Exhibit 1: Financial Statements

 

 

 

| ELECTRONIC SYSTEMS    TECHNOLOGY, INC. 
FINANCIAL STATEMENTS
AND
REPORT OF    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
FOR THE YEARS ENDED    DECEMBER 31, 2004 AND 2003
 

 

 

 

 

TABLE OF CONTENTS  
Page Report of Independent    Registered Public Accounting Firm
1 Financial    Statements: Balance Sheets
2 Statements of Income
3 Statements of    Comprehensive Income
4 Statements of Changes in    Stockholders’ Equity
5 Statements of Cash Flows
6-7 Notes to Financial    Statements
8-20 Supplemental Schedules of    Operating Expenses
21 Supplemental Schedules of    Selected Financial Data
22
 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of DirectorsElectronic Systems Technology, Inc.415 N. Quay, Suite 4Kennewick, WA 99336

We have audited the accompanying balance sheets of Electronic SystemsTechnology, Inc., as of December 31, 2004 and 2003, and the related statements of income,comprehensive income, stockholders’ equity and cash flowsfor each of the three years in the period ended December 31, 2004. These financialstatements are the responsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the PublicCompany Accounting Oversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Electronic Systems Technology,Inc., as of December 31, 2004 and 2003, and the results of its operations and its cashflows for each of the three years in the period ended December 31, 2004, in conformitywith accounting principles generally accepted in the United States of America.

Our audit was conducted for the purpose of forming an opinion on thebasic financial statements taken as a whole. The supplemental schedules of operatingexpenses and selected financial data are presented for purposes of additional analyses andare not a required part of the basic financial statements. Such supplemental scheduleshave been subjected to the auditing procedures applied in the examination of the basicfinancial statements and, in our opinion, are fairly stated in all material respects whenconsidered in relation to the basic financial statements taken as a whole.

 

 

February 15, 2005

 

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

BALANCE SHEETS

DECEMBER 31, 2004 AND 2003
ASSETS  
2004
2003CURRENT ASSETSCash$ 11,100$ 11,100 Money market investment477,380 367,003  Available-for-sale    investments1,344,619 1,341,491 Accounts receivable, net    of allowance for doubtful accounts of $1,884 at 2004 and $2,153 at 2003 
257,080  
284,972 Inventory605,159 511,972 Prepaid insurance9,878 9,353 Prepaid expenses2,700 2,605 Prepaid federal income    taxes             - 29,433 Total Current Assets2,707,9162,557,929 PROPERTY AND EQUIPMENT -    NET253,456222,674 OTHER ASSETS – NET4,62427,486 DEFERRED INCOME TAX    BENEFIT17,30014,600 $2,983,296$2,822,689
 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

BALANCE SHEETS

DECEMBER 31, 2004 AND 2003
LIABILITIES    AND STOCKHOLDERS’ EQUITY  
2004
2003CURRENT    LIABILITIESAccounts payable$ 96,949 $ 44,848 Refundable deposits3,630 80,372 Accrued payroll37,113 21,308 Accrued payroll and other    taxes9,467 6,702 Accrued vacation pay22,675 24,193 Income tax payable39,201 - Deferred income              - 25,088 Total Current Liabilities209,035202,511 DEFERRED INCOME TAXES75,50059,400 COMMITMENTS AND    CONTINGENCIES             -              -  STOCKHOLDERS'    EQUITYCommon stock - $.001 par    value 50,000,000 shares authorized, 5,148,667 and 5,098,667 issued and outstanding at 2004    and 2003, respectively 
    5,149  
    5,099 Additional paid-in capital966,184 945,734 Retained earnings1,743,252 1,619,419 Accumulated other    comprehensive Loss(15,824)(9,474)  2,698,7612,560,778  $2,983,296$2,822,689
 

See Notes to Financial Statements

2

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002  
2004
2003
2002 SALES – NET
$2,297,945$2,064,628$1,932,648 COST OF SALESBeginning inventory
511,972569,424531,599Purchases and allocated    Costs
1,077,380880,909907,087 
1,589,3521,450,3331,438,686 Ending inventory
605,159511,972569,424  
984,193938,361869,262 GROSS PROFIT
1,313,7521,126,2671,063,386 OPERATING EXPENSES
1,089,3961,006,674788,631 OPERATING INCOME
224,356119,593274,755 OTHER INCOMEInterest income
23,50834,20641,233Other income (expense)
12,26220,10211,629 
35,77054,30852,862INCOME BEFORE INCOME TAXES
260,126173,901327,617PROVISION FOR FEDERAL    INCOME TAXES
85,30650,895114,041NET INCOME
$ 174,820$ 123,006$ 213,576 BASIC EARNINGS PER SHARE
$ 0.03$ 0.02$ 0.04 DILUTED EARNINGS PER SHARE
$ 0.03$ 0.02$ 0.04
 

See Notes to Financial Statements

3

 

 

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002  
2004
2003
2002NET INCOME$174,820$123,006$213,576 OTHER    COMPREHENSIVE LOSS:Unrealized loss on    securities arising during the period(9,622)(8,280)(6,332)Income tax benefit related    to other comprehensive loss3,2722,8152,150Other comprehensive loss,    net(6,350)(5,465)(4,182)COMPREHENSIVE INCOME$ 168,470$ 117,541$ 209,394
 

 

 

See Notes to Financial Statements

4

 

 

 

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’    EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
Accumulated
Other
Common Stock
Paid-In
Retained 
Comprehensive
Shares
Amount
Capital
Earnings
Loss
TotalBALANCE AT    JANUARY 1, 2002
5,098,667
$ 5,099
$945,734
$1,359,317
$
$2,310,150COMPREHENSIVE    INCOME:Net income    December 31, 2002
-
-
-
213,576 
- 
213,576 Unrealized    loss on securities - net
-
-
-
-
(4,182) 
(4,182)
5,098,667
5,099
945,734
1,572,893 
(4,182) 
2,519,544 COMPREHENSIVE    INCOME:Net income    December 31, 2003
-
-
-
123,006 
- 
123,006 Unrealized    loss on securities - net
-
-
-
- 
(5,465) 
(5,465)Less    reclassification adjustment included in net income
-
-
-
- 
173 
173 CASH DIVIDEND
-
-
-
(76,480)
-
(76,480)
5,098,667
5,099
945,734
1,619,419 
(9,474) 
2,560,778 STOCK OPTIONS    EXERCISED
50,000
50
20,450
-
-
20,500COMPREHENSIVE    INCOME:Net income
-
-
-
174,820 
- 
174,820 Unrealized loss on    securities - net
-
-
-
- 
(6,350) 
(6,350)CASH DIVIDEND 
-
-
-
(50,987)
-
(50,987)BALANCE AT    DECEMBER 31, 2004
5,148,667
$ 5,149
$966,184
$1,743,252
$(15,824) 
$2,698,761
 

See Notes to Financial Statements

5

 

 

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002 
2004
2003
2002CASH FLOWS    FROM OPERATING ACTIVITIES:Net income (Loss)
$ 174,820
$ 123,006
$ 213,576Non cash    expenses included in income:Depreciation
65,370
49,207
40,869Amortization
4,257
4,404
4,404Allowance for doubtful    accounts
(269)
869
-Deferred income taxes
13,400
23,600
3,917Loss on disposition of    assets
3
1,245
23Realized loss on sale of    investments
-
2,334
-Decrease    (increase) in current assets:Accounts receivable, net
28,161
16,428
(143,595)Inventory
(93,187)
57,452
(37,825)Other current assets
(620)
(935)
(2,528)Prepaid federal income tax
29,433
(29,433)
-Increase    (decrease) in current liabilities:Accounts payable and other    current liabilities
(32,677)
114,878
13,394Federal income taxes    payable
42,473
(101,866)
113,377 Net Cash From Operating    Activities
231,164
261,189
205,612 CASH FLOWS    FROM INVESTING ACTIVITIES:Deposits
18,605
(1,483)
(17,122)Purchase of investments
(12,750)
(817,843)
(1,344,000)Proceeds from sale of    investments
-
803,666
-Additions to property and    equipment
(96,155)
(113,943)
(35,085)Net Cash From Investing    Activities
(90,300)
(129,603)
(1,396,207) CASH FLOWS    FROM FINANCING ACTIVITIES:Stock options exercised
20,500 
- 
- Cash dividend
(50,987)
(76,480)
-Net Cash From Financing    Activities
$ (30,487)
$ (76,480)
$ -
(Continued)
 

See Notes to Financial Statements

6

 

 

 

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002 
2004
2003
2002 NET INCREASE (DECREASE) IN    CASH AND EQUIVALENTS
$ 110,377
$ 55,106
$    (1,190,595) CASH AND CASH EQUIVALENTS    AT BEGINNING OF YEAR
378,103
322,997
1,513,592 CASH AND CASH EQUIVALENTS    AT END OF YEAR
$    488,480
$    378,103
$ 322,997 SUPPLEMENTAL    DISCLOSURES OF CASH FLOW INFORMATION:Cash paid    during the year for:Income taxes
$               -
$    158,594
$               - Cash and cash    equivalents:Cash
$ 11,100
$ 11,100 
$ 11,100 Money market
477,380
367,003
311,897 
$    488,480
$    378,103
$ 322,997
(Concluded)
 

See Notes to Financial Statements

7

 

 

 

 

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. On November    12, 1984, the Company sold 3,000,000 shares of its unissued common stock to the public at    an offering price of $.30 per share, arbitrarily determined by the underwriter.

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, liabilities, revenues and expenses. Estimates used    in the accompanying financial statements include allowance for uncollectible accounts    receivable, inventory obsolescence, useful lives of depreciable assets, and deferred    income taxes. Actual results could differ from those estimates.

Concentrations of Credit Risks

Financial instruments that potentially subject the Company to credit    risk consists of cash and customer receivables. 

The Company places its cash with one major financial institution.    During the period, the Company had cash balances that were in excess of federally insured    limits.

The Company’s customers, to which trade credit terms are extended,    consist of United States and local governments and foreign and domestic companies.
8

 

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies    (Continued)

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.

Financial Instruments

The Company’s financial instruments are cash and cash equivalents,    accounts receivable and accounts payable. The recorded values of cash and cash    equivalents, accounts receivable and accounts payable approximate their fair values based    on their short-term nature.
Cash and Cash Equivalents

Cash and cash equivalents consist primarily of cash, certificates of    deposit, money market accounts and investment grade commercial grade paper that is readily    convertible into cash and purchased with original maturities of three months or less.

Allowance for Uncollectible Accounts

The Company uses the allowance method to account for uncollectible    accounts receivable. Accounts receivable are presented net of an allowance for doubtful    accounts of $1,884 and $2,153 as of December 31, 2004 and 2003, respectively. The Company’s    policy for writing off past due accounts receivable is based on the amount, time past due,    and response received from the subject customer. 
 

9

 

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies    (Continued)

Inventory

Inventories are stated at lower of cost or market. Cost is determined    on an average cost basis that approximates the first-in, first-out (FIFO) method. Market    is determined based on net realizable value and consideration is given to obsolescence.

Patent Costs

Expenses incurred in connection with the patent have been capitalized    and are being amortized over 17 years.

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 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.

 

10

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies    (Continued)

Investments

The Company classifies its marketable equity securities into    trading or available-for-sale categories. Marketable securities that are held principally    for the purpose of selling them in the near term are classified as trading securities and    are reported at fair value, with unrealized gains and losses recognized in earnings.    Marketable equity securities classified as available-for-sale are carried at fair market    value, with the unrealized gains and losses, net of tax, included in the determination of    comprehensive income and reported in the stockholders’    equity.
The fair value of substantially all securities is determined by quoted    market prices. Gains or losses on securities sold are based on the specific identification    method.

Available-for-sale investments consist of bond funds purchased at a    cost of $1,368,593, with a fair market value of $1,344,619, at December 31, 2004. A net    unrealized loss on available-for-sale securities in the amount of $23,974 has been charged    to accumulated other comprehensive loss for the year ended December 31, 2004.

Capitalized Software Costs

Capitalized software costs consist of costs to purchase and develop    software. The Company capitalizes the costs of creating a software product to be sold,    leased or otherwise marketed, for which technological feasibility has been established.    Amortization of the software product, on a product-by-product basis, begins on the date    the product is available for distribution to customers and continues over the estimated    revenue-producing life, not to exceed five years.

 

11

 

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies    (Continued)

Income Taxes

The provision for income taxes is computed on the pretax income (loss)    based on the current tax law. Deferred income taxes are recognized for the tax    consequences in future years of differences between the tax basis of assets and    liabilities and their financial reporting amounts at each year-end based on enacted tax    laws and statutory tax rates.

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 2004, 2003, and 2002, were $306,949, $239,446, and $167,522,    respectively.

Advertising Costs

Costs incurred for producing and communicating advertising are expensed    when incurred. Advertising costs for the years ended December 31, 2004, 2003, and 2002,    were $17,160, $18,306, and $18,277, respectively.

Comprehensive Income

Comprehensive income consists of net income and unrealized losses on    marketable equity investments.

Reclassifications

Certain reclassifications have been made to the prior years’    financial statements to conform to the current year presentation. These reclassifications    had no effect on previously reported results of operations or retained earnings.
 

12

 

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

2. Inventories

Inventories consisted of the following:
 
2004
2003
Parts
$248,433 
$232,801 
Work in    progress
104,488 
86,928 
Finished    goods
252,238
192,243 
$605,159
$511,972
3. Property and Equipment

Property and equipment consisted of the following:
 
2004
2003
Leasehold    improvements
$ 13,544 
$ 13,544 
Laboratory    equipment |
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