result in the
change of share values, the Optionee will receive options for
equivalent shares. If the Company is not the surviving
entity by virtue of merger, acquisition, etc., the Optionee
will have a window of ten days in which to exercise any
options held at the time. The last day of the window will be
five days prior to the legal conclusion of any such event.
c. In the event of Company acquisition, merger, reorganization
and other transactions altering the Company structure, any
outstanding options then in force must be immediately
exercised.
12. CHANGES IN COMMON STOCK. The aggregate number and class of shares
on which options may be granted under this Plan, the number and
class of shares covered by each outstanding option, and the
exercise price per share thereof (but not the total price), of
each such option, shall all be proportionately adjusted for any
increase or decrease in the number of issued shares of common
stock of the Company resulting from a split-up or consolidation of
shares, or any spin-off, spin-out, split-up, or other distribution
of assets to shareholders, or any like capital adjustment or the
payment of any such stock dividend, or any other increase or
decrease in the number of shares of common stock of the Company
without the receipt of consideration by the Company, or assumption
and conversion of outstanding grants due to an acquisition.
13. AMENDMENT AND DISCONTINUANCE. The Board of Directors may amend,
suspend, or discontinue this Plan, but may not, without the
approval of the holders of the Company's common stock, make any
amendment thereof which operates: a) to increase the total number
or shares which may be granted under this Plan, b) to extend the
terms of this Plan or the maximum option period provided in
Section 6 hereof, c) to decrease the minimum option price
provided in Section 7 hereof, d) to materially modify the
requirements as to eligibility for participation in this Plan, or
e) to materially increase the benefits accruing to participants
under this Plan. No amendment to this Plan shall, except with
the consent of the Optionee, adversely affect rights under an
option previously granted.
14. TERMS OF PLAN. This Plan shall become effective April 12, 1996,
subject to the approval by the holders of the Company's common
stock at a meeting to be held within one year of the date of
adoption of this Plan.
15. INVESTMENT REPRESENTATION. Upon demand by the Company, the
Optionee shall deliver to the Company a representation in writing
that the purchase of all shares with respect to which notice of
exercise of the Option has been given by Optionee is being made
for investment only and not for resale or with a view to
distribution and containing such other representations and
provisions with respect thereto as the Company may require. Upon
such demand, delivery of such representation promptly and prior to
the transfer or delivery of any such shares and prior to the
expiration of the option period, shall be a condition precedent to
the right to purchase such shares.
<PAGE>
16. RIGHTS AS SHAREHOLDER AND EMPLOYEE. An Optionee shall have no
rights as a shareholder of the Company with respect to any shares
of Common Stock covered by an Option until the date of the
issuance of the stock certificate for such shares. Neither the
Plan, nor the granting of an option or other rights herein, nor
any other action taken pursuant to the Plan shall constitute or be
evidence of, any agreement or understanding, express or implied,
that an Employee has a right to continue as an Employee for any
period of time or at any particular rate of compensation.
17. GOVERNING LAW. Options granted under this Plan shall be construed
and shall take effect in accordance with the laws of the State of
Washington.
Electronic Systems Technology, Inc.
Phone: 509-735-9092
415 N. Quay Street, Kennewick, WA 99336
Fax: 509-783-5475
www.esteem.com
