Exhibit 1 - Audit Report andFinancial Statements
 

 

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC. 
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS’ REPORT 
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS 
 
Page Independent Auditors’ Report 
1 Financial Statements: Balance Sheets 
2 Statements of Income (Loss) 
3 Statements of Comprehensive Income (Loss) 
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
 

 

 

 

 

INDEPENDENT AUDITORS’ REPORT

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, 2003 and 2002, and the related statements of income(loss), comprehensive income (loss), stockholders’ equity and cash flows for each ofthe years in the three year period ended December 31, 2003. These financial statements arethe 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 auditing standards generallyaccepted in the United States of America. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statements are freeof material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believe that ouraudits 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, 2003 and 2002, and the results of its operations and its cashflows for each of the years in the three year period ended December 31, 2003, inconformity with 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 12, 2004

 

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC. 
BALANCE SHEETS 
DECEMBER 31, 2003 AND 2002 
ASSETS 
CURRENT ASSETS
2003
2002Cash
$11,100
$11,100Money market investment
367,003
311,897Available-for-sale investments
1,341,491
1,337,668Accounts receivable, net of allowance for doubtful    accounts of $2,153 at 2003 and $1,284 at 2002
    284,972
    302,269Inventory
511,972
569,424Prepaid insurance
9,353
8,523Prepaid expenses
2,605
2,500Prepaid federal income taxes
29,433
-Total Current Assets
2,557,929
2,543,381 PROPERTY AND EQUIPMENT - NET
222,674
159,182 OTHER ASSETS - NET
27,486
30,407 DEFERRED INCOME TAX BENEFIT
14,600
9,200 
$2,822,689
$2,742,170 
(Continued)
 

ELECTRONIC SYSTEMS TECHNOLOGY, INC. 
BALANCE SHEETS 
DECEMBER 31, 2003 AND 2002 
LIABILITIES AND STOCKHOLDERS’    EQUITY  
2003
2002CURRENT LIABILITIESAccounts payable
$ 44,848
$ 38,855Refundable deposits
80,372
21,758Accrued payroll
21,308
2,648 Accrued payroll and other taxes
6,702
4,943Accrued vacation pay
24,193
19,428Income tax payable
-
104,594Deferred income
25,088
- Total Current Liabilities
202,511
192,226 DEFERRED INCOME TAXES
59,400
30,400 COMMITMENTS AND CONTINGENCIES
-
- STOCKHOLDERS’ EQUITYCommon stock $.001 par value 50,000,000 shares authorized,    5,098,667 issued and outstanding
    5,099
    5,099Additional paid-in capital
945,734
945,734Retained earnings
1,619,419
1,572,893Accumulated other comprehensive loss
(9,474)
(4,182) 
2,560,778
2,519,544  
$2,822,689
$2,742,170
(Concluded)
See Notes to Financial Statements

2

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC. 
STATEMENTS OF INCOME (LOSS) 
FOR THE YEARS ENDED DECEMBER 31, 2003,    2002, AND 2001 
2003
2002
2001 SALES - NET
$2,064,628
$1,932,648
$1,303,811 COST OF SALESBeginning inventory
569,424
531,599
561,946Purchases and allocated costs
880,909
907,087
664,047 
1,450,333
1,438,686
1,225,993Ending inventory
511,972
569,424
531,599 
938,361
869,262
694,394GROSS PROFIT
1,126,267
1,063,386
609,417OPERATING EXPENSES
1,006,674
788,631
681,374OPERATING INCOME (LOSS)
119,593
274,755
(71,957) OTHER INCOMEInterest income
34,206
41,233
54,970Other income (expense)
20,102
11,629
23,059 
54,308
52,862
78,029 INCOME BEFORE INCOME TAXES
173,901
327,617
6,072 PROVISION FOR FEDERAL INCOME TAXES
    50,895
    114,041
    16,368 NET INCOME (LOSS)
123,006
213,576
(10,296) BASIC EARNINGS PER SHARE
$ 0.02
$ 0.04
$ - DILUTED EARNINGS PER SHARE
$ 0.02
$ 0.04
$ -
See Notes to Financial Statements

3

ELECTRONIC SYSTEMS TECHNOLOGY, INC. 
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) 
FOR THE YEARS ENDED DECEMBER 31, 2003,    2002, AND 2001 
2003
2002
2001 NET INCOME (LOSS)
$123,006
$213,576
$(10,296) OTHER COMPREHENSIVE LOSS:Unrealized loss on securities    arising during the period
    (8,280)
    (6,332)
    -Income tax benefit related to    other comprehensive loss
    2,815
    2,150
    -Other comprehensive loss, Net
(5,465)
(4,182)
-COMPREHENSIVE INCOME (LOSS)
$117,541
$209,394
$(10,296)
 

See Notes to Financial Statements

4

ELECTRONIC SYSTEMS TECHNOLOGY,    INC.
STATEMENTS OF CHANGES IN    STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER    31, 2003, 2002, AND 2001
    Common Stock
    Paid-InCapital 
    RetainedEarnings
    Accumulated    Other    ComprehensiveLoss 
    Total
    Shares
    AmountBALANCE AT JANUARY 1, 2001
5,068,667
$ 5,069
$933,464
$1,369,613
$    -
$2,308,146STOCK OPTIONS EXERCISED
30,000
30
12,270
-
-
12,300NET LOSS DECEMBER 31, 2001
-
-
-
(10,296)
-
(10,296)
5,098,667
5,099
945,734
1,359,317
-
2,310,150 COMPREHENSIVE INCOME:Net income December 31, 2002
-
-
-
213,576
-
213,576Unrealized loss on securities - net
-
-
-
-
(4,182)
(4,182)
5,098,667
5,099
945,734
1,572,893
(4,182)
2,519,544COMPREHENSIVE INCOME:Net income
-
-
-
123,006
-
123,006Unrealized loss on securities - net
-
-
-
-
(5,465)
(5,465)Less reclassification adjustment    included in net income
-
-
-
-
173
173CASH DIVIDEND
-
-
-
(76,480)
-
(76,480)BALANCE AT DECEMBER 31, 2003
$5,098,667
$5,099
$945,734
$1,619,419
$(9,474)
$2,560,778
See Notes to Financial Statements

5

ELECTRONIC SYSTEMS TECHNOLOGY,    INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER    31, 2003, 2002, AND 2001  
2003
2002
2001CASH FLOWS FROM OPERATING ACTIVITIES:Net income (Loss)
$ 123,006
$ 213,576
$(10,296)Noncash expenses included in income:Depreciation
49,207
40,869
42,978Amortization
4,404
4,404
3,034Allowance for doubtful accounts
869
-
-Deferred income taxes
23,600
3,917
16,368Loss on disposition of assets
1,245
23
1,059Realized loss on sale of investments
2,334
-
-Decrease (increase) in current assets:Accounts receivable, net
16,428
(143,595)
24,953Inventory
57,452
(37,825)
30,347Other current assets
(935)
(2,528)
12,148Prepaid federal income tax
(29,433)
-
-Increase (decrease) in current liabilities:Accounts payable and other current liabilities
114,878
13,394
(24,571)Federal income taxes payable
(101,866)
113,377
- Net Cash From Operating Activities
261,189
205,612
96,020CASH FLOWS FROM INVESTING ACTIVITIES:Deposits
(1,483)
(17,122)
-Purchase of investments
(817,843)
(1,344,000)
-Proceeds from sale of investments
803,666
-
-Capitalized software
-
-
(13,709)Additions to property and equipment
(113,943)
(35,085)
(33,306) Net Cash From Investing Activities
(129,603)
(1,396,207)
(47,015) CASH FLOWS FROM FINANCING ACTIVITIES:Stock options exercised
-
-
12,300Cash dividend
(76,480)
-
- Net Cash From Financing Activities
$ (76,480)
$ -
$ 12,300
(Continued)

See Notes to Financial Statements

6 

ELECTRONIC SYSTEMS TECHNOLOGY,    INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER    31, 2003, 2002, AND 2001  
2003
2002
2001NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
    $ 55,106
    $(1,190,595)    $ 61,305  CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    322,997
    1,513,592
    1,452,287 CASH AND CASH EQUIVALENTS AT END OF YEAR
    $ 378,103
    $ 322,997
    $1,513,592 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
$ 6,100Money market
367,003
311,897
516,334Certificate of deposit (initial maturity, three months or    less)
    -
    -
    991,158 
$ 378,103
$ 322,997
$1,513,592
(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 $2,153 and $1,284 as of December 31, 2003 and 2002, 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 $1,355,843, with a fair market value of $1,341,491, at December 31, 2003. A net    unrealized loss on available-for-sale securities in the amount of $8,280 has been charged    to other comprehensive income (loss) for the year ended December 31, 2003.

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 2003, 2002, and 2001, were $239,446, $167,522, and $146,245,    respectively.

Advertising Costs

Costs incurred for producing and communicating advertising are expensed    when incurred. Advertising costs for the years ended December 31, 2003, 2002, and 2001,    were $18,306, $18,277, and $20,774, respectively.

Other Comprehensive Income (Loss)

Comprehensive income consists of net income and unrealized gains and    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:
 
2003
2002
Parts
$232,801
$359,915