UNITED STATES SECURITIES AND EXCHANGE COMMISSIONS
WASHINGTON D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 1996
Commission File Number: 2-92949-S
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1238077
(State of Incorporation) (I.R.S. Employer Identification No.)
415 N. Quay St., #4 Kennewick WA 99336
(Address of Principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (509) 735-9092
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
The number of shares outstanding of common stock as of September 30, 1996 was
4,953,667.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
(as prepared by Management)
(Unaudited)
<CAPTION>
SELECTED FINANCIAL DATA
Nine months ended Sept 30 Sept 30
1996 1995
========== ==========
<S> <C> <C>
Sales $ 905,680 $ 1,154,290
Other revenue $ 207,568 $ 153,740
Gross profit $ 545,166 $ 707,353
Income (Loss) before provisions
for income taxes $ 211,750 $ 355,545
Earnings per common share before taxes
Primary $ .04 $ .07
Fully diluted .04 .07
Earnings per common share after taxes
Primary $ .03 $ .04
Fully diluted .03 .04
Weighted average number of common
shares and common stock equivalents
outstanding for use in determining
Earnings Per Share:
Primary 5,475,339 5,396,256
Fully diluted 5,475,339 5,396,256
Total assets $2,047,304 $1,955,667
Long-term debt and capital
lease obligations $ -0- $ -0-
Shareholders' equity $1,991,756 $1,827,893
Shareholders' equity per share $0.40 $0.37
Working Capital $1,835,750 $1,708,249
Current ratio 34:1 16:1
Equity to total assets 97% 93%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
BALANCE SHEET
(as prepared by Management)
(Unaudited)
ASSETS September 30 December 31
1996 1995
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,345,891 $1,162,726
Marketable securities 0 121,117
Certificates of Deposit
(over 90 day maturity) 0 102,000
Accounts receivable, net of allowance
for uncollectibles of $1,284 139,884 157,920
Inventory 357,822 297,037
Accrued interest 2,918 3,745
Prepaid expenses 16,489 4,134
Deferred tax asset 5,287 5,287
Prepaid Federal Income Taxes 23,007 0
Note receivable (current portion) 0 3,449
--------- ---------
Total Current Assets $1,891,298 $1,857,415
PROPERTY & EQUIPMENT, net of
depreciation of $177,936 at
Sept. 30, 1996 and $155,504 at
Dec. 31, 1995 148,194 145,243
OTHER ASSETS 7,812 8,114
--------- ---------
TOTAL ASSETS $2,047,304 $2,010,772
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 40,998 $ 56,493
Accrued Liabilities 14,550 18,434
Accrued federal income tax 0 58,665
--------- ---------
Total Current Liabilities $ 55,548 $ 133,592
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value
50,000,000 shares authorized,
shares issued and outstanding:
5,006,667-December 31, 1995
4,953,667-September 30, 1996 $ 4,954 $ 5,007
Additional paid-in capital 894,129 918,057
Retained earnings 1,092,673 954,116
---------- ---------
$1,991,756 $1,877,180
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,047,304 $2,010,772
========== =========
</TABLE>
(See "Notes to Financial Statements")
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF OPERATIONS
(as prepared by Management)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30 Sept 30 Sept 30 Sept 30
1996 1995 1996 1995
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
SALES $ 259,919 $ 414,663 $ 905,680 $1,154,290
--------- --------- --------- ----------
COST OF SALES
Beginning Inventory $ 341,430 $ 356,110 $ 297,037 $ 423,932
Purchases & Allocated
Costs 122,094 138,641 421,299 355,720
--------- --------- --------- ----------
$ 463,524 $ 494,751 $ 718,336 $ 779,652
Ending Inventory 357,822 332,715 357,822 332,715
--------- --------- --------- ----------
Total Cost of Sales $ 105,702 $ 162,036 $ 360,514 $ 446,937
--------- --------- --------- ----------
GROSS PROFIT $ 154,217 $ 252,627 $ 545,166 $ 707,353
--------- --------- --------- ----------
OPERATING EXPENSES
Finance/Administration $ 29,984 $ 27,468 $ 152,797 $ 135,199
Research & Development 44,533 23,437 106,665 56,263
Marketing 53,119 45,476 150,467 137,467
Customer Service 17,936 12,870 42,336 36,059
--------- --------- --------- ----------
Total Operating Expenses $ 145,572 $ 109,251 $ 452,265 $ 364,988
--------- --------- --------- ----------
NET OPERATING INCOME $ 8,645 $ 143,376 $ 92,901 $ 342,365
--------- --------- --------- ----------
OTHER INCOME (EXPENSES)
Interest Income $ 15,001 $ 13,730 $ 47,143 $ 38,750
Loss-asset disposition 0 ( 63) 0 ( 63)
Loss-Mktble Securities 0 0 ( 3,522) ( 46,558)
Recovery from Mktble
Sec. Litigation 1,782 0 5,483 0
Uncollectible Accounts
Recovered 0 0 57,204 0
Engineering Services 34,291 24,227 97,738 114,990
Engineering Support ( 28,817) ( 20,931) ( 85,197) ( 93,939)
--------- --------- --------- ----------
Net Other Income $ 22,257 $ 16,963 $ 118,849 $ 13,180
--------- --------- --------- ----------
NET INCOME BEFORE TAX $ 30,902 $ 160,339 $ 211,750 $ 355,545
Provision for income tax 10,507 54,515 73,193 136,715
--------- --------- --------- ----------
NET INCOME $ 20,395 $ 105,824 $ 138,557 $ 218,830
========= ========== ========= =========
Earnings per Share
Primary $0.004 $0.02 $0.03 $0.04
Fully Diluted $0.004 $0.02 $0.03 $0.04
</TABLE>
(See "Notes to Financial Statements)
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
(as prepared by Management)
(Unaudited)
<CAPTION>
NINE MONTHS ENDED Sept 30 Sept 30
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS PROVIDED (USED) IN
OPERATING ACTIVITIES:
Net income $ 138,557 $ 218,830
Noncash expenses included in income:
Depreciation 22,432 16,632
Amortization 1,378 1,376
Deferred income tax liability 0 1,693
Loss-asset disposition 0 63
Realized Loss/Impaired Securities 3,522 46,558
Decrease (Increase) in Current Assets:
Additions to short-term investments 0 (102,000)
Accounts receivable, net 18,036 (148,854)
Inventory ( 60,785) 91,217
Prepaid income taxes ( 23,007) 16,471
Prepaid expenses ( 12,355) ( 8,149)
Accrued interest 827 809
Increase (Decrease) in Current Liabilities:
Accounts payable, accrued expenses
and other current liabilities ( 19,379) 17,512
Accrued federal income taxes ( 58,665) 66,515
-------- --------
$ 10,561 $ 218,673
-------- --------
CASH FLOWS PROVIDED (USED) IN
INVESTING ACTIVITIES:
Additions to property and equipment $( 25,383) $( 33,883)
Additions to capitalized software ( 1,076) 0
Refund of Deposits 0 184
Additions to marketable securities 0 ( 12,185)
Certificate of Deposit classified as
cash equivalent 102,000 0
Proceeds from sale of Marketable
Securities 117,595 0
-------- --------
$ 193,136 $( 45,884)
-------- --------
CASH FLOWS PROVIDED (USED) IN
FINANCING ACTIVITIES:
Proceeds from Note Receivable $ 3,449 $ 1,187
Repurchase common stock ( 23,981) 0
--------- --------
$( 20,532) $ 1,187
--------- --------
</TABLE>
(See "Notes to Financial Statements)
<PAGE>
<TABLE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
(continued)
(as prepared by Management)
(Unaudited)
<CAPTION>
Nine Months Ended
Sept 30 Sept 30
1996 1995
--------- ---------
<S> <C> <C>
Net increase in cash and
cash equivalents $ 183,165 $ 173,976
Cash and cash equivalents at
beginning of period 1,162,726 769,967
--------- --------
Cash and Cash equivalents at
ending of period $ 1,345,891 $ 943,943
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Cash paid year to date:
Interest $ 0 $ 0
========== =========
Income taxes 154,865 57,729
========== =========
Cash and Cash Equivalents:
Cash $ 6,034 $ 15,708
Money market accounts 418,680 428,235
Certificates of Deposit 321,177 200,000
Banker Acceptances/Commercial paper 600,000 300,000
---------- ---------
$ 1,345,891 $ 943,943
========== =========
Items not affecting cash flows:
Unrealized loss,
marketable securities $ 0 $( 407)
========== =========
(See "Notes to Financial Statements)
</TABLE>
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(as prepared by Management)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The condensed financial statements of Electronic Systems Technology, Inc.
(the "Company"), presented in this Form 10Q are unaudited and reflect, in the
opinion of Management, a fair presentation of operations for the three and
nine month periods ended September 30, 1996 and September 30, 1995. Certain
information and footnote disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to the applicable rules and regulations of
the Securities and Exchange Commission. In preparation of the condensed
financial statements, certain amounts and balances have been restated from
previously filed reports to conform with the condensed format of the 1996
presentation. These condensed financial statements should be read in
conjunction with the audited financial statements and notes thereto included
in the Company's Form 10K for the year ended December 31, 1995 as filed with
the Securities and Exchange Commission.
The results of operation for the three and nine month periods ended September
30, 1996 and September 1995, are not necessarily indicative of the results
expected for the full fiscal year or for any other fiscal period.
NOTE 2 - INVENTORIES
Inventories are stated at lower of cost or market with cost determined using
the FIFO (first in, first out) method. Inventories consist of the following:
September 30 December 31
1996 1995
----------- ----------
Parts $ 259,842 $ 198,487
Work in progress 9,068 0
Finished goods 88,912 98,550
----------- ----------
$ 357,822 $ 297,037
=========== ==========
NOTE 3 - EARNINGS PER COMMON SHARE
Primary earnings per common share are based on the weighted average number of
shares outstanding during the period after consideration of the dilutive
effect of stock options and restricted stock awards. The primary weighted
average number of common shares outstanding for the quarters ended September
30, 1996 and September 30, 1995 were 5,475,339 and 5,396,256, respectively.
Also, fully diluted earnings per common share assume conversion of derivative
securities when the result is dilutive.
NOTE 4 - CAPITALIZED SOFTWARE COSTS
Statement of Financial Accounting Standards No. 86, issued by the Financial
Accounting Standards Board (FASB), directs the costs of creating a computer
software product to be sold, leased or otherwise marketed, and which are
incurred after the products technological feasibility has been established,
be capitalized. All costs capitalized under FASB No. 86 are required to be
<PAGE>
NOTE 4 - CAPTALIZED SOFTWARE COSTS (cont'd)
amortized over their estimated revenue-producing lives, not to exceed five
years, beginning on the date the product is available for distribution to
customers. During the period ended September 30, 1996, the Company
capitalized $1,076 of software costs associated with the creation of the
operating system of the Company's new product, the ESTeem(tm) 192 wireless
modem. Amortization of capitalized software costs charged to expenses for
the periods presented are $1,296 for the nine month period ending September
30, 1996, and $1,296 for the same period of 1995.
NOTE 5 - STOCK OPTIONS
As of September 30, 1996, the Company had outstanding stock options which
have been granted periodically to individual employees and directors with no
less than three years of continuous tenure with the Company. On February 9,
1996, additional 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 granted on February 9, 1996
totaled 200,000 shares under option and have an exercise price of $0.42 per
share. The options granted on February 9, 1996 may be exercised any time
during the period from February 9, 1996 through February 8, 1999. The
Company's Form 8-K dated February 9, 1996, as filed with the Securities and
Exchange is included herein by reference. All outstanding stock options must
be exercised within 90 days after termination of employment. During the 12
month period from September 30, 1995 to September 30, 1996, 125,000 shares
under option expired, no shares under option were exercised, and 200,000
shares under option were granted. At September 30, 1996 there were 525,000
shares under option reserved for future exercises.
NOTE 6 - RELATED PARTY TRANSACTIONS
For the nine month periods ended September 30, 1996 and September 30, 1995,
services in the amount of $34,191 and $42,487, respectively, were contracted
with Manufacturing Services, Inc., of which the owner/president, is a member
of the Board of Directors of the Company.
NOTE 7 - MARKETABLE SECURITIES
The Company has adopted SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. SFAS No. 115 establishes generally accepted
accounting principles for the financial accounting, measurement and
disclosure principals for (1) investments in equity securities that have
readily determinable fair market value and (2) all investments in debt
securities. The change had no effect on prior year's results. All of the
marketable securities held by the Company consisted of securities
"available-for-sale", as defined by SFAS No. 115. The securities held
determined in computing realized gain or loss is the specific
identification method. During 1995, a total loss of $49,953 was recognized
by the Company due to impairment of the value of the marketable securities
held by the Company. As of March 31, 1996, the Company had liquidated its
marketable securities investment. A summary of the Company's marketable
security investment activity as of September 30, 1996 is shown below:
<PAGE>
NOTE 7 - MARKETABLE SECURITIES (cont'd)
September 30, December 31,
1996 1995
============ ===========
Aggregate fair value of marketable securities $ 0 $ 121,117
Gross unrealized holding gains -- --
Gross unrealized holding losses -- --
Gross realized loss due to impairment in
Marketable Securities -- 49,953
Amortized cost basis 0 171,070
Changes in marketable securities for the period ended September 30, 1996
are as follows:
September 30, December 31,
1996 1995
============ ===========
Cost $ 171,070 $ 153,726
Purchase of shares -- --
Dividends and capital gains reinvested -- 17,344
Sale of securities ( 117,595) --
Realized loss due to impairment of
marketable securities ( 49,953) ( 49,953)
Realized loss on sale of securities ( 3,522) --
------------ -----------
Fair market value $ 0 $ 121,117
============ ===========
The Company was included in the class action suit settlement against the
manager of the Company's marketable securities investments, Piper Jaffray. In
February 1996, the Company received the first payments pursuant to this
settlement in the amount of $3,700, and as of September 30, 1996 has received
settlement payments amounting to a total of $5,483, and expects to receive
periodic settlement payments of similar amounts over the next three years
NOTE 8 - STOCK REPURCHASE PLAN
On March 26, 1996, the Company's Board of Directors authorized the
establishment of a plan for the repurchase of the Company's common stock.
Pursuant to the Plan, the Company could repurchase shares of its common
stock in open market transactions through brokers and dealers, up to the
amount allocated by the Plan of $100,000. Repurchase transactions could
continue through June 30, 1996. On June 6, 1996, the Company's Board of
Directors authorized the establishment of a plan for the repurchase of the
Company's common stock with terms and conditions identical to the Plan
expiring June 30, 1996. The plan approved June 6, 1996 would be in effect
from July 1, 1996 through September 30, 1996. At the conclusion of the
established repurchase Plan on September 30, 1996, $23,981 of the funds
allocated by the Plan had been expended by the Company to repurchase a
total of 53,000 shares. The transactions for shares repurchased under the
Plan were completed by September 30, 1996. The subject shares were either
canceled from the Company's outstanding shares or were in transit to the
Company's transfer agent for cancellation, and were therefore removed from
the Company's outstanding common shares for September 30, 1996. The
Company's Forms 8-K dated March 26, 1996, June 6, 1996, and September 30,
1996, as filed with the Securities and Exchange Commission, are included
herein by reference.
<PAGE>
ITEM II
MANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS IS INTENDED TO BE READ IN CONJUCTION
WITH THE COMPANY'S UNAUDITED FINANCIAL STATEMENTS AND THE INTEGRAL NOTES
THERETO FOR THE QUARTER ENDING SEPTEMBER 30, 1996. THE FOLLOWING STATEMENTS
MAY BE FORWARD LOOKING IN NATURE AND ACTUAL RESULTS MAY DIFFER MATERIALLY.
A. RESULTS OF OPERATIONS
REVENUES:
Total revenues from the sale of the Company's ESTeem(tm) wireless modem systems,
accessories, and services decreased to $294,210 for the third quarter of 1996
as compared to $438,890 in the third quarter of 1995, reflecting a 33%
decrease. Gross revenues decreased to $310,993 for the quarter ending
September 30, 1996, from $452,620 for the same quarter of 1995. This
decrease is attributable to less than expected customer orders from all
major customer categories for the Company, a trend experienced in the
second quarter of 1996, and in Management's opinion will in all likelihood
continue through the year ending December 31, 1996. In Management's
opinion, the overall reduction in sales revenue is due primarily to
cancellation or postponements of industrial automation projects by both
foreign and domestic customers, as well as increased competition from other
wireless systems and hardware providers. In Management's opinion, the
Company's increased marketing efforts corresponding with the release of the
new ESTeem 192 wireless modem products, as well an increase in the number
of ESTeem product distributors in the second half of 1996, may lead to a
reverse in the downward trend in sales revenues in 1997.
The Company's revenues fall into three major customer categories, Domestic,
Export and U.S. Government Sales. Domestic commercial sales decreased to
$222,884 in the third quarter of 1996 as compared to $280,479 for the third
quarter of 1995. Foreign export sales for the third quarter of 1996
decreased to $26,439 as compared to the $70,490 in the same quarter of 1995
due to continued slow sales to customers in Croatia, Slovenia, and Canada,
when compared with the third quarter of 1995. In Management's opinion,
foreign sales levels may increase as a benefit of increased domestic
advertising by the Company and the addition of ESTeem products distributors
in the Pacific Rim. The Company sales revenues to Canada were less than
expected in the second and third quarters of 1996 when compared with the same
periods of 1995 which contained unusually large sales to Canada. The Company
plans to continue advertising its products for the Canadian market through
normal North American advertising methods. In Management's opinion sales
revenues to Croatia and Slovenia will continue to decrease due to the end of
the political unrest in these areas and the reestablishment of communications
infrastructure. U.S. Government sales in the third quarter of 1996 were
$44,887, a decrease from the third quarter 1995 figure of $87,921.
Engineering services increased from $24,227 as of June 30, 1995, to $34,291
as of September 30, 1996, primarily as a result of an increase in the size
and scope of engineering services requested when compared with the third
quarter of 1995. During the quarter ending September 30, 1996, sales to
U.S. Government programs and customers comprised 15% of the Company's
product sales. No other sales to a single customer comprised 10% or more
of the Company's product sales for the quarter ending September 30, 1996.
<PAGE>
A percentage breakdown of EST's major customer categories of Domestic, Export
and U.S. Government Sales, for the third quarter of 1996 and 1995 are as
follows:
For the third quarter of
1996 1995
------- -------
Domestic Sales 76% 64%
Export Sales 9% 16%
U.S. Government Sales 15% 20%
A percentage breakdown of EST's product sales categories for the third
quarter of 1996 and 1995 are as follows:
For the third quarter of
1996 1995
-------- --------
ESTeem Model 84SP/85SP 1% 2%
ESTeem Model 85 9% 14%
ESTeem Model 95 37% 24%
ESTeem Model 96 17% 31%
ESTeem Model 98 - 2%
ESTeem Accessories 21% 20%
Factory Services 3% 1%
Site Support 12% 6%
Year to date sales include foreign export sales as follows:
Nine Months Ended
Sept. 30 Sept. 30
1996 1995
-------- ---------
Export sales $ 121,298 $ 204,249
Percent of sales 12% 16%
The geographic distribution of foreign sales for the first nine months of
1996 and 1995 is as follows:
Percent of Foreign Sales
Sept. 30 Sept. 30
COUNTRY 1996 1995
- - ---------- ------ ------
Mexico 26 % 7 %
Croatia/Slovenia 25 % 32 %
Brazil 19 % 9 %
South Korea 9 % --
Canada 5 % 30 %
Israel 4 % 4 %
Ecuador 4 % --
Costa Rica 4 % --
Philippines 3 % --
Venezuela less than 1 % less than 1 %
Singapore -- less than 1 %
Chile less than 1 % 12 %
Taiwan -- 6 %
<PAGE>
The majority of the Company's domestic sales in the third quarter of 1996,
were made to Supervisory Control and Data Acquisition (SCADA) applications.
It is Management's opinion that these applications continue to provide the
largest portion of the Company's domestic revenues, and will continue to do
so for the foreseeable future. A shift in product mix of items sold was
experienced in the third quarter of 1996. A shift from the ESTeem 96 to
ESTeem 95 products is a result of the type of projects equipped during the
third quarter of 1996. Small, short radio range projects, which was the
trend in the third quarter of 1996, require the shorter range, less expensive
ESTeem 95 products. Large, long radio range projects, require the longer
range, more expensive ESTeem 96 products, which was the trend during the
third quarter of 1995. Products purchased by foreign customers in the third
quarter of 1996 were used primarily in Industrial Control applications. In
Management's opinion, these applications will continue to provide the largest
portion of the Company's foreign revenues in the foreseeable future. Products
purchased by U.S. Government agencies or U.S. Government contractors in the
third quarter of 1996 continue to be utilized primarily in Inventory Control.
The Company's subcontract, dated December 23, 1993, with UNISYS is a five
year indefinite delivery, indefinite quantity, fixed price contract through
September 1997. Based on the terms of the UNISYS contract, and contracts of
this type in general, Management does not base liquidity, profitability, or
material purchase projections on anticipated sales. The Company's economic
position allows it to respond to UNISYS orders on an as needed basis. It is
Management's opinion that due to the nature of this contract, sales or timing
of orders, if any, pursuant to the contract cannot be predicted.
The Company's AIT subcontract, dated July 26, 1994, with INTERMEC 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. It is
Management's opinion that due to the nature of this contract, sales or timing
of orders, if any, pursuant to the contract cannot be predicted.
Based on previous years activity, the majority of all Federal government
purchases are under the Company's GSA contract. Projections regarding
liquidity, profitability, and material purchases are based on past history of
annual purchases. Historically Federal sales average approximately 18% of
annual sales, but this level cannot be guaranteed. Due to the uncertain
nature of Federal purchasing, procurement of material and production planning
is adjusted quarterly based on demand. It is Management's opinion that the
majority of Federal purchases in 1996 will be under this contract.
The Company's revenues have historically fluctuated from quarter to quarter
due to timing factors such as customer order placement and product shipments
to customers, as well as customer buying trends, and changes in the general
economic environment. The procurement process regarding plant and project
automation, or project development, which usually surrounds the decision to
purchase ESTeem products can be lengthy. This procurement process may
involve bid activities unrelated to the ESTeem products, such as additional
systems and subcontract work, as well as capital budget considerations on the
part of the customer. Because of the complexity of this procurement process,
forecasts in regard to the Company's revenues become difficult to predict.
<PAGE>
BACKLOG:
The Company had backlog in the amount of $29,928 at September 30, 1996. This
backlog consisted primarily of foreign orders awaiting clearance of funds.
The majority of these orders were filled during the first half of October,
1996. Customers generally place orders on an "as needed basis". Shipment is
generally made within 5 working days after receiving an order.
COST OF SALES:
Cost of sales percentages of gross sales for the third quarters of 1996 and
1995 were 41% and 39% of gross sales respectively. Cost of Sales variations
are attributed to the type of product sold and the size of orders filled.
Larger orders grant lower sales prices because of volume discounting, thus
reducing the margin of profit.
OPERATING EXPENSES:
Operating expenses for the third quarter of 1996 were $36,321 higher than the
third quarter of 1995. The following is a delineation of operating expenses:
For the quarter ended: Sept. 30 Sept. 30 Increase
1996 1995 (Decrease)
-------- -------- ---------
Finance/Administration $ 29,984 $ 27,468 $ 2,516
Research/Development 44,533 23,437 21,096
Marketing 53,119 45,476 7,643
Customer Service 17,936 12,870 5,066
-------- -------- ---------
Total Operating Expenses $145,572 $109,251 $ 36,321
======== ======== =========
FINANCE AND ADMINISTRATION:
During the third quarter of 1996 Finance and Administration expenses
increased $2,516 over the third quarter of 1995. The increase in
expenditures for Finance and Administration for the third quarter of 1996 are
attributable mainly to increased state and local taxes, and for services to
improve the Company's computer system.
RESEARCH AND DEVELOPMENT:
The Company has under development a new generation of products, the ESTeem
192, planned to replace existing product lines in the VHF and UHF ESTeem
radio modem product categories, targeted for applications within the
Industrial Control and Federal markets. The new ESTeem 192 products were
originally scheduled for release during the second quarter of 1996, but due
to continuing delays from third-party service providers, and orientation
and instruction issues surrounding the use of surface mount technology, the
product releases are now scheduled for the fourth quarter of 1996. The
ESTeem 192 products are currently under development and have to date not
received required FCC Type Acceptance. During the third quarter of 1996,
Research and Development expenses increased $21,096 as compared to the same
period in 1995. This increase is due to additional in-house labor, as well as
subcontracted Research and Development expertise associated with the
development of the Company's ESTeem 192 products, when compared with the same
period in 1995. Management foresees increased Research and Development
expenditures as a whole during 1996.
<PAGE>
MARKETING:
During the third quarter of 1996, marketing expenses increased $7,643 over
the same period in 1995. This increase is attributable to the increase in
both the magnitude and frequency of the Company's advertising in
preparation for the release of the ESTeem 192 products in the fourth
quarter of 1996.
CUSTOMER SERVICE:
Customer service expenses for the third quarter of 1996 increased by $5,066
when compared to the third quarter of 1995. The increase is attributable to
increased salaries and wages, due to increased labor being allocated to the
department.
INTEREST INCOME:
The Corporation earned $15,001 in interest income during the quarter ending
September 30, 1996. Sources of this income were savings and money market
accounts and short term investments.
ENGINEERING SUPPORT:
Engineering support costs increased to $28,817 for the quarter ended
September 30, 1996, as compared to $20,931 for the same period of 1995.
This increase in engineering support costs for the third quarter of 1996 is
a result of an increase in the scope of engineering services requested by
customers in the third quarter of 1996, which also resulted in increased
engineering services revenues of $34,291.
NET INCOME:
The Corporation had a net profit of $20,395 for the third quarter of 1996,
compared to a $105,824 for the third quarter of 1995. The decrease in net
profit is attributed to an overall decrease in sales during the third quarter
of 1996, combined with increased expenses, primarily marketing and research
and development expenses, for developing and advertising the Company's new
ESTeem 192 wireless modem products.
B. Financial Condition as of September 30, 1996.
The Corporation's current asset to current liabilities ratio at September 30,
1996 was 34:1 compared to 19:1 at December 31, 1995. The increase in current
ratio is primarily attributable to a decrease in federal income tax liability
as compared with year-end 1995.
For the quarter ending September 30, 1996, the Company had cash and cash
equivalent short-term investment holdings of $1,345,891 as compared to cash
and cash equivalent holdings of $1,162,726 at December 31, 1995. This
increase is attributable to a certificate of deposit being classified as a
cash equivalent due to approaching maturity, and proceeds received by the
Company from the sale of its marketable securities investment held at year-
end 1995.
Accounts receivable decreased to $139,884 as of September 30, 1996, from
December 31, 1995 levels of $157,920, due to decreased sales revenues
during the third quarter. Management believes all of the Company's
accounts receivable as of September 30, 1996 are collectible.
<PAGE>
Inventory increased to $357,822 at September 30, 1996, from December 31,
1995 levels of $297,037 due to lower than expected sales in the second and
third quarters, and procurement of components for production of the
Company's ESTeem 192 products, scheduled for release the fourth quarter of
1996. It is Management's opinion inventory levels will increase
significantly in 1996 as components are procured for the production of the
ESTeem 192 products. Prepaid expenses increased from December 31, 1995
levels of $4,134 to $16,489 as of September 30, 1996, due mainly to annual
insurance policy renewals and prepaid fees for tradeshows to be attended
later in 1996.
The Company's prepaid federal income taxes increased to $23,007 as of
September 30, 1996 as compared to a federal income tax liability of $58,665
at December 31, 1995. This increase is attributable to the Company making
estimated tax payments based on 1995 sales revenue levels, while having
revenue and income levels in 1996 year to date lower than those experienced
during 1995.
The Company's fixed assets increased to $326,130 as of September 30, 1996,
from December 31, 1995 levels of $300,747, resulting in capital expenditure
of $25,383. These expenditures consisted mainly of upgrade and expansion
of the Company's trade show display, as well as computer network upgrades,
and production support equipment.
As of September 30, 1996, the Company's trade accounts payable balances
were $40,998 as compared with $56,493 at December 31, 1995, and reflects
amounts owed primarily for procurement for inventory stocks. As of
September 30, 1996, all of the Corporation's accounts payable were within
agreed terms.
It is Management's opinion the Company's cash, cash equivalent reserves,
and working capital at September 30, 1996 is sufficient to satisfy
requirements for operations, capital expenditures, and other expenditures
as may arise in the short term.
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
registration statements filed with the Securities and Exchange Commission.
<PAGE>
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule for September 30, 1996.
(b) Reports on Form 8-K
Form 8-K dated March 26, 1996 is incorporated herein by reference.
Form 8-K dated June 6, 1996 is incorporated herein by reference.
Form 8-K dated August 13, 1996 is incorporated herein by reference.
Form 8-K dated September 30, 1996 in incorporated herein by reference.
Exhibit Index Reference
Form 10-QSB
Exhibit Number Notes to
Financial Statements
4. Instruments defining the Rights of Security Holders including indentures.
Form 8-K dated Jul 12, 1991 is incorporated herein by reference.
Form 8-K dated Dec 14, 1992 is incorporated herein by reference.
Form 8-K dated Dec 10, 1993 is incorporated herein by reference.
Form 8-K dated Feb 3, 1995 is incorporated herein by reference.
Form 8-K dated Feb 9, 1996 is incorporated herein by reference.
11. Statement Re: computation of per share earnings. Note 3 to
Financial Statements
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
Date: November 13, 1996 By: /s/ T.L. KIRCHNER
Name: T.L. Kirchner
Title: Director/President
(Principal Executive Officer)
Date: November 13, 1996 By: /s/ ROBERT SOUTHWORTH
Name: Robert Southworth
Title: Director/Secretary/Treasurer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM, BALANCE
SHEET, STATEMENT OF OPERATIONS, AND STATEMENT OF CASH FLOWS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10QSB, FOR SEPTEMBER 30, 1996.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,345,891
<SECURITIES> 0
<RECEIVABLES> 141,168
<ALLOWANCES> 1,284
<INVENTORY> 357,822
<CURRENT-ASSETS> 1,891,298
<PP&E> 326,130
<DEPRECIATION> 177,936
<TOTAL-ASSETS> 2,047,304
<CURRENT-LIABILITIES> 55,548
<BONDS> 0
<COMMON> 4,954
0
0
<OTHER-SE> 1,986,802
<TOTAL-LIABILITY-AND-EQUITY> 2,047,304
<SALES> 905,680
<TOTAL-REVENUES> 1,113,248
<CGS> 360,514
<TOTAL-COSTS> 445,711
<OTHER-EXPENSES> 149,001
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 211,750
<INCOME-TAX> 73,193
<INCOME-CONTINUING> 138,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 138,557
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