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 26, 1999
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 26, 1999, the Company mailed its Annual Report for 1998, and
information pertaining to the Company's June 11, 1999 Annual Shareholder
Meeting to its shareholders of record as of April 23, 1999.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
Exhibit 22.1: 1998 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 13, 1999
EXHIBIT 22.1 - 1998 ANNUAL REPORT MAILED APRIL 26, 1999
1998 ANNUAL REPORT
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
415 NORTH QUAY STREET
KENNEWICK, WA 99336
<PAGE>
Dear Shareholder,
During 1998, we undertook many different challenges, that we are confident
will reap benefits in the future for the Company. We continued development
of new products based on our ESTeem(tm) 192-product platform, which we
believe, will lead to increased presence in both new and existing markets
for our products. We have also concentrated development efforts on the
modernization of the exterior case of the ESTeem products to enhance both
ease of use for the customer, product performance, and reduced manufacturing
costs. We moved ahead with our marketing plan for the ESTeem Mobile Data
Computer System (MDCS) for public safety/law enforcement entities, by hiring
a sales manager for the endeavor, advertising, and attending numerous
tradeshows, which resulted in our being awarded our first contracts. We
have continued to strengthen relationships in our distribution network, and
processed large U.S. Government orders late in the year. The end result was
increased sales revenues for 1998, but the increased marketing expenses and
development outlays resulted in profitability nearly identical with 1997.
For the year ending December 31, 1998, the Company recorded gross product
sales of $1,485,381 compared with $1,337,303 in 1997, an increase of 11%,
with the majority of the increased sales resulting from large U.S. Government
orders. The Company's gross revenues for 1998 were $1,631,298, compared to
1997 gross revenues of $1,476,487. Net income before tax for 1998 was
$242,779, compared with net income before tax of $247,760 for 1997. Net
income after tax for 1998 was $162,927, equivalent to $0.03 per share,
compared with net income after tax of $166,201, or $0.03 per share, in 1997.
Shareholder equity in the Company increased to $0.45 for year-end 1998, an
increase from $0.43 per share for year end 1997. At December 31, 1998 the
Company remains strong financially, with $2,354,145 in total assets, cash
and short-term investments of $1.45 million, and no long-term debt.
Our main goal in the interest of you, our shareholders, 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. However, we continue in our
belief that the market value of the Company's stock remains undervalued,
which has hampered the PSE listing efforts of the Company. Table 1 shows a
comparison of PSE listing requirements with EST's standing as of year-end
1998. During 1998 we were pleased to again pay a cash distribution,
thereby returning value to our loyal shareholders. We believe the key to
increasing the value of the Company's stock is through increased sales
revenues, and expansion into new market segments for the Company's products.
With increased sales revenues and expansion into new markets as our
objective, the Company's plans for 1999 include marketing the new ESTeem
192S spread spectrum product in new market segments of the industrial
control arena and continued aggressive marketing the ESTeem Mobile Data
Computer Systems for the public safety/law enforcement market. We also
remain committed to the existing markets and customers for our products
in the industrial controls industry.
The Company's publicly filed Securities and Exchange Commission (SEC)
information continues to be available from the SEC EDGAR(r) archive at
the SEC Internet website (http://www.sec.gov), and at the FreeEDGAR(r) web
site (http://www.freeedgar.com) for those interested parties with Internet
access.
<PAGE>
As we move forward to face the certain challenges and opportunities of 1999,
I would like to express my gratitude to our shareholders for their continued
support.
<TABLE>
<CAPTION>
Table 1
PACIFIC STOCK EXCHANGE LISTING REQUIREMENTS
Electronic Systems Technology
Category (Selected Financial Data)
Listing 1998 1997
Requirements Year End Year End
<S> <C> <C> <C>
Net Tangible Assets $2,000,000 $2,241,988 $2,128,598
After Tax Income $ 100,000 $ 162,927 $ 166,201
Public Float (Shares) 500,000 4,337,979 4,337,979
Market Value Of Float $1,500,000 $1,279,703 $1,301,000
Bid Price $ 3.00 $ .25 - .34 $ .26 - .34
Shareholders 500 >640 >640
Operating History 3 Years 14 Years 13 Years
TABLE 1
</TABLE>
/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 lines are 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, resellers and distributors.
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 a Canadian patent in October 1988. In the past three years, the Company
has continued to improve its products to incorporate the latest technology
and respond to customer needs and market opportunities. The Company continues
to develop products based on the versatile ESTeem 192 product platform, which
is faster and more adaptable than previous products. The Company has
continually expanded its customer base, particularly in the industrial
control arena with efforts to team with all major programmable logic
controller (PLC) hardware vendors. The Company has also been involved as a
hardware provider for 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 1998, the Company started
marketing ESTeem products to public safety entities for Mobile Data Computer
applications, and continued to participate in foreign and domestic Supervisory
Control and Data Acquisition (SCADA), Industrial Controls, and Government
marketplaces.
PRODUCTS AND MARKETS
The Company's product line is a group of narrow band, packet burst, licensed,
and spread spectrum unlicensed, VHF & UHF FM radio modems that employ radio
frequency waves to provide communication links between computers, peripherals,
and instrumentation controls.
EST's products provide communication links between computers, peripherals,
and instrumentation controls using radio frequency waves. The Company's
products are packet burst, VHF & UHF FM radio modems, operating in radio
frequency bands between 66 to 79 Megahertz (MHz), 150 to 174 MHz, 400 to
420 MHz, 450 to 470 MHz, and 2.4 Gigahertz (GHz).
The ongoing proliferation of computer applications in business and industry
has created a dynamic environment of automation and networks which require
increasing amounts of data transfer. Prior to the invention of the ESTeem
modem, the majority of data transfers used telephone modems or direct cable
connections. These latter methods had costly side effects. Telephone modems
have a potentially expensive monthly charge for the use of telephone lines,
and direct cable connections can have installation costs as much or more than
the cost of the communication system. ESTeem wireless modem products provide
a "Wireless Solution" by eliminating the need for conventional hardwiring and
leased phone lines.
<PAGE>
All of the ESTeem models ("ESTeems") come with industry standard asynchronous
communications ports to give the user a new dimension to "Local Area
Networking". As many as 253 devices can be interfaced on a single frequency.
ESTeem wireless modems have over one hundred internal software commands, which
are saved in non-volatile memory, allowing users to easily configure the unit
for any application.
ESTeem Modems work on a packet burst communications concept. Packet systems,
whether hardwired or radio, share the same principle of operation: data is
taken from a standard RS-232C, RS-422 or RS-485 asynchronous port and is
transmitted in "Electronic Packets". The size of the packet can be user
defined from 1 to 2000 bytes of information. Once a packet of data is formed,
it is transmitted in a "burst," from one ESTeem modem to another ESTeem modem,
hence the term "packet burst communications." ESTeem Modems provide data
accuracy of greater than one part in 100 million. Internal Digi-Repeater
features allow the user to increase operating range by relaying transmission
through a maximum of three ESTeems to reach a destination ESTeem. An 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
Law Enforcement/Public Safety Computer Networking
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, and
Model 192M, operate in the mid 66-79 MHz and 150-174 MHz band of the VHF RF
spectrum. The standard production units of the ESTeem Model 95 and 192V are
configured to operate in the 72 to 73 and 75 to 76 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 ESTeem 192M operates in the 150-174 MHz RF frequency spectrum
with a data rate of 19,200 bps, and RF output power from two to four watts,
depending on customer licensing. The major markets for these products are in
industrial control, SCADA, and inventory control in the commercial arena, and
inventory and command control for Federal applications.
The Company's UHF radio modem products operate in the lower 400 MHz federal
radio band, the mid to upper 400 MHz commercial radio band, and the 2.4 GHz
unlicensed radio band, of the UHF RF spectrum. The ESTeem UHF radio modem
products are the ESTeem Model 192C, 192F, and 192S. The ESTeem Models 192C
<PAGE>
and 192F, have the same features as the VHF radio modem products, but are
designed to operate in the lower and upper 400 MHz areas of the UHF RF
spectrum and have capability of RF output power from two to four watts
depending on customer licensing. The 192C and 192F products contain infrared
and optional telephone interfaces not available on previous models. The ESTeem
192C was designed to operate in business radio bands of upper 400 MHz. The
ESTeem Model 192F was designed tooperate in U.S. Government radio bands of
lower 400 MHz. The ESTeem 192S is a low cost unlicensed direct sequence spread
spectrum product operating in the 2.4 GHz radio spectrum, with a power output
of 1 watt and a data rate of 171,000 bps, intended for domestic and foreign
applications over distances up to three miles. 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.
For operation in the United States, the ESTeem products require Federal
Communications Commission (FCC) Type Acceptance. For operation in Canada, the
ESTeem products require Industry Canada Type Acceptance. Of the Company's
current production line, the ESTeem Models 192F, 192C, 192M and 192V have
applied for and have been granted type acceptance in the United States and
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 Company's products compete in the rapidly changing technology environment
of the communications industry, where standards and technologies are subject
to rapid and unexpected changes. This environment results in it being necessary
for the Company to be continually updating and enhancing existing products, as
well as developing new products in order to remain competitive. During 1998,
the Company completed development of the ESTeem 192M radio modem, which is a
mid range VHF spectrum offering not covered by the Company's existing products.
The Company's development efforts were also directed toward revamping of the
outer case structure of the ESTeem products for both cost savings and
performance enhancement. Development was commenced on the ESTeem 192S, using
spread spectrum, nonlicensed radio architecture to augment the Company's
existing products, and is expected for release in the first quarter of 1999,
pending FCC and Industry Canada type acceptance. The Company plans on
continued research and development expenditures and to undertake new
development and improvement projects, as they become necessary. 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.
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, approximately seventy percent of the Company's products are
distributed through direct sales and thirty percent are through Reseller and
OEM entities. Customers generally place orders on an "as needed basis". As
of December 31, 1998, the Company had minimal order backlog.
<PAGE>
During 1998, the Company continued advertisements in publications targeting
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 competitors 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 a limited marketing budget.
MARKET INFORMATION FOR THE COMPANY'S COMMON STOCK
There is no established market for trading the Common Stock of the Company.
The Common Stock is not regularly quoted in the automated quotation system of a
registered securities system or association. 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.
<PAGE>
<TABLE>
<CAPTION>
Bid Ask
High Low High Low
<S> <C> <C> <C> <C>
Fiscal year ended December 31, 1998
First Quarter 3/8 0.26 0.44 0.32
Second Quarter 19/32 3/8 11/16 7/16
Third Quarter 1/2 1/4 9/16 7/16
Fourth Quarter 11/32 1/4 7/16 11/32
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
</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, 1999 was 650 persons/entities.
Electronic Systems Technology Inc. paid non-cumulative, cash
distributions on July 9, 1998 and July 11, 1997, respectively, each
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.
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. Operations of the Company are
sustained solely from revenues received through sales of its products and
services.
FISCAL YEAR 1998 vs. FISCAL YEAR 1997
GROSS REVENUES: Total revenues for the fiscal year 1998 were $1,631,298
reflecting a 10% increase from the $1,476,487 gross revenues for fiscal
year 1997. The increase is attributable to increased product sales in
<PAGE>
1998, of $1,485,381 as compared to 1997 sales of $1,337,303, representing
an increase of 11%. During 1998 the Company had increased sales to U.S.
Government contractors, which accounted for the majority of increased
sales revenues. Management believes the increase in U.S. Government
sales revenues was the result of unexpected contract purchases, and due
to the uncertain nature of U.S. Government purchasing patterns, that a
continuation of U.S. Government sales revenues like those experienced in
1998 cannot be guaranteed.
In 1998, 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 1998, the Company had $214,396 in foreign export sales, amounting to
14% of gross product and service sales for the year. For year-end 1997,
foreign export sales were $340,423, or 24% of gross product sales for the
year. It is Management's belief that foreign sales decreased due to the
result of economic downturns experienced in Asia and South America, and
1998 performance being compared with the strong 1997 foreign export year
of $340,423, or 24% of product sales for the Company, which historically
amounts to 15% to 20% of the Company's product sales. Products purchased
by foreign customers were used primarily for use in SCADA projects.
Management believes the majority of foreign export sales are due to EST
distributor efforts and the Company's Internet website presence. The
geographic compositions of the Company's foreign export sales for 1998
and 1997 are shown in Note 6 to the Financial Statements. (See Note 6 to
Financial Statements.)
In 1998 products purchased by U.S. Government agencies or by U.S.
Government contractors amounted to $423,923 or 27%, of gross product
sales compared with 1997 levels of $250,840, or 18%, of gross product
sales. Management believes the increase in U.S. Government sales
revenues was the result unexpected contract purchases, and due to the
uncertain nature of U.S. Government purchasing patterns, that a
continuation of U.S. Government sales revenues like those experienced in
1998 cannot be guaranteed. Management does not base liquidity,
profitability, or material purchase projections on anticipated U.S
Government sales. Products purchased by the U.S. Government were
utilized in inventory control, PC/PC (Personal Computer) networking and
command control.
As of December 31, 1998, the Company had minimal backlog. 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 to 10 working
days after receipt of customer orders.
COST OF SALES: Cost of Sales, as a percentage of gross sales, for the
years of 1998 and 1997 was 47% and 43%, respectively. Cost of Sales
variations that occur are attributed to the type of product sold and the
size of orders processed. The cost of sales variation for 1998 is the
result of the Company having more discounted sales through distributors
and U.S. Government contracts, and a product mix of items sold with a
higher cost than 1997.
<PAGE>
INVENTORY: The Company's year-end inventory values for 1998 and 1997
were as follows:
1998 1997
----- -----
Parts $229,903 $218,263
Work in Progress -- 26,582
Finished goods 155,462 74,282
-------- --------
TOTAL $385,365 $319,127
======== ========
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 1998, purchases and costs allocated to cost of goods sold
were $758,870 as compared to $492,985 in 1997. This increase is a result
of increased purchasing by the Company in 1998 to respond to large U.S.
Government orders late in the year, and increased manufacturing salaries
and wages, when compared with 1997.
OPERATING EXPENSES: Operating expenses, prior to allocation of expenses
to Cost of Sales and Engineering Services, increased to $885,416 in 1998,
from 1997 levels of $813,364. Material changes in expenses are comprised
of the following components: Advertising expenses decreased to $37,149 in
1998 from 1997 levels of $51,935 due to reduced advertising frequency by
the Company in 1998. Supplies and materials expenses decreased to
$15,568 in 1998, from $22,079 in 1997 due to decreased research and
development projects requiring such material. Professional services
increased to $66,210 from 1997 levels of $56,215 due to increased
subcontracted engineering services for research and development projects
during 1998. Repair and maintenance expenses increased in 1998 to
$18,259 as compared to $10,759 in 1997, due to increased equipment
repairs, and scheduled facilities maintenance.
Salaries increased to $467,118 in 1998, from 1997 levels of $408,840, due
to addition of manufacturing labor and a sales manager for the Company's
Mobile Data Computer program. Travel expenses for the Company increased
to $50,847 from 1997 levels of $36,804 due to increased marketing trips
by the Company. The Company did not incur bad debt expense during 1998
or 1997.
<PAGE>
FISCAL YEAR 1997 vs. FISCAL YEAR 1996 RESULTS
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 was attributable 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 Management believed the
increase in sales revenues to domestic and foreign customers was
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, 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. The geographic
composition of the Company's foreign export sales for 1997 is shown in
Note 6 to the 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. 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.
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, 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 in 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.
<PAGE>
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues and expenses resulted in net income of $162,927
for 1998, reflecting a 2% decrease from the $166,120 net income of 1997.
At December 31, 1998, the Company's working capital was $2,119,569
compared with $1,988,266 at December 31, 1997. The increase is primarily
attributable to the Company's 1998 net income of $162,927. 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, 1998 is adequate for expected resource requirements for the next
twelve months.
The Company's current asset to current liability ratio at December 31,
1998 was 25.3:1 compared to 26.7:1 at December 31, 1997. The decreased
ratio is attributable to the Company having increased trade accounts
payable and deferred income liabilities at year end 1998.
The Company's cash resources at December 31, 1998, including cash and
cash equivalent liquid assets, were $1,426,381, reflecting an decrease
from cash resources of $1,466,760 for year end 1997. The decrease in
cash resources at year end is the result of increased inventory
expenditures by the Company, increased year end accounts receivable
levels yet to be converted to cash, and deposits for ESTeem case mold
manufacturing, when compared with year-end 1997. Cash flows from
operating activities were provided by net income of $162,927, and
depreciation of $31,630. Cash flows were offset primarily by increases
in accounts receivable of $112,407, inventory of $66,238, deposits paid
for ESTeem case molds of $26,250, additions to property plant and
equipment of $11,021, cash distributions paid by the Company of $49,537.
<PAGE>
The Company's trade accounts receivable, adjusted for allowance for
uncollectible accounts, at December 31, 1998, were $381,386, compared to
$268,980 at year-end 1997. The increase is attributable to heavy late
fourth quarter sales in 1998. No bad debt expense was recorded during
1998. Management believes that all of the Company's accounts receivable
as of December 31, 1998, are collectible.
The Company believes the 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.
Inventory levels as of December 31, 1998, were $385,365, which is an
increase from December 31, 1997, levels of $319,127. The increased
inventory level is the result of increased purchasing by the Company in
the fourth quarter of 1998 to prepare for production of the ESTeem 192S
product, and meet heavy fourth quarter sales orders.
Capital expenditures during year 1998 amounted to $11,021, primarily for
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, 1998, the Company's current liabilities were $87,140,
increased $9,927 from1997 year-end levels of $77,213. The increase is a
result of increased carrying levels of trade accounts payable. All of
the Company's accounts payable at year-end were current. The Company
recognized Deferred Income liability of $25,017 for a public safety
communications contract project, with the liability representing the
amount of the contract billed to the customer, but to be performed during
the first quarter of 1999.
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
February 2004. 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 1999 will be under this GSA contract.
<PAGE>
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 has undertaken the process to identify anticipated costs, and
implementation issues associated with transition of the Company's
products and internal systems to operations during and after the Year
2000. The Company expects to resolve any Year 2000 issues associated with
the Company's internal and operations systems through planned replacement
or upgrades of software applications, which are not currently deemed to
have significant cost potential. All of the products supplied by the
Company are Year 2000 compliant. Management does not expect Year 2000
transition issues to have a material impact on its operations, but there
can be no assurance that there will not be interruptions or disturbance
of operations should negative transition issues arise.
The Company's operations were not adversely effected by inflation during
1998. No adverse affect is anticipated during 1999.
FORWARD LOOKING STATEMENTS: The above discussion may contain forward-
looking statements that involve a number of risks and uncertainties. In
addition to the factors discussed above, among other factors that could
cause actual results to differ materially are the following: competitive
factors such as rival wireless architectures and price pressures;
availability of third party component products at reasonable prices;
inventory risks due to shifts in market demand and/or price erosion of
purchased components; change in product mix, and risk factors that are
listed in the Company's reports and registrations statements filed with
the Securities and Exchange Commission.
INDEX TO FINANCIAL STATEMENTS
ACCOUNTANTS' REPORT ON THE FINANCIAL STATEMENTS 1
BALANCE SHEETS 2-3
STATEMENT OF OPERATIONS 4-5
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 6
STATEMENT OF CASH FLOWS 7-6
NOTES TO FINANCIAL STATEMENTS 9-19
<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, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the
results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
ROBERT MOE & ASSOCIATES, P.S.
Spokane, Washington
February 3, 1999
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
------------ --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 6,642 $ 6,237
Money market investment 297,122 405,815
Certificate of Deposit 909,506 439,708
Commercial paper 213,111 615,000
Account receivable, net of allowance
for uncollectibles of $1,284 - 1998,
and $1,284 - 1997 381,386 268,980
Inventory 385,365 319,127
Accrued interest 7,888 7,439
Prepaid insurance 4,177 3,098
Prepaid expenses 1,025 75
Deferred tax asset 487 -
------------- --------------
Total Current Assets 2,206,709 2,065,479
------------- -------------
PROPERTY & EQUIPMENT
Leasehold improvements 13,544 13,544
Laboratory equipment 307,892 298,027
Furniture & fixtures 16,173 15,017
Dies & molds 20,827 20,827
------------- --------------
358,436 347,415
Less accumulated depreciation 246,122 214,491
------------- --------------
112,314 132,924
------------- --------------
OTHER COSTS
Patent costs, net of amortization
of $1,562-1998, and $1,453-1997 824 933
Deposits 26,590 340
Capitalized software costs of
$68,895-1998 net of amortization
of $61,187; $64,852 - 1997, and
net of amortization of $58,717 7,708 6,135
------------- --------------
35,122 7,408
------------- --------------
TOTAL ASSETS $ 2,354,145 $ 2,205,811
============= ==============
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
-------------- ----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 52,386 $ 29,931
Accrued payroll 2,720 3,704
Accrued payroll taxes 1,143 930
Accrued excise taxes payable 681 959
Accrued vacation pay 15,700 16,896
Federal income taxes payable 14,510 24,793
-------------- ----------------
Total current liabilities 87,140 77,213
-------------- ----------------
DEFERRED INCOME 25,017 -
-------------- ----------------
STOCKHOLDERS' EQUITY
Common stock $.001 par value
50,000,000 shares authorized,
4,953,667-1998, and 4,953,667-1997
shares issued and outstanding 4,954 4,954
Additional paid-in capital 894,129 894,129
Retained earnings 1,342,905 1,229,515
-------------- ----------------
2,241,988 2,128,598
-------------- ----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,354,145 $ 2,205,811
============== ================
</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, 1998, 1997 and 1996
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
SALES $ 1,485,381 $1,337,303 $1,190,304
----------- ---------- ----------
COST OF SALES
Beginning inventory 319,127 401,305 297,037
Purchases and allocated costs 758,870 492,985 595,119
----------- ---------- ----------
1,077,997 894,290 892,156
Ending inventory 385,365 319,127 401,305
----------- ---------- ----------
692,632 575,163 490,851
GROSS PROFIT 792,749 762,140 699,453
----------- ---------- ---------
OPERATING EXPENSES
Advertising 37,149 51,935 54,969
Amortization 2,579 2,579 1,837
Commissions-sales 23,046 21,036 22,972
Dues & Subscriptions 4,191 4,180 5,407
Depreciation 31,630 32,599 30,303
Insurance 7,451 7,568 6,528
Materials & supplies 15,568 22,079 26,060
Office & administration 11,692 11,371 18,517
Printing 7,082 8,443 10,203
Professional services 66,210 56,215 77,795
Rent & utilities 30,709 32,932 26,001
Repair & maintenance 18,259 10,759 13,080
Salaries 467,118 408,840 413,920
Taxes 87,494 74,806 73,412
Telephone 10,377 11,463 11,639
Trade shows 14,374 19,755 17,682
Travel expenses 50,487 36,804 54,837
---------- --------- --------
885,416 813,364 865,162
Expenses allocated to cost of Sales (255,950) (227,389) (257,035)
---------- --------- --------
629,466 585,975 608,127
---------- --------- --------
OPERATING INCOME 163,283 176,165 91,326
---------- --------- --------
</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, 1998, 1997 and 1996
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
OTHER INCOME
Interest income 72,364 63,347 62,206
Site support reimbursement
net of allocated costs 4,921 6,799 16,192
Loss on disposition of assets - (184) (238)
Realized loss on marketable
securities - - (3,522)
Uncollectible account recovered - - 57,204
Recovery from marketable
securities litigation 2,211 1,633 11,288
-------- --------- --------
79,496 71,595 143,130
-------- --------- --------
INCOME BEFORE PROVISION FOR FEDERAL
INCOME TAXES 242,779 247,760 234,456
PROVISION FOR FEDERAL INCOME TAXES 79,852 81,559 75,721
-------- --------- --------
NET INCOME $162,927 $ 166,201 $158,735
======== ========= ========
BASIC EARNINGS PER SHARE $ 0.03 $ 0.03 $ 0.03
======== ========= ========
DILUTED EARNINGS PER SHARE $ 0.03 $ 0.03 $ 0.03
======== ========= ========
</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, 1995 through December 31, 1998
Amount
Common Stock Paid-In Retained
Shares Amount Capital Earnings TOTAL
------- ------ ------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT
December 31, 1995 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 DISTRIBUTION
DECLARED
$0.01 per share - - - (49,537) (49,537)
NET INCOME
December 31, 1997 - - - 166,201 166,201
------- ------ ------- ---------- ----------
4,953,667 4,954 894,129 1,229,515 2,128,598
CASH DISTRIBUTION
DECLARED
$0.01 per share - - - (49,537) (49,537)
NET INCOME
December 31, 1998 - - - 162,927 162,927
------- ------ ------- ---------- ----------
BALANCE AT
December 31, 1998 4,953,667 $4,954 $ 894,129 $ 1,342,905 $ 2,241,988
======= ====== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS PROVIDED (USED) IN
OPERATING ACTIVITIES:
Net income $ 162,927 $ 166,201 $ 158,735
Noncash expenses included in income:
Depreciation 31,630 32,599 30,303
Amortization 2,579 2,579 1,836
Deferred income taxes (487) 411 4,876
Loss on disposition of assets - 184 238
Realized loss/impaired securities - - 3,522
Decrease (increase) in current assets:
Accounts receivable, net (112,407) (230,668) 119,609
Inventory ( 66,238) 82,178 (104,268)
Other current assets ( 2,478) 28,481 ( 31,214)
Increase (decrease)in current liabilities:
Accounts payable, accrued expenses
and other current liabilities 20,212 21,644 ( 44,152)
Deferred income 25,017 - -
Federal Income taxes payable ( 10,283) 24,793 ( 58,665)
----------- ---------- -----------
Net cash provided by operating
Activities 50,472 128,402 80,820
----------- ---------- -----------
CASH FLOWS PROVIDED (USED) IN
INVESTING ACTIVITIES:
Deposit ( 26,250) - ( 2,919)
Capitalized software ( 4,043) ( 790) ( 26,508)
Additions to property & equipment ( 11,021) ( 24,497) 102,000
Proceeds from sale of marketable
Securities - - 117,595
----------- ---------- -----------
Net cash used in investing activities ( 41,314) ( 25,287) 190,168
----------- ---------- -----------
CASH FLOWS PROVIDED (USED) IN
FINANCING ACTIVITIES:
Repurchase common stock - - ( 23,981)
Distributions paid ( 49,537) ( 49,537) -
Proceeds form note receivable - - 3,449
----------- ---------- -----------
Net cash used in financing activities ( 49,537) ( 49,537) ( 20,532)
----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ( 40,379) 53,578 250,456
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,466,760 1,413,182 1,162,726
----------- ---------- -----------
CASH AND CASH EQUIVALENTS AT
ENDING OF PERIOD $ 1,426,381 $1,466,760 $ 1,413,182
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
SUPPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION:
Cash paid during the year for:
Interest - - -
Income taxes $ 90,693 $ 30,000 $ 90,693
=========== ========== ==========
Cash and cash equivalents:
Cash $ 6,642 $ 6,237 $ 5,717
Money market 297,122 405,815 482,892
Certificate of deposit
(maturity = 3 months or less) 909,506 439,708 724,573
Commercial paper
(maturity = 3 months or less) 213,111 615,000 200,000
----------- ---------- ----------
$ 1,426,381 $1,466,760 $1,413,182
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATIONS 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 amount of revenues and expenses during he 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, 1998, and $1,284 as of December 31, 1997.
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:
1998 1997 1996
----------- --------- ----------
Parts $ 229,903 $ 218,263 $ 260,397
Work in Progress - 26,582 68,555
Finished goods 155,462 74,282 72,353
----------- --------- ----------
$ 385,365 $ 319,127 $ 401,305
=========== ========= ==========
PROPERTY AND EQUIPMENT: Property and equipment are carried at cost.
Deprecation 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
one-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.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFIANT ACCOUNTING POLICIES
(continued)
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
1998, 1997, and 1996 were $139,675, $128,110, and $135,468
respectively.
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 5,577,694, 5,521,283,
and 5,478,558 for the years ended December 31, 1998, 1997, and 1996
respectively.
For the Year Ended 1998
---------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
BASIC EPS
Income available to common
stockholders $ 162,927 5,577,694 $ 0.03
=========== ============= ==========
DILUTED EPS
Income available to common
stockholder + assumed
conversion $ 162,927 5,583,667 $ 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 costs subsequent to 1985. Costs incurred prior to 1986
are not permitted to be capitalized by FASB No. 86 and the Company has
not capitalized such costs. All costs capitalized under FASB No. 86
are required to be amortized over their estimated revenue-producing
lives, not to exceed five years, beginning on the date the product is
available for distribution to customers.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Amortization of capitalized software costs charged to expenses for
periods presented is as follows:
1986 $3,234
1987 4,865
1988 9,080
1989 10,501
1990 9,527
1991 7,358
1992 6,219
1993 1,719
1994 288
1995 1,728
1996 1,728
1997 2,470
1998 2,470
CASH AND CASH EQUIVALENTS: Cash and cash equivalents 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.
OTHER COMPREHENSIVE INCOME: The Company does not have other revenues,
expenses, gains, and losses that require disclosure under SFAS No. 130
as other comprehensive income.
YEAR 2000 ISSUES: The Company has undertaken the process to identify
anticipated costs, and implementation issues associated with transition
of the Company's products and internal systems to operations during and
after the year 2000. Management believes that the products supplied by
the Company are Year 2000 compliant. The Company expects to resolve
any Year 2000 issues associated with internal and operations systems
through planned replacement or upgrades of software applications, which
are not currently deemed to have significant cost potential.
Management does not expect Year 2000 transition issues to have a
material impact on its operation, but there can be no assurance that
there will not be interruptions or disturbance of operations should
negative transition issues arise.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
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:
1998 1997 1996
----------- ----------- ------------
Currently payable $ 80,339 $ 81,148 $ 70,845
Deferred (487) 411 4,876
----------- ----------- ------------
Provision for Federal
Income taxes $ 79,852 $ 81,559 $ 75,721
=========== =========== ============
The components of the net deferred tax (assets) liability at December
31, were as follows:
1998 1997 1996
----------- ----------- ------------
Depreciation $ 18,324 $ 19,969 $ 18,523
Accrued vacation payable (5,338) (5,744) (4,154)
Allowance for uncollectable
accounts receivable (437) (437) (437)
Unused capital loss carry
forward (13,036) (13,788) (14,343)
----------- ----------- ------------
$ (487) $ - $ (411)
=========== ============ ===========
The differences between the provision for income taxes and income
taxes computed using the U.S. Federal Income tax rate were as follows:
1998 1997 1996
----------- ------------ -----------
Amount computed using the
statutory rates $ 80,339 $ 81,148 $ 70,845
Increase (reduction):
Deferred tax (asset) liability (487) 411 4,876
----------- ------------ -----------
Provision for Federal Income
Taxes $ 79,852 $ 81,559 $ 75,721
=========== ============ ===========
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.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
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 $15,700 and $16,896 have been accrued as
of December 31, 1998 and 1997, 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, 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 $2008.00 monthly rent. For
the second and any following years of the renewed term, the parties
agree that any rental amounts be increased by the Consumer Price Index
- Pacific Cities and U.S. City Average-All Items Indexes using the
U.S. City Average for the 12 month period preceding. The rental
expenses for 1998, 1997, and 1996 were as follows: 1998 = $25,993; 1997
= $27,670; 1996 = $21,428.
The following is a schedule of estimated future minimum rental payments
required under the above operating leases over the next five(5)
succeeding fiscal years:
Year ending December 31 Amount
----------------------- ------
1999 $ 25,348
2000 -
2001 -
2002 -
2003 -
6. FOREIGN SALES
The Company's revenues fall into three major customer categories,
Domestic, Export, and U.S. Government sales. A percentage breakdown of
E.S.T.'s major customer categories for the years of 1998 and 1997, are
as follows:
1998 1997
------------ -----------
Domestic sales 59% 58%
Export sales 14% 24%
U.S. Government sales 27% 18%
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
6. FOREIGN SALES (continued)
The geographic distribution of foreign sales for 1998 and 1997 are as
follows:
1998 1997
---------- -----------
South Korea 23 6
Germany 11 0
Canada 9 5
Chile 9 10
Taiwan 6 0
Uruguay 5 0
Israel 5 3
Columbia 5 0
Brazil 5 21
Croatia 4 12
Peru 3 0
Mexico 3 6
Ireland 3 0
New Zealand 3 0
Malaysia 2 14
Italy 2 0
Venezuela 2 less than 1
Philippines 0 12
Ecuador 0 5
Ghana 0 2
Cyprus 0 2
Slovenia 0 1
Thailand 0 less than 1
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.
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 which
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:
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
8. STOCK OPTIONS (continued)
Shares under Option
-------------------
Outstanding, beginning of year 175,000
Granted during year -
Canceled during year (175,000)
Exercised during year -
-------------------
Outstanding, end of year -
===================
On February 9, 1996 stock options to purchase shares of the Company's
commons stock were granted to individual employees and directors with
no less that 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 though February 9, 1999.
Following is a summary of transactions:
Shares under Option
-------------------
Outstanding, beginning of year 200,000
Granted during year -
Canceled during year -
Exercised during year -
-------------------
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 continuos tenure. The options have an exercise
price of $.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 215,000
Granted during year -
Canceled during year -
Exercised during year -
-------------------
Outstanding, end of year 215,000
===================
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
8. STOCK OPTIONS (continued)
On February 6, 1998 stock options to purchase shares of the Company's
common stock were granted to individual employees and directors with no
less that three years continuous tenure. The options have an exercise
price of $0.41 per share. Options may be exercised any time during the
period from February 6, 1998 through February 5, 2001. Following is a
summary of transactions:
Shares under Option
-------------------
Outstanding, beginning of year -
Granted during year 215,000
Canceled during year -
Exercised during year -
-------------------
Outstanding, end of year 215,000
===================
1998 1997 1996
------- -------- --------
Option price range
at end of year $ .28 to $.41 $ .28 to $.42 $.31 to .42
Option range for exercised
Shares None exercised None exercised None exercised
Weighted average fair
value of options granted
during the year $0.41 $0.28 $0.42
The following table summarizes information about fixed-price stock
options outstanding at December 31, 1998:
Range of exercise Number exerciseable Weighted average Weighted average
prices and outstanding remaining contractual exercise
----------------- ------------------ --------------------- ----------------
$ 0.42 200,000 1 year $ 0.42
$ 0.28 215,000 2 years $ 0.28
$ 0.41 215,000 3 years $ 0.41
After termination of employment, stock options may be exercised within
90 days. During the 12 month ended December 31, 1998; 175,000 shares
under option expired and no shares under option were exercised. At
December 31, 1998 there are 630,000 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
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
8. STOCK OPTIONS (continued)
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:
1998 1997 1996
---------- --------- ----------
Net earnings - as reported $ 162,927 $ 166,201 $ 158,735
Net earnings - pro forma 129,711 141,925 124,850
Earnings per share - as reported 0.03 0.03 0.03
Earnings per share - pro forma 0.03 0.03 0.02
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 1998; dividend yield
equaled 0; expected volatility of 47.71% risk-free interest rate of 5%;
and expected lives of 3 years.
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, 1998;
the Company had cash and cash equivalents with Seattle First National
Banks with a combined balance of $723,641 which is $623,641 in excess
of the FDIC insured amount. At December 31, 1998 the Company held
commercial paper in the amount of $213,111 which was not FDIC insured.
At December 31, 1998 the Company had cash deposits with Pioneer Bank
with a balance of $118,280 which is $18,280 in excess of the FDIC
insured amount. At December 31, 1998 the Company had cash deposits
with First Savings Bank of Washington with a balance of $116,156 which
is $16,156 in excess of the FDIC insured amount. Additionally, at
December 31, 1998 the Company had cash deposits with Pacific One Bank
with a combined balance of $122,948 which is $22,948 in excess of the
FDIC insured amount. At December 31, 1998 the Company had cash
deposits with Piper Jaffray with a balance of $127,046 which is not
FDIC insured.
<PAGE>
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
10. CONCENTRATIONS OF CREDIT RISK (continued)
Concentrations of credit risk with respect of trade accounts receivable
are generally diversified due to the geographic dispersion of the
Company's customer base.
11. RELATED PARTY TRANSACTONS
For the years ended December 31, 1998, 1997, and 1996; services in the
amount of $106,166, $82,490 and $52,199 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 an/or
material cost expenditures could take place.
12. MARKETABLE SECURITIES
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 $2,211 during 1998.
13. 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 of 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.
14. NOTE - CASH DISTRIBUTION
On June 4, 1998 the Company declared a one-time, non-cumulative, cash
distribution to shareholders of record as of June 19, 1998 of $0.01 per
share of common stock, with payable date of July 11, 1998. The payment
of the cash distribution was completed by July 9, 1998 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,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales $1,485,381 $1,337,303 $1,190,304 $1,535,071 $1,197,720
Gross Profit 792,749 762,140 699,453 932,485 732,340
Income (Loss) before
provision for
income taxes 242,779 247,760 234,456 404,137 290,839
Provision for income
taxes 79,852 81,559 75,721 136,428 104,899
Net income 162,927 166,201 158,735 267,709 185,940
Net income per share 0.03 0.03 0.03 0.05 0.04
Weighted average number
of shares outstanding 5,577,694 5,521,283 5,478,558 5,433,174 5,360,982
Total assets 2,354,145 2,205,811 2,042,709 2,010,772 1,597,612
Long-term debt and
Capital lease
obligations - - - - -
Stockholders' equity 2,241,988 2,128,598 2,011,934 1,877,180 1,555,558
Stockholders' equity
per share 0.45 0.43 0.41 0.37 0.31
Working capital 2,119,569 1,988,266 1,861,527 1,723,823 1,449,848
Current ratio 25.3:1 26.7:1 61.5:1 13.9:1 44.9:1
Equity to total assets 95% 96% 98% 93% 97%
</TABLE>
<PAGE>
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------
Board of Directors
Electronic Systems Technology, Inc.
Kennewick, Washington
We hereby consent to the use of our opinion, dated February 3, 1999 on the
financial statements of ELECTRONIC SYSTEMS TECHNOLOGY, INC. for the years
ended December 31, 1998 and 1997 in the Form 10-KSB.
ROBERT MOE & ASSOCIATES, P.S.
Spokane, Washington
March 3, 1999
<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
American Securities Transfer & Trust, Inc.
Transfer Operations Office
1825 Lawrence St., Suite 444
Denver Colorado 80202
(800) 962-4284
(303) 234-5300
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 11, 1999, 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 26, 1999
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
o 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 11, 1999 at 3:00
p.m. Pacific time, including any adjournments thereof.
1. Election of Directors
T. L. Kirchner
For Against Abstain
------------------ ------------------ ----------
John H. Rector
For Against Abstain
------------------ ------------------ ----------
TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THAT
NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.
- --------------------------------------------------------------------
- --------------------------------------------------------------------
2. To ratify Robert Moe & Associates, P.S. as independent auditors
of the Corporation for the fiscal year ending December 31, 1999.
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
--------------- --------------- --------
(To be signed on other side.)
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. WHEN PROPERLY
EXECUTED, THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED BY THE UNDERSIGNED
SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
PROPOSALS 1, 2 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.
----------------- -----------------
(Over)
EXHIBIT 22.3 - PROXY STATEMENT MAILED APRIL 26, 1999
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
JUNE 11, 1999
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 11, 1999 at 3:00 p.m.
Pacific 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 23, 1999 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 26, 1999 / 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 11, 1999
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 11, 1999 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 26, 1999. The Annual Report of the Company for the year
ending December 31, 1998 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, 1999. 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 23, 1999 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 DIRECTORS
It is intended that the proxies solicited hereby will be voted for election of
the nominees for directors listed below, unless authority to do so has been
withheld. The Board of Directors knows of no reason why its nominees will be
unable to accept election. However, if the nominees become 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 III
expire with the 1999 Annual Meeting, the terms of directors of Class I expire
with the 2000 Annual Meeting, and the terms of directors of Class II expire
with the 2001 Annual Meeting.
<PAGE>
Nominees
The nominees for Class III director whose term, if elected, will expire in 2002
and certain additional information with respect to the nominees are as follows:
Nominee's Name, Position with the Company, Principal Occupation(s), Other
- -------------------------------------------------------------------------
Directorships, Age, and Ownership:
- ---------------------------------
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: 50
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 2-7-97, 2-6-98 and 2-12-99.
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 registered under the Securities Exchange Act.
Age: 82
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, 2-6-98 and 2-12-99.
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, 1999, 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
<PAGE>
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 purchased $106,166 of
these services from Manufacturing Services during 1998. (See Related Party
Transactions below.) Mr. Brown does not serve as a director for any company
registered under the Securities Exchange Act.
Age: 68
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 2-7-97, 2-6-98 and 2-12-99.
ARTHUR LEIGHTON: Mr. Leighton is a Director of the Company. Mr. Leighton
served as President of Kraft Industries through mid 1986. Since then he has
been working as an independent Management Consultant. Mr. Leighton does not
serve as director of any company registered under the Securities Exchange Act.
Age: 75
Shares Beneficially Owned: 95,000
Percent of Class: 1.9
A Director Since: 1985
* Shares beneficially owned do not include 75,000 shares subject to the options
granted 2-7-97, 2-6-98 and 2-12-99.
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
<PAGE>
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: 55
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 2-7-97, 2-6-98 and 2-12-99.
CLASS II - Three Year Term Expiring June 2001
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 registered under the Securities Act.
Age: 59
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, 2-6-98 and 2-12-99.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of January 29, 1999, amount and
percentage of the Common Stock of the Company, which according to
information supplied by the Company, is beneficially owned by Management,
including officers and directors of the Company.
Title Name Amount & Nature Percent
Of of of of
Class Beneficial Owner Beneficial Ownership Class
--------------------------------------------------------------------
Common T.L. Kirchner 403,488(1) 8.1%
(Officer & Director)
Common Robert Southworth 4,000(1) 0.1%
(Officer & Director)
Common Melvin H. Brown (Director) 76,500(1) 1.5%
Common Arthur Leighton (Director) 95,000(1) 1.9%
Common John H. Rector (Director) 6,000(1) 0.1%
(1) Does not include stock options. See below.
* Shares benefically owned do not include shares subject to the options
granted 2-7-97, 2-6-98 and 2-12-99.
<PAGE>
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, 1998 are: None
(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, 1998.
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 1998 74,580 5,080 734 0 25,000 0 5,846
President & 1997 74,580 5,081 1,615 0 25,000 0 5,524
CEO 1996 74,015 8,748 1,185 0 25,000 0 5,368
</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 and 1998, totaling $4035 and $4,035, respectively.
Receipt of cash distribution was based solely on capacity as a
shareholder.
The information specified concerning the stock options of the named executive
officers during the fiscal year ended December 31, 1998 is provided in the
following Option/SAR Grants in the Last Fiscal Year Table:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants (5)
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or base Expiration
Name Granted # (5) Fiscal Year Price($/Sh) Date
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
T.L. Kirchner 25,000 11.6% 0.41 2/5/01
</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, 1998 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, 1998 the Board of Directors held
three meetings on February 6, 1998, June 4, 1998, and October 9, 1998. All
directors were in attendance at such meetings, except as follows: Mr. Leighton
was absent from the June 4, 1998 and February 6, 1998 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 1998, the Company contracted for services from Manufacturing
Services, Inc. in the amount of $106,166. 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 2, 2000. 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 14, 2000. 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, 1998 (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
12 APR 99
(Date)
