EXHIBIT 22.1 - 1996 ANNUAL SHAREHOLDERS REPORT
1996 ANNUAL REPORT
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
415 NORTH QUAY STREET
KENNEWICK, WA 99336
Dear Shareholder,
Electronic Systems Technology faced a challenging year in 1996. We completed
the development process of our new ESTeem(TM) 192 products, which were
announced to the public in the fourth quarter of 1996. This costly
development process was funded solely by the Company's resources, which
unavoidably impacted profitability in 1996, but ultimately resulted in the
development of a product which we are proud to produce and excited to market.
Compounding our challenge was an unexpected sales downturn following a record
sales year in 1995, with lower than expected sales revenues in all of our
main customer markets. Despite these adverse circumstances, the Company
remained profitable through 1996, and retained its financial stability as can
be seen in growth experienced both in net assets and shareholders equity.
For the year ending December 31, 1996, EST reported ESTeem product sales of
$1,190,304 compared with $1,535,071 in 1995. Total EST gross revenues for
1996 were $1,443,549 as compared to 1995 gross revenues of $1,731,949, a
decrease of 17%. The Company reported a net before tax profit of $234,456,
compared with net income before tax in 1995 of $404,137. Net income
performance was enhanced by the recovery of $57,000 in bad debts owed to the
Company which had been recorded as an expense in 1995. Net income after tax
for 1996 was $158,735, or $0.03 per share, as compared with net income after
tax of $267,709 or $0.05 per share, in 1995. For the sixth straight year
shareholder equity has increased. At year end 1996, shareholder equity
was $0.41 per share, as compared with $0.37 per share in 1995, a 10%
increase. Your Company remains very strong financially, with $2,042,709 in
total assets at year end 1996, compared with $2,010,772 in 1995, cash and
short-term investments of $1.4 million, and without any long-term debt.
Our decreased sales revenues for 1996 is believed to be a result of increased
competition, postponements of customer projects, and uncertainty generated by
delays experienced in bringing the ESTeem 192 products to market. With the
improvement and expansion of our ESTeem 192 product line late in 1996, we
hope that 1997 will bring a return to the positive business trends
experienced in 1995, as we bring to bear the full force of what we feel is a
superior product.
PACIFIC STOCK EXCHANGE LISTING REQUIREMENTS
ELECTRONIC SYSTEMS TECHNOLOGY
(Selected Financial Data)
Category Listing 1996 1995
Requirements Year End Year End
Net Tangible Assets $2,000,000 $2,011,934 $1,877,180
After Tax Income $ 100,000 $ 158,735 $ 267,709
Public Float (shares) 500,000 4,337,979 4,415,979
Market Value of Float $1,500,000 $1,220,000 $2,009,000
Bid Price $ 3.00 $ .25-.31 $ .41-.50
Shareholders 500 >670 >770
Operating History 3 Years 12 Years 11 Years
Table 1
As a duty to our Shareholders, our main goal continues to be the pursuit of
listing the Company's stock on a major stock exchange to allow increased
marketability of EST stock. The Pacific Stock Exchange (PSE) has been,
and remains, the prime candidate for the listing effort. A comparison of
PSE listing requirements with EST's standing as of year end 1996 is shown in
Table 1. It has been, and continues to be, our belief that the market value
of the Company's stock has been undervalued for some time. In the second
and third quarters of 1996, the Company implemented a plan for the
repurchase of its common stock from time to time through purchases on the
open market. Through this stock repurchase program it was hoped that
confidence in the Company's stock would be improved, with the shareholders of
the Company reaping the ultimate benefits. During the duration of the
plans, the Company expended $23,981 in resources to repurchase a total of
53,000 shares of the Company's stock. Management and the Board of Directors
remain diligent in exploration of methods to meet the listing requirements of
the Pacific Stock Exchange and to increase confidence in the Company's stock.
As a information source both to our customers and shareholders, EST has an
Internet website, (http://www.esteem.com), containing product information.
We have been pleased with the response to the web site, particularly in
facilitating access to information on the Company's products to the
Company's existing and potential foreign customers. Also, all of EST's
publicly filed Security Exchange Commission (SEC) data is available from the
SEC information archive at the SEC Internet website (http://www.sec.gov),
with the search string of "electronic systems".
We were all devastated by the recent news that Art Leighton, a Director of the
Company, had been seriously injured in a shooting incident near his home.
Mr. Leighton is one of the longest serving Directors of the Company,
whose experience and advise have proven invaluable to the Company. The
Company will publicly release information regarding changes and improvements
in Mr. Leighton's condition as news becomes available. We send our wishes
for Mr. Leighton's full and rapid recovery to both him and his family.
Both personally, and as an organization, I would like to thank all our
shareholders for their ongoing support as we move forward in 1997 to meet
the challenges and opportunities presented to us.
/s/ T.L. KIRCHNER
T.L. Kirchner
President
COMPANY PROFILE
Electronic Systems Technology, Inc. ("EST" or the "Company") specializes in the
manufacturing and development of wireless modem products. The Company uses its
research and development, manufacturing, and marketing efforts to produce and
market the Company's line of ESTeem(TM) Wireless Modem products and
accessories. The Company offers a product line which provide innovative
communication solutions for applications not served by existing conventional
communication systems. The product line is offered in the growing markets for
process automation in commercial, industrial, and government arenas
domestically, as well as internationally. The Company's products are
marketed through factory direct sales, sales representatives, Original
Equipment Manufacturers (OEM's), and both foreign and domestic resellers.
The Company was incorporated in the State of Washington in February, 1984, and
was granted a U.S. Patent for the "Wireless Computer Modem" in May 1987, and
the Canadian patent in October 1988. During the past three years, the
Company has continually refined its product line in response to customer
needs, as well as developing the ESTeem 192 product line, a new generation of
ESTeem products which are faster and more flexible than previously offered
products. The Company has continued to expand its customer base,
particularly in the industrial controls arena, with its efforts to team with
all major programmable logic controller (PLC) hardware vendors.
This cooperation with PLC vendors has resulted in the Company being
recommended as the "Wireless Computer Modem" supplier for several networks
of distributors for the PLC industry. The Company has also been included as
hardware provider on Government programs such as the Core Automated Maintenance
System (CAMS) for the U.S. Air Force, and Automatic Identification Technology
(AIT) for the U.S. Army. In 1996, the Company continued to participate in the
process automation and industrial control marketplace which has served as
the core of the Company's customer base for the several years.
PRODUCTS AND MARKETS
EST's product line is a family of narrow band, packet burst, VHF & UHF FM radio
modems providing communication links between computers, peripherals, and
instrumentation controls using radio frequency waves.
The continually increasing computer based applications in business and
industrial environments is placing new requirements on data transfer. Prior to
the invention of the ESTeem modem, the majority of data transfers used
telephone modems or direct cable connections. Both of these alternatives had a
costly side effect. When utilizing telephone modems, there is a monthly charge
for the use of telephone lines. When using direct cable connections the cost
of installing cable systems will usually cost as much or more than the cost
of the communication system. ESTeem wireless modem products provide a
"Wireless Solution" by eliminating the need for conventional hardwiring and
leased phone lines.
All of the ESTeem models ("ESTeems") come with the industry standard
asynchronous communications ports to provide users with new dimensions in
"Local Area Networking". As many as 253 devices can be interfaced on a
single frequency. ESTeem wireless modems have over one hundred internal
software commands to allow the user to easily configure the unit for any
application or use. The ESTeem setup parameters are saved in its own
non-volatile memory.
ESTeem Modems work on a packet burst communications concept. Packet systems,
whether hardwired or radio, share the same principle of operation; data is
taken from a standard RS-232C or RS-422 asynchronous port and is transmitted
in "Electronic Packets" (i.e. electronic packets of information). The size
of the packet can be defined by the user from 1 to 1010 bytes of information.
Once a packet of data is formed, it is transmitted in a "burst," from one
ESTeem to another, hence the term "packet burst communications." ESTeem
Modems provide data accuracy of greater than one part in 100 million. The
ESTeems have frequency agility in the VHF and UHF frequency ranges. Internal
Digi-Repeater features allow the user to increase operating range by relaying
transmission through a maximum of three ESTeems to reach the destination
ESTeem. An ESTeem can operate as an operating node, a repeater node, or
both simultaneously, for added flexibility.
"Private Data Communications" is provided by the use of the ESTeem firmware,
Synchronous Data Link Control (SDLC), bit compression, and Manchester encoding
techniques. The user can define over four different security code and
communications parameter groups that allow communication access to the
"Radio Area Network". If higher security is required, the ESTeem is compatible
with asynchronous Data Encryption Standard (DES) encryption devices.
PRODUCT APPLICATIONS
Some of the major applications and/or industries for which the ESTeem products
are being utilized are as follows:
Water and Waste Water Industry Transportation
Industrial Process Control Overhead Crane Control
Remote Data Acquisition (SCADA) Shop Floor Manufacturing
Law Enforcement/Public Safety Intra-Office/Building Computer
Networking
Petroleum Industry Federal
Oil and Gas Pipelines Ground Mobile Communications
Offshore Production Ship to Shore Communications
On-shore Production Flight Line Maintenance
Tank Farm
PRODUCT LINES
The Company's VHF radio modem products operate in the mid 60-70 MHz band of the
VHF RF spectrum. The ESTeem VHF radio modem products are the ESTeem Model 85
and Model 95. The standard production units of the ESTeem Model 85 and 95 are
configured to operate in the lower 70 MHz spectrum. The Model 95 ESTeem has
the same features as the Model 85 with the additional technical enhancements
of software frequency agility, software selectable receiver sensitivity, and
received signal strength option. The major markets for these products are
in industrial control, SCADA, and inventory control in the commercial arena,
and inventory and command control for Federal applications.
The Company's UHF radio modem products operate in the lower 400 MHz federal
radio band, and the mid to upper 400 MHz commercial radio band of the UHF RF
spectrum. The ESTeem UHF radio modem products are the ESTeem Model 192C,
192F, 96F, 98F, and 96C, which have the same features as the VHF radio modem
products, but were designed to operate in the lower 400 and upper 400 MHz
areas of the Federal and commercial bands of the UHF RF spectrum. The 192
product line is differentiated from the other UHF radio modem products by
having a data rate of 19,200 bits per second (bps). This data rate is four
times faster than the data rates of the 96 and 98 product lines. The 192
product line contains infrared and telephone interfaces which are not available
on the 96 and 98 product lines. All of the UHF radio modem products have the
additional following technical capabilities: software frequency agility,
software selectable receiver sensitivity, and RF output power from two to
four watts depending on customer licensing. The major markets for these
products are in industrial control, SCADA, and inventory control in the
commercial arena, and inventory and command control for Federal applications.
The Company's Specialty Modem Products are network enhancing products using
ESTeem modem technology. The ESTeem specialty modem products are the ESTeem
Model 84SP, 85SP and Port Expansion Module. The ESTeem Models 84SP and 85SP
are special purpose versions of the ESTeem Model 85 VHF radio modem, without
radio transceiver circuitry. In place of the transceiver card is a
universal interface card that allows the use of a customer's full- or
half-duplex radio transceiver, turning it into a packet burst communications
device. The Model 85SP is a lower cost version of the 84SP and contains only
the necessary circuitry for interfacing to direct digital modulated radios.
The major market for these products are civilian SCADA and public safety
applications. The ESTeem Port Expansion Module (PEM) is designed to allow a
single ESTeem product to have up to eight independent RS-232/422
communications ports. The PEM is designed with the proper input/output
interfaces to be cascaded to additional PEM modules to increase the
communications ports in multiple groups of eight. The major market for this
product is main frame to remote terminal applications in the Domestic,
Foreign, and Federal markets.
For operation in the United States, the ESTeem RF Modems require Federal
Communications Commission (FCC) Type Acceptance. The FCC Type Acceptance is
granted for devices which demonstrate operation within performance criteria
mandated, observed, and tested by the FCC. All of the Company's products
requiring FCC Type Acceptance have been granted such acceptance. For
operation in Canada, the ESTeem RF Modems require Canadian Department of
Communications (DOC) Type Acceptance. The DOC Type Acceptance is granted for
devices which demonstrate operation within performance criteria mandated,
observed, and tested by the DOC. To date the ESTeem Models 85, 96C, and 98F
and 192C have applied for and have been granted type acceptance in Canada.
All ESTeem radio modem products require consumer licensing under FCC Rules and
Regulations, which is applied for by the end user of the Company's products.
The Company provides information to it's customers to assist in the application
for FCC consumer licenses.
PRODUCTS FOR THE FUTURE
Due to the constantly changing technology environment of the communications
industry, specifically the markets in which the Company's products compete,
standards and technologies are subject to rapid, unexpected changes. To remain
competitive in this dynamic environment, the Company is required to
continually update and enhance existing products, develop new products, and
seek new applications where these products may be marketable. Development has
recommenced on a line of radio modem products scheduled for release in 1997
which is targeted for applications within the Industrial Control and Federal
markets. The Company's strategy for the future calls for continued product
development, improvement of existing products, as well as exploring
opportunities for new applications of the Company's products. The goal of
product improvement and development has been, and will continue to be, to
penetrate both existing and new market applications to encourage sales
growth for the Company's products and to maintain the Company's status as a
leader in innovative wireless communications solutions.
MARKETING STRATEGY
The majority of the Company's products are sold and distributed directly from
the Company's facility through direct sales to the end users of the ESTeem
products. The remainder of the Company's sales are through non-exclusive,
non-stocking Resellers, and Original Equipment Manufacturers (OEM's).
Normally, ninety-five percent of the Company's products are distributed through
direct sales and five percent are through Reseller and OEM entities. The
Company carries a minimal amount of backlog, if any. Customers generally
place orders on an "as needed basis".
During 1996, the Company continued a strategy of advertising in trade
publications targeted at users of control, instrumentation, and automation
systems worldwide. The Company's advertising is targeted toward customers
using Programmable Logic Controllers (PLCs). There are approximately twenty
five major PLC manufacturers worldwide. In 1996 the Company established 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 is continuing its Government sales activities which are directed
towards all branches of the United States Armed Services. Examples of
projects the Company's products are included in are flight-line maintenance
for the United States Air Force, flight-line lighting for the United States
Navy, command and inventory control for the United States Marine Corps, and the
Automatic Identification Technology program for the United States Army. The
Company's sales to Government entities is administered through the Company's
General Services Administration (GSA) contract, and separate project
contracts administered by both the UNISYS and Intermec Corporations, all of
which are fixed price, indefinite quantity and delivery agreements.
The Company's competition varies according to the market or submarket of the
communications industry in which its products are established or are entering.
Due to the broad number of applications in which the Company's products
perform, there is also a resulting broad number of competition in the
electronics and communications industry. All of the markets in which the
Company's products are sold are highly competitive. Management believes the
ESTeem products compete favorably in these markets because of performance,
price, and adaptable to a wide range of applications. The Company's
major limitation in competing with other manufacturers is its limited marketing
budget.
MARKET INFORMATION FOR THE COMPANY'S COMMON STOCK
There is no established market for trading the Common Stock of the Company.
The Common Stock is not regularly quoted in the automated quotation system of a
registered securities system or association. 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, 1996
First Quarter 5/16 3/32 3/8 11/32
Second Quarter 9/32 3/32 11/32 9/32
Third Quarter 13/32 1/8 1/2 9/32
Fourth Quarter 13/32 1/8 53/100 15/32
Fiscal year ended December 31, 1995
First Quarter 1/2 1/4 3/4 7/16
Second Quarter 11/32 1/4 1/2 3/8
Third Quarter 13/32 5/16 9/16 1/2
Fourth Quarter 5/16 7/32 1/2 5/16
The above data was compiled from information obtained from the National
Quotation Bureau, Inc. daily quotation service.
The approximate number of record holders of common stock of the Registrant as
of January 21, 1997 was 672 persons/entities.
Electronic Systems Technology Inc. has never paid a cash dividend and the Board
of Directors does not anticipate declaring cash dividends in the foreseeable
future.
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. WHEN USED IN THIS DISCUSSION THE WORDS "ESTIMATE", "BELIEVE",
"INTEND", "EXPECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD
LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD LOOKING STATEMENTS WHICH SPEAK ONLY AS OF THE DATE OF THIS ANNUAL
REPORT.
RESULTS OF OPERATIONS
GENERAL: The Company is specializes in the manufacturing and
development of wireless modem products. The Company offers a
product line which provide innovative communication solutions for
applications not served by existing conventional communication
systems. The Company offers its product lines in the growing
markets for process automation in commercial, industrial, and
government arenas domestically, as well as internationally. The
Company markets its products through direct sales, sales
representatives, Original Equipment Manufacturers (OEM's), and
domestic, as well as foreign, resellers. Operations of the Company
are sustained solely from revenues received through sales of its
products and services.
FISCAL YEAR 1996 vs. FISCAL YEAR 1995
GROSS REVENUES: Total revenues for the fiscal year 1996 were
$1,443,549 reflecting a 17% decrease from the $1,731,949 total
revenues for fiscal year 1995. The decrease is attributable
primarily to decreased sales in 1996, of $1,190,304 as compared
to 1995 sales of $1,535,071, representing a decrease of 22%.
Throughout 1996 the Company experienced decreases in sales revenues
in all of the Company's major customer categories; domestic,
foreign and U.S. Government (See Note 6 to Financial Statements.)
Management believes the reduction in sales revenues is a result of
several factors, primarily, increased competition from other types
of wireless products in the markets in which the Company competes,
postponements and/or cancellations of customer projects intended to
employ the Company's products, and uncertainty in purchase
decisions on the part potential customers due to delays experienced
in the release of the Company's new product, the ESTeem 192.
In 1996, 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 1996, the Company had $222,239 in foreign export sales,
amounting to 17% of total product and service sales for the year.
For year end 1995, foreign export sales were $223,800, or 15% of
total product sales for the year. It is Management's opinion that
foreign sales did not follow the same percentage reduction in sales
as other customer categories due to increased use of the Company's
products in SCADA projects abroad, as well as relatively large,
unexpected orders to customers in Mexico, Venezuela and the
Philippines. Management believes reduction in sales to Canada is
due to lack of large site orders which weighted Canadian sales
performance in 1995 and 1994. Management believes that reduced
sales to former Yugoslavian countries will continue as political
stability returns to the region and normal infrastructures are
restored, thereby reducing the need for Company's products.
Products purchased by foreign customers were used primarily for
Industrial Control applications, although an increase in the use of
the Company's products in SCADA projects was noted in 1996. It is
Management's opinion foreign sales will continue to be strong in
the Industrial Control arena. Other than sales through foreign
distributors, management believes a majority of the Company's
export sales have been obtained as a result of advertisements in
INDUSTRIAL & CONTROL SYSTEMS magazine. The geographic composition
of the Company's foreign export sales for 1996, and 1995 are shown
in Note 6 to the Financial Statements. (See Note 6 to Financial
Statements.)
In 1996 products purchased by U.S. Government agencies or by U.S.
Government contractors amounted to $262,326 or 22%, of total
product sales compared with 1995 levels of $396,567, or 20%, of
total product sales. Management believes the comparative decrease
in U.S. Government sales are the result of the following factors:
1) postponement of a U.S. Marine Corps (USMC) order that was
originally expected in the fourth quarter of 1996, 2) lack of
sales under the Company's CAMS subcontract with the Unisys
Corporation, and 3) high levels of U.S. Government sales
experienced in 1995 unusually weighted 1995 performance for
comparative purposes. Products purchased by the U.S. Government
were utilized in three primary applications: Inventory Control,
PC/PC (Personal Computer) networking, and Command Control. The
major application for EST products is in Command Control
applications, with Inventory Control second and PC/PC networking
third. It is Management's opinion that in the future Command
Control applications will exceed PC/PC networking applications and
inventory control applications. Due to the uncertainty of the
nature of U.S. Government purchasing in general, and specifically
the AIT, CAMS, and other programs the Company's products are
involved in, Management does not base liquidity, profitability, or
material purchase projections on anticipated sales.
As of December 31, 1996, the Company had a backlog of $89,065, for
orders placed late in December. The majority of these orders were
shipped within the first week of January, 1997. The Company
carries a minimal amount of backlog, if any. Customers generally
place orders on an "as needed basis". Shipment for most of the
Company's products is generally made within 5 working days after
receipt of customer orders.
COST OF SALES: Cost of Sales, as a percentage of gross sales, for
the years of 1996 and 1995 was 41% and 39%, respectively. Cost of
Sales variations that occur are normally attributed to the type of
product sold and the size of the order. Larger orders grant lower
sales prices, reducing the profit margin.
INVENTORY: The Company's year-end inventory values for 1996 and
1995 were as follows:
1996 1995
------- --------
Parts $260,397 $198,487
Work in Progress 68,555 --0--
Finished goods 72,353 98,550
------- --------
TOTAL $401,305 $297,037
======= ========
The majority of the Company's material purchases are handled with
scheduled purchase orders. A scheduled purchase order is an order
where materials are purchased over a time period negotiated with
the supplier, generally from 2 months to 12 months. Shipments are
made monthly or on an as-needed basis. By using this method, the
Company is able to obtain volume discounts on purchases and also
assure that materials will be available when needed. Volume
discounts generally provides cost savings of 25% or more. If the
Company's sales are less than anticipated, inventory over-stocking
can occur. The Company's objective is to keep inventory levels as
low as possible to provide maximum cash liquidity, while at the
same time, meet production and delivery requirements. The Company
must also take into consideration that significant portion of EST
component parts have lead times ranging from 16 to 40 weeks. Based
on past experience with component availability, current distributor
relationships, and current inventory levels, the Company foresees
no anticipated shortages of materials used in production.
For year end 1996, purchases and costs allocated to cost of goods
sold were $595,119 as compared to $475,691 in 1995. This increase
is a primary result of the Company increasing specific and
specialized inventory stocks for the anticipated production of the
Company's EST 192 product line. This is also reflected in the
increase in inventory value at year end 1996 to $401,305 from 1995
year end levels of $297,037.
OPERATING EXPENSES: Operating expenses, prior to allocation of
expenses to Cost of Sales and Engineering Services, increased in
1996 to $865,162 from 1995 levels of $839,793. Material changes
in expenses is comprised of the following components: Advertising
expenses increased to $54,969 in 1996 from 1995 levels of $50,619
due to the Company expanding its advertising exposure in
anticipation of the release of the EST 192 product line, as well as
increases in fees charged by publishing companies for EST's
advertising. Sales commissions decreased from 1995 levels of
$31,974 to $22,972 in 1996 due to decreased sales to the U.S.
Government. Depreciation expense on the Company's assets increased
from 1995 levels of $25,379 to $30,303 in 1996 due to increased
depreciable assets acquired by the Company for manufacturing and
research and development use. Supplies and materials expenses
increased to $26,060 in 1996, from 1995 levels of $12,383 due to
increased requirements primarily from research/development
projects. Printing expenses decreased from 1995 level of $13,104
to $10,203 at year end 1996, due mainly to the Company producing an
increased amount of printed material in house instead of
subcontracting. Professional services increased from 1995 levels
of $46,113 to $77,795 at year end 1996 due to increased amounts
paid for engineering services to outside third parties for research
and development projects for the development of the EST 192 product
line. Repair and maintenance expenses increased in 1996 to $13,080
as compared to $6,992 in 1995, due to increased equipment
calibration costs, and higher than normal necessary repairs on the
Company's manufacturing and analysis equipment.
Salaries increased to $413,920 in 1996, an increase from 1995
levels of $391,826. This increase is a result of increases in
wages and benefits costs, as well as higher accrued vacation
benefits from a more tenured employee base accruing an increased
amount of vacation benefits in 1996, as compared with figures for
1995. Trade show expenses increased from 1995 levels of $8,688 to
$17,682 in 1996, due to increased trade show attendance on the part
of the Company.
The Company did not incur bad debt expense during 1996 as compared
with the $54,474 recognized for amounts owed to the Company by
Diversified Engineering for 1995.
FISCAL YEAR 1995 vs. FISCAL YEAR 1994 RESULTS
Total revenues for fiscal year 1995 were $1,731,949 reflecting a
29% increase from the $1,340,380 total revenues for fiscal year
1994. The increase was attributable primarily to increased sales
in 1995 of $1,535, 071 as compared to 1994 sales of $1,197,720.
Throughout 1995 the Company experienced increases in both customer
orders of large quantity, and in total customer orders processed.
Management felt this trend was due in part to increased advertising
by the Company, increased awareness of wireless technology options
by potential buyers of the Company's products, and customer
referrals from the Company's existing customer base.
Operating expenses, prior to allocation of expenses to Cost of
Sales and Engineering Services, increased in 1995 to $839,793 from
1994 levels of $743,816. Material changes in operating expenses
is comprised of the following components: Advertising expenses
increased to $50,619 in 1995 from 1994 levels of $35,848 due to the
Company expanding its advertising exposure, as well as increases in
fees charged by publishing companies for EST's advertising. Sales
commissions increased from 1994 levels of $17,925 to $31,974 in
1995 due to increased sales to the U.S. Government. Depreciation
expense on the Company's assets increased from 1994 levels of
$21,160 to $25,379 in 1995 due to increased depreciable assets
acquired by the Company for internal networking, manufacturing, and
research and development use. Supplies expenses increased to
$12,383 in 1995, from 1994 levels of $9,601 due to increased
requirements resulting from elements such as increases in
production and research/development projects. Printing expenses
increased from 1994 level of $6,750 to $13,104 at year end 1995,
due mainly to increased demand for customer support and marketing
related material, such as owners manuals, brochures, and technical
bulletins, as well as increased shareholder mailings.
Professional services decreased from 1994 levels of $61,338 to
$46,113 at year end 1995 due to timing differences in amounts paid
for engineering services to outside third parties. In 1994, the
Company had contracted with Remtron, Inc. for these services,
whereas in 1995, engineering expertise was not required on
development projects until late in the year.
Salaries increased to $391,826 in 1995, an increase from 1994
levels of $381,243. This increase is a result of increases in
wages and benefits costs, as well as higher accrued vacation
benefits from a more tenured employee base, in comparison with
figures for 1994. Trade show expenses decreased from 1994 levels
of $10,017 to $8,688 in 1995, due to discounts on tradeshow fee
earned by the Company by being a returning participant at the
attended tradeshows.
Bad Debt expense was recorded, and Accounts Receivable reduced in
the amount of $57,204 for 1995 for amounts owed to the Company by
Diversified Engineering, but were unpaid. There was also a downward
adjustment to the allowance for doubtful accounts to $1,284 for
1995 due to the Company's prior history of low accounts write-offs,
leading to a net bad debt expense of $54,474 for 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's working capital was $1,861,527
compared with $1,723,823 at December 31, 1995. The increase is
primarily attributable to the Company's 1996 after-tax profit of
$158,735. The Company's operations rely solely on the income
generated from sales. The Company's major capital resource
requirement is for maintaining adequate inventory levels. Long
lead times for some of the critical components, ranging from 16 to
40 weeks, force the Company to maintain higher than normal
inventory levels. It is Management's opinion that the Company's
working capital as of December 31, 1996 is adequate for expected
resource requirements for the next twelve months.
The Company's current asset to current liability ratio at December
31, 1996 was 61.5:1 compared to 13.9:1 at December 31, 1995. The
ratio change is attributable primarily to the Company having
reduced trade accounts payable and the absence of a federal income
tax liability at year end 1996.
The Company's cash resources at December 31, 1996, including cash
in the bank and cash equivalent liquid assets, were $1,413,182,
reflecting an increase from cash resources of $1,162,726 for year
end 1995. Cash flows from operating activities were provided by
net income of $158,735, a decrease in accounts receivable of
$119,609, depreciation of $30,303. Cash flows were primarily
offset by increases in inventory of $104,268, decreasing federal
income taxes payable of $58,665, and repurchase of the Company's
common stock in the amount of $23,981 in 1996.
Cash and short term investments of the Company changed in holding
amounts from year end 1995 to year end 1996, with the majority of
the Company's idle cash being invested in commercial paper short
term investments, certificates of deposit, and money market
accounts. These changes in holding amounts are implemented by the
Company so that the Company's liquid resources may earn improved
rates of return.
During 1995 the Company held an investment in marketable securities
in the Piper Jaffray Institutional Government Fund (the "Fund").
Public information indicates Piper Jaffray suffered losses due to
derivatives in is Institutional Government Income Portfolio Mutual
Fund. Write downs in the value of the Company's investment in this
Fund totaling $49,953 in 1995 were realized due to the other than
temporary decline in value of the investment, treatment for which
is outlined in paragraph 16 of Statement of Financial Accounting
Standard (SFAS) 115. As of March 31, 1996, the Company had
liquidated its marketable securities investment in the Fund.
The Company's trade accounts receivable, adjusted for uncollectible
accounts, at December 31, 1996 were $38,311, compared to $157,920
for 1995. The decrease is attributable to reduced sales in the
fourth quarter of 1996 which resulted in reduced amounts of
receivables owed to the Company. No bad debt expense was recorded
during 1996. Bad debt expense was recorded in the amount of $57,204
for 1995 for amounts owed to the Company by Diversified
Engineering, which were recovered by the Company during the second
quarter of 1996. Management believes that all of the Company's
accounts receivable as of December 31, 1996 are collectible.
Aging of accounts receivable, as of December 31, 1996, is as
follows:
Category Amount Percentage
----------- ---------- --------------
Current $15,431 39%
1-30 past 10,041 25%
31-60 past 10,251 26%
61-90 past 3,581 9%
91-120 past - 0 - - 0 -
over 120 290 1%
The balances in the past due categories are considered to be at
normal levels for the Company. The overall percentages are
considered skewed by the abnormally low amount of accounts
receivable at year end 1996. The Company believes it's level of
risk associated with customer receipts on export sales is minimal.
Foreign shipments are made only after payment has been received or
if 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.
On May 31, 1991, the Corporation received a Promissory Note from
Western Data Com in the amount of $31,491 to cover it's outstanding
accounts receivable balance. The Company had received $30,679 from
Western Data Com prior to April 25, 1996. On April 25, 1996, the
Company received $3,656 from Western Data Com in full settlement of
the outstanding portion of the Promissory Note.
Inventory levels as of December 31, 1996 were $401,305, an increase
from December 31, 1995 levels of $297,037. This increase is a
primary result of the Company increasing specific and specialized
inventory stocks for the anticipated production of the Company's
ESTeem 192 product line.
Outlays for capital expenditures during fiscal year 1996 amounted
to $26,508. These expenditures were primarily for equipment used
for research/development and manufacturing. 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, 1996, the Company's current liabilities were
$30,775, a decrease of $102,817 over the 1995 year end levels of
$133,592. The decrease is primarily attributable to the absence of
federal income tax payable by the Company, and decreases in trade
accounts payable due to low year end purchasing activity. All of
the Company's accounts payable at year end were current.
Differences between the provision for income taxes and income taxes
computed using the Federal income tax rate, resulted in a deferred
tax asset of $411 at year end 1996, compared with a $5,287 deferred
tax asset for year end 1995. The primary components of the
deferred tax asset were amounts provided by the Company's accrued
vacation benefits payable and unused capital loss carryforward
resulting from the Companies realized loss on impaired marketable
securities during 1995.
The Company's subcontract administered by UNISYS, dated December
23, 1993, is a five year indefinite delivery, indefinite
quantity, fixed price contract through September 1997. Based on
the terms of the UNISYS contract, and contracts of this type in
general, Management does not base liquidity, profitability, or
material purchase projections on anticipated sales. The
Company's economic position allows it to respond to UNISYS orders
on an as needed basis. There were no sales by the Company to
UNISYS under the contract in 1996. It is Management's opinion
that sales under the UNISYS contract are impossible to predict
due to the uncertain nature of U.S. Government purchasing.
The Company's AIT subcontract administered by INTERMEC, dated
July 26, 1994, is a five year indefinite delivery, indefinite
quantity, fixed price contract through September 1999. Based on
the terms of the AIT contract, and contracts of this type in
general, Management does not base liquidity, profitability, or
material purchase projections on anticipated sales. The
Company's economic position allows it to respond to AIT orders on
an as needed basis. Sales under the AIT contract in 1996 were
$96,144. It is Management's opinion that sales under the AIT
contract are impossible to predict due to the uncertain nature of
U.S. Government purchasing.
The Company has a General Services Administration (GSA) contract to
sell goods to the U.S. Government. This contract is a fixed price,
indefinite quantity and delivery agreement. The current contract
runs through March 31, 1997. A renewal GSA contract is being
negotiated. If awarded the new GSA contract period would extend
through March 31, 1998. Management expects its GSA contract to be
renewed. Based on previous years activity, the Company expects
the majority of U.S. Government purchases to be placed under the
Company's GSA contract. Projections regarding liquidity,
profitability, and material purchases are based on past history
of annual purchases. Historically, Federal Government sales have
averaged approximately 18% of annual sales. Due to the uncertain
nature of Federal Government purchasing, procurement of material
and production planning is adjusted quarterly based on demand. It
is Management's opinion that the majority of Federal Government
purchases in 1997 will be under this GSA contract.
With the possible exception of orders from the Company's UNISYS,
AIT, or GSA contracts, and the impact of planned research and
development expenditures, Management is unaware of any known
trend which would reasonably be likely to have a material effect
on the Company's liquidity, results of operations, or financial
condition.
The Company's operations were not adversely effected by inflation
during 1996. No adverse affect is anticipated during 1997.
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. The Company does not undertake any
obligation to publicly release any revisions to these forward looking
statements to reflect events or circumstances after the date of this
Annual Report or to reflect the occurrence of unanticipated events.
INDEX TO FINANCIAL STATEMENTS
PAGE
ACCOUNTANTS' REPORT ON THE FINANCIAL STATEMENTS 16
BALANCE SHEETS 17 - 18
STATEMENT OF OPERATIONS 19
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 20
STATEMENT OF CASH FLOWS 21 - 22
NOTES TO FINANCIAL STATEMENTS 23 - 24
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, 1996 and 1995, and the
related statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31,
1996. 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, 1996 and
1995 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ROBERT MOE & ASSOCIATES, P.S.
Spokane, Washington
February 6, 1997
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
BALANCE SHEETS
December 31, 1996 and 1995
ASSETS
1996 1995
--------- ----------
CURRENT ASSETS
Cash $ 5,717 $ 15,765
Money market investment 482,892 444,335
Certificate of Deposit 724,573 504,626
Commercial paper 200,000 300,000
Marketable securities 121,117
Accounts receivable, net of allowance
for uncollectibles of $1,284-1996
and $1,284-1995 38,311 157,920
Inventory 401,305 297,037
Accrued interest 2,707 3,745
Prepaid insurance 3,101 3,034
Prepaid expenses 6,930 1,100
Prepaid Federal income taxes 26,355
Deferred tax asset 411 5,287
Current portion of note receivable 3,449
--------- ---------
Total current assets 1,892,302 1,857,415
--------- ---------
PROPERTY & EQUIPMENT
Leasehold improvements 13,544 13,544
Laboratory equipment 276,421 254,931
Furniture & fixtures 15,017 15,017
Dies & molds 21,612 17,255
--------- ---------
326,594 300,747
Less accumulated depreciation 185,384 155,504
--------- ---------
141,210 145,243
--------- ---------
OTHER ASSETS
Patent costs, net of amortization
of $1,344-1996 and $1,236-1995 1,042 1,150
Deposits 340 340
Capitalized software cost of
$64,062-1996 net amortization of $56,247;
$61,143-1995 net amortization of
$54,519 7,815 6,624
--------- ---------
9,197 8,114
--------- ---------
TOTAL ASSETS $2,042,709 $2,010,772
========= =========
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
BALANCE SHEETS
December 31, 1996 and 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
--------- ---------
CURRENT LIABILITIES
Accounts payable $ 15,035 $ 56,493
Accrued payroll 1,288 5,199
Accrued payroll taxes 1,816 1,113
Accrued excise taxes payable 418 410
Accrued vacation pay 12,218 11,712
Federal income taxes payable 58,665
--------- ---------
Total current liabilities 30,775 133,592
--------- ---------
DEFERRED TAX LIABILITY
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value,
50,000,000 shares authorized,
4,953,667-1996 and 5,006,667-1995
shares issued and outstanding 4,954 5,007
Additional paid-in capital 894,129 918,057
Retained earnings 1,112,851 954,116
--------- ---------
2,011,934 1,877,180
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,042,709 $2,010,772
========= =========
The accompanying notes are an integral part of this statement
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF OPERATIONS
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---------- ---------- ---------
SALES $1,190,304 $1,535,071 $1,197,720
---------- ---------- ---------
COST OF SALES
Beginning inventory 297,037 423,932 386,201
Purchases and allocated costs 595,119 475,691 503,111
---------- ---------- ---------
892,156 899,623 889,312
Ending inventory 401,305 297,037 423,932
---------- ---------- ---------
490,851 602,586 465,380
---------- ---------- ---------
GROSS PROFIT 699,453 932,485 732,340
---------- ---------- ---------
OPERATING EXPENSES
Advertising 54,969 50,619 35,848
Amortization 1,837 1,837 397
Bad Debts 54,474
Commissions-sales 22,972 31,974 17,925
Dues & Subscriptions 5,407 7,700 6,009
Depreciation 30,303 25,379 21,160
Insurance 6,528 6,911 5,176
Materials & supplies 26,060 12,383 9,601
Office & administration 18,517 16,628 14,427
Printing 10,203 13,104 6,750
Professional services 77,795 46,113 61,338
Rent & utilities 26,001 25,895 25,733
Repair & maintenance 13,080 6,992 4,863
Salaries 413,920 391,826 381,243
Taxes 73,412 74,333 80,594
Telephone 11,639 11,159 10,571
Trade shows 17,682 8,688 10,017
Travel expenses 54,837 53,778 52,164
---------- ---------- ---------
865,162 839,793 743,816
Expenses allocated to cost of sales (257,035) (280,650) (255,710)
---------- ---------- ---------
608,127 559,143 488,106
---------- ---------- ---------
OPERATING INCOME 91,326 373,342 244,234
OTHER INCOME
Interest income 62,206 58,359 27,750
Site support reimbursement-net of allocated costs 16,192 24,259 19,667
Loss on disposition of assets (238) (1,870) (812)
Realized loss on marketable
securities due to impairment (49,953)
Realized loss on marketable securities (3,522)
Uncollectible accounts recovered 57,204
Recovery from marketable securities litigation 11,288
---------- ---------- ---------
143,130 30,795 46,605
---------- ---------- ---------
INCOME BEFORE PROVISION FOR FEDERAL INCOME TAXES 234,456 404,137 290,839
PROVISION FOR FEDERAL INCOME TAXES 75,721 136,428 104,899
---------- ---------- ---------
NET INCOME $ 158,735 $ 267,709 $ 185,940
========== ========== =========
EARNINGS PER SHARE $ .03 $ .05 $ .04
========== ========== =========
The accompanying notes are an integral part of this statement
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for December 31, 1993 through December 31, 1996
Additional Loss on
Common Stock Paid-In Marketable Retained
Shares Amount Capital Securities Earnings TOTAL
--------- ------- --------- ---------- --------- ---------
Balance at
December 31, 1993 4,956,667 $ 4,957 $901,607 $ 497,180 $1,403,744
Stock options
Exercised
June 2, 1994 at $.33 50,000 50 16,450 16,500
Unrealized loss in
marketable securities $ (50,626) (50,626)
Cumulative effect of change in
accounting principle; unrealized
loss in marketable securities;
net of income tax effect (3,287) 3,287
NET INCOME
December 31, 1994 185,940 185,940
--------- ------- --------- ---------- --------- ---------
5,006,667 5,007 918,057 (53,913) 686,407 1,555,558
Unrealized holding loss
reclassified to realized
loss due to impairment 53,913 53,913
NET INCOME
December 31, 1995 267,709 267,709
--------- ------- --------- ---------- --------- ---------
5,006,667 5,007 918,057 0 954,116 1,877,180
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)
Sept 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 $ 0 $1,112,851 $2,011,934
========= ======= ======== ========== ========= =========
The accompanying notes are an integral part of the financial statements
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---------- ---------- ---------
CASH FLOWS PROVIDED (USED) IN
OPERATING ACTIVITIES:
Net income $ 158,735 $ 267,709 $ 185,940
Noncash expenses included in income:
Depreciation 30,303 25,379 21,160
Amortization 1,836 1,837 397
Deferred income taxes 4,876 (17,035) 11,370
Loss on disposition of assets 238 1,870 812
Realized loss/impaired securities 3,522 49,953
Decrease (increase) in Current Assets:
Accounts receivable, net 119,609 6,391 114,907
Inventory (104,268) 126,895 (37,731)
Other current assets (31,214) 13,587 (18,712)
Increase (decrease) in Current Liabilities:
Accounts payable, accrued expenses
and other current liabilities (44,152) 41,730 (27,750)
Federal Income Taxes Payable (58,665) 59,863 (75,450)
--------- --------- --------
Net Cash Provided By Operating Activities 80,820 578,179 174,943
--------- --------- ---------
CASH FLOWS PROVIDED (USED) IN INVESTING ACTIVITIES:
Deposit 497 (497)
Capitalized software (2,919)
Proceeds received from sale of fixed assets 100
Additions to property & equipment (26,508) (68,373) (30,533)
Certificates of deposit-over 3 months 102,000 (102,000)
Institutional Governmental Income Fund (17,344) (11,134)
Proceeds from sale of marketable securities 117,595
--------- --------- ---------
Net Cash Used In
Investing Activities 190,168 (187,220) (42,064)
--------- --------- ---------
CASH FLOWS PROVIDED (USED) IN FINANCING ACTIVITIES:
Repurchase common stock (23,981)
Proceeds from issuance of common stock 16,500
Proceeds from note receivable 3,449 1,800 2,139
--------- --------- --------
Net Cash Provided By Financing Activities (20,532) 1,800 18,639
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 250,456 392,759 151,518
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,162,726 769,967 618,449
--------- --------- --------
CASH AND CASH EQUIVALENTS AT ENDING OF PERIOD $1,413,182 $1,162,726 $ 769,967
========= ========= ========
The accompanying notes are an integral part of the financial statements
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
for the years ended December 31, 1996, 1995, and 1994
1996 1995 1994
---------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION:
Cash paid during the year for:
Interest
Income taxes $ 155,865 $ 77,129 $ 185,450
========= ========= =========
Cash and Cash equivalents:
Cash $ 5,717 $ 15,765 $ 66,032
Money Market 482,892 444,335 400,935
Certificates of deposit
(maturity =3 months or less) 724,573 402,626 203,000
Commercial paper
(maturity =3 months or less) 200,000 300,000
Bankers acceptance 100,000
--------- --------- ---------
$1,413,182 $1,162,726 $ 769,967
========= ========= =========
The accompanying notes are an integral part of these financial statements
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ORGANIZATION: The Company was incorporated under the laws of
the State of Washington on February 10, 1984, primarily to develop,
produce, sell and distribute wireless modems that will allow
communication between peripherals via radio frequency waves.
ACCOUNTING ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION: The Company recognizes revenue from product sales
upon shipment to the customer. Revenues from site support are
recognized as the Company performs the services in accordance with
agreement terms.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS: The Company uses the reserve
method for recording allowance for uncollectible accounts. The amount
included in Allowance for Uncollectible Accounts consists of $1,284 as
of December 31, 1996 and $1,284 as of December 31, 1995.
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:
1996 1995 1994
-------- --------- --------
Parts $ 260,397 $ 198,487 $ 245,569
Work in progress 68,555 30,553
Finished goods 72,353 98,550 147,810
-------- --------- --------
$ 401,305 $ 297,037 $ 423,932
======== ========= ========
PROPERTY AND EQUIPMENT: Property and equipment are carried at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. The useful life of property and
equipment for purposes of computing depreciation is five to seven
years. The useful life for leasehold improvements is thirty-one and a
half years. The Company periodically reviews its long-lived assets for
impairment and, upon indication that the carrying value of such assets
may not be recoverable, recognizes an impairment loss by a charge
against current operations.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PATENT COSTS: Expenses incurred in connection with the patent have
been capitalized and are being amortized over 17 years.
FEDERAL INCOME TAXES: Effective as of January 1, 1992 the Corporation
adopted Statement of Financial Accounting Standards ("SFAS") No. 109
Accounting for Income Taxes which establishes generally accepted
accounting principles for the financial accounting measurement and
disclosure principles for income taxes that are payable or refundable
for the current year and for the future tax consequences of events that
have been recognized in the financial statements of the Corporation and
past and current tax returns. The change had no effect on prior years
results.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed
as incurred. Research and development expenditures for new product
development and improvements of existing products by the Company for
1996, 1995, and 1994 were $135,468, $85,265, and $102,918,
respectively.
EARNINGS (LOSS) PER COMMON SHARE: Primary earnings (loss) per common
share are based on the weighted average number of shares outstanding
during the period after consideration of the diluted effect of stock
options and restricted stock awards. The primary weighted average
number of common shares outstanding was 5,508,667, 5,433,174, and
5,360,982, for the years ended December 31, 1996, 1995, and 1994
respectively. Also, fully diluted earnings per common share assume
conversion of dilutive securities when the result is dilutive.
CAPITALIZED SOFTWARE COSTS: In August, 1985, the Statements of
Financial Accounting Standards No. 86 was issued by the Financial
Accounting Standards Board (FASB), directing that the costs of creating
a computer software product to be sold, leased, or otherwise marketed,
and which are incurred after the product's technological feasibility
has been established, be capitalized. During 1986 the Company adopted
this statement as permitted by the FASB No. 86 and, accordingly,
capitalized all such costs subsequent to 1985. Costs incurred prior to
1986 are not permitted to be capitalized by FASB No. 86 and the Company
has not capitalized such costs. All costs capitalized under FASB No.
86 are required to be amortized over their estimated revenue-producing
lives, not to exceed five years, beginning on the date the product is
available for distribution to customers.
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
CASH AND CASH EQUIVALENTS: Cash and cash equivalents generally consist
of cash, certificates of deposit, time deposits, commercial paper and
other money market instruments. The Company invests its excess cash in
deposits with major banks, and commercial paper of investment grade
companies and, therefore bears minimal risk. These securities have
original maturity dates not exceeding three months. Such investments
are stated at cost, which approximates fair value, and are considered
cash equivalents for purposes of reporting cash flows.
ADVERTISING COSTS: Costs incurred for producing and communicating
advertising are expensed when incurred.
2 - FEDERAL INCOME TAXES
Effective as of January 1, 1992 the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109 Accounting for Income
Taxes which establishes generally accepted accounting principles for
the financial accounting measurement and disclosure principles for
income taxes that are payable or refundable for the current year and
for the future tax consequences of events that have been recognized in
the financial statements of the Company and past and current tax
returns. The change had no effect on prior years results.
The provision for Federal Income Taxes consisted of:
1996 1995 1994
-------- -------- -------
Currently payable $ 70,845 $152,265 $ 93,529
Deferred (4,876) (15,837) 11,370
-------- -------- -------
Provision for Federal Income
Taxes $ 75,721 $136,428 $104,899
======== ======== =======
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
2 - FEDERAL INCOME TAXES (continued)
The components of the net deferred tax (asset) liability at
December 31, were as follows:
1996 1995 1994
-------- -------- -------
Depreciation $ 18,523 $ 16,116 $12,899
Accrued vacation payable (4,154) (3,982) (1,949)
Allowance for uncollectible
accounts receivable (437) (437) (2,093)
Realized loss due to impairment
of marketable securities (16,984)
Unused capital loss carryforward (14,343)
-------- -------- -------
$ (411) $ (5,287) $ 8,857
======== ======== =======
The differences between the provision for income taxes and income
taxes computed using the U.S. federal income tax rate were as
follows:
1996 1995 1994
-------- -------- -------
Amount computed using the
statutory rates $ 70,845 $152,265 $ 93,529
Increase (reduction):
Deferred tax (asset) liability 4,876 (15,837) 11,370
-------- --------- -------
Provision for Federal Income Taxes $ 75,721 $136,428 $104,899
======== ========= =======
3 - PUBLIC OFFERING OF COMMON STOCK
The Company sold 3,000,000 shares of its unissued common stock to
the public on November 12, 1984. An offering price of $.30 per
share was arbitrarily determined by the underwriter.
4 - COMPENSATED ABSENCES
FASB Statement No. 43 requires employers to accrue a liability for
employees' compensation for certain future absences. Liabilities
for vacation pay in the amounts of $12,218 and $11,712 have been
accrued as of December 31, 1996 and 1995, respectively.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
5 - LEASES
The Company has no obligation under capital lease arrangements.
The Company rents its facility under a three (3) year operating
lease commencing on the 1st day of December, 1996. The Company
leases the facility from the Port of Kennewick, who with the
assistance of federal economic development funds (EDA), has
constructed a building for the purpose of leasing space to new or
expanding high tech and electronic industries. The Company will
pay as rental for 6,275 square feet of building space the sum of
$24,096.00 per year, payable monthly in advance at the rate of
$2,008.00 per month. A leasehold tax of $257.83 per month is due
in addition to the $2,008.00 monthly rent. For the second and any
following years of the renewed term, the parties agree that any
rental amount be increased by the Consumer Price Index- Pacific
Cities and U.S. City Average-All Items Indexes using the U.S. City
Average for the 12 month period preceding. The rental expense for
1996, 1995 and 1994 were as follows: 1996=$21,428; 1995=$21,428;
1994=$21,428.
The following is a schedule of estimated future minimum rental
payments required under the above operating leases over the next
five succeeding fiscal years:
Year ending December 31, Amount
------------------------ ------
1997 27,258
1998 28,076
1999 26,442
2000 -0-
2001 -0-
6 - FOREIGN SALES
The Company's revenues fall into three major customer categories,
Domestic, Export, and U.S. Government Sales. A percentage
breakdown of E.S.T.'s major customer categories for the years of
1996 and 1995 are as follows:
1996 1995
------ -------
Domestic Sales 61% 59%
Export Sales 17% 15%
U.S. Government Sales 22% 26%
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
6 - FOREIGN SALES (continued)
The geographic distribution of foreign sales for 1996 and 1995 is
as follows:
1996 1995
----- -----
Mexico 25% 6%
Venezuela 16% less than 1%
Brazil 15% 11%
Croatia/Slovenia 14% 30%
Philippines 14% --
South Korea 4% --
Canada 3% 37%
Israel 3% 4%
Costa Rica 2% 2%
Equador 2% --
Peru 2% --
Taiwan -- 5%
Chile -- 4%
Singapore -- less than 1%
Thailand/Indonesia -- less than 1%
7 - PROFIT SHARING AND SALARY DEFERRAL 401-K PLAN
The Company sponsors a Profit Sharing Plan and Salary Deferral
401-K plan and trust. All employees over the age of 21 are
eligible. The Company is not making contributions under the
current plan agreement.
8 - STOCK OPTIONS
On December 10, 1993, stock options to purchase shares of the
Company's common stock were granted to individual employees and
directors with no less than three years continuous tenure. The
options have an exercise price of $.60 per share. Options may be
exercised any time during the period from December 10, 1993 through
December 9, 1996. Following is a summary of transactions:
Shares under Option
-------------------
Outstanding, beginning of year 150,000
Granted during year 0
Canceled during year (150,000)
Exercised during year --------
Outstanding, end of year 0
========
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
8 - STOCK OPTIONS (continued)
On February 3, 1995, stock options to purchase shares of the
Company's common stock were granted to individual employees and
directors with no less than three years continuous tenure. The
options have an exercise price of $0.31 per share. Options may be
exercised any time during the period from February 3, 1996 through
February 2, 1998. Following is a summary of transactions:
Shares under Option
-------------------
Outstanding, beginning of year 175,000
Granted during year 0
Canceled during year 0
Exercised during year 0
-------
Outstanding, end of year 175,000
=======
On February 9, 1996, stock options to purchase shares of the
Company's common stock were granted to individual employees and
directors with no less than three years continuous tenure. The
options have an exercise price of $.42 per share. Options may be
exercised any time during the period from February 9, 1996 through
February 9, 1999. Following is a summary of transactions:
Shares under Option
--------------------
Outstanding, beginning of year 0
Granted during year 200,000
Canceled during year 0
Exercised during the year 0
--------
Outstanding, end of year 200,000
========
1996 1995
----------- ------------
Option price range at end of year $.31 to $.42 $.31 to $.60
Option range for exercised shares None Exercised
Weighted average fair value of
options granted during the year $.42 $.31
The following table summarizes information about fixed-price stock
options outstanding at December 31, 1996:
Weighted
Number Average Weighted
Range of Exerciseable & Remaining Average
Exercise Outstanding Contractual Exercise
Prices at 12/31/96 Life Price
---------- -------------- ----------- ----------
$.31 175,000 2 years $.31
$.42 200,000 3 years $.42
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
8 - STOCK OPTIONS (continued)
After termination of employment, stock options may be exercised
within 90 days. During the 12 months ended December 31, 1996
150,000 shares under option expired and no shares under option were
exercised. At December 31, 1996 there are 375,000 shares reserved
for future exercises.
The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation." Accordingly, no compensation cost has been
recognized for the stock option plan. Had compensation cost for
the Company's stock option plan been determined based on the fair
value at the grant date for awards in 1996 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:
1996 1995
------- -------
Net earnings-as reported $158,735 $267,709
Net earnings-pro forma 124,850 240,601
Earnings per share-as reported .03 .05
Earnings per share- pro forma .02 .04
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 1996;
dividend yeild equaled 0; expected volatility of 45.26%, 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,
1996 the Company had cash and cash equivalents with Seattle First
National Bank with a combined balance of $772,126 which is $672,126
in excess of the F.D.I.C. insured amount. At December 31, 1996 the
Company held commercial paper in the amount of $200,000 which was
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
10 - CONCENTRATIONS OF CREDIT RISK (continued)
not F.D.I.C. insured. At December 31, 1996 the Company had cash
deposits with Pioneer Bank with a balance of $106,567 which is
$6,567 in excess of the F.D.I.C. insured amount. At December 31,
1996 the Company had cash deposits with U.S. Bank with a balance of
$105,785 which is $5,785 in excess of the F.D.I.C. insured amount.
Additionally, at December 31, 1996, the Company had cash
deposits with Pacific One Bank with a combined balance of
$112,221 which is $12,221 in excess of the F.D.I.C. insured
amount. At December 31, 1996, the Company had cash deposits
with Piper Jaffray with a balance of $115,766, which is not
F.D.I.C. insured. The Company held an investment in
marketable securities in the Piper Jaffray Institutional
Government Fund (the "Fund"). Write downs in the value of the
Company's investment in this Fund totaling $49,953 in 1996
were realized due to the other than temporary decline in value
of the investment, treatment for which is outlined in
paragraph 16 of Statement of Financial Accounting Standard
(SFAS) 115. During 1995, a total loss of $49,953 was
recognized by the Company due to impairment of the value of
the marketable securities held by the Company. As of March
31, 1996, the Company had liquidated its marketable securities
investment.
Concentrations of credit risk with respect to trade accounts
receivable are generally diversified due to the geographic
dispersion of the Company's customer base.
11 - RELATED PARTY TRANSACTIONS
For the years ended December 31, 1996, 1995, and 1994 services
in the amount of $52,199, $51,974, and $50,788, 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 this supplier could be replaced or
substituted by other products, if it became necessary to do
so. It is possible that if this action became necessary, a
material interruption of production and/or material cost
expenditures could take place.
During fiscal year 1994, the Company contracted services with
an engineering firm in the amount of $41,583. This firm is
owned and operated by a Director of Electronic Systems
Technology, Inc. For fiscal years 1996 and 1995, this firm
did not provide any services to Electronic Systems Technology, Inc.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
12 - MARKETABLE SECURITIES
The Company has adopted SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. SFAS No. 115
establishes generally accepted accounting principles for the
financial accounting, measurement and disclosure principals
for (1) investments in equity securities that have readily
determinable fair market value and (2) all investments in debt
securities. The change had no effect on prior year's results.
All of the marketable securities held by the Company
consisted of securities "available-for-sale", as defined by
SFAS No. 115. The securities held determined in computing
realized gain or loss is the specific identification method.
During 1995, a total loss of $49,953 was recognized by the
Company due to impairment of the value of the marketable
securities held by the Company. As of March 31, 1996, the
Company had liquidated its marketable securities investment.
The following information is as of December 31, 1996 and 1995:
1996 1995
-------- ---------
Aggregate fair value of marketable
securities $ -- $121,117
Gross unrealized holding gains -- --
Gross unrealized holding losses -- --
Gross unrealized loss due to impairment
in marketable securities -- 49,953
Amortized cost basis -- 171,070
Changes in marketable securities for the period ended December 31, 1996
and 1995 are as follows:
Cost $ 171,070 $153,726
Dividends and capital gains reinvested -- 17,344
Sale of securities (117,595) --
Realized loss due to impairment
in marketable securities (49,953) (49,953)
Realized loss on sale of securities (3,522) --
-------- --------
Fair market value $ 0 $121,117
======== ========
The Company was included in the class action suit settlement
against the manager of the Company's marketable securities
investments, Piper Jaffray. In February, 1996, the Company
received the first payments pursuant to this settlement in
the amount of $3,700 and as of September 30, 1996 has
received settlement payments totalling $11,288, and expects
to receive periodic settlement payments of similar amounts
over the next three years.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
13 - CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1994, the Company changed its method of
accounting for Debt and Equity Securities to conform with
requirements of the Financial Accounting Standards Board.
This change was adopted by the Company as of January 1, 1994,
but was not reported on subsequent filing with the Commission
until the Form 10-Q for the quarter ending March 31, 1995.
The effect of this change was to increase net income for 1994
by $3,287, which resulted in an amount of $0.0006 per share.
The cumulative effect of the change of $3,287 is shown as a
one-time credit to income for 1994.
14 - STOCK REPURCHASE PLAN
On March 26, 1996, the Company's Board of Directors
authorized the establishment of a plan for the repurchase of
the Company's common stock. Pursuant to the Plan, the
Company could repurchase shares of its common stock in open
market transactions through broker and dealers, up to the
amount allocated by the Plan of $100,000. Repurchase
transactions could continue through June 30, 1996. On June
6, 1996, the Company's Board of Directors authorized the
establishment of a plan for the repurchase of the Company's
common stock with terms and conditions identical to the Plan
expiring June 30, 1996. The plan approved June 6, 1996 would
be in effect from July 1, 1996 through September 30, 1996.
At the conclusion of the established repurchase Plan on
September 30, 1996, $23,981 of the funds allocated by the
Plan had been expended by the Company to repurchase a total
53,000 shares. The transactions for shares repurchased under
the Plan were completed by September 30, 1996. The subject
shares were canceled from the Company's outstanding shares
and were therefore removed from the Company's outstanding
common shares.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
SELECTED FINANCIAL DATA
For the five years
ended December 31, 1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
Sales $1,190,304 $1,535,071 $1,197,720 $1,444,039 $1,232,217
Gross profit 699,453 932,485 732,340 846,292 725,406
Income (Loss)
before provision
for income taxes 234,456 404,137 290,839 438,192 323,555
Provision for
income taxes 75,721 136,428 104,899 144,970 60,402
Net income (Loss) 158,735 267,709 185,940 293,222 263,153
Net income (Loss)
per share .03 .05 .04 .06 .05
Weighted average
number of shares
outstanding 5,478,558 5,433,174 5,360,982 5,345,844 5,289,188
Total Assets 2,042,709 2,010,772 1,597,612 1,540,141 1,154,823
Long-term debt and
capital lease
obligations 0 0 0 0 0
Stockholders'
equity 2,011,934 1,877,180 1,555,558 1,403,744 1,110,522
Stockholders'
equity per
share .41 .37 .31 .28 .22
Working capital 1,861,527 1,723,823 1,449,848 1,297,738 1,025,431
Current Ratio 61.5:1 13.9:1 44.9:1 10.5:1 24.2:1
Equity to
total assets 98% 93% 97% 91% 96%
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
SCHEDULE I - MARKETABLE SECURITIES AND OTHER INVESTMENTS
December 31, 1996 and 1995
Amount
Carried
Units or Market in the
Name and Issuer and Principal Value at Balance
Title of Issue Amount Cost Dec. 31, Sheet(1)
- -------------------------- --------- ------- -------- --------
1996 Piper Jaffray;
Institutional Government
Income Portfolio $ 15,311 $171,069 $121,116 $121,116
1995 Piper Jaffray;
Institutional Government
Income Portfolio $ 13,118 $153,726 $ 98,120 $ 98,120
(1) Included in the caption "Marketable Securities" in the balance
sheet at December 31, 1996 and 1995.
CORPORATE DIRECTORY
DIRECTORS
Tommy L. Kirchner
President
Chief Executive Officer
Electronic Systems Technology Inc.
Robert Southworth
Patent Attorney
U.S. Department of Energy
Melvin H. Brown
President
Chief Executive Officer
Manufacturing Services, Inc.
Arthur Leighton
Retired President
Chief Executive Officer
Kraft Systems Inc.
John H. Rector
Retired President
Chief Executive Officer
Western Sintering Company Inc.
John L. Schooley
President
Chief Executive Officer
President of Remtron, Inc.
EXECUTIVE OFFICERS
T. L. Kirchner
President
Chief Executive Officer
Robert Southworth
Secretary
CORPORATE HEADQUARTERS
Electronic Systems Technology, Inc.
415 N. Quay Street
Kennewick, Washington 99336
(509) 735-9092
(509) 783-5475 (Facsimile)
INDEPENDENT AUDITORS
Robert Moe and Associates
305 IBM Building
West 201 North River Drive
Spokane, Washington 99201
TRANSFER AGENT
TranSecurities International
2510 N. Pines Road, Suite 202
Spokane, Washington 99206
The Transfer Agent should be contacted for
questions regarding changes in address, name, or
ownership, lost certificates, and consolidation of
account. When corresponding with the Transfer
Agent, shareholders should state the exact name(s)
in which the stock is registered and certificate
number of the certificate(s).
FORM 10-K
A copy of the Company's Form 10-KSB, as filed
with the Securities and Exchange Commission , is
available upon request.
CORPORATE AND INVESTOR
INFORMATION
Please direct inquiries to:
Investor Relations Department
Electronic Systems Technology, Inc.
415 N. Quay Street
Kennewick, Washington 99336
ANNUAL MEETING
The annual meeting of stockholders of Electronic
Systems Technology, Inc. will be held at 3:00 p.m.
on June 6, 1997, at:
Cavanaugh's Motor Inn
1101 N. Columbia Center Blvd.
Kennewick, Washington 99336
All stockholders are encouraged to attend.