UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Date of Report: April 21, 1998
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 April 21, 1998, the Company mailed its Annual Report for 1997, and
information pertaining to the Company's June 5, 1998 Annual Shareholder
Meeting to its shareholders of record as of April 2, 1998.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
Exhibit 22.1: 1997 Annual Report.
Exhibit 22.2: Proxy
Exhibit 22.3: 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.
/s/ T.L. KIRCHNER
By: T.L. Kirchner
President
Date: May 4, 1998
EXHIBIT 22.1 - 1997 ANNUAL REPORT MAILED APRIL 21, 1998
1997 ANNUAL REPORT
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
415 NORTH QUAY STREET
KENNEWICK, WA 99336
<PAGE>
Dear Shareholder,
1997 was a positive year for Electronic Systems Technology. Our new ESTeem(TM)
192 products were greeted with enthusiasm in the marketplace, and immediately
contributed to increasing our gross sales revenues from the downturn
experienced in 1996. We strengthened relationships within our distribution
network, both foreign and domestic, which resulted in increased sales from
the market segment. We have made great strides in the development of new
products based on the ESTeem 192 architecture, allowing us to offer a greater
depth of products in markets in which we compete. We are optimistic these
developments will lead to increased market presence and growth potential for
the Company.
For the year ending December 31, 1997, the Company recorded gross product sales
of $1,337,303 compared with $1,190,304 in 1996, reflecting an increase of 12%.
The Company's gross revenues for 1997 were $1,476,487 as compared to 1996 gross
revenues of $1,443,549. The Company's 1997 net income before tax was $247,760,
compared with net income before tax in 1996 of $234,456. Our net income after
tax for 1997 was $166,201, or $0.03 per share, compared with net income after
tax of $158,735, or $0.03 per share, in 1996. Shareholder equity in the
Company continued to increase, with a 1997 year end shareholder equity of $0.43
per share, an increase from $0.41 per share for 1996. The Company retains a
very strong financial foundation, with $2,205,811 in total assets at year end
1997, cash and short-term investments of $1.46 million, and no long-term debt.
For our shareholders, our main goal continues to be the pursuit of listing the
Company's stock on a major stock exchange to allow increased marketability and
value of EST stock. The Pacific Stock Exchange (PSE) remains the focus of the
listing effort. Table 1 shows a comparison of PSE listing requirements with
EST's standing as of year end 1997. We firmly believe the market value of the
Company's stock remains undervalued. Management and the Board of Directors
remain diligent in exploration of methods to attain the Pacific Stock Exchange
listing requirements and to increase confidence in the Company's stock. We
believe that increased sales revenues and expansion into other market segments
is key to this effort.
<TABLE>
<CAPTION>
Table 1
PACIFIC STOCK EXCHANGE LISTING REQUIREMENTS
Electronic Systems Technology
Category PSE (Selected Financial Data)
Listing 1997 1996
Requirements Year End Year End
<S> <C> <C> <C>
Net Tangible Assets $2,000,000 $2,128,598 $2,011,934
After Tax Income $ 100,000 $ 166,201 $ 158,735
Public Float (Shares) 500,000 4,337,979 4,337,979
Market Value Of Float $1,500,000 $1,301,000 $1,220,000
Bid Price $ 3.00 $ .26 - .34 $ .25 - .31
Shareholders 500 >640 >670
Operating History 3 Years 13 Years 12 Years
</TABLE>
<PAGE>
For 1998, the Company is aggressively pursuing new market opportunities in the
recently deregulated power utility industry and mobile data network development
for public safety entities. Toward this end, the Company has commissioned its
first power utility project in Klickitat County, Washington, and has
established a reference site for public safety applications with the City of
Pasco, Washington, Police Department. We are excited about these new market
areas and the opportunities they represent, but we also remain committed as
always to our existing markets and customers in the industrial controls
industry.
As a reminder, all of the Company's publicly filed Securities and Exchange
Commission (SEC) data is available from the SEC EDGAR(R) archive at the SEC
Internet website (http://www.sec.gov), with the search string of
"electronic systems", or at the FreeEDGAR(R) web site
(http://www.freeedgar.com).
As we enter in to 1998, and the challenges that lie before us, I would like to
express my gratitude to you, our shareholders, for your loyalty and continued
support.
/s/ 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 in the
production and marketing of the Company's line of ESTeem(TM) Wireless Modem
products and accessories. The product line offered by the Company provides
innovative communication solutions for applications not served by conventional
communication systems. The product line is offered domestically and
internationally, in the growing markets of process automation in commercial,
industrial, and government arenas. The Company's products are marketed through
factory direct sales, sales representatives, resellers, distributors, and
Original Equipment Manufacturers (OEM's).
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 continued to refine its product line in response to customer needs and
developing technology. The Company also developed the ESTeem 192 product line,
as the next generation of ESTeem products, faster and more adaptable than
previous products. The Company has continued to expand its customer base and
market presence, particularly in the industrial controls arena, with its
efforts to team with all major programmable logic controller (PLC) hardware
vendors. The teaming efforts of the Company with PLC vendors have reaped
benefits resulting in the Company's products being recommended 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 1997, the Company
continued to participate in foreign and domestic Supervisory Control and Data
Acquisition (SCADA), Industrial Controls, and Government marketplaces which
continues to serve as the core of the Company's sales revenue base.
PRODUCTS AND MARKETS
The Company's product line is a group of narrow band, packet burst, VHF & UHF
FM radio modems which employ radio frequency waves to provide communication
links between computers, peripherals, and instrumentation controls.
Constant growth of computer applications in business and industry places ever
increasing requirements on the need for data transfer. Prior to the ESTeem
modem, the majority of data transfers used conventional methods of interface
via telephone modems or direct cable connections. The conventional methods
both have costly side effects. When utilizing telephone modems, monthly
charges for telephone lines are incurred. 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 it is intended to serve. ESTeem wireless
modem products provide a "Wireless Solution" by eliminating the need for
conventional hardwiring and leased phone lines.
All of the ESTeem modems ("ESTeems") come with the industry standard
asynchronous communications ports to provide users with new dimensions in
"Local Area Networking". As many as 253 devices can be interfaced on
a single frequency. ESTeem wireless modems have over one hundred internal
software commands, allowing the user to easily configure the product for any
application or use.
<PAGE>
ESTeem Modems operate 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
transmitted in "Electronic Packets" (i.e. electronic packets of information).
The packet size 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 modem 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
modem.
Any ESTeem can operate as an operating node, a repeater node, or both
simultaneously, for added flexibility. Secure data communication is provided
in the ESTeem products through the use of proprietary technology and
techniques, providing users of the products four definable security codes.
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 Overhead Crane Control
Industrial Process Control Shop Floor Manufacturing
Remote Data Acquisition (SCADA) Intra-Office/Building Computer Networking
Law Enforcement/Public Safety
Power Utility Federal
Oil/Gas Pipeline Ground Mobile Communications
Material Handling Ship to Shore Communications
Flight Line Maintenance
PRODUCT LINES
The Company's VHF radio modem products, the ESTeem Model 95 and Model 192V,
operate in the mid 60-70 MHz band of the VHF RF spectrum. The standard
production units of the ESTeem Model 95 and 192V are configured to operate in
the lower 70 MHz spectrum. The ESTeem 192V has a data rate of 19,200 bits
per second (bps), which is four times faster than the ESTeem 95 data rate.
The ESTeem 192V also features infrared and optional telephone interfaces which
are not available on the ESTeem 95 products. 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 UHF radio modem products, ESTeem Models 192C, 192F, 96F, and 96C,
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 Models 192C, 192F,
96F, and 96C, have the same features as the VHF radio modem products, but are
designed to operate in the lower 400 and upper 400 MHz areas of the UHF RF
spectrum. The ESTeem 192C and 192F product lines are differentiated from the
other products by having data rates of 19,200 bps, four times faster than the
data rates of the 96C and 96F products. The 192C and 192F products offer
infrared and optional telephone interfaces not available on the 96C and 96F
products. The ESTeem 192C and 96C were designed to operate in business radio
bands of upper 400 MHz. The ESTeem Model 192F and 96F were designed to operate
in U.S. Government radio bands of lower 400 MHz. All of the UHF radio modem
<PAGE>
products have the additional capability of RF output power of either two or
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 95 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. 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 Radio 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 Industry Canada Type Acceptance. The
Type Acceptance is granted for devices which demonstrate operation within
performance criteria mandated, observed, and tested by Industry Canada. Of the
Company's current production line, the ESTeem Models 96C, 192F, 192C, and 192V
have applied for and have been granted type acceptance in Canada.
All ESTeem radio modem products require consumer licensing under FCC Rules and
Regulations, which is applied for by the end user of the Company's products.
The Company provides information to customers to assist in the application for
FCC consumer licenses.
PRODUCT DEVELOPMENT
The markets in which the Company's products compete, specifically the
communications industry, is a constantly changing technology environment.
Standards and technologies are rapidly and unexpectedly changing. To remain
competitive in this dynamic environment, the Company is required to continually
update and enhance existing products and develop new products. During 1997,
the Company completed development of the ESTeem 192V radio modem, an evolution
of the ESTeem 192C and 192F radio modems developed during 1996. The ESTeem
192V is designed to be a higher data rate complement in the VHF radio frequency
spectrum, comparable to the ESTeem 192C and 192F radio modems in the UHF radio
frequency spectrum. Development has commenced on the ESTeem 192M product line,
which will have features similar to previous ESTeem 192 models, but for
operation in the mid range VHF spectrum not covered by the Company's existing
products. The Company is also studying the feasibility of development of a
radio modem product using spread spectrum technology as a complement to the
Company's existing products. The goal of product improvement and development
has been, and will continue to be, 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.
<PAGE>
MARKETING STRATEGY
The majority of the Company's products are sold and distributed directly from
the Company's facility through direct sales to 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, seventy-one percent of the Company's products are distributed through
direct sales and twenty-nine percent are through Reseller and OEM entities.
Customers generally place orders on an "as needed basis". As of December
31, 1997, the Company had a backlog of $181,000, for orders placed late
in December. Normally, the Company maintains minimal levels of sales backlog.
During 1997, the Company continued to advertise in trade publications
specifically 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 also attends
tradeshows each year specifically targeted toward the customers and markets
in which it sells products. During 1998, the Company intends to implement
marketing plans specifically targeted at the high growth potential market
segments of the recently deregulated power utility marketplace, and Mobile Data
Computers for public safety networks. The Company maintains an Internet web
site to provide easy access to product and technical information for both
present and potential customers of the Company's products. The Company
provides technical support and service for its products through phone support,
field technicians, and Internet sources. The Company believes high quality
customer and technical support is necessary and vital to its business and the
markets in which it competes.
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 a separate project contract
administered by Intermec Corporation. Both contracts are fixed price,
indefinite quantity and delivery agreements.
Competition for the Company is variable according to the market 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 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.
<PAGE>
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. 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.
<TABLE>
<CAPTION>
Bid Ask
High Low High Low
<S> <C> <C> <C> <C>
Fiscal year ended December 31, 1997
First Quarter 1/4 1/4 5/16 1/4
Second Quarter 1/4 7/32 5/16 1/4
Third Quarter 1/4 7/32 5/16 7/32
Fourth Quarter 9/32 5/32 0.34 3/16
Fiscal year ended December 31, 1996
First Quarter 7/16 11/32 1/2 7/16
Second Quarter 15/32 1/4 9/16 15/32
Third Quarter 7/16 5/16 9/16 15/32
Fourth Quarter 11/32 3/16 3/8 5/16
</TABLE>
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 29, 1998 was 649 persons/entities.
Electronic Systems Technology Inc. paid a one-time, non cumulative,
cash distribution on July 11, 1997, equivalent to $0.01 per outstanding share.
The Company has never paid a cash dividend, and any such dividend undertaken by
the Company will be at the discretion of the Board of Directors.
ITEM 6.
MANAGEMENT'S 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 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.
<PAGE>
Operations of the Company are sustained solely from revenues received through
sales of its products and services.
FISCAL YEAR 1997 vs. FISCAL YEAR 1996
GROSS REVENUES: Total revenues for the fiscal year 1997 were $1,476,487
reflecting a 2% increase from the $1,443,549 gross revenues for fiscal year
1996. The increase is attributable primarily to increased product sales
in 1997, of $1,337,303 as compared to 1996 sales of $1,190,304, representing an
increase of 12%. During 1997 the Company experienced increased commercial
sales to both domestic and foreign customers, and a slight decrease in sales
revenues to the U.S. Government. (See Note 6 to Financial Statements.)
Management believes the increase in sales revenues to domestic and foreign
customers is primarily a result of commercial market acceptance of the
Company's ESTeem 192 modems which were available for volume sales from the end
of the first quarter of 1997, and enhanced sales contributions from increased
number of EST distributors.
In 1997, 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.
In 1997, the Company had $340,423 in foreign export sales, amounting to 24% of
gross product and service sales for the year. For year end 1996, foreign
export sales were $222,239, or 17% of gross product sales for the year. It is
Management's belief that foreign sales increased due to comparatively large
orders to customers in Brazil, and orders placed with new EST distributors in
the Philippines and Malaysia. Products purchased by foreign customers were
used primarily for use in SCADA projects. Management believes the majority of
the Company's foreign sales are the result of EST distributor efforts and the
Company's Internet website presence. The geographic composition of the
Company's foreign export sales for 1997 and 1996 are shown in Note 6 to the
Financial Statements. (See Note 6 to Financial Statements.)
In 1997 products purchased by U.S. Government agencies or by U.S. Government
contractors amounted to $250,840 or 18%, of gross product sales compared with
1996 levels of $262,326, or 22%, of gross product sales. Management believes
the decrease in U.S. Government sales is the result of a general contraction of
the military infrastructure in which the Company's products are used.
Management believes this contraction will continue and may possibly increase in
the foreseeable future. Products purchased by the U.S. Government continue
to be utilized in three main categories: Inventory Control, PC/PC (Personal
Computer) networking, and Command Control. Due to the uncertain nature of U.S.
Government purchasing in general, and specifically the Automatic Identification
Technologies (AIT), Core Automated Maintenance System (CAMS), and other
programs the Company's products are involved in, Management does not base
liquidity, profitability, or material purchase projections on anticipated U.S
Government sales.
As of December 31, 1997, the Company had a backlog of $181,000, for orders
placed late in December, 1997. The majority of these orders were shipped
during January, 1998. The Company's 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.
<PAGE>
COST OF SALES: Cost of Sales, as a percentage of gross sales, for the years of
1997 and 1996 was 43% and 41%, respectively. Cost of Sales variations that
occur are attributed to the type of product sold and the size of orders
processed. Larger orders grant lower sales prices, reducing the profit margin.
INVENTORY: The Company's year-end inventory values for 1997 and 1996 were as
follows:
1997 1996
------------- ---------------
Parts $218,263 $260,397
Work in Progress 26,582 68,555
Finished goods 74,282 72,353
------------- ---------------
TOTAL $319,127 $401,305
============= ===============
The Company's objective is to maintain inventory levels as low as possible to
provide maximum cash liquidity, while at the same time, meet production and
delivery requirements. If the Company's sales are less than anticipated,
inventory over-stocking can occur. 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,
however component availability cannot be assured.
For year end 1997, purchases and costs allocated to cost of goods sold were
$492,985 as compared to $595,119 in 1996. This decrease is a result of lower
purchasing by the Company in 1997 when compared with the purchasing undertaken
to support the introduction of the ESTeem 192 products during 1996. Increased
sales volume during 1997 also resulted in the Company reducing existing
inventory stocks at year end 1997.
OPERATING EXPENSES: Operating expenses, prior to allocation of expenses to
Cost of Sales and Engineering Services, decreased to $813,364 in 1997, from
1996 levels of $865,162. Material changes in expenses is comprised of the
following components: Advertising expenses decreased to $51,935 in 1997 from
1996 levels of $54,969 due to reduced advertising by the Company in 1997 as
contrasted with the marketing campaign in 1996 for the ESTeem 192 products.
Supplies and materials expenses decreased to $22,079 in 1996, from $26,060 in
1996 due to decreased research and development projects requiring such
material. Office and Administration expenses decreased from 1996 levels of
$18,517 to $11,371 at year end 1997 due to an overall reduction in mailing and
postage expenses from expenses incurred in 1996 related to mailings associated
with tradeshows and the release of the ESTeem 192 products. Professional
services decreased from 1996 levels of $77,795 to $56,215 at year end 1997 due
to decreased subcontracted engineering services for research and development
projects when compared with 1996. Repair and maintenance expenses decreased in
1997 to $10,759 as compared to $13,080 in 1996, due to an absence of abnormal
equipment repairs, as contrasted with the Company's experience in 1996.
Salaries decreased to $408,840 in 1997, from 1996 levels of $413,920. The
salaries decrease is primarily a result of decreased wage bonuses paid during
1997, which were based on the Company's reduced financial performance figures
in 1996. Travel expenses for the Company decreased from 1996 levels of $54,837
to $36,804 in 1997 primarily due to reduced requests for engineering services
from the Company's customers, resulting in reduced frequency and amount
incurred travel expenses. The Company did not incur bad debt expenses during
1997 or 1996.
<PAGE>
FISCAL YEAR 1996 vs. FISCAL YEAR 1995 RESULTS
Total revenues for the fiscal year 1996 were $1,443,549 reflecting a 17%
decrease from the $1,731,949 total revenues for fiscal year 1995. The decrease
is attributable primarily to decreased sales in 1996, of $1,190,304 as
compared to 1995 sales of $1,535,071, representing a decrease of 22%. During
1996, the Company experienced decreases in sales revenues in all of the
Company's major customer categories; domestic, foreign and U.S. Government.
Management believes the reduction in sales revenues was a result of several
factors, including increased competition from other types of wireless products,
postponement of customer projects employing the Company's products, and
customers' purchase decision uncertainty generated from delays in the releasing
the Company's ESTeem 192 product line.
For year end 1996, purchases and costs allocated to cost of goods sold were
$595,119 as compared to $475,691 in 1995. This increase is a primary result of
increased specific and specialized inventory stocks for production of the
Company's EST 192 product line. The additional inventory requirements was also
reflected in the increase in inventory value at year end 1996 to $401,305 from
1995 year end levels of $297,037.
Operating expenses, prior to allocation of expenses to Cost of Sales and
Engineering Services, during 1996 increased to $865,162 from 1995 levels of
$839,793. Material changes in expenses were comprised of the following
components: Advertising expenses increased to $54,969 in 1996 from 1995 levels
of $50,619 due to expanded advertising exposure in preparation of the release
of the ESTeem 192 product line, as well as increased fees charged by publishers
for the Company's advertising. Sales commissions decreased from 1995 levels
of $31,974 to $22,972 in 1996 due to decreased sales to the U.S. Government.
Depreciation expense on the Company's assets increased from 1995 levels of
$25,379 to $30,303 in 1996 due to increased depreciable assets acquired by the
Company for manufacturing and research and development use. Supplies and
materials expenses increased to $26,060 in 1996, from 1995 levels of $12,383
due to increased requirements primarily from research/development projects.
Professional services increased from 1995 levels of $46,113 to $77,795 at year
end 1996 due to increased amounts paid for engineering services to outside
third parties for research and development in association with the ESTeem 192
product line. Repair and maintenance expenses increased in 1996 to $13,080 as
compared to $6,992 in 1995, due to increased equipment calibration costs, and
higher than normal necessary repairs on the Company's manufacturing and
analysis equipment.
Salaries increased to $413,920 in 1996, increased from 1995 levels of $391,826.
This increase was a result of increased wages and benefits costs, as well as
higher accrued vacation benefits from a more tenured employee base accruing an
increased amount of vacation benefits in 1996, as compared with figures for
1995. Trade show expenses increased from 1995 levels of $8,688 to $17,682 in
1996, due to increased trade show attendance on the part of the Company.
The Company did not incur bad debt expense during 1996 as compared with the
$54,474 recognized for amounts owed to the Company by Diversified Engineering
for 1995. Amounts expensed as bad debt in 1995 for amounts owed to the Company
by Diversified Engineering were recovered by the Company from Diversified
Engineering in the second quarter of 1996.
The Company's cash resources at December 31, 1996, including cash in the bank
and cash equivalent liquid assets, were $1,413,182, reflecting an increase from
cash resources of $1,162,726 for year end 1995. Cash flows from operating
activities were provided by the Company's net income of $158,735, a decrease in
<PAGE>
accounts receivable of $119,609, and depreciation of $30,303. Cash flows were
offset by increases in inventory of $104,268, decreasing federal income taxes
payable of $58,665, and repurchase of the Company's common stock in the amount
of $23,981 during 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues and expenses equated to a net income of $166,120 for
1997, reflecting a 5% increase from the $158,735 net income of 1996. At
December 31, 1997, the Company's working capital was $1,988,266 compared with
$1,861,527 at December 31, 1996. The increase is primarily attributable to the
Company's 1997 after-tax profit of $166,120. 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 12 to 20 weeks, force
the Company to maintain high inventory levels. It is Management's opinion that
the Company's working capital as of December 31, 1997 is adequate for expected
resource requirements for the next twelve months.
The Company's current asset to current liability ratio at December 31, 1997 was
26.7:1 compared to 61.5:1 at December 31, 1996. The decreased ratio is
attributable to the Company having increased trade accounts payable and federal
income tax liabilities at year end 1997 when compared with year end 1996.
The Company's cash resources at December 31, 1997, including cash in the bank
and cash equivalent liquid assets, were $1,466,760, reflecting an increase from
cash resources of $1,413,182 for year end 1996. Cash flows from operating
activities were provided by net income of $166,201, and depreciation of
$30,303. Cash flows were also increased from decreased inventory levels,
increased accounts payable and other accrued liabilities, and increased federal
income tax liabilities at year end 1997 when compared with the same period of
1996. Cash flows were offset primarily by increases in accounts receivable of
$230,668, additions to property plant and equipment of $24,497, cash
distributions paid by the Company of $49,537.
The Company's trade accounts receivable, adjusted for allowance for
uncollectible accounts, at December 31, 1997, were $268,980, compared to
$38,311 at year end 1996. The increase is attributable to increased
sales in the fourth quarter of 1997 and an abnormally low sales amount in the
fourth quarter of 1996 with which to compare. No bad debt expense was recorded
during 1997. The Company is experiencing delayed payment on the part of one of
the Company's distributors due to unexpected delays in the end customers
project, but the Company expects payment in full to be forthcoming from the
distributor in the first quarter of 1998. Management believes that all of the
Company's accounts receivable as of December 31, 1997, are collectible.
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, irrevocable letter of credit terms have been pre-arranged, or
on Net 30 terms to foreign offices of domestic companies with which the Company
has an existing relationship. Foreign orders are generally filled as soon as
they are received, therefore, foreign exchange rate fluctuations do not impact
the Company. Due to the cash or letter of credit terms for the Company's
foreign sales, the Company is not aware of any material negative impacts on the
Company by the downturn experienced in the Asian economy during late 1997.
<PAGE>
Inventory levels as of December 31, 1997, were $319,127, which is a decrease
from December 31, 1996, levels of $401,305. This decrease is the result of
increased sales activity during 1997 thereby reducing existing inventory
stocks.
Outlays for capital expenditures during fiscal year 1997 amounted to $24,497.
These expenditures were primarily for manufacturing and research/development
equipment and computer upgrades. The Company intends on investing in
additional capital equipment as it is deemed necessary to support development
and/or manufacture of the ESTeem Modem.
As of December 31, 1997, the Company's current liabilities were $77,213, an
increase of $46,438 from 1996 year end levels of $30,775. The increase is a
result of increased carrying levels of trade accounts payable and increased
federal income taxes payable based on increased Company profitability at year
end 1997. All of the Company's accounts payable at year end were current.
The Company's subcontract, dated December 23, 1993, with UNISYS was an
indefinite delivery, indefinite quantity, fixed price contract which expired in
September 1997. The Company had not received any sales revenues pursuant to
the contract prior to expiration for year to date 1997. It is Management's
opinion that the UNISYS contract has not been renewed by UNISYS due to a
perceived shift in corporate focus on the part of UNISYS.
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. 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, 1997. A
renewal GSA contract is being negotiated. If awarded the new GSA contract
period would extend through March 31, 1998. 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 have averaged approximately 18% of annual sales. 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 1998 will be under
this GSA contract.
With the possible exception of orders from the Company's 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 1997.
No adverse affect is anticipated during 1998.
FORWARD LOOKING STATEMENTS: The above discussion may contain forward-looking
statements that involve a number of risks and uncertainties. In addition to
<PAGE>
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>
INDEX TO FINANCIAL STATEMENTS
PAGE
ACCOUNTANTS' REPORT ON THE FINANCIAL STATEMENTS 13
BALANCE SHEETS 14-15
STATEMENT OF OPERATIONS 16-17
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 18
STATEMENT OF CASH FLOWS 19-20
NOTES TO FINANCIAL STATEMENTS 21-32
<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, 1997 and 1996, and the related statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1997. 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, 1997 and 1996 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
ROBERT MOE & ASSOCIATES, PS
Spokane, Washington
February 6, 1998
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
-------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 6,237 $ 5,717
Money market investment 405,815 482,892
Certificate of Deposit 439,708 724,573
Commercial paper 615,000 200,000
Accounts receivable, net of allowance
for uncollectibles of $1,284-1997
and $1,284-1996 268,980 38,311
Inventory 319,127 401,305
Accrued interest 7,439 2,707
Prepaid insurance 3,098 3,101
Prepaid expenses 75 6,930
Prepaid Federal income taxes - 26,355
Deferred tax asset - 411
-------------- ---------------
Total current assets 2,065,479 1,892,302
-------------- ---------------
PROPERTY & EQUIPMENT
Leasehold improvements 13,544 13,544
Laboratory equipment 298,027 276,421
Furniture & fixtures 15,017 15,017
Dies & molds 20,827 21,612
-------------- ---------------
347,415 326,594
Less accumulated depreciation 214,491 185,384
-------------- ---------------
132,924 141,210
-------------- ---------------
OTHER ASSETS
Patent costs, net of amortization
of $1,453-1997 and $1,344-1996 933 1,042
Deposits 340 340
Capitalized software cost of
$64,852-1997 net of amortization
of $58,717; $64,062-1996 net of
amortization of $56,247 6,135 7,815
-------------- ---------------
7,408 9,197
-------------- ---------------
TOTAL ASSETS $ 2,205,811 $ 2,042,709
============== ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
BALANCE SHEETS
December 31, 1997 and 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
---------------- -----------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 29,931 $ 15,035
Accrued payroll 3,704 1,288
Accrued payroll taxes 930 1,816
Accrued excise taxes payable 959 418
Accrued vacation pay 16,896 12,218
Federal income taxes payable 24,793 -
---------------- -----------------
Total current liabilities 77,213 30,775
---------------- -----------------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value,
50,000,000 shares authorized,
4,953,667-1997 and 4,953,667-1996
shares issued and outstanding 4,954 4,954
Additional paid-in capital 894,129 894,129
Retained earnings 1,229,515 1,112,851
---------------- -----------------
2,128,598 2,011,934
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,205,811 $ 2,042,709
================ =================
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
SALES $ 1,337,303 $ 1,190,304 $ 1,535,071
COST OF SALES
Beginning inventory 401,305 297,037 423,932
Purchases and allocated costs 492,985 595,119 475,691
----------- ----------- -----------
894,290 892,156 899,623
Ending inventory 319,127 401,305 297,037
----------- ----------- -----------
575,163 490,851 602,586
GROSS PROFIT 762,140 699,453 932,485
----------- ----------- -----------
OPERATING EXPENSES
Advertising 51,935 54,969 50,619
Amortization 2,579 1,837 1,837
Bad Debts 54,474
Commissions-sales 21,036 22,972 31,974
Dues & Subscriptions 4,180 5,407 7,700
Depreciation 32,599 30,303 25,379
Insurance 7,568 6,528 6,911
Materials & supplies 22,079 26,060 12,383
Office & administration 11,371 18,517 16,628
Printing 8,443 10,203 13,104
Professional services 56,215 77,795 46,113
Rent & utilities 32,932 26,001 25,895
Repair & maintenance 10,759 13,080 6,992
Salaries 408,840 413,920 391,826
Taxes 74,806 73,412 74,333
Telephone 11,463 11,639 11,159
Trade shows 19,755 17,682 8,688
Travel expenses 36,804 54,837 53,778
----------- ------------ ------------
813,364 865,162 839,793
Expenses allocated to cost of sales (227,389) (257,035) (280,650)
----------- ------------ ------------
585,975 608,127 559,143
----------- ------------ ------------
OPERATING INCOME 176,165 91,326 373,342
----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ----------- ---------
<S> <C> <C> <C>
OTHER INCOME
Interest income 63,347 62,206 58,359
Site support reimbursement
net of allocated costs 6,799 16,192 24,259
Loss on disposition of assets (184) (238) (1,870)
Realized loss on marketable
securities due to impairment - - (49,953)
Realized loss on marketable securities - (3,522) -
Uncollectible accounts recovered - 57,204 -
Recovery from marketable securities
litigation 1,633 11,288 -
----------- ---------- ---------
71,595 143,130 30,795
----------- ---------- ---------
INCOME BEFORE PROVISION FOR FEDERAL
INCOME TAXES 247,760 234,456 404,137
PROVISION FOR FEDERAL INCOME TAXES 81,559 75,721 136,428
----------- ---------- ---------
NET INCOME $ 166,201 $ 158,735 $ 267,709
=========== ========== =========
BASIC EARNINGS PER SHARE $ 0.03 $ 0.03 $ 0.05
=========== ========== =========
DILUTED EARNINGS PER SHARE $ 0.03 $ 0.03 $ 0.05
=========== ========== =========
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for December 31, 1994 through December 31, 1997
Additional Loss on
Common Stock Paid-In Marketable Retained
Shares Amount Capital Securities Earnings TOTAL
----------- ------------ ------------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
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 - 954,116 1,877,180
REPURCHASE OF COMMON STOCK:
May 17, 1996 (7,000) (7) (3,143) (3,150)
June 26, 1996 (13,000) (13) (6,658) (6,671)
July 8, 1996 (3,000) ( 3) (1,527) (1,530)
September 3, 1996 (30,000) (30) (12,600) (12,630)
NET INCOME
December 31, 1996 - - - - 158,735 158,735
----------- ----------- ------------ --------------- ----------- -----------
4,953,667 4,954 894,129 - 1,112,851 2,011,934
CASH DISTRIBUTIONS DECLARED:
$0.01 per share - - - - (49,537) (49,537)
NET INCOME
December 31, 1997 - - - - 166,201 166,201
----------- ----------- ------------ --------------- ---------- -----------
BALANCE AT
December 31, 1997 4,953,667 $ 4,954 $ 894,129 $ - $1,229,515 $ 2,128,598
=========== =========== ============ =============== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED (USED) IN
OPERATING ACTIVITIES:
Net income $ 166,201 $ 158,735 $ 267,709
Noncash expenses included in income:
Depreciation 32,599 30,303 25,379
Amortization 2,579 1,836 1,837
Deferred income taxes 411 4,876 (17,035)
Loss on disposition of assets 184 238 1,870
Realized loss/impaired securities - 3,522 49,953
Decrease (increase) in Current Assets:
Accounts receivable, net (230,668) 119,609 6,391
Inventory 82,178 (104,268) 126,895
Other current assets 28,481 (31,214) 13,587
Increase (decrease) in Current Liabilities:
Accounts payable, accrued expenses
and other current liabilities 21,644 (44,152) 41,730
Federal Income Taxes Payable 24,793 (58,665) 59,863
--------------- ------------- --------------
Net Cash Provided By Operating Activities 128,402 80,820 578,179
--------------- ------------- --------------
CASH FLOWS PROVIDED (USED) IN
INVESTING ACTIVITIES:
Deposit - - 497
Capitalized software (790) (2,919) -
Additions to property & equipment (24,497) (26,508) (68,373)
Certificates of deposit-over 3 months - 102,000 (102,000)
Institutional Governmental Income Fund - - (17,344)
Proceeds from sale of marketable securities - 117,595 -
--------------- ------------- --------------
Net Cash Used In Investing Activities (25,287) 190,168 (187,220)
--------------- ------------- ---------------
CASH FLOWS PROVIDED (USED) IN
FINANCING ACTIVITIES:
Repurchase common stock - (23,981) -
Distributions paid (49,537) - -
Proceeds from note receivable - 3,449 1,800
--------------- ------------- ---------------
Net Cash Provided By Financing Activities (49,537) (20,532) 1,800
--------------- ------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 53,578 250,456 392,759
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,413,182 1,162,726 769,967
--------------- ------------- ---------------
CASH AND CASH EQUIVALENTS AT
ENDING OF PERIOD $ 1,466,760 $ 1,413,182 $ 1,162,726
=============== ============= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---------------- ------------- ---------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION:
Cash paid during the year for:
Interest - - -
Income taxes $ 30,000 $ 155,865 $ 77,129
================ ============= ===============
Cash and Cash equivalents:
Cash $ 6,237 $ 5,717 $ 15,765
Money Market 405,815 482,892 444,335
Certificates of deposit (maturity =
3 months or less) 439,708 724,573 402,626
Commercial paper (maturity =
3 months or less) 615,000 200,000 300,000
---------------- ------------- ---------------
$ 1,466,760 $ 1,413,182 $ 1,162,726
================ ============= ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ORGANIZATION: The Company was incorporated under the laws of the
State of Washington on February 10, 1984, primarily to develop, produce, sell
and distribute wireless modems that will allow communication between
peripherals via radio frequency waves.
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION: The Company recognizes revenue from product sales upon
shipment to the customer. Revenues from site support are recognized as the
Company performs the services in accordance with agreement terms.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS: The Company uses the reserve method for
recording allowance for uncollectible accounts. The amount included in
Allowance for Uncollectible Accounts consists of $1,284 as of December 31,
1997, and $1,284 as of December 31, 1996.
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:
1997 1996 1995
---------- ---------- ----------
Parts $218,263 $260,397 $198,487
Work in progress 26,582 68,555
Finished goods 74,282 72,353 98,550
---------- ---------- ---------
$319,127 $401,305 $297,037
========== ========== =========
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.
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 1997, 1996, and 1995
were $128,110, $135,468, and $85,265, respectively.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
EARNINGS (LOSS) PER COMMON SHARE: Basic EPS excludes dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. The
primary weighted average number of common shares outstanding was 5,521,283,
5,478,558, and 5,433,174, for the years ended December 31, 1997, 1996, and 1995
respectively.
For the Year Ended 1997
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
BASIC EPS
Income available to common
stockholders $166,201 5,521,283 $0.03
=========== ============= ==========
DILUTED EPS
Income available to common
stockholders + assumed
conversions $166,201 5,543,667 $0.03
=========== ============= =========
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.
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
1996 1,728
1997 2,470
<PAGE>
ELECTRONIC SYSTEMS TEHCNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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:
1997 1996 1995
------------- ------------ -----------
Currently payable $ 81,148 $ 70,845 $ 152,265
Deferred 411 4,876 (15,837)
------------- ------------ -----------
Provision for Federal
Income Taxes $ 81,559 $ 75,721 $ 136,428
============= ============ ===========
The components of the net deferred tax (asset) liability at December 31, were
as follows:
1997 1996 1995
------------- ------------ -----------
Depreciation $ 19,969 $ 18,523 $ 16,116
Accrued vacation payable (5,744) (4,154) (3,982)
Allowance for uncollectible
accounts receivable (437) (437) (437)
Realized loss due to impairment
of marketable securities - - (16,984)
Unused capital loss carryforward (13,788) (14,343) -
------------- ------------- -----------
$ - $ (411) $ (5,287)
============= ============= ===========
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
2 - FEDERAL INCOME TAXES (continued)
The differences between the provision for income taxes and income taxes
computed using the U.S. federal income tax rate were as follows:
1997 1996 1995
------------- ------------- -----------
Amount computed using the
statutory rates $ 81,148 $ 70,845 $ 152,265
Increase (reduction):
Deferred tax (asset)
liability 411 4,876 (15,837)
------------- ------------- -----------
Provision for Federal
Income Taxes $ 81,559 $ 75,721 $ 136,428
============= ============= ===========
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 $16,896 and $12,218 have been accrued as of December 31, 1997, and
1996, respectively.
5 - LEASES
The Company has no obligation under capital lease arrangements.
The Company rents its facility under a three (3) year operating lease
commencing on the 1st day of December, 1996. 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
$24,096.00 per year, payable monthly in advance at the rate of $2,008.00 per
month. A leasehold tax of $257.83 per month is due in addition to the
$2,008.00 monthly rent. For the second and any following years of the
renewed term, the parties agree that any rental amount be increased by the
Consumer Price Index- Pacific Cities and US City Average-All Items Indexes
using the US City Average for the 12 month period preceding. The rental
expense for 1997, 1996 and 1995 were as follows: 1997 = $27,670;
1996 = $21,428; 1995 = $21,428.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
5 - LEASES (continued)
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
------------------------ ------
1998 27,652
1999 25,348
2000 -0-
2001 -0-
2002 -0-
6 - FOREIGN SALES
The Company's revenues fall into three major customer categories, Domestic,
Export, and US Government Sales. A percentage breakdown of E.S.T.'s major
customer categories for the years of 1997 and 1996 are as follows:
1997 1996
---- ----
Domestic Sales 58% 61%
Export Sales 24% 17%
US Government Sales 18% 22%
The geographic distribution of foreign sales for 1997 and 1996 is as follows:
1997 1996
---- ----
Brazil 21 15
Malaysia 14 -
Philippines 12 14
Croatia 12 14
Chile 10 -
Mexico 6 25
South Korea 6 4
Canada 5 3
Ecuador 5 2
Israel 3 3
Ghana 2 -
Cyprus 2 -
Slovenia 1 -
Thailand less than 1 -
Venezuela less than 1 16
Costa Rica - 2
Peru - 2
7 - PROFIT SHARING 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.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
8 - STOCK OPTIONS
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
=======
On February 9, 1996, 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 $.42 per
share. Options may be exercised any time during the period from February 9,
1996, through February 9, 1999. Following is a summary of transactions:
Shares under Option
-------------------
Outstanding, beginning of year 200,000
Granted during year 0
Canceled during year 0
Exercised during the year 0
-------
Outstanding, end of year 200,000
=======
On February 7, 1997, 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 $0.28 per
share. Options may be exercised any time during the period from February 7,
1997, through February 7, 2000. Following is a summary of transactions:
Shares under Option
-------------------
Outstanding, beginning of year 0
Granted during year 215,000
Canceled during year 0
Exercised during the year 0
-------
Outstanding, end of year 215,000
=======
1997 1996
------------- -------------
Option price range at end of year $.28 to $.42 $.31 to $.42
Option range for exercised shares None Exercised
Weighted average fair value of
options granted during the year $.28 $.42
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTE TO FINANCIAL STATEMENTS
8 - STOCK OPTIONS (continued)
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Number Average Weighted
Range of Exerciseable & Remaining Average
Exercise Outstanding Contractual Exercise
Prices at 12/31/97 Life Price
--------- ---------------- ------------- -----------
<S> <C> <C> <C>
$.31 175,000 1 years $.31
$.42 200,000 2 years $.42
$.28 215,000 3 years $.28
</TABLE>
After termination of employment, stock options may be exercised within 90 days.
During the 12 months ended December 31, 1997, 150,000 shares under option
expired and no shares under option were exercised. At December 31, 1997, there
are 590,000 shares reserved for future exercises.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plan. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant date for awards in 1997
consistent with the provisions of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts indicated
below:
1997 1996
------------ --------------
Net earnings-as reported $166,201 $158,735
Net earnings-pro forma 141,925 124,850
Earnings per share-as reported .03 .03
Earnings per share-pro forma .03 .02
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997; dividend yield equaled 0; expected
volatility of 52.37%, risk-free interest rate of 5%; and expected lives of
3 years.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
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
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, 1997, the Company had cash
and cash equivalents with Seattle First National Bank with a combined
balance of $385,032 which is $285,032 in excess of the FDIC insured amount.
At December 31, 1997, the Company held commercial paper in the amount
of $615,000 which was not FDIC insured. At December 31, 1997, the Company
had cash deposits with Pioneer Bank with a balance of $112,189 which is $12,189
in excess of the FDIC insured amount. At December 31, 1997, the Company had
cash deposits with First Savings Bank of Washington with a balance of $110,400
which is $10,400 in excess of the FDIC insured amount. Additionally, at
December 31, 1997, the Company had cash deposits with Pacific One Bank with a
combined balance of $117,120 which is $17,120 in excess of the FDIC insured
amount. At December 31, 1997, the Company had cash deposits with Piper Jaffray
with a balance of $127,289, which is not FDIC insured.
Concentrations of credit risk with respect to trade accounts receivable are
generally diversified due to the geographic dispersion of the Company's
customer base.
11 - RELATED PARTY TRANSACTIONS
For the years ended December 31, 1997, 1996, and 1995 services in the amount of
$82,490, $52,199, and $51,974 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.
The Company purchases certain key components necessary for the production of
its products from sole suppliers. The components provided by the suppliers
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.
12 - 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
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
12 - MARKETABLE SECURITIES (continued)
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.
The following information is as of December 31, 1997, and 1996:
1997 1996
----------- ------------
Aggregate fair value of marketable
securities $ -- $ --
Gross unrealized holding gains -- --
Gross unrealized holding losses -- --
Gross unrealized loss due to impairment
in marketable securities -- --
Amortized cost basis -- --
Changes in marketable securities for the period ended December 31, 1997,
and 1996 are as follows:
Cost $ -- $ 171,070
Dividends and capital gains
reinvested -- --
Sale of securities -- (117,595)
Realized loss due to impairment
in marketable securities -- (49,953)
Realized loss on sale of securities -- (3,522)
Fair market value $ 0 $ 0
The Company was included in the class action suit settlement against the
manager of the Company's marketable securities investments, Piper Jaffray.
The Company received settlement payments of $11,288 during 1996 and $1,633
during 1997, and expects to receive periodic settlement payments of similar
amounts in 1998.
13 - CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1995, 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, 1995, but was not reported on subsequent filing with the Commission
until the Form 10-Q for the quarter ending March 31, 1996. The effect of this
change was to increase net income for 1995 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 1995.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
14 - 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 broker 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
53,000 shares. The transactions for shares repurchased under the Plan were
completed by September 30, 1996. The subject shares were canceled from the
Company's outstanding shares and were therefore removed from the Company's
outstanding common shares.
NOTE - CASH DISTRIBUTION
On June 5, 1997, the Company declared a one-time, non-cumulative, cash
distribution to shareholders of record as of June 20, 1997 of $0.01 per share
of common stock, with a payable date of July 11, 1997. The payment of the cash
distribution was completed by July 11, 1997, for a total dollar value of
$49,537.
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
SELECTED FINANCIAL DATA
For the five years
ended December 31, 1997 1996 1995 1994 1993
----------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales $1,337,303 $1,190,304 $1,535,071 $1,197,720 $1,444,039
Gross profit 762,140 699,453 932,485 732,340 846,292
Income (Loss)
before provision
for income taxes 247,760 234,456 404,137 290,839 438,192
Provision for
income taxes 81,559 75,721 136,428 104,899 144,970
Net income 166,201 158,735 267,709 185,940 293,222
Net income per share 0.03 0.03 0.05 0.04 0.06
Weighted average
number of shares
outstanding 5,521,283 5,478,558 5,433,174 5,360,982 5,345,844
Total Assets 2,205,811 2,042,709 2,010,772 1,597,612 1,540,141
Long-term debt and
capital lease
obligations - - - - -
Stockholders' equity 2,128,598 2,011,934 1,877,180 1,555,558 1,403,744
Stockholders' equity
per share 0.43 0.41 0.37 0.31 0.28
Working capital 1,988,266 1,861,527 1,723,823 1,449,848 1,297,738
Current Ratio 26.7:1 61.5:1 13.9:1 44.9:1 10.5:1
Equity to total assets 96% 98% 93% 97% 91%
</TABLE>
<PAGE>
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Electronic Systems Technology, Inc.
415 N. Quay, Suite 4
Kennewick, WA 99336
We hereby consent to the use of our opinion dated February 6, 1998, on the
financial statements of ELECTRONIC SYSTEMS TECHNOLOGY, INC. for the year ended
December 31, 1997, in your annual report.
ROBERT MOE & ASSOCIATES, PS
Spokane, Washington
February 26, 1998
<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
2510 N. Pines Road, Suite 202
Spokane, Washington 99206
(800) 762-8233
(509) 928-6449 (Facsimile)
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 5, 1998, at:
Cavanaugh's Motor Inn
1101 N. Columbia Center Blvd.
Kennewick, Washington 99336
All stockholders are encouraged to attend.
EXHIBIT 22.2 - PROXY MAILED APRIL 21, 1998
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
(509) 735-9092 415 N. QUAY STREET KENNEWICK, WASHINGTON 99336
PROXY
The undersigned hereby revokes all previous proxies for his stock and appoints
T.L. Kirchner, with power of substitution, to represent and to vote on behalf
of the undersigned all of the shares of Electronic Systems Technology, Inc.
which the undersigned is entitled to vote at the Annual Meeting of the
shareholders to be held at Cavanaugh's Motor Inn at Columbia Center,
Kennewick, Washington on June 5, 1998 at 3:00 p.m. Kennewick time, including
any adjournments thereof.
1. Election of Director
John L. Schooley
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, 1998.
For Against Abstain
------------------- ------------------- --------------------
3. In his discretion the proxy is hereby authorized to vote upon such other
matters as may properly come before the meeting.
For Against Abstain
----------------- ----------------- ----------------------
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 AND 3.
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.
----------------- -----------------
EXHIBIT 22.3 - PROXY STATEMENT MAILED APRIL 21, 1998
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
JUNE 5, 1998
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 5, 1998 at 3:00 p.m.
Kennewick time 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 transact such other business as may properly come before the annual
meeting or any adjournments thereof.
Stockholders of record at the close of business on April 2, 1998 are entitled
to notice of and to vote at the meeting.
By order of the Board of Directors,
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
/s/ T. L. KIRCHNER
T.L. Kirchner, President
April 20, 1998 / 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 5, 1998
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 5, 1998 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 20, 1998. The Annual Report of the Company for the year
ending December 31, 1997 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 Director
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 one
director 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, 1998. See "Approval of Auditors."
Other Business
To transact other matters as may properly come before the annual meeting or any
adjournment or adjournments thereof.
VOTING AT ANNUAL MEETING
General
The close of business on the Date of April 2, 1998 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 4,953,667 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
<PAGE>
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 the individual to
the Corporation's Board of Directors, (2) FOR the ratification of the selection
of independent auditors; (3) 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.
1. ELECTION OF DIRECTOR
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 nominee will be
unable to accept election. However, if the 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 1999 Annual Meeting and the terms of directors of Class I expire
with the 2000 Annual Meeting.
Nominee
The nominee for Class II director whose term, if elected, will expire in 2001
and certain additional information with respect to the nominee is as follows:
<PAGE>
Nominee's Name, Position with the Company, Principal Occupation(s), Other
Directorships, Age, and Ownership:
CLASS II - Three Year Term Expiring June 1998
JOHN L. SCHOOLEY: Mr. Schooley is a Director of the Company. During the past
five years, Mr. Schooley has been the owner and President of Remtron, Inc. in
San Diego, California. Remtron, Inc. is a manufacturer of advanced radio
control and telemetry systems for the industrial market. Mr. Schooley
does not serve as director of any other company which is registered under the
Securities Act.
Age: 57
Shares Beneficially Owned: 10,000
Percent of Class: 0.2
A Director Since: 1993
* Shares beneficially owned do not include 25,000 shares subject to the options
granted 2-7-97 and 2-6-98.
MANAGEMENT RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE NOMINEE TO THE BOARD
OF DIRECTORS OF THE COMPANY
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, 1998, 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. 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 2000
MELVIN H. BROWN: Mr. Brown is a Director of the Company. During the last five
years Mr. Brown has been the owner and president of Manufacturing Services,
Inc. Manufacturing Services provides services in packaging design, printed
circuit board layout, prototyping, production runs, verification of
documentation testing, burn-in, quality control, and repetitive volume
production. Manufacturing Services provides electronic manufacturing and
quality control testing services for Electronic Systems Technology. EST
<PAGE>
purchased $82,490 of these services from Manufacturing Services during 1997.
(See Related Party Transactions below.) Mr. Brown does not serve as a director
for any company registered under the Securities Exchange Act.
Age: 67
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 2-9-96, 2-7-97 and 2-6-98.
ARTHUR LEIGHTON: Mr. Leighton is a Director of the Company. Mr. Leighton
served as President of Kraft Industries through mid 1986. Since then he has
been working as an independent Management Consultant. Mr. Leighton was
critically injured in 1997. Currently, Mr. Leighton is recovering from his
injuries at his home in Southern California, where he is expected to make a
full recovery. Mr. Leighton does not serve as director of any company which
is registered under the Securities Exchange Act.
Age: 74
Shares Beneficially Owned* 84,000
Percent of Class: 1.7
A Director Since: 1985
* Shares beneficially owned do not include 75,000 shares subject to the
options granted 2-9-96, 2-7-97, and 2-6-98.
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: 54
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 2-9-96, 2-7-97, and 2-6-98.
CLASS III - Three Year Term Expiring June 1999
T.L. KIRCHNER: Mr. Kirchner is founder, President and a Director of the
Company. During the last five years Mr. Kirchner devoted 100% of his time to
the Management of the Company. His primary duties were, and are, to oversee
the Management and Marketing functions of the Company. Mr. Kirchner does
not serve as a director for any company registered under the Securities
Exchange Act.
Age: 49
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 2-9-96, 2-7-97, and 2-6-98.
<PAGE>
JOHN H. RECTOR: Mr. Rector is a Director of the Company. Mr. Rector founded
Western Sintering, located in Richland, Washington. Western Sintering, a
powdered metal parts manufacturer, is an Original Equipment Manufacturer (OEM).
Mr. Rector is the former President of Western Sintering, Inc. Mr. Rector
currently serves as President of Plastic Injection Molding, Inc., a plastic
injection parts manufacturer. Mr. Rector does not serve as director of any
company which is registered under the Securities Exchange Act.
Age: 81
Shares Beneficially Owned: 6,000
Percent of Class: 0.1
A Director Since: 1992
* Shares beneficially owned do not include 25,000 shares subject to the options
granted 2-7-97 and 2-6-98.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of January 29, 1998, 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.
<TABLE>
<CAPTION>
Title of Name of Amount & Nature of Percent of
Class Beneficial Owner Beneficial Ownership Class
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Common T.L. Kirchner 403,488 (1) 8.1%
(Officer & Director)
Common Robert Southworth 4,000 (1) 0.1%
(Officer & Director)
Common Melvin H. Brown (Director) 76,500 (1) 1.5%
Common Arthur Leighton (Director) 84,000 (1) 1.7%
Common John H. Rector (Director) 6,000 (1) 0.1%
</TABLE>
(1) Does not include stock options. See below.
* Shares beneficially owned do not include shares subject to the options
granted 2-9-96, 2-7-97, and 2-6-98.
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, 1997 are:
None
<PAGE>
(b) Summary Compensation Table
The Company's named compensated executive officer is T.L. Kirchner, President
and CEO. The Company had no other compensated executive officers as of
December 31, 1997.
The information specified concerning the compensation of the named executive
officers for each of the Registrant's last three completed fiscal years is
provided in the following Summary Compensation Table:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Name and Other Restricted Options All
Principal Annual Stock Underlying LTIP Other
Position Year Salary Bonus Compensation Awards SARs Payouts Compensation
($) ($)(1) ($)(2) ($) (#) ($) ($)(3)(4)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
T. L. Kirchner 1997 74,580 5,081 1,615 0 25,000 0 5,524
President & 1996 74,015 8,748 1,185 0 25,000 0 5,368
CEO 1995 67,800 5,356 1,406 0 25,000 0 5,025
</TABLE>
(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
(4) Amount does not reflect proceeds of $0.01 per share cash distribution
received during 1997, totaling to $4035. Receipt of cash distribution was
based solely on capacity as a shareholder.
The information specified concerning the stock options of the named executive
officers during the fiscal year ended December 31, 1997 is provided in the
following Option/SAR Grants in the Last Fiscal Year Table:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants (5)
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or base Expiration
Name Granted # (5) Fiscal Year Price($/Sh) Date
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
T.L. Kirchner 25,000 11.6% 0.28 2/8/00
</TABLE>
(5) This table does not include Stock Options granted previously.
<PAGE>
The information specified concerning the stock options of the named executive
officers during the fiscal year ended December 31, 1997 is provided in the
following Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal
Year-End Options/SAR Values Table:
<TABLE>
<CAPTION>
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
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
T.L. Kirchner 0 0 75,000 0
</TABLE>
The Company does not currently have a Long-Term Incentive Plan ("LTIP").
Compensation to outside directors is limited to reimbursement of out-of-pocket
expenses that are incurred in connection with the directors duties associated
with the Company's business. There is currently no other compensation
arrangements for the Company's directors.
The Company currently does not hold any Employment Contracts nor Change of
Control Arrangements with any parties.
CERTAIN INFORMATION REGARDING THE BOARD OF DIRECTORS
During the fiscal year ended December 31, 1997 the Board of Directors held
three meetings on December 12, 1997, June 5, 1997, February 7, 1997. All
directors were in attendance at such meetings, except as follows:
Mr. Schooley was absent from the February 7, 1997 and December 12, 1997
meetings. Mr. Brown was absent from the February 7, 1997 meeting.
Mr. Leighton was absent for the June 5, 1997 and December 12, 1997 meetings.
COMMITTEES
There are no Compensation, Audit or Nominating Committees. However, the Board
has established a Stock Option Committee. The sole purpose of this committee
is to research and make recommendations to the Board of Directors regarding
issuance of Stock Options pursuant to the Company's Stock Option Plan.
RELATED PARTY TRANSACTIONS
During fiscal year 1997, the Company contracted for services from Manufacturing
Services, Inc. in the amount of $82,490. 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.
<PAGE>
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 is scheduled for June 4, 1999. 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, 1999. 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 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, 1997 (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. Additionally, the Securities and Exchange Commission maintains a web
site that contains reports and other information at the following address
http://www.sec.gov.
By Order of the Board of Directors
/s/ T. L. KIRCHNER
T.L. Kirchner
President
10 APR 98
(Date)
