U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of the SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period to
--------- ----------
Commission file number 2-92949-S
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
(Name of small business issuer in its charter)
Washington 91-1238077
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
415 N. Quay St., Kennewick , Washington 99336
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (509) 735-9092
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulations S-B is met contained in this form, and no
disclosure will be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. [ ] Not applicable [X]
State issuer's revenues for its most recent fiscal year. $1,631,298.
On January 29, 1999 the aggregate market value, based on the average
of the bid and asked Price, of the voting stock held by nonaffiliates
of the registrant was $1,365,212.
The number of shares outstanding of the registrant's common stock as
of January 29, 1999: 4,953,667 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into Parts
I, II, III, and IV of this report: (1) Form S-18, effective Nov. 5,
1984, Commission File No. 2-92949-S; (2) Form 8-K, filed March 15,
1985, Commission File No. 2-92949-S; Forms 8-K dated July 12, 1991,
December 14, 1992, December 10, 1993, February 9, 1996, February 7,
<PAGE>
1997, June 5, 1997, February 6, 1998, June 4, 1998, and February 12,
1999.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
PART I
ITEM 1.
FORWARD LOOKING STATEMENTS:
When used in this Annual Report and the documents incorporated herein by
reference, the words "believes", "anticipates", "expects" and
similar expressions are intended to identify in certain circumstances,
forward-looking statements. Such statements are subject to a number of
risks and uncertainties that could cause actual results to differ
materially from those projected, including the risks described in this
Annual Report. Given these uncertainties, readers are cautioned not to
place undue reliance on such statements. The Company also undertakes no
obligation to update those forward-looking statements.
BUSINESS
Electronic Systems Technology, Inc. ("EST" or the "Company")
specializes in the manufacturing and development of wireless modem
products. The Company uses its research and development, manufacturing,
and marketing efforts to produce and market the Company's line of ESTeem
(TM) Wireless Modem products and accessories. The Company offers product
lines, which provide innovative communication solutions for applications
not served by existing conventional communication systems. The product
lines are offered in markets for process automation in commercial,
industrial, and government arenas both domestically and internationally,
as well in the domestic markets for public safety communications
infrastructure. The Company's product lines are marketed through direct
sales, sales representatives, Original Equipment Manufacturers (OEM's)
and domestic and foreign resellers.
The Company was incorporated in the State of Washington in February 1984,
and was granted a U.S. Patent for the "Wireless Computer Modem" in May
1987, and 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.
Most recently, the Company has developed an ESTeem product line built on
spread spectrum, non-licensed radio frequency architecture for release in
the first quarter of 1999 to augment the Company"s existing products,
which use licensed radio frequency design. 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
terminal communication applications, and continued to participate in
foreign and domestic Supervisory Control and Data Acquisition (SCADA),
Industrial Controls, and Government marketplaces.
PRODUCTS AND MARKETS
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 72 to 76 Megahertz (MHz), 150
to 170 MHz, 400 to 420 MHz, 450 to 470 MHz, and 2.4Gigahertz (GHz).
<PAGE>
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 both
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.
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 1010 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 Computer
Networking
Law Enforcement/Public Safety
Power Utility Federal
Oil/Gas Pipeline Ground Mobile Communications
Material Handling Ship to Shore Communications
Flight Line Maintenance
PRODUCT LINES
VHF RADIO MODEM PRODUCTS: The ESTeem VHF radio modem products are the
ESTeem Model 95 and Model 192V which operate in the mid 60-70 MHz band of
the VHF RF spectrum and the ESTeem 192M which operates in the 150-174 MHz
band of the VHF RF spectrum.
<PAGE>
The ESTeem Model 95 and 192V are configured to operate in the lower
70 MHz spectrum. The frequency and receiver sensitivity of the
ESTeem 95 are software selectable, and includes a device for
examining the received signal strength of the radio. 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. Listed below are the major markets for these
products:
Domestic: Industrial process control, SCADA, inventory control,
water/waste water, overhead crane, shop floor
manufacturing.
International:Telephone by-pass, industrial control, and SCADA.
Federal: Inventory and command control.
UHF RADIO MODEM PRODUCTS: Operating in the lower 400 MHz federal radio
band, 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 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 to operate 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. All of the UHF radio modems are
applicable to uses in the following markets:
Domestic: Industrial control, SCADA, inventory control, water/waste
water, power utility, oil/gas pipeline, law enforcement
and public safety.
International: Telephone by-pass, industrial control and SCADA.
Federal: Inventory and command control.
ADDITIONAL PRODUCTS AND SERVICES
The Company sells various accessories that support its EST product lines.
Accessories are purchased from other manufacturers and resold by EST to
support the application of ESTeem modems. Antennas, power supplies and
cable assemblies are examples of such items. The Company also provides
Factory Services, such as repair and upgrade of ESTeem products. To
assist in the application of ESTeem wireless modems the Company provides
professional services, site survey testing, system start-up, and custom
engineering services.
<PAGE>
RESEARCH AND DEVELOPMENT AND NEW PRODUCTS
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. Research and
Development expenditures for new product development and improvements of
existing products by the Company for 1998 and 1997 were $139,675 and
$128,110, respectively. None of the Company's research and development
expenses are directly paid for by any of the Company's customers. In
1998, the Company continued to contract with an independent,
nonaffiliated, engineering company specializing in radio design, when
that expertise was required.
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. The Company plans on
continued research and development expenditures and to undertake new
development and improvement projects, as they become necessary.
MARKETING, CUSTOMERS AND SUPPORT
The majority of the Company's products are sold and distributed directly
from the Company's facility through direct sales to end users of the
ESTeem products. The remainder of the Company's sales are through non-
exclusive, non-stocking Resellers, and Original Equipment Manufacturers
(OEM's). Normally, seventy 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". Shipping dates for most products are generally 5 to 10 working
days after receipt of a customer order. As of December 31, 1998, the
Company had minimal backlog.
During 1998, the Company continued to advertise in trade publications
specifically targeted at users of control, instrumentation, and
automation systems worldwide, as well as public safety entities
domestically. The Company's advertising is primarily targeted toward
potential 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 1999, the
Company intends to continue marketing strategies targeted at the 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
<PAGE>
it competes. To maintain this high level of customer support the Company
has in the past, and will continue in the future, to make investments and
expenditures in support of its customer service programs.
The Company is continuing Government sales activities directed towards
all branches of the United States Armed Services. Examples of projects
the Company's products are included in are; flight-line maintenance for
the United States Air Force, flight-line lighting for the United States
Navy, command and inventory control for the United States Marine Corps,
and the Automatic Identification Technology program for the United States
Army.
For the year ended December 31, 1998, the largest sales concentration
were to entities and contractors of the United States Government, which
amounted to 27% of total product sales for the year. Foreign sales were
14% of total revenues for 1998. No other sales to a single customer
comprised 10% or more of total product sales as of December 31, 1998.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations", and "Financial Statements".
The Company has a General Services Administration (GSA) contract to sell
goods to the U.S. Government. This contract is a fixed price, indefinite
quantity and delivery agreement. The current contract runs through
February 2004.
The Company participates in a Government program with contracts
administered by the Intermec Corporation. The contract is a fixed price,
indefinite quantity and delivery agreement. The current Intermec
contract expires September 30, 1999.
COMPETITION
The Company"s competition varies according to the market in which the
Company's products are competing. All of the markets in which the
Company's products are sold are highly competitive. Listed below are the
markets the Company's products compete in and competition in those
markets:
Major Market Major Competitors
------------ -----------------
Remote Data Acquisition, Industrial Data-Linc, GRE America,
Control, Shop Floor Manufacturing, Johnson, Maxon, Microwave Data
Overhead Crane Control Systems, Motorola, Metricom, and
Proxim
Computer Networking, inter and intra Aironet Wireless Communications,
building Cylink, Digital Wireless,
Metricom, and Proxim
Radio Area Networking of hand held Intermec, LXE, Norand, Symbol
data collection terminals and Technologies, and Telxon
bar coding
Mobile Data Computer systems for Data Radio, Coded Communications,
public safety applications Motorola, various cellular
service providers using CDPD
architectures.
<PAGE>
Federal applications Data Radio, Datron Technology,
Harris Computer Systems, Lockheed
Martin, Magnavox, Motorola,
Siemens, Watkins-Johnson, and
California Microwave
Management believes the ESTeem products compete favorably in the market
because of performance, price, and adaptability of the products to a wide
range of applications. The Company's major limitation in competing with
other manufacturers is its limited marketing budget.
PATENTS, TRADEMARKS, AND PROPRIETARY INFORMATION
EST was granted a United States patent in 1987 for a "Wireless Computer
Modem". In 1988, EST was granted a Canadian Patent for a "Wireless
Computer Modem". Both patents have lives of 17 years. Trademark for the
ESTeem Wireless Modem was granted in 1985.
To protect the Company against unauthorized disclosure of proprietary
information belonging to the Company, all employees, dealers,
distributors, original equipment manufacturers, sales representatives and
other persons having access to confidential information regarding Company
products or technology are required to sign non-disclosure agreements.
GOVERNMENT REGULATION
For operation in the United States, the ESTeem Radio Modems require
Federal Communications Commission (FCC) Type Acceptance. The FCC Type
Acceptance is granted for devices, which demonstrate operation within
mandated, observed, and tested performance criteria. All of the
Company's products requiring FCC Type Acceptance have been granted such
acceptance.
For operation in Canada, the ESTeem RF Modems require Industry Canada
Type Acceptance. Industry Canada grants the Type Acceptance for devices
demonstrating operation within performance criteria mandated, observed,
and tested. Of the Company's current production line, the ESTeem Models
96C, 192F, 192C, and 192V have applied for and have been granted type
acceptance in Canada.
All ESTeem radio modem products require consumer licensing under Part 90
of the FCC Rules and Regulations, which must be applied for by the end
user of the Company's products. The Company cannot guarantee its
customers that they will receive FCC consumer licenses in the VHF or UHF
frequency spectrum for any particular application. The Company provides
information to its customers to assist in the application for FCC
consumer licenses.
At the time of this filing the Company is unaware of any existing or
proposed FCC regulation that would have an materially adverse effect on
the Company's operations, but there can be no assurance that future FCC
regulations will not have materially adverse effects on the operations of
the Company.
SOURCE OF SUPPLY AND MANUFACTURING
The Company purchases certain components necessary for the production of
its products from sole suppliers. Key components for the Company's
products are supplied by the Motorola Corporation and Toko America Inc.,
<PAGE>
as purchased through a number of distributors. The components provided
by Motorola and Toko America could be replaced or substituted by other
products, if it became necessary to do so. If this action became
necessary, a material interruption of production and/or material cost
expenditures involved with locating and qualifying replacement components
could take place.
Approximately 10% of the Company's inventory at December 31, 1998
consisted of parts having lead times ranging from 12 to 20 weeks. Some
parts are maintained at high levels to assure availability to meet
production requirements, and accordingly, account for a significant
portion of the inventory dollar amount. Based on past experience with
component availability, current distributor relationships, and current
inventory levels, the Company foresees no anticipated shortages of
materials used in production.
The Company contracts with Manufacturing Services, Inc., in Kennewick,
Washington, for assembly of the Company's products, using material
purchased by the Company. By contracting with Manufacturing Services,
Inc., the Company is able to avoid staff fluctuations associated with
operating its own manufacturing operation. The President of
Manufacturing Services, Melvin H. Brown, is a Director of the Company.
Management believes all prices for services, provided by Manufacturing
Services, Inc., were as favorable as could be obtained from comparable
manufacturing services companies. See :"Management's Discussion and
Analysis of Financial Condition and Results of Operations", and
"Financial Statements".
EMPLOYEES
As of December 31, 1998, the Company employed a staff of 12 persons on a
full time basis, 3 in marketing, 2 in technical support, 5 in
engineering/manufacturing, and 2 in Finance and Administration. The
Company's operations are dependent upon key members of its Engineering
and Management personnel. In the event services of these key individuals
were lost to the Company, adverse effects on the Company's operations may
be realized. The Company employs part-time labor on an "as needed"
basis, usually in engineering/manufacturing. At year-end 1998 the
Company employed 4 part-time employees. None of the Company's employees
are represented by a labor union and the Company believes it has good
relations with its employees.
ITEM 2.
PROPERTIES
EST does not own any real property, plants, mines, or any other
materially important physical properties. The Company's administrative
offices and laboratories are located in leased facilities at 415 N. Quay
Street, Kennewick, Washington. The Company leases its office and
laboratory space in a lease agreement with The Port of Kennewick in
Kennewick, Washington for approximately 6,300 square feet of office and
laboratory space. The total monthly lease cost is $2,265.83, including a
leasehold tax of $257.83. The lease covers a period of three years,
expiring November 30, 1999.
The Company also owns miscellaneous assets, such as computer equipment,
laboratory equipment, and furnishings. The Company does not have any
real estate holdings, nor investments in real estate. The Company
maintains insurance in such amounts and covering such losses,
<PAGE>
contingencies and occurrences that the Company deems adequate to protect
its property. Insurance coverage includes a comprehensive liability
policy covering legal liability for bodily injury or death of persons,
and for property owned by, or under the control of the Company, as well
as damage to the property of others. The Company maintains key man life
insurance protecting the Company in the event of the death of the Company
President. The Company also maintains fidelity insurance which provides
coverage to the Company in the event of employee dishonesty.
ITEM 3.
LEGAL PROCEEDINGS
No proceedings are identified to which involve a claim for damages,
exclusive of interest and costs, that exceed 10% of the current assets of
the Company.
The Company was notified on March 8, 1995 that it was included in a class
action against Piper Jaffray, the manager of the Company's marketable
securities fund investment, which experienced losses as described in Note
13 to the financial statements. This litigation was an amended
consolidated class action complaint originally filed on October 5, 1994,
as Civ. File No. 3-94-587, in the United States District Court, District
of Minnesota. In February 1996, the Company received the first payments
pursuant to the settlement of this litigation, and as of December 31,
1998 had received settlement payments amounting to a total of $15,132.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters for shareholder approval during
the fourth quarter of 1998 fiscal year.
<PAGE>
PART II
ITEM 5.
MARKET INFORMATION FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established market for trading the Common Stock of the
Company. The Common Stock is not regularly quoted in the automated
quotation system of a registered securities system or association. The
Common Stock of the Company is traded on the "over-the-counter" market
and is listed on the electronic bulletin board under the symbol of
"ELST". The following table illustrates the average high/low price of
the Common Stock for the last two (2) fiscal years. The "over-the-
counter" quotations do not reflect inter-dealer prices, retail mark-ups,
commissions or actual transactions.
Bid Ask
--- ---
High Low High Low
---- --- ---- ---
Fiscal year ended December 31, 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
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's Forms 8-K dated
June 4, 1998 and June 5, 1997, as filed with the Securities and Exchange
Commission are included herein by reference. The Company has never paid
a cash dividend, and any such dividend undertaken by the Company will be
at the discretion of the Board of Directors.
ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis is intended to be read in
conjunction the Company's audited financial statements the integral notes
thereto. The following statements may be forward- looking in nature and
actual results may differ materially.
RESULTS OF OPERATIONS
GENERAL: The Company specializes in the manufacturing and development of
wireless modem products. The Company offers a product line which provide
innovative communication solutions for applications not served by
<PAGE>
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
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.
<PAGE>
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.
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.
ITEM 7.
FINANCIAL STATEMENTS
See Exhibit 1, Financial Statements and Financial Statement Schedules.
Such Financial Statements and Schedules are incorporated herein by
reference.
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None
<PAGE>
PART III
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS:
The following table sets forth the names and ages of all directors of the
Company as of December 31, 1998; as well as term in office and principal
occupation of each director.
Name of Director Term in Office Age Principal Occupation
----------------- -------------- --- --------------------
T.L. Kirchner 06/05/96-06/04/99 50 President of the Company
Melvin H. Brown 06/06/97-06/06/00 68 President of Manufacturing
Services, Inc.
Arthur Leighton 06/06/97-06/06/00 75 Consultant
Robert Southworth 06/04/97-06/06/00 55 Patent Attorney for U.S.
Dept. of Energy
John H. Rector 06/05/96-06/04/99 82 Consultant
John L. Schooley 06/05/98-06/05/01 59 President of Remtron, Inc.
Management believes that there are no agreements or understanding between
the directors and suppliers or contractors of the Company, except the
agreement with Manufacturing Services, Inc. as described elsewhere in
this report.
IDENTIFICATION OF EXECUTIVE OFFICERS
The following table sets forth the names and ages of all executive
officers of the Company as of December 31, 1998; all positions by such
persons; term of office and the period during which he has served as
such; and any arrangement or understanding between him and any other
person(s) pursuant to which he was elected as an officer:
Name of Officer Age Position Term of Office Period of Service
---------------- --- -------- -------------- -----------------
T. L. Kirchner 50 President 3 Years 02/10/84- Present
Robert Southworth 55 Sec/Treas 3 Years 12/11/92- Present
There are no family relationships, whether by blood, marriage, or
adoption, between any of the Directors or Executive Officers of the
Company.
<PAGE>
The following is a brief description of the business experience during
the last five years of each director and/or executive officer of the
Company.
T.L. KIRCHNER. Mr. Kirchner is founder, President and a Director of the
Company. During the last five years Mr. Kirchner devoted 100% of his
time to the Management of the Company. His primary duties 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.
MELVIN H. BROWN. Mr. Brown is a Director of the Company. During the
last five years Mr. Brown has been the owner and president of
Manufacturing Services, Inc. Manufacturing Services provides services in
packaging design, printed circuit board layout, prototyping, production
runs, verification of documentation testing, burn-in, quality control,
and repetitive volume production. Manufacturing Services provides
electronic manufacturing and quality control testing services for
Electronic Systems Technology. Mr. Brown does not serve as a director
for any company registered under the Securities Exchange Act.
ROBERT SOUTHWORTH. Mr. Southworth is a Director and the
Secretary/Treasurer of the Company. Since 1980, Mr. Southworth has been
employed with the U. S. Department of Energy as a Senior Patent Attorney
in Richland, Washington. His primary duties with the Department of
Energy include the preparation and prosecution of domestic and foreign
patent applications in such fields as nuclear reactors, fuel
reprocessing, waste management and energy related fields of solar, wind,
and fossil fuels. Mr. Southworth does not serve as a director of any
company which is registered under the Securities Exchange Act.
ARTHUR LEIGHTON. Mr. Leighton is a Director of the Company. Mr.
Leighton served as President of Kraft Industries through mid 1986. Since
then he has been working as an independent Management Consultant. Mr.
Leighton does not serve as director of any company that is registered
under the Securities Exchange Act.
JOHN H. RECTOR. Mr. Rector is a Director of the Company. Mr. Rector
founded Western Sintering, located in Richland, Washington. Western
Sintering, a powdered metal parts manufacturer, is an Original Equipment
Manufacturer (OEM). Mr. Rector is the former President of Western
Sintering, Inc. Mr. Rector currently serves as President of Plastic
Injection Molding, Inc., a plastic injection parts manufacturer. Mr.
Rector does not serve as director of any company that is registered under
the Securities Exchange Act.
JOHN L. SCHOOLEY. Mr. Schooley is a Director of the Company. During the
past five years, Mr. Schooley has been the owner and President of
Remtron, Inc. in San Diego, California. Remtron, Inc. is a manufacturer
of advanced radio control and telemetry systems for the industrial
market. Remtron, Inc. has provided research and development services for
Electronic Systems Technology. Mr. Schooley does not serve as director of
any other company that is registered under the Securities Act.
The Company is not registered under the Securities Exchange Act of 1934
and is therefore not subject to the requirements of section 16 (a) of the
Securities Exchange Act of 1934.
<PAGE>
ITEM 10.
EXECUTIVE COMPENSATION
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) Amounts do not reflect proceeds of $0.01 per share cash distribution
received during 1997 and 1998, totaling $4035 and $4035,
respectively. Receipt of cash distribution was based solely on
capacity as a shareholder.
The information specified concerning the stock options of the named
executive officers during the fiscal year ended December 31, 1998 is
provided in the following Option/SAR Grants in the Last Fiscal Year
Table:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants (5)
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or base Expiration
Name Granted # (4) Fiscal Year Price($/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. Forms
8-K dated 2/7/97 and 2/6/98, respectively, are incorporated herein
by reference.
<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. (See
"Security Ownership of Certain Beneficial Owners and Management" for
Stock Options granted in previous years.)
The Company currently does not hold any Employment Contracts or Change of
Control Arrangements with any parties.
<PAGE>
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of December 31, 1998, the amount and
percentage of the Common Stock of the Company, which according to
information supplied by the Company, is beneficially owned by each person
who, to the best knowledge of the Company, is the beneficial owner (as
defined below) of more than five (5%) of the outstanding common stock.
Amount &
Nature of
Title Name & Address Beneficial Percent
of of of of
Class Beneficial Owner (1) Ownership (2) Class
-----------------------------------------------------------------
Common T.L. Kirchner 403,488 (3) 8.1%
415 N. Quay Street.
Kennewick, WA 99336
------------------------------------------------------------------
(1) Under Rule 13d-3, issued by the Securities and Exchange Commission,
a person is, in general, deemed to "Beneficially own" any shares if
such person directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, has or shares
(a) voting power, which includes the power to vote or to direct the
voting of those shares and/or (b) investment power, which included
the power to dispose, or to direct the disposition of those
securities. The foregoing table gives effect to shares deemed
beneficially owned under Rule 13d-3 based on the information
supplied to the Company. The persons named in the table have sole
voting power and investment power with respect to all shares of
Common Stock beneficially owned by them.
(2) The beneficial owner listed above has stock options giving the right
to acquire 75,000 shares of Electronic Systems Technology, Inc.
Common Stock: Options for 25,000 shares were granted February 7,
1997; Options for 25,000 shares were granted February 6, 1998, and
Options for 25,000 granted February 12, 1999. Forms 8-K , dated
February 9, 1996, February 7, 1997, February 6, 1998, and February
12, 1999 respectively, are incorporated herein by reference.
(3) Does not include options granted. See footnote (1) above.
<PAGE>
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.
On various dates, the Company's Board of Directors has approved Stock
Option Bonuses for Directors and Employees. The following is a summary
of the Stock Option bonuses currently outstanding: Options are
exercisable at fixed prices. Options may not be exercised in blocks of
less than 5,000 shares. Options not exercised expire three years after
approval date or 90 days following termination of employment/board
membership, whichever occurs first. In the event of acquisition, merger,
recapitalization or similar events of the Company, the optionee will
receive equivalent shares or will have a 10-day window in which to
exercise the options. Option grants are not transferable or assignable
except to the optionee's estate in the event of the optionee's death.
The information below does not include stock options granted in February
1999.
Recipients of Stock Options currently unexpired as of 12/31/98 were as
follows:
Exercise Price
Name Option Shares per Share ($)
--------------------------------------------------------------
APPROVAL DATE: 2-6-98
David B. Strecker 15,000 0.41
Eric P. Marske 15,000 0.41
Jon A. Correio 15,000 0.41
Alan B. Cook 15,000 0.41
Debra Vaughn 5,000 0.41
Melvin Brown 25,000 0.41
Tom Kirchner 25,000 0.41
Arthur Leighton 25,000 0.41
Robert Southworth 25,000 0.41
John H. Rector 25,000 0.41
John L. Schooley 25,000 0.41
<PAGE>
APPROVAL DATE: 2-7-97
David B. Strecker 15,000 0.28
Eric P. Marske 15,000 0.28
Jon A. Correio 15,000 0.28
Alan B. Cook 15,000 0.28
Debra Vaughn 5,000 0.28
Melvin Brown 25,000 0.28
Tom Kirchner 25,000 0.28
Arthur Leighton 25,000 0.28
Robert Southworth 25,000 0.28
John H. Rector 25,000 0.28
John L. Schooley 25,000 0.28
APPROVAL DATE: 2-9-96
David B. Strecker 25,000 0.42
Eric P. Marske 25,000 0.42
Jon A. Correio 25,000 0.42
Alan B. Cook 25,000 0.42
Melvin Brown 25,000 0.42
Tom Kirchner 25,000 0.42
Arthur Leighton 25,000 0.42
Robert Southworth 25,000 0.42
Stock options must be exercised within 90 days after termination of
employment/board membership. During 1998, 175,000 options expired, and
none were exercised. At December 31, 1998 there were 630,000 shares
reserved for future exercise.
ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
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>
PART IV
ITEM 13.
EXHIBITS AND REPORTS ON FORM 8-K
Exhibits filed as part of the Company's 10KSB report for 1998 are listed
below. Certain exhibits have been previously filed with the Securities
and Exchange Commission and are incorporated by reference.
EXHIBIT
NUMBER DESCRIPTION
-------- ------------------------------
1. Report of Independent Certified Public Accountant
Financial Statements/Financial Statement Schedules
Balance Sheets
Statement of Operations
Statement of Changes in Stockholders Equity
Statement of Cash Flows
Notes to Financial Statements
2. Reports on Form 8-K
2.1 Form 8-K, dated November 17, 1998
2.2 Form 8-K, dated February 12, 1999
3. Articles of Incorporation and By-Laws filed as Exhibit 2.1 to
Form S-18, Registration Statement No. 2-92949-S, Exhibit (c) to
Form 8-K, filed March 15, 1985, and Amendments to By-Laws
adopted by Shareholders on January 14, 1985 are incorporated
herein by reference.
4. Instrument defining the rights of security holders including
indentures.
Exhibit II Form S-18 Registration Statement No. 2-92949-S is
incorporated herein by reference.
Forms 8-K dated February 9, 1996, February 7, 1997, February 6,
1998, and February 12, 1999.
11. Statement re-computation of per share earnings.
13. Annual report to security holders, Form 10-Q or quarterly
report to security holders. N/A
22. Published report regarding matters submitted to vote of
security holders. N/A
24. Consents of experts and counsel
27. Financial Data Schedule
99. Additional Exhibits N/A
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
By: /s/ T.L. KIRCHNER
T.L. Kirchner, Director/President
(Principal Executive Officer)
Date: March 25, 1999
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Signature Title Date
--------- ------ ---------
/s/ T. L. KIRCHNER Director/President March 25, 1999
T.L. Kirchner
/s/ ROBERT SOUTHWORTH Director/Secretary/ March 25, 1999
Robert Southworth Treasurer
/s/ MELVIN BROWN Director March 25, 1999
Melvin H. Brown
/s/ ARTHUR LEIGHTON Director March 25, 1999
Arthur Leighton
/s/ JOHN RECTOR Director March 25, 1999
John H. Rector
/s/ JOHN SCHOOLEY Director March 25, 1999
John L. Schooley
EXHIBIT 1 - FINANCIAL STATEMENTS
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>
EXHIBIT 2.1 - Form 8-K dated November 17, 1998
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: November 17, 1998
ELECTRONIC SYSTEMS TECHNOLOGY INC.
(A Washington Corporation)
Commission File no. 2-92949-S
IRS Employer Identification no. 91-1238077
415 N. Quay St. #4
Kennewick WA 99336
(Address of principal executive offices)
Registrant's telephone number, including area code:(509) 735-9092
<PAGE>
ITEM 5. OTHER EVENTS
On November 17, 1998, the Company issued a press release with summary financial
performance figures for the quarter ending September 30, 1998. This press
release is incorporated by reference and is attached hereto as Exhibit 99.7.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS,
AND EXHIBITS.
Exhibit 99.7 - Press release issued November 17, 1998.
<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 here unto duly authorized.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
/s/ T.L. KIRCHNER
By: T.L. Kirchner
President
Date: November 23, 1998
<PAGE>
EXHIBIT 99.7 - PRESS RELEASE ISSUED NOVEMBER 17, 1998
PRESS RELEASE
ELECTRONIC SYSTEMS TECHNOLOGY
415 N. QUAY STREET
KENNEWICK, WA 99336
509-735-9092 (O)
509-783-5475 (FAX)
EST ANNOUNCES 3rd QUARTER 1998 FINANCIAL INFORMATION
KENNEWICK, WASHINGTON --- November 17, 1998 --- Electronic Systems Technology
Inc. (EST) (OTC: ELST), a manufacturer of wireless modems, today
announced sales and results of operations for the three and nine month
periods ended September 30, 1998.
EST reported sales for the third quarter 1998 in the amount of $250,562
compared to $366,869 for the same quarter in 1997. Net income was $9,817, or
$0.002 per share, compared with net income of $70,995, or $0.01 per share,
for the third quarter of 1997. For the nine month period, EST reported net
income of $82,093 or $0.01 per share on sales of $967,678 compared with net
income of $93,691 or $0.02 per share on sales of $913,763 for the same period in
1997.
<TABLE>
Selected Statement of Operations Information
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30 Sept 30 Sept 30 Sept 30
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 250,562 $ 366,869 $ 967,678 $ 913,763
Net income before tax 14,874 107,567 124,384 141,956
Net Income 9,817 70,995 82,093 93,691
Weighted average common
shares outstanding 5,567,612 5,480,843 5,567,612 5,480,843
Basic Earnings per Share $ 0.002 0.01 $ 0.01 0.02
Diluted Earnings per Share $ 0.002 0.01 $ 0.01 0.02
</TABLE>
<TABLE>
<CAPTION>
Selected Balance Sheet Information
(Unaudited)
Sept 30 December 31
1998 1997
-------- -----------
<S> <C> <C>
Cash and cash equivalents $1,485,478 $1,466,760
Total current assets 2,082,364 2,065,479
Property & equipment (net) 120,315 132,924
Total assets 2,234,403 2,205,811
Total current liabilities 73,248 77,213
Long-term debt -0- -0-
Stockholders' equity 2,161,155 2,128,598
</TABLE>
Electronic Systems Technology, a publicly held Company since 1984, was
the first Company to develop the wireless modem and receive the United
States and Canadian patent for this technology.
Contact EST for more details.
www.esteem.com
EXHIBIT 2.2 - Form 8-K dated February 12, 1999
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: February 12, 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
A: During the Company's scheduled Board of Directors Meeting
on February 12, 1999, the Board of Directors awarded Stock
Options for Employees and Directors, as was recommended by
the Board's Employee/Director Stock Option Committee, subject
to the conditions delineated in the Committee's recommendations
and in accordance with the Electronic Systems Technology, Inc.
Stock Option Plan for Directors, Officers, and Employees, as
approved by Shareholder vote on June 7, 1996. Employees and
Directors, who were recipients of the stock options and
conditions relating to the stock options approved by the
Board of Directors, are delineated on attached Exhibit 20.1.
B: During the Board of Directors Meeting on February 12, 1999,
following evaluation and due diligence, the Board rejected an
unsolicited offer from Wincroft Inc. to acquire all of the
outstanding shares of the Company upon such terms and
consideration as set forth in such offer. See attached
exhibit 99.1
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS,
AND EXHIBITS.
Exhibit 20.1 - Summary of Employee/Director Stock Option Committee
recommendations regarding Employee and Director Stock Options, as
approved by the Company's Board of Directors, February 12, 1999.
Exhibit 99.1 - Offer received from Wincroft Inc. for proposed
acquisition of outstanding shares of Electronic Systems Technology, Inc.
<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: March 1, 1999
<PAGE>
EXHIBIT 20.1 - SUMMARY OF EMPLOYEE/DIRECTOR STOCK OPTION COMMITTEE
RECOMMENDATIONS REGARDING EMPLOYEE AND DIRECTOR STOCK OPTIONS, AS
APPROVED BY THE COMPANY'S BOARD OF DIRECTORS, FEBRUARY 12, 1999.
EXHIBIT 20.1
February 12, 1999
To: EST Board of Directors
From: Employee/Director Stock Option Committee
Subject: Recommendations
The committee recommends to the Board of Directors that the
individual employees and directors with no less than three years
continuous tenure named herein be granted stock options, effective
February 12, 1999, in the amounts tabulated and subject to the
conditions herein delineated and in accordance with the Electronic
Systems Technology Stock Option Plan for Directors, Officers, and
Employees, as ratified by shareholder vote on June 7, 1996.
Name Status Option Shares
----------------- -------- -------------
Melvin Brown Director 25,000
Tom Kirchner Director 25,000
Arthur Leighton Director 25,000
John H. Rector Director 25,000
John L. Schooley Director 25,000
Robert Southworth Director 25,000
David B. Strecker Employee 15,000
Eric P. Marske Employee 15,000
Jon A. Correio Employee 15,000
Alan B. Cook Employee 15,000
Debra R. Blair Employee 5,000
Brad E. Bement Employee 5,000
Philip J. Smith Employee 5,000
Recommended Option Conditions:
1. Each option grant will be at an exercise price per share
equal to market price at the time of grant. Market price
will be the mean of bid and ask prices recorded on the National
Daily Quotation Service "pink sheet" for the effective date of
the option grant. If no activity is reported for that date the
"pink sheet" with closest preceding date with recorded activity
will establish market price.
2. Each grant must be exercised by the optionee not later than
three years (1095) days from the date of the grant.
3. Options will be exercised in minimum blocks of 5,000 shares at
any one time. Options not exercised within the three year
(1095 day) period from option grant will terminate and not carry
over.
4. Rule 144 of the Securities Act of 1933 as amended will apply to
all stock acquired by exercise of the option grants. Rule 144
prohibits resale for a period of two years after acquisition and
<PAGE>
restricts resale quantities for one additional year. Each optionee
shall make an independent inquiry as to all other restrictions.
5. The company shall have the right, but not obligation, to
register all or any portion of the optioned shares at any time.
The intent of registration is to relieve the Rule 144 resale
restrictions which may still be in force at the time of registration.
6. In the event of termination of employment or board membership,
the optionee shall have a period of ninety days in which to
exercise any options which he has been granted, except under the
conditions of paragraph 7 and 8, which shall supersede the
provisions of this paragraph. Unless otherwise extended by the
board, all options terminated at the end of the ninety day period.
7. If recapitalization and/or similar events result in the change
of share unit values, the optionee will receive equivalent shares.
If the company is not the surviving entity by virtue of merger,
acquisition, etc., the optionee will have a window of ten days
in which to exercise his option. The last day of the window will
be five days prior to the legal conclusion of any such event.
8. In the event of company acquisition, merger, reorganization and
other transactions altering the company structure any outstanding
options then in force must be immediately exercised.
9. Option grants are not transferable or assignable except to an
employee's estate in accordance with the laws of inheritance in
the event of optionee's death.
10. All facets of the stock option program shall be appropriately
documented in accordance with the advice of the company's legal
counsels and shall comply with all relevant legal requirements
in the State of Washington and all Securities and Exchange
Commission rules, regulations, and disclosure requirements.
<PAGE>
EXHIBIT 99.1 - Unsolicited offer from Wincroft Inc.
Wincroft
Elthorne Gate, 64 High Street, Pinner, Middlesex, HA5 5QA UK
Tel: +44 (0) 181 429 7319 Fax: +44 (0) 181 429 7339
http://www.wincroft.com
PRIVATE AND CONFIDENTIAL
November 24, 1998
Tom Kirchner
Electronic Systems Technology, Inc.
415 N. Quay Street
Kennewick WA 99336
RE: LETTER OF INTENT
Dear Mr. Kirchner:
Further to the introduction by Daniel Wettreich of Forme Capital, Inc.,
please regard this letter as the intention of Wincroft, subject to
contract and due diligence, to acquire the whole of the issued shared
capital of Electronic Systems Technology, Inc. ("ELST"). Subsequent to
acquisition, Wincroft will make application for NASDAQ listing and pursue
a $10,000,000 fund raising to provide additional working capital and to
assist in future acquisitions. Our proposal is as follows:
1) The consideration for the acquisition will value ELST at $1.00 per share
for a total value of $4,953,667 and will be payable by the issuance of
1,415,333 Wincroft shares valued at its present price on the OTC Bulletin
Board of $3.50 per share.
2) Separately upon conclusion of the acquisition, if desired, an investor
group will purchase up to $200,000 of the Wincroft shares owned by
Mr. Kirchner personally at $3.50 per share.
3) The Board of Directors of Wincroft will be strengthened with the addition
of Mr. Kirchner as a Director.
4) In addition to Mr. Kirchner's present employment contract with ELST a
further contract of employment will be entered into with Mr. Kirchner and
Wincroft to run concurrently with the term of his contract with ELST, and
will compensate him for his services as a Director of Wincroft in the
amount of $25,000 per annum.
5) The present management of ELST will continue to manage the business of
ELST reporting to Mr. Kirchner.
6) Documentation to effect this transaction will be prepared by us for your
review. Closing of this transaction can occur very quickly with a NASDAQ
listing to be effected in the first quarter of 1999.
Please find enclosed the 10K and latest 10Qof Wincroft which will give you
full details on our company. I would like to direct you to our website at
www.wincroft.com for further details on our revolutionary video conferencing
product VideoTalk.
If you and your board view our proposal positively then I would like to come
and see you in your offices shortly after Thanksgiving so we can progress
matters further.
Yours Sincerely,
/s/ JASON CONWAY
Jason Conway
Chairman and CEO
Dictated by Mr. Conway
And signed in his absence by
Duncan James, Director
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS.
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
=========== ============= ==========
EXHIBIT 24 - CONSENTS OF EXPERTS AND COUNSEL
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.
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM, BALANCE SHEET, STATEMENT OF OPERATIONS, AND STATEMENT OF CASH
FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10KSB,
FOR DECEMBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,426,381
<SECURITIES> 0
<RECEIVABLES> 382,670
<ALLOWANCES> 1,284
<INVENTORY> 385,365
<CURRENT-ASSETS> 2,206,709
<PP&E> 358,436
<DEPRECIATION> 246,122
<TOTAL-ASSETS> 2,354,145
<CURRENT-LIABILITIES> 87,140
<BONDS> 0
<COMMON> 4,954
0
0
<OTHER-SE> 2,237,034
<TOTAL-LIABILITY-AND-EQUITY> 2,354,145
<SALES> 1,485,381
<TOTAL-REVENUES> 1,631,298
<CGS> 692,632
<TOTAL-COSTS> 759,053
<OTHER-EXPENSES> 204,941
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 242,779
<INCOME-TAX> 79,852
<INCOME-CONTINUING> 162,927
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 162,927
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
