SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission file number 0-9587
ELECTRO-SENSORS, INC.
(Name of Small Business Issuer in its Charter)
Minnesota 41-0943459
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
6111 Blue Circle Drive
Minnetonka, Minnesota 55343-9108
(Address of Principal Executive Offices; Zip Code)
Issuer's telephone number Including Area Code: (612) 930-0100
Securities registered Under Section 12(b) of the Act: None
Securities registered Under Section 12(g) of the Act:
Common Stock, $.10 par value
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. __x__ Yes _____ No
Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended December 31, 1996 were
$6,142,643.
The aggregate market value of the Issuer's Common Stock held by nonaffiliates
(persons other than officers, directors or holders of more than 5% of the
outstanding stock) as of March 18, 1997, was approximately $2,946,130 (based on
the closing sale price of the Issuer's Common Stock on such date).
Shares of Common Stock, $.10 par value, outstanding on March 18, 1997: 1,944,911
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1996 are incorporated into Part II of this Form 10-KSB.
Portions of the Registrant's Proxy Statement for its 1997 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes ___ No __X__
INDEX
PART I Page
----
Item 1. Description of Business......................... 1
Item 2. Description of Property......................... 9
Item 3. Legal Proceedings............................... 9
Item 4. Submission of Matters to a
Vote of Security Holders................. 9
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters...................... 9
Item 6. Management's Discussion and Analysis
or Plan of Operation..................... 9
Item 7. Financial Statements............................ 10
Item 8. Changes in and Disagreements with
Accountants on Accounting
and Financial Disclosure................. 10
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance
with Section 16(a) of the Exchange Act ... 10
Item 10. Executive Compensation ......................... 11
Item 11. Security Ownership of Certain
Beneficial Owners and Management......... 11
Item 12. Certain Relationships and Related
Transactions............................. 11
Item 13. Exhibits and Reports on Form 8-K ............... 11
Signatures............................................................. 12
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Electro-Sensors, Inc. (the "Company"), a Minnesota corporation, is
engaged in three distinct business lines: (i) the manufacture and distribution
of industrial production monitoring and process control systems through its
Controls Division, (ii) the manufacture and distribution of small gas torches
and related accessories through its Microflame, Inc. subsidiary, and (iii) the
development and distribution of PC-based software for both automated survey
processing and hand printed character recognition through its AutoData Systems
division.
In addition, through its ESI Investment Co. subsidiary, the Company
invests in other businesses and companies. Although Electro-Sensors, Inc.,
through its ESI Investment Co. subsidiary, invests in other businesses or
companies, Electro-Sensors, Inc. does not intend to become an investment company
and intends to remain primarily an operating company. Unless indicated
otherwise, the term "Company" when used herein includes the Company and its
subsidiaries.
NARRATIVE DESCRIPTION OF BUSINESS
(1) PRINCIPAL PRODUCTS AND MARKETS.
PRODUCTION MONITORING SYSTEMS - CONTROLS DIVISION. The Company's
Controls Division manufactures and sells several different types of monitoring
systems that measure actual machine production and operation rates, as well as
systems that regulate the speed of related machines in production processes.
1. Speed Monitoring Systems Unit. Traditionally, the Company's
products have compared machine revolutions per minute or speed against
acceptable rates as determined by the customers. The monitors generally have the
same general operating principle and use a non-contacting sensing head that
translates the speed at which a shaft rotates into electronic information. The
systems include both the sensing device and a signal-generating pulser disc or
wrap that attaches to the rotating shaft. The systems vary in complexity from a
simple system that detects gross slow-downs or stoppages to more sophisticated
systems that warn of deviations from precise tolerances and that permit various
subsidiary operations to be determined through monitoring a single critical
shaft speed. In 1987, the Company created a separate Drive Control Systems Unit
to market products that regulate machine speeds, as discussed below. The
Company's Controls Division's traditional products remain in the "Speed
Monitoring Systems Unit."
The Speed Monitoring Systems Unit also markets a line of digital
products that translate sensor impulses from its production monitoring systems
into digital readouts indicating production counts or rates, such as parts,
gallons, or board feet. The Speed Monitoring Systems Unit also manufactures and
sells alarm systems, tachometers, and other devices that translate impulses from
the sensors into alarm signals, computer inputs, or digital displays that are
understandable to and usable by the customer. The Company now manufactures both
digital and analog monitoring systems.
The Speed Monitoring Systems Unit manufactures and sells two
production monitoring devices that do not operate by measuring shaft speeds.
These devices are the tilt switch and vibration monitor. A tilt switch is
designed to alert the operator when a storage bin or production system reaches a
certain capacity, for example, when grain fills a silo. A vibration monitor will
alert an operator when the vibration in a production system exceeds a certain
level.
The Speed Monitoring Systems Unit production monitoring systems are
sold to businesses in all major standard industrial classifications, including
food processing, chemicals, mining, utility, forest products, steel, tire, glass
and electronics. Any business that uses machinery with a rotating shaft is a
potential customer.
The Speed Monitoring Systems Unit markets its speed monitoring
systems primarily through five home office salesmen who deal directly with
customers, and a number of non-exclusive distributors located throughout the
United States.
The Company advertises its products in industrial periodicals that
cover a wide range of industrial products. The Company maintains its own
advertising and sales promotion departments to service customer inquiries and
provides support for the Company salesmen, representatives and distributors.
2. Drive Control Systems Unit
During the last several years, the Company has developed and
introduced products that not only monitor machine operation levels, but that
also regulate the speed of related machines in the same production sequence to
ensure that the performance of the various machines is coordinated.
In late 1986 and early 1987, the Company began marketing a Model
SDC-l Synchronous Drive Controller. The SDC-l is designed for use as a precision
speed reference for use with DC regenerative drives. Typical applications for
the SDC-l Controller include draw control involving web processes, precision
conveyors and electronic line shaft applications.
In 1988, the Company entered into a sales agreement with MKS
MaschinenKontroll Systeme GmbH ("MKS"), the West German manufacturer of the
SDC-1 Controller product line under which the Company has the exclusive right to
distribute in the United States drive controls manufactured by MKS. MKS is the
manufacturer of the Synchronizer, a drive control product that coordinates a
number of motors in a production machine. The Synchronizer product lines enable
a manufacturer to match speed/velocity and phase/position of independently
driven machines so they operate together. Applications include synchronizing
overhead and floor conveyors and load sharing of multiple motors.
In 1988, the Company began research and development of a digital
control for motors that utilize a complete P.I.D. (proportional integral
derivative) closed control. These products have been introduced to the market
under the name MicroSpeed, designed as a closed loop speed control. The
MicroSpeed is marketed, for example, for applications such as speed control of
motors transporting variable loads, mixing chambers that combine raw materials
in varying ratios and accordingly require varying speed ratios, and screw
conveyor feeding systems. For example, the MicroSpeed will digitally establish a
designated motor speed and maintain that speed regardless of loading.
The Drive Control Systems unit product sales accounted for
approximately eighteen percent in 1994, twenty-three percent in 1995, and
nineteen percent in 1996. The Company expects to continue to expend resources in
1997 in development and marketing of products for its Drive Control Systems
unit.
The Company believes that significant savings in both time and
materials can be achieved by manufacturing companies by adding drive control
technology to existing manufacturing processes to coordinate operation of
related machines. The Company intends to continue to market its products for
sale in this "retrofit" market and also to companies building new manufacturing
machinery or processing systems.
AUTODATA SYSTEMS. The Company initially invested in AutoData Systems
as a development project chartered to create opportunities using proprietary,
pattern recognition technology. The outcome of the project was a Windows(TM)
software-based system that reads hand-printed characters, check marks, and bar
code information from scanned or faxed forms.
The system offers customers a new data entry solution that converts
information from forms into a text file compatible with most computer databases.
This intelligent, data entry alternative saves time, strain and money compared
to the current method of manual data entry. The basis of the hand print reading
capability is the Associative Pattern Memory(TM) (APM), a patented, pattern
recognition algorithm. The APM is a trainable, neural network based memory that
was incorporated in a Windows Dynamic Link Library (DLL). This DLL is the
foundation of the two products marketed by AutoData Systems.
AutoData Systems became an operating unit in January 1993. The first
software package, AutoData PRO(TM), was released in May 1993. This software was
designed for the end user. AutoData PRO served as a utility software package
designed to process only check mark and hand print information from scanned
forms. The software would allow the user to export the data in an ASCII file
format. In September 1993, AutoData PRO II was released as an upgrade along with
AutoData SDK. AutoData SDK II was designed for Windows developers. The software
included the AutoData DLL which developers could embed in their application in
order to provide automated data entry from scanned or faxed forms. AutoData
Survey was released in the spring of 1996. Survey is a software package which
utilizes check mark recognition technology to automate the data entry processing
of responding participant questionnaires. AutoData Survey has been directed
toward the Healthcare industry.
MICROFLAME GAS TORCHES. Microflame manufactures and sells four kinds
of miniature brazing torches, under the names Cub, Super Cub, Microflame and
Dragon. During the past several years, a significant portion of Microflame
product sales have been from its Cub and Super Cub miniature hand-held torches.
Both the Cub and Super Cub torches utilize butane, which mixes with ambient air
to develop a flame about the size of a pencil. The Cub torch is sold exclusively
to Radio Shack stores.
The Company's "Microflame" torch is composed of two high pressure
cylinders, one containing fuel and the other containing an oxidizer, which
produce a flame with a tip the size of a pencil point. Microflame sells several
kits based upon this basic torch. The kits differ in the number of replacement
cylinders, brazing rods and other accessories which they contain.
The Company's fourth torch, marketed under the name "Dragon," has a
unique flame-action lever that operates on isobutane, which, when mixed with
ambient air, produces a larger flame than the Company's other torches.
Microflame's products are used primarily by hobbyists, electronic kit
assemblers, creators of jewelry and do-it-yourselfers.
(2) MARKETING AND DISTRIBUTION.
The Speed Monitoring Systems Unit markets its speed monitoring
systems primarily through five home office salesmen who deal directly with
customers, and a number of non-exclusive distributors located throughout the
United States.
In 1987, the Company reorganized its Controls Division and created a
"Drive Control Systems" unit through which its Micro Speed and SDC-l are
marketed. The Company has established a separate marketing process for the Drive
Control Systems unit products, which are marketed through manufacturers'
representatives, integrators, and in-house application personnel.
The AutoData Systems division markets its products primarily through
two home office salesmen who deal directly with customers, and a number of
non-exclusive distributors located throughout the United States, Canada, Europe
and Asia.
Microflame's products are sold both directly by the Company and
through manufacturers' representatives. Direct sales are made both domestically
and internationally to selected house accounts. The house accounts consist of
large accounts and miscellaneous accounts which do not fit into the general
categories of hobby, hardware and electronics. Examples of miscellaneous
accounts are catalog and mail order houses, premium and incentive gift outlets,
government and industrial users, and dental and optical users. There are also a
few dealers and consumers with whom the Company deals directly because they are
located in pockets of the country not served by existing sales outlets.
The Company uses three manufacturers' representatives in the sale of
its Microflame products, each of whom has an exclusive territory within the
United States. These representatives collectively have a network of wholesale
distributors and dealers in the hobby, hardware and electronics fields and are
responsible for seeking out additional qualified new distributors.
(3) STATUS OF NEW PRODUCTS.
See Item (10) below.
(4) COMPETITION.
The potential market for the Company's monitoring products includes a
broad range of industrial and commercial businesses. Design, quality, and
multiplicity of application, rather than price, are the focus of competition in
selling these products. The Company has substantial competition for its
production monitoring systems. Many of these competitors are well established
and larger in terms of total sales volume. Among the larger competitors are
Danaher Controls, Red Lion Controls, Dazic Controls, Newport Elect., Durant
Corp. and Contrex/Fenner Controls. The Company's competitive advantages are that
its products are sold as ready-to-install units and that its products have a
wide range of applications. The Company's major disadvantages include the fact
that its major competitors are much larger, have a broader variety of sensing
instruments, and have larger sales forces and established names.
AutoData competitors are essentially in the same product entry phase
of marketing their software products to users and developers. The essential
differences are that few competitors have their own technology and some have
larger sales volume because they have been in the market longer.
The market for Microflame gas torches consists primarily of
hobbyists, electronic kit assemblers, creators of jewelry and do-it-yourselfers.
Competitive products come from foreign sources, but are of a totally different
design that projects them as a soldering iron rather than a torch. Large propane
torches are sold in the home improvement market by Cooper Tools and
Bernz-O-Matic which both have established names and broader product lines than
Microflame.
(5) SOURCES AND AVAILABILITY OF RAW MATERIALS.
The Controls Division purchases parts and materials for its
production monitoring systems from various manufacturers and distributors. In
some instances these materials are manufactured in accordance with proprietary
designs. Multiple sources of these supplies and materials are readily available,
and the Controls Division is not dependent on any single sources for these
supplies and materials. The Controls Division has not experienced any problem of
short supply or delays from its suppliers. AutoData Systems purchases supplies
and materials from various suppliers and is not dependent on any single source
for such supplies.
Except for the small compressed gas cylinders used in Microflame's
gas torches, Microflame's parts and materials are purchased from various
manufacturers and distributors. There are multiple sources of necessary supplies
and materials available to Microflame, and Microflame is not now dependent on
any single source for these supplies and materials. Compressed gas cylinders are
purchased from two sources, as follows:
Manufacturing Source Percentage
-------------------- ----------
ISI of North America 25.2%
Nippon Tansan Gas Company, 74.8%
Ltd. (Japan)
The loss of any of these sources or significant delays in delivery from any of
these sources could result in serious shortages which would have a material
adverse effect on Microflame's business. However, the Company has not yet
experienced any shortage or delay in shipment from any of these suppliers. The
cylinders are shipped in compliance with applicable D.O.T. regulations for gas
containers.
(6) CUSTOMER DEPENDENCE.
The Company is not dependent upon a single customer or a few
customers for a material portion of sales of any of its products.
(7) PATENTS AND TRADEMARKS.
The Company holds no patents, concessions, licenses or franchises
that relate to its production monitoring systems; however, AutoData has obtained
two patents related to recognition technology.
The names "Microflame," "Electro-Sensors" and "Auto Data" are
trademarks registered with the U.S. Patent and Trademark Office, respectively as
Reg. No. 809916, Reg. No. 1,142,310 and Reg. No. 1,874,543. The Company believes
its trademarks have been and will be useful in developing and protecting market
recognition for its products.
PPT Vision, Inc. has granted the Company an exclusive license which
allows the Company to incorporate a patented neural network algorithm in its
products. The initial use of this algorithm will be in the Company's automated
computer entry group under the name "AutoData Systems."
(8) GOVERNMENT APPROVALS.
The Company is not required to obtain governmental approval of its
products.
(9) EFFECT OF GOVERNMENTAL REGULATIONS.
The Company does not believe that any existing or proposed
governmental regulations will have a material effect on its business.
(10) RESEARCH AND DEVELOPMENT.
The Company has spent the following amounts on research and
development during the past two fiscal years:
1996: $706,813
1995: $621,763
All these expenditures were incurred by the Controls Division and AutoData
Systems. The Company is currently conducting very limited research and
development with respect to certain products sold by its Microflame subsidiary.
The Company has conducted a very limited amount of customer sponsored research
activities relating to the development of new products, services or techniques
or the improvement of existing products, services or techniques. A portion of
the Company's development project was undertaken based upon the identified
specific needs of the Company's customer base.
During fiscal 1996 the Company has continued to fund the AutoData
Systems. The goal of this project is to create a software based system that
enables a computer to read hand printed characters. In January 1992, the Company
acquired an exclusive license from PPT Vision, Inc. (PPT) which offers the
Company protection of the algorithm necessary for the reading technology.
In the process of developing the reading software, the Company has
refined its vision of the initial product. The Company's goal is to develop a
technology that provides a data entry method that saves time, strain and money
compared to the current method of keystroke data entry. The product produced by
the Company will enter the hand printed information on forms into a data base
faster and more accurately than could be typed in by data entry personnel.
Larry Werth, former president of PPT, has been hired as a Research
Scientist charged with finalizing the software.
(11) ENVIRONMENTAL COMPLIANCE.
Compliance with federal, state and local environmental provisions has
only nominal effect on current or anticipated capital expenditures and has had
no material effect on earnings or on the competitive position of the Company.
(12) EMPLOYEES.
As of March 1, 1997, the Company had 42 employees, 3 of whom
are engaged by its Microflame subsidiary and 39 of whom are engaged in work for
its Controls Division.
CAUTIONARY STATEMENTS
As provided for under the Private Securities Litigation Reform Act of
1995, the Company wishes to caution investors that the following important
factors, among others, in some cases have affected and in the future could
affect the Company's actual results of operations and cause such results to
differ materially from those anticipated in forward-looking statements made in
this document and elsewhere by or on behalf of the Company:
UNCERTAINTY OF MARKET ACCEPTANCE OF NEW DIVISION. The Company's
AutoData Systems division is in an early stage of development. There can be no
assurance that Company will be able to successfully market the products offered
by the AutoData Systems division. The ability of the Company to achieve
acceptable growth will be highly dependent on market acceptance of these
products.
FLUCTUATIONS IN OPERATING RESULTS. The Company's Drive Control Systems
division has experienced an increase in sales; however, the Company's Speed
Monitoring division and the Company's subsidiary, Microflame, Inc., have
experienced sales declines. Sales by the Drive Control Systems division has
been, and is expected to continue to be, subject to quarterly fluctuations due
to large system orders. There can be no assurance that the Drive Control Systems
division sales will continue to increase or that sales by the Speed Monitoring
division or Microflame, Inc. will improve.
Further, investments by the Company's subsidiary, ESI Investment Co.,
are subject to significant positive and negative changes in value. In
particular, a significant investment by ESI Investment Co. in PPT Vision has
experienced substantial value fluctuations, which are expected to continue. The
Company's current intention is to gradually liquidate its investment securities
to finance expansion of its operating activities. As a result of the foregoing
factors, the Company believes that its results of operations will continue to
fluctuate from period to period. Therefore, there can be no assurance that the
Company's earnings growth will equal that of prior years.
COMPETITION. The Company's operating activities are subject to intense
competition. There can be no assurance that the Company will be able to
effectively compete within its existing markets or the new market it is entering
through its AutoData Systems division. Further, there can be no assurance that
others will not enter these markets. Competition in these markets is based
primarily on price, which subjects the Company to increasing pressures to make
price adjustments to remain competitive. Such price adjustments, if any, may
have an adverse impact on the Company's results of operations if not offset by
an increase in revenues or a reduction in expenses. Many of the Company's
competitors are large, well-established companies.
NEW PRODUCT DEVELOPMENT. The Company's future success is dependent in
part on its ability to develop new products. Difficulties or delays in the
Company's ability to develop, produce, test and market new products would have a
material adverse effect on future sales growth.
DEPENDENCE ON SUPPLIERS. The Company currently purchases, and will in
the future purchase, parts and components from vendors. While the Company
attempts to have more than a single source of supply for each part and
component, it is possible from time to time that the Company will have only one
supplier for any single part or component. Should a supplier be unwilling or
unable to supply any such part or component in a timely manner, the Company's
business could be materially adversely affected.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's Controls Division owns and occupies a 25,000 square
foot facility at 6111 Blue Circle Drive, Minnetonka, Minnesota 55343.
Microflame occupies a building of 5,576 square feet located at 14873
DeVeau Place, Minnetonka, Minnesota 55345. This building is used for management,
sales and production. The building is leased for a period ending July 31, 1997.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Section entitled "Price Range of Common Stock" in the Company's
1996 Annual Report to Shareholders is incorporated herein by reference. Although
there were 217 shareholders of record as of March 12, 1997, the Company has
approximately 658 beneficial shareholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the 1996 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements and notes contained in the 1996
Annual Report to Shareholders and the Section entitled "Quarterly Financial
Summary (Unaudited)" are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, ages and positions of the Company's executive officers are
as follows:
Name Age Office
---- --- ------
Bradley D. Slye 37 Chairman of the Board of
Directors and President
Peter R. Peterson 63 Secretary and Director
Mark D. Laumann 42 Treasurer and Director
Mr. Slye has been the Chairman of the Board and President of the
Company since January 6, 1997, when he was elected to succeed James P. Slattery,
the Company's former Chairman and President, who died on December 27, 1996. Mr.
Slye has served as a Design Engineer for the Company since 1987 and as
Engineering Manager since 1990. He received his BSEE degree from the University
of Minnesota in 1983, following which he was employed as an electrical engineer
by Micro Component Technology, Inc. in Shoreview, Minnesota prior to joining the
Company.
Mr. Peterson has served as Secretary of the Company since 1973 and
served as Chairman of the Board from 1969 to January 1989. Mr. Peterson is also
a director of PPT, Vision, Inc.
Mr. Laumann has been employed by the Company in various accounting
capacities since 1975, serving as Controller from March 1981 to January 1994,
when he was elected Treasurer and a Director.
The executive officers of the Company are elected each year by the
Board of Directors at its first meeting or by written action following the
annual meeting of shareholders to serve during the following year or until their
successors are elected and qualified.
Other Significant Employee
Richard Kurzeka, Microflame Manager, 48, started employment with
Electro-Sensors, Inc. in 1978, as manager of production control. He proceeded to
Operations Manager of the Controls Division, which involved responsibilities in
administration, purchasing, production and inventory control, sales, quality
control and manufacturing. In February 1981, Mr. Kurzeka was transferred to
Microflame. He presently is the Vice President and a Director of Microflame.
The information required by Item 9 relating to directors and
compliance with Section 16(a) is incorporated herein by reference to the
sections entitled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" which appear in the Company's definitive proxy
statement for its 1997 Annual Meeting of Shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by
reference to the section entitled "Executive Compensation" which appears in the
Company's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated herein by
reference to the section entitled "Shareholdings of Principal Shareholders and
Management" which appears in the Company's definitive Proxy Statement for its
1997 Annual Meeting of Shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated herein by
reference to the section entitled "Certain Transactions" in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See "Exhibit Index" on page following signatures.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
fourth quarter ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ELECTRO-SENSORS, INC.
("Registrant")
Dated: March 25 , 1997 By: /s/ Brad Slye
---------------
Bradley D. Slye,
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the
Registrant, in the capacities, and on the dates, indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints
BRADLEY D. SLYE and PETER R. PETERSON as his true and lawful attorneys-in-fact
and agents, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10-KSB
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, each acting alone, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
<TABLE>
<CAPTION>
Signature Title Date
--------- ------------------------- ----------------
<S> <C> <C>
/s/ Brad Slye Chairman, President and March 25 , 1997
- ------------------------------------- Director (Chief Executive
Bradley D. Slye Officer)
/s/ Mark D. Laumann Treasurer and Director March 25 , 1997
- -------------------------------- (Chief Financial and
Mark D. Laumann Accounting Officer)
/s/ Peter R. Peterson Director and Secretary March 25 , 1997
- -----------------------------------
Peter R. Peterson
- ----------------------------------- Director March , 1997
John S. Strom
/s/ Joseph A. Marino Director March 25 , 1997
- ----------------------------------
Joseph A. Marino
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-KSB
For the fiscal year
ended December 31, 1996 Commission File No.: 0-9587
---------------------
ELECTRO-SENSORS, INC.
---------------------
Exhibit
3.1 Registrant's Restated Articles of Incorporation, as
amended--incorporated by reference to Exhibit 3.1 to the Company's 1991
Form 10-K*
3.2 Registrant's By-Laws, as amended--incorporated by reference to Exhibit
3.2 to the Company's 1988 Form 10-K*
10.1 Lease between Microflame, Inc. and Minnetonka Business Associates dated
December 15, 1988, with respect to property at 14857 DeVeau Place,
Minnetonka, Minnesota--incorporated by reference to Exhibit 10.2 to the
Company's 1988 Form 10-K*
10.2 Agreement to Extend Lease, dated May 25, 1994, relating to property at
14857 DeVeau Place, Minnetonka, Minnesota--incorporated by reference to
Exhibit 10.2 to the Company's 1994 Form 10-KSB*
10.3 Agreement to Extend Lease, dated June 12, 1995, relating to property at
14857 DeVeau Place, Minnetonka, Minnesota--incorporated by reference to
Exhibit 10.3 to the Company's 1995 Form 10-KSB*
10.4** Electro-Sensors, Inc. 1987 Stock Option Plan--incorporated by reference
to Exhibit A to the Company's Proxy Statement dated April 21, 1987 for
the Company's 1987 Annual Meeting of Shareholders*
10.5** Employment Agreement dated December 10, 1980, between Electro-Sensors,
Inc. and James P. Slattery--incorporated by reference to Exhibit 10.5
to the Company's 1990 Form 10-K*
11 Statement Regarding Computation of Per Share Earnings
13 Portions of 1996 Annual Report to Shareholders that are incorporated in
this Form 10-KSB by reference
21 Subsidiaries of Registrant:
Name State of Incorporation
---- ----------------------
Microflame, Inc. Minnesota
ESI Investment Co. Minnesota
Senstar Corporation Minnesota
23 Consent of Independent Certified Public Accountants
24 Power of Attorney from certain Directors and Officers
(See Signature Page)
27 Financial Data Schedule (filed in electronic format only)
- ----------------
* Incorporated by reference to a previously filed report or document--SEC File
No. 0-9587
**Management contract or compensatory plan or arrangement
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
CALCULATION OF WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
INCOME FOR DETERMINATION OF EARNINGS PER SHARE OF COMMON STOCK
EXHIBIT 11
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------- -------------- ------------
<S> <C> <C> <C>
Common shares:
Weighted average common shares:
Outstanding 1,941,163 1,901,840 1,878,278
For stock options 23,403 13,085 23,172
- -------------------------------------------------------------------------- -------------- ------------
Weighted average number of common
shares and common stock
equivalents outstanding 1,964,566 1,914,925 1,901,450
Additional shares for stock options 918 8,912 808
- -------------------------------------------------------------------------- -------------- ------------
Weighted average number of common
shares and common stock
equivalents outstanding
assuming full dilution 1,965,484 1,923,837 1,902,258
========================================================================================================
Net income applicable to common shares
and common stock equivalents $ 462,853 $ 785,256 $ 459,713
========================================================================================================
Net income applicable to common shares
and common stock equivalents,
assuming full dilution $ 462,853 $ 785,256 $ 459,713
========================================================================================================
</TABLE>
[LOGO ELECTRO-SENSORS]
CORPORATE PROFILE
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
BRIEF SUMMARY OF BUSINESS
Electro-Sensors, Inc. operates three distinct businesses. The first is the
Controls Division which carries the name of Electro-Sensors, Inc. This division
manufactures and markets a complete line of speed monitoring and control systems
for industrial machinery. The Controls Division utilizes leading-edge technology
to continuously improve its products and make them easier to use. The Controls
Division's goal is to manufacture the industry-preferred product for every
market served. These products are sold through telemarketing and distributors to
a wide variety of manufacturers and processors to monitor the efficiency of
process machinery.
The second business is AutoData Systems, a division of Electro-Sensors, Inc.
AutoData Systems designs and markets a desktop software-based system that reads
hand-printed characters, check marks and bar code information from scanned or
faxed forms. AutoData systems products are designed to both provide the
capabilities to automate data collection and meet their customers complete forms
processing needs. These software packages are sold through telemarketing to end
users, resellers and developers in the United States, Canada, Europe and Asia.
The third business is operated through a wholly-owned subsidiary, Microflame,
Inc. Microflame produces small hand held gas torches used primarily by
hobbyists, electronic kit assemblers, creators of jewelry and do-it-yourselfers.
The Microflame products are sold through distributors to retailers of hardware,
hobby craft and electronic products.
In addition, through its ESI Investment Company subsidiary, the Company has
invested funds in other companies and businesses. The value of the Company's
investments fluctuates. It is the Company's intention over a substantial period
of time to liquidate such investments in order to finance expansion of its
operating activities. Although the Company has invested in other companies and
businesses, Electro-Sensors, Inc. intends to remain primarily an operating
company.
SELECTED FINANCIAL DATA (CONSOLIDATED)
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31
-----------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 6,143 $ 6,185 $6,076 $5,231 $4,806
Gross Profit 3,502 3,525 3,424 2,920 2,701
Selling Expenses 1,339 1,214 1,501 1,128 908
General and Administrative Expenses 948 777 801 718 653
Research and Development Expenses 707 622 659 647 598
Provision for Income Taxes 283 371 222 246 247
Net Income 463 785 460 505 515
Earnings Per Share .24 .41 .24 .26 .27
Working Capital 8,708 9,332 4,772 5,711 5,749
Total Assets 11,485 13,181 7,941 6,771 6,442
Shareholders' Equity 9,147 9,466 6,693 6,398 6,057
</TABLE>
2
LETTER TO SHAREHOLDERS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
March 14, 1997
TO THE SHAREHOLDERS:
The combined total sales for 1996 were $6,142,643. The year reflected increases
in the Speed Monitoring Systems and Autodata Systems, and decreases in the Drive
Control Systems and Microflame, Inc., product groups. During 1996, new products
were introduced for the Speed Monitoring group. These products provide enhanced
features such as field programmability and DIN rail mounting. International
sales were up as we continue to expand our foreign presence in South America,
Europe, the Mid-East and Asia. The new Autodata Survey software product
introduced in March was well received by our customers due to its ease of use
and powerful reporting features. The Drive Control Systems sales decrease
reflected a reduction in large complete system sales. We plan to increase our
efforts in the system sales area in the coming year. In addition, product
performance, safety testing, and certification to national and international
standards required extra expense, but are required by the customers who purchase
our products.
The past annual letters to the shareholders were written by a man that all of
the employees at Electro-Sensors, Inc., greatly admired. His leadership and
guidance brought Electro-Sensors, Inc., from a dream to a very successful and
stable company. James Slattery founded the Company based on monitoring the speed
of rotating drive shafts in factories and industrial plants. The Company grew
from this base product line to three divisions consisting of Speed Monitoring
Systems, Drive Control Systems, Autodata Systems, and two wholly-owned
subsidiaries: Microflame, Inc., and ESI Investment Co. Jim accomplished this
through hard work, perseverance, and leading and mentoring everyone involved at
Electro-Sensors. He enabled employees to become successful contributors by
developing new skills and leadership abilities. Together, a company was built
which provides shareholder growth and earnings while providing both worldwide
recognized products and a gateway for individual and corporate growth. Jim was
an exceptional man, respected and loved by all of his family and friends. He
passed away on December 27, 1997. Our memories of him will not pass away and we
are thankful for his part in each of our lives. This annual letter is dedicated
to his honor and memory.
This is my first annual letter as the President of Electro-Sensors, Inc. I have
worked here for the past ten years, and it has been a great experience. As I
begin leading the Company, I want to assure you of my complete devotion to the
creation of growth and continued financial well-being of the Company. My goal is
to build upon the foundation of Jim Slattery's strong leadership. We have
excellent employees working together for this cause. Please feel free to talk
with me at any time. I look forward to the future with anticipation of good
things.
Sincerely,
/s/ Bradley D. Slye
Bradley D. Slye
President
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
1996 VS. 1995
The Company's sales for 1996 were $6,142,643, a slight decrease from 1995 sales
of $6,184,880. The decrease in sales is attributed to both the Drive Control
Systems and the Company's wholly-owned subsidiary, Microflame, Inc. Drive
Control Systems achieved record sales during 1995 resulting from the shipment of
a $225,000 integrated system, but was unable to reach the same comparable sales
level in 1996. Meanwhile, the Speed Monitoring Systems and AutoData Systems
divisions provided sales increases during the year.
The Company's Speed Monitoring Systems and Drive Control Systems divisions have
experienced increased single unit/replacement orders throughout the year.
However, the larger reindustrialization sales orders experienced in 1995 slowed
significantly during 1996 as plant expansions and retrofitting projects were
postponed until late in 1996 and into the following year. The Speed Monitoring
Systems provided an increase of 6.9% from increased component sales while the
Drive Control Systems experienced a 20% decrease resulting from a slow down in
plant expansions.
AutoData Systems experienced slowed sales in the beginning of the year, but was
able to provide an overall sales increase for 1996. This sales increase resulted
from the release of AutoData Survey. Survey is a PC-based software package which
utilizes check mark recognition technology to automate the data entry processing
of responding participant questionnaires and is presently directed toward health
care providers.
Microflame sales declined 6.4% in 1996 as compared to 1995. The sales decrease
resulted from a reduction in sales volume of the single gas torch. Sales to
Microflame's largest customer decreased 9.4% during the year. Microflame sales
continue to reflect a lessening demand and weak consumer marketplace for its gas
torch products.
The Company's cost of sales decreased slightly for 1996 and remained relatively
unchanged as a percentage of sales when compared to 1995. Improved product sales
margins in the Drive Control Systems division offset increased material costs
due to changing product mix in both AutoData Systems and Microflame. AutoData
Systems material costs rose significantly in 1996 and is the direct result of
increased scanner sales which carry a relatively lower gross margin.
Overall operating expenses increased 14.6% during 1996. The increased expense
occurred primarily in both the marketing and research and development ("R&D")
areas. These increased expenses were concentrated in the product promotion and
product development areas. Marketing expenses increased resulting from both the
introduction of the AutoData Survey software package to health care providers
and increased advertising and promotion in the Speed Monitoring Systems. The
increase in R&D expenses occurred as the Company continues its commitment toward
new product development and increased product enhancements. In addition,
administrative expense increased primarily from the employment agreement benefit
payable to James Slattery's widow. The agreement provided for a one year base
salary upon his death.
ESI Investment continues to provide an alternative source of earnings for the
Company through investments in marketable securities. The investments provided a
realized gain of $263,244 on proceeds of $287,098 during the year. ESI
Investment made additional investments during the year of $31,250 through the
exercise of previously acquired warrants. The cumulative unrealized gain on
securities was $3,770,485, $4,751,933, and $80,739 as of December 31, 1996, 1995
and 1994, respectively. The company recognizes investment gains and losses when
realized and, therefore, the change in net unrealized gains and losses on
securities have not been reflected in the net income of the Company during the
respective years. The Company's investment in marketable securities are subject
to significant positive and negative changes in value.
4
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to generate strong cash flows from operations. Increased
working capital and funds for capital expenditures have been provided through
current earnings. These funds have been placed in secure short-term investments.
The funds are being used primarily for dividend distributions, working capital
as needed and general corporate purposes, which may include acquisitions.
Accounts receivable decreased due to timing differences which extended the
payment terms on a few customers at the end of 1995 and resulted in the payments
being received in early January of 1996. Inventories and accounts payable
increased due to increased sales activity experienced during the fourth quarter.
The Company's decrease in shareholders' equity was due to the decrease in
unrealized gain on investment securities. This decrease resulted primarily from
the Company's holding of 549,084 shares of PPT Vision, which experienced a
significant decrease in market value during the year. Because of the volatile
nature of the company's holdings, the value of the Company's investment
securities should be expected to fluctuate significantly from year to year.
Principal payments made during the year decreased the building note payable.
Capital expenditures resulted mainly from the purchase of additional
manufacturing and office equipment. The Company does not anticipate the need for
additional working capital from outside sources. Also, the Company declared a
first quarter cash dividend payable in February 1997.
CHANGING PRICES AND INFLATION
The Company did not experience any significant inflationary pressure during
1996. Cost management programs and modest price increases have enabled the
Company to minimize inflation's impact on operating performance. The Company
continually works to control product cost increases through engineering
improvements, selection and use of more cost efficient product components and
through improved operating efficiency.
CAUTIONARY STATEMENT
For a description of factors which could affect the results of future operations
see "Cautionary Statements" under Item I of the Company's Form 10-KSB for the
fiscal year ended December 31, 1996.
5
CONSOLIDATED BALANCE SHEETS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including temporary cash
deposits of $1,727,981 and $2,539,398,respectively $ 2,581,588 $ 3,273,873
Marketable securities (Note 2) 5,356,210 6,330,262
Trade receivables, less allowance for doubtful
accounts $18,000 and $21,500, respectively 726,628 791,445
Inventories (Note 3) 829,428 788,282
Prepaid expenses 76,018 80,182
Deferred taxes (Note 12) 77,200 29,100
- -------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 9,647,072 11,293,144
- -------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT (Note 4) 1,838,270 1,887,648
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $ 11,485,342 $ 13,180,792
===========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable (Note 5) $ 421,383 $ 586,516
Accounts payable 115,666 98,404
Accrued expenses (Note 6) 387,594 216,692
Dividends payable 0 970,135
Accrued income taxes 14,748 88,931
- -------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 939,391 1,960,678
- -------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES (Note 12) 1,398,900 1,754,100
- -------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 9)
SHAREHOLDERS' EQUITY:
Common stock, par value $.10 per share; authorized
10,000,000 shares; issued 1,942,282 and 1,940,270, shares,
respectively (Note 8) 194,228 194,027
Additional paid-in capital 618,135 584,236
Retained earnings 5,988,629 5,758,728
Unrealized holding gain on investment securities,
net (Note 2) 2,408,385 3,035,733
Unallocated employee stock ownership plan shares 0 (41,951)
Notes receivable (Note 11) (62,326) (64,759)
- -------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 9,147,051 9,466,014
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,485,342 $ 13,180,792
===========================================================================================
</TABLE>
See Notes to Financial Statements.
6
CONSOLIDATED STATEMENTS OF INCOME
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 6,142,643 $ 6,184,880 $ 6,076,294
COST OF GOODS SOLD 2,640,508 2,659,733 2,651,988
- ------------------------------------------------------------------------------------
GROSS PROFIT 3,502,135 3,525,147 3,424,306
- ------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling 1,339,473 1,214,073 1,500,948
Administrative 948,228 777,379 801,237
Research And development 706,813 621,763 658,945
- ------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 2,994,514 2,613,215 2,961,130
- ------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 507,621 911,932 463,176
- ------------------------------------------------------------------------------------
NONOPERATING INCOME (EXPENSE):
Gain (loss) on sale of investment
securities (Note 2) 263,244 222,608 164,205
Interest income 116,240 156,187 117,763
Other (141,402) (134,521) (63,331)
- ------------------------------------------------------------------------------------
TOTAL NONOPERATING INCOME (EXPENSE) 238,082 244,274 218,637
- ------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 745,703 1,156,206 681,813
FEDERAL AND STATE INCOME TAXES (NOTE 12) 282,850 370,950 222,100
- ------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 462,853 $ 785,256 $ 459,713
====================================================================================
INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.24 $ 0.41 $ 0.24
====================================================================================
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES 1,964,566 1,914,925 1,901,450
====================================================================================
</TABLE>
See Notes to Financial Statements.
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash:
Received from customers $ 6,207,460 $ 6,122,647 $ 6,008,065
Paid to suppliers and employees (5,497,248) (5,424,528) (5,482,675)
Interest received 116,240 156,187 123,464
Income taxes paid (406,233) (178,065) (247,718)
- ---------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 420,219 676,241 401,136
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 0 0 639
Purchase of property and equipment (78,616) (34,006) (1,438,806)
Investment in marketable securities:
Sales 287,098 246,063 205,951
Purchases (31,250) (143,500) (215,191)
Repayments (net of advances) from Employee
Stock Ownership Plan 67,500 1,946 30,000
Repayments of notes receivable 2,433 8,743 8,436
- ---------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 247,165 79,246 (1,408,971)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (1,203,087) (189,850) (189,550)
Net proceeds (payments) on short-term borrowings (165,133) (222,354) 808,870
Proceeds from issuance of stock 8,551 103,812 7,125
- ---------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,359,669) (308,392) 626,445
- ---------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (692,285) 447,095 (381,390)
CASH AND CASH EQUIVALENTS:
BEGINNING 3,273,873 2,826,778 3,208,168
- ---------------------------------------------------------------------------------------------------
ENDING $ 2,581,588 $ 3,273,873 $ 2,826,778
- ---------------------------------------------------------------------------------------------------
(continued on following page)
</TABLE>
See Notes to Financial Statements.
8
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net income (loss) $ 462,853 $ 785,256 $ 459,713
Adjustments to reconcile net income (loss) to net
cash provided by (used in operating activities:
Depreciation and amortization 127,994 125,245 79,786
Provision for losses on trade receivables (3,500) (10,500) 7,500
Realized (gain) loss on sale of:
Investment securities, net (263,244) (222,608) (164,205)
Property and equipment 0 1,360 (615)
Deferred taxes (49,200) 8,600 900
(Increase) decrease in:
Trade receivables 68,317 (51,734) (70,028)
Inventories (41,146) (95,461) 45,214
Prepaid:
Expenses 4,164 8,961 8,718
Income taxes 0 51,754 (26,518)
Increase (decrease) in:
Accounts payable 17,262 (77,430) 24,715
Accrued:
Expenses 170,902 12,767 35,956
Income taxes (74,183) 140,031 0
- ------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 420,219 $ 676,241 $ 401,136
================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Net change in unrealized holding gains on marketable
securities $ (627,348) $ 2,982,494 $ 53,239
================================================================================================
Accrued dividends $ 0 $ 970,135 $ 0
================================================================================================
Tax benefit of stock options exercised $ 0 $ 43,600 $ 0
================================================================================================
</TABLE>
See Notes to Financial Statements.
9
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK ISSUED ADDITIONAL
----------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 1,892,500 $ 189,250 $ 478,076 $5,812,194
Unrealized investment holding gain,
net of tax (Note 2)
Exercise of stock options (Note 8) 3,000 300 6,825
Repayment of note receivable (Note 10)
Net change in unrealized gain on
marketable securities
Change in accounting policy for
ESOP (Note 9)
Collection of ESOP note receivable
(Note 9)
Dividend on common stock
$.10 per share (189,550)
Net income 459,713
- --------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 1,895,500 189,550 484,901 6,082,357
Exercise of stock options (Note 8) 44,770 4,477 99,335
Repayment of note receivable
Net change in unrealized gain on
marketable securities
Collection of ESOP note receivable
(Note 9)
Tax benefit of stock options exercised 43,600
Dividend on common stock
$.10 per share (189,850)
Dividend declared on common stock
$.50 per share (962,635)
Net income 785,256
- --------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 1,940,270 194,027 584,236 5,758,728
Collection of ESOP note 25,549
Repayment of note receivable
Net change in unrealized gain on
marketable securities
Stock issued through the Employee
Stock Purchase Plan, 2,012 shares 2,012 201 8,350
Dividend on common stock
$.12 per share (232,952)
Net Income 462,853
- --------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 1,942,282 $ 194,228 $ 618,135 $5,988,629
========================================================================================================
</TABLE>
See Notes to Financial Statements.
10
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
UNREALIZED HOLDING UNALLOCATED EMPLOYEE TOTAL
GAIN ON INVESTMENT STOCK OWNERSHIP NOTE SHAREHOLDERS'
SECURITIES, NET PLAN SHARES RECEIVABLE EQUITY
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $ 0 $ 0 $ (81,938) $ 6,397,582
Unrealized investment holding gain,
net of tax (Note 2) 1,006,965 1,006,965
Exercise of stock options (Note 8) 7,125
Repayment of note receivable (Note 10) 8,436 8,436
Net change in unrealized gain on
marketable securities (953,726) (953,726)
Change in accounting policy for
ESOP (Note 9) (73,897) (73,897)
Collection of ESOP note receivable
(Note 9) 30,000 30,000
Dividend on common stock
$.10 per share (189,550)
Net income 459,713
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 53,239 (43,897) (73,502) 6,692,648
Exercise of stock options (Note 8) 103,812
Repayment of note receivable 8,743 8,743
Net change in unrealized gain on
marketable securities 2,982,494 2,982,494
Collection of ESOP note receivable
(Note 9) 1,946 1,946
Tax benefit of stock options exercised 43,600
Dividend on common stock
$.10 per share (189,850)
Dividend declared on common stock
$.50 Per share (962,635)
Net income 785,256
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 3,035,733 (41,951) (64,759) 9,466,014
Collection of ESOP note 41,951 67,500
Repayment of note receivable 2,433 2,433
Net change in unrealized gain on
marketable securities (627,348) (627,348)
Stock issued through the Employee
Stock Purchase Plan, 2,012 shares 8,551
Dividend on common stock
$.12 per Share (232,952)
Net Income 462,853
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ 2,408,385 $ 0 $ (62,326) $ 9,147,051
===============================================================================================================================
</TABLE>
See Notes to Financial Statements.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTE 1. NATURE OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
The accompanying consolidated financial statements include the accounts of
Electro-Sensors, Inc. and its wholly-owned subsidiaries: Microflame, Inc.,
and ESI Investment Co.
ELECTRO-SENSORS, INC. manufactures production monitoring and software
systems, and Microflame, Inc. produces miniature brazing torches used for
hobbies and crafts. ESI Investment Co. manages a varied investment portfolio.
Intercompany accounts, transactions and earnings have been eliminated in
consolidation.
ELECTRO-SENSORS, INC. markets its products to a number of different
industries located throughout the United States and abroad. The Company
grants credit to customers under normal industry terms, generally 30 days.
Microflame, Inc. also markets its products throughout the U.S. and abroad
under normal credit terms. The majority of Microflame, Inc. sales are
concentrated in the hobby and craft industry. ESI Investment Co. has
investments in marketable securities which are subject to normal market
risks.
SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY ARE SUMMARIZED BELOW:
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents. Cash equivalents are carried at cost plus accrued interest
which approximates market value.
The Company maintains its cash in bank deposit accounts, which, at times, may
exceed federally insured limits. The Company has not experienced any losses on
such accounts. The Company believes it is not exposed to any significant credit
risk on cash.
INVESTMENT IN MARKETABLE EQUITY SECURITIES AND ACCOUNTING CHANGE:
The Company has investments in marketable equity securities. Marketable equity
securities consist primarily of common stocks that are traded or listed on
national exchanges. The estimated fair value of marketable equity securities is
based on quoted market prices and therefore subject to the inherent risk of
market fluctuations.
The Company adopted the provisions of FASB Statement No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, as of January 1, 1994.
Statement 115 requires that management determine the appropriate classification
of securities at the date of adoption, and thereafter at the date individual
investment securities are acquired, and that the appropriateness of such
classification be reassessed at each balance sheet date. Since the Company does
not buy investment securities in anticipation of short-term fluctuations in
market prices, the investment in marketable equity securities has been
classified as available-for-sale in accordance with Statement 115.
Available-for-sale securities are stated at fair value, and unrealized holding
gains and losses, net of the related deferred tax effect, are reported as a
separate component of shareholders' equity. Prior to the adoption of Statement
115, the Company stated marketable equity securities at the lower of their
aggregate cost or market. Dividends on marketable equity securities are
recognized in income when declared.
Realized gains and losses, including losses from declines in value of specific
securities determined by management to be other-than-temporary, are included in
income. Realized gains and losses are determined on the basis of the specific
securities sold.
Note 2 to the financial statements provides further information about the effect
of adopting Statement 115.
INVENTORIES:
Inventories include material, labor, and overhead and are valued at the lower of
cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Expenditures for renewals and
betterments are capitalized and repairs and maintenance costs are charged to
expense as incurred. When items are disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in the results of operations.
DEPRECIATION:
The cost of property and equipment is depreciated on the straight-line method
over the estimated useful lives.
ESTIMATED USEFUL LIVES ARE AS FOLLOWS:
YEARS
- ---------------------------------------
Equipment 5-10
Furniture and fixtures 10
Building 7-40
Depreciation expense for the years ended December 31, 1996, 1995, and 1994 was
$127,994, $125,245, and $79,786, respectively.
12
INCOME TAXES:
Deferred income taxes are provided on an asset and liability approach to
financial accounting and reporting for income taxes. The difference between the
financial statement and tax bases of assets and liabilities is determined
annually. Deferred income tax assets and liabilities are computed for those
differences that have future tax consequences using the currently enacted tax
laws and rates that apply to the periods in which they are expected to affect
taxable income. Income tax expense is the current tax payable or refundable for
the period plus or minus the net change in the deferred tax assets and
liabilities.
INCOME PER SHARE:
Income per common and common equivalent share are computed based on the weighted
average number of common and common equivalent shares outstanding during the
year. Common equivalent shares are those issuable upon the assumed exercise of
stock options, reflected under the treasury stock method using the average
market price of the Company's shares during each year.
The number of shares used in the per share computations are as follows:
DECEMBER 31,
---------------------------------
1996 1995 1994
- --------------------------------------------------------
Total weighted
average outstanding
shares 1,941,163 1,901,840 1,878,278
Assumed exercise of
options at average
market price 23,403 13,085 23,172
- --------------------------------------------------------
Weighted average
common and
common equivalent
shares 1,964,566 1,914,925 1,901,450
========================================================
NOTE 2. INVESTMENT IN MARKETABLE SECURITIES
As discussed in Note 1, the Company adopted FASB Statement No. 115 as of January
1, 1994. The January 1, 1994 balance of shareholders' equity was increased by
$1,006,965, net of the $570,000 related deferred tax effect, to recognize the
net cumulative effect of the unrealized holding gain on securities held at that
date.
<TABLE>
<CAPTION>
The cost and estimated fair value of the investment in marketable securities are
as follows:
GROSS GROSS FAIR
COST UNREALIZED GAIN UNREALIZED LOSS VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Treasury bills $ 1,727,981 $ 0 $ 0 $ 1,727,981
Money-market funds 127,859 0 0 127,859
Equity securities 1,585,725 3,875,325 (104,840) 5,356,210
- -----------------------------------------------------------------------------------------------
3,441,565 3,875,325 (104,840) 7,212,050
Less cash equivalents (1,855,840) (1,855,840)
- -----------------------------------------------------------------------------------------------
Total investment securities $ 1,585,725 $3,875,325 $(104,840) $ 5,356,210
===============================================================================================
GROSS GROSS FAIR
COST UNREALIZED GAIN UNREALIZED LOSS VALUE
- -----------------------------------------------------------------------------------------------
DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------------
Treasury bills $ 2,539,398 $ 0 $ 0 $ 2,539,398
Money-market funds 127,618 0 0 127,618
Equity securities 1,578,329 4,867,352 (115,419) 6,330,262
- -----------------------------------------------------------------------------------------------
4,245,345 4,867,352 (115,419) 8,997,278
Less cash equivalents (2,667,016) 0 0 (2,667,016)
- -----------------------------------------------------------------------------------------------
Total investment securities $ 1,578,329 $4,867,352 $(115,419) $ 6,330,262
===============================================================================================
GROSS GROSS FAIR
COST UNREALIZED GAIN UNREALIZED LOSS VALUE
- -----------------------------------------------------------------------------------------------
DECEMBER 31, 1994
- -----------------------------------------------------------------------------------------------
Treasury bills $ 1,938,248 $ 0 $ 0 $ 1,938,248
Money-market funds 259,402 0 0 259,402
Equity securities 1,458,283 258,990 (178,251) 1,539,022
- -----------------------------------------------------------------------------------------------
3,655,933 258,990 (178,251) 3,736,672
Less cash equivalents (2,197,650) 0 0 (2,197,650)
- -----------------------------------------------------------------------------------------------
Total investment securities $ 1,458,283 $258,990 $(178,251) $ 1,539,022
===============================================================================================
</TABLE>
13
Realized gains and losses on investment securities are as follows:
DECEMBER 31,
---------------------------------
1996 1995 1994
- -------------------------------------------------------------
Gross realized gains $263,244 $224,119 $165,241
Gross realized losses 0 (1,511) (1,036)
- -------------------------------------------------------------
Net realized gain $263,244 $222,608 $164,205
=============================================================
At January 31, 1997, the fair value of equity securities was $5,392,000. The
Company holds an investment in a single security which represents 86% of the
fair value of equity securities held at January 31, 1997.
The change in the net unrealized holding gain on investment securities at
December 31, 1996 and 1995 consisted of the following:
1996 1995
- ---------------------------------------------------------
Unrealized gain on current
portfolio of marketable
equity securities $ 3,875,325 $ 4,867,352
Unrealized loss on current
portfolio of marketable
equity securities (104,840) (115,419)
Related deferred tax effect (1,362,100) (1,716,200)
- ---------------------------------------------------------
Total unrealized
holding gain, net $ 2,408,385 $ 3,035,733
=========================================================
NOTE 3. INVENTORIES
Inventories used in the determination of cost of goods sold are as follows:
DECEMBER 31,
---------------------------------
1996 1995 1994
- --------------------------------------------------------
Raw materials $562,837 $518,524 $500,665
Work in process 139,905 128,371 73,395
Finished goods 126,686 141,387 118,761
- --------------------------------------------------------
Total inventories $829,428 $788,282 $692,821
========================================================
Note 4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
DECEMBER 31,
------------------------
1996 1995
- -------------------------------------------------------------------------
Equipment $ 483,890 $ 464,348
Furniture and fixtures 324,606 293,695
Building 1,301,711 1,301,711
Land 414,540 414,540
- -------------------------------------------------------------------------
2,524,747 2,474,294
Less accumulated depreciation 686,477 586,646
- -------------------------------------------------------------------------
Total property and equipment $1,838,270 $1,887,648
=========================================================================
NOTE 5. NOTE PAYABLE
DECEMBER 31,
----------------------
1996 1995
- ------------------------------------------------------------------------
Unsecured bank note, due
July 1997, with interest
of 8.5% paid monthly $421,383 $586,516
========================================================================
NOTE 6. ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1995 include:
1996 1995
- --------------------------------------------
Wages and commissions $320,525 $163,140
Other 67,069 53,552
- --------------------------------------------
Total accrued expenses $387,594 $216,692
============================================
NOTE 7. COMMITMENTS
LEASE COMMITMENTS:
The Company is currently renting office space under a lease agreement which
expires July 1997. The agreement calls for basic monthly rentals of $2,611 plus
operating expenses. The Company is also leasing office equipment under operating
leases expiring at various dates through 1999.
Minimum lease payments required under non-cancelable operating leases are as
follows:
YEAR AMOUNT
- ----------------------------------------
1997 $55,286
1998 21,131
1999 13,927
2000 723
- ----------------------------------------
Total minimum lease payments $91,067
========================================
Rental expense charged to operations was $78,760, $78,114, and $235,632, for
years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 8. COMMON STOCK OPTIONS
The Company has granted nonqualified and incentive stock options to certain
employees and directors. Payment for the shares may be made in cash, shares of
the Company's common stock or a combination thereof. Under the terms of the
incentive stock option plan, options are granted at 100% of fair market value on
the date of grant and may be exercised at various times depending upon the term
of the option. The nonqualified stock options were granted to directors to
annually purchase 4,500 shares of the Company's common stock. The Company ceased
granting director's options in 1996. All existing options expire 10 years from
the date of grant or one year from the date of death. The Company reserved
300,000 shares to be issued under the stock option plan.
14
A summary of stock options issued outstanding and exercisable under the plans
are as follows:
NUMBER OF SHARES
---------------------
INCENTIVE DIRECTOR
OPTIONS OPTIONS
- --------------------------------------------------
Balance, December 31, 1993 27,500 112,500
Granted 0 22,500
Exercised (3,000) 0
Expired 0 (27,000)
- --------------------------------------------------
Balance, December 31, 1994 24,500 108,000
Granted 0 22,500
Exercised (23,240) (27,000)
Expired 0 0
- --------------------------------------------------
Balance, December 31, 1995 1,260 103,500
Granted 0 0
Exercised 0 0
Expired Weighted Average
Remaining Life 0 0
- --------------------------------------------------
Balance, December 31, 1996 1,260 103,500
- --------------------------------------------------
As Of December 31, 1996:
Price range of
outstanding options $ 2.38 $2.63-$4.75
Weighted average
exercise price $ 2.38 $ 3.76
Expiration dates 1998 1997-2005
Options exercisable 1,260 103,500
Weighted average
fair value of option
granted during the year 0 0
Weighted average
remaining life 1.92years 4.77years
==================================================
The Company accounts for stock options and other equity instruments in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees"
and its related interpretations. Accordingly, no compensation cost has been
recognized for its stock purchase and stock option plans. All options
outstanding are fully vested and exercisable.
NOTE 9. EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors a leveraged employee stock ownership plan (ESOP) that
covers substantially all employees who work 1,000 or more hours during the year.
The ESOP has, at various times, secured financing from the Company to purchase
the Company's shares on the open market. Dividends on shares held by the ESOP
are used to pay debt service. The ESOP shares purchased with the proceeds of the
Company loans are pledged as collateral for its debt. The shares are maintained
in a suspense account until released and allocated to participant accounts.
ESOP compensation expense was $36,000, $42,781, and $39,772, for the years ended
December 31, 1996, 1995 and 1994, respectively.
Shares of the Company held by the ESOP at December 31, 1996 and 1995 are as
follows:
1996 1995
- ------------------------------------------------------------------------
Allocated Shares 112,890 100,681
Shares released for allocation 15,000 0
Unreleased (unearned) shares 0 15,000
Fair value of
unreleased (unearned) shares 0 105,000
========================================================================
In the event a terminated ESOP participant desires to sell his or her shares of
the Company's stock and the shares are not readily tradable, the Company may be
required to purchase the shares from the participant at their fair market value.
At December 31, 1996, approximately 112,890 shares of the Company's stock, with
an aggregate fair market value of approximately $381,000 are held by ESOP
participants, who if terminated, would be subject to the repurchase requirement.
NOTE 10. EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan ("ESPP") under which 100,000
share are authorized for issuance. The ESPP allows employees to set aside up to
15% of earnings to purchase shares of the Company's common stock. Shares are
purchased semi-annually at a price equal to 85% of the lower of the market
prices at the beginning or end of the applicable six-month period, but not less
than book value at the end of the period. Reserved but unissued shares under the
Plan were 97,988 at December 31, 1996.
NOTE 11. NOTES RECEIVABLE FOR THE PURCHASE OF COMMON STOCK
DECEMBER 31, 1996 1995
- ------------------------------------------------------------------------
Note receivable for the purchase of common
stock is due from the estate of the past
president of the Company. Interest on the note
is paid monthly at a rate which is adjusted
annually (8.5% At December 31, 1996). The
note, which does not contain scheduled
principal payments, is due February 1998, and
is unsecured. $57,000 $57,000
Notes receivable for the purchase of common
stock are due from employees of the Company.
Interest on the notes is 6%. Monthly payments
of interest and principal are made through
payroll deductions. The notes are due December
1998 and are unsecured. 5,326 7,759
- --------------------------------------------------------------------------
Total notes receivable for the
purchase of common stock $62,326 $64,759
==========================================================================
15
NOTE 12. INCOME TAXES
The components of the income tax provision for the years ended December 31,
1996, 1995 and 1994, are as follows:
1996 1995 1994
- -----------------------------------------------------------
Current:
Federal $215,986 $337,539 $209,217
State 17,664 24,811 11,983
Deferred:
Federal 45,300 8,450 200
State 3,900 150 700
- -----------------------------------------------------------
Total federal and
state income taxes $282,850 $370,950 $222,100
===========================================================
The provision for income taxes for the years ended December 31, 1996, 1995 and
1994, differs from the amount obtained by applying the U.S. federal income tax
rate to pretax income due to the following:
1996 1995 1994
- ---------------------------------------------------------------
Computed 'expected'
tax expense $261,000 $405,000 $231,816
Increase (decrease) in
taxes resulting from:
State income taxes,
net of federal
benefit 11,500 16,127 7,909
Credits 0 (27,479) (27,552)
Other 10,350 (22,698) 9,927
- ---------------------------------------------------------------
Total federal and
state income taxes $282,850 $370,950 $222,100
===============================================================
The components of the net deferred tax asset (liability) consist of:
1996 1995
- -------------------------------------------------------
Deferred tax assets:
Salary accrual $ 47,000 $ 0
Vacation disallowance 23,700 21,300
Allowance for
doubtful accounts 6,500 7,800
- -------------------------------------------------------
Total deferred tax assets $ 77,200 $ 29,100
=======================================================
Deferred tax liabilities:
Depreciation $ (36,800) $ (37,900)
Unrealized investment
holding gain (1,362,100) (1,716,200)
- -------------------------------------------------------
Total deferred liabilities $(1,398,900) $(1,754,100)
=======================================================
Net deferred tax
asset (liability) $(1,321,700) $(1,725,000)
=======================================================
NOTE 13. OPERATIONS IN DIFFERENT INDUSTRIES
The following is a breakdown of selected financial statement information by
operating entity:
Production Monitoring Systems
----------------------------------------
December 31, 1996 1995 1994
- -----------------------------------------------------------
Total sales $5,132,829 $5,164,674 $4,910,149
Export sales 373,944 239,005 226,672
Income from
operations 1,075,134 1,344,487 978,027
Depreciation 109,582 106,984 62,270
Capital
expenditures 59,698 23,989 1,419,141
Year end
total assets 5,750,411 6,360,711 6,062,743
Character Recognition Imaging Systems
----------------------------------------
December 31, 1996 1995 1994
- -----------------------------------------------------------
Total sales $ 381,562 $ 349,256 $ 449,019
Export sales 49,709 66,712 59,777
(Loss) from
operations (468,163) (363,101) (437,168)
Depreciation 14,409 13,443 12,721
Capital
expenditures 15,652 8,856 11,925
Year end
total assets 115,080 73,549 115,200
Brazing Torches
----------------------------------------
December 31, 1996 1995 1994
- -----------------------------------------------------------
Total sales $ 628,252 $ 670,950 $ 717,126
Export sales 28,415 26,998 37,962
(Loss) from
operations (99,350) (69,454) (77,683)
Depreciation 4,003 4,818 4,795
Capital
expenditures 3,266 1,161 7,740
Year End
total assets 220,998 239,260 233,837
16
INDEPENDENT AUDITOR'S REPORT
ELECTRO-SENSOR'S INC. AND SUBSIDIARIES
The Board of Directors and Shareholders
ELECTRO-SENSORS, INC.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Electro-Sensors,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Electro-Sensors,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
SCHWEITZER RUBIN KARON & BREMER
Certified Public Accountants
Minneapolis, Minnesota
January 28, 1997
17
PRICE RANGE OF COMMON STOCK
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
The Company's Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market(SM) under the symbol "ELSE". The following table sets forth
the quarterly high and low reported last sales prices for the Company's common
stock over the past two years as reported on the NASDAQ system.
PERIOD HIGH LOW
------------- ---- ---
1996 FIRST QUARTER 7 3/4 3 3/4
SECOND QUARTER 6 3/4 4 1/4
THIRD QUARTER 5 5/8 3 7/8
FOURTH QUARTER 4 3/8 3 1/4
1995 First Quarter 3 7/8 3
Second Quarter 3 5/8 2 3/4
Third Quarter 5 1/2 2 1/2
Fourth Quarter 9 3/4 5
On March 14, 1997 there were approximately 658 shareholders of record.
Electro-Sensors, Inc. on May 19, 1995 paid a cash dividend on its common stock
of $.10 per share on1,898,500 shares. Electro-Sensors, Inc. on January 12, 1996
paid a special dividend on its common stock of $.50 per share on 1,940,270
shares. Electro-Sensors, Inc. paid a cash dividend on its common stock of $.12
per share in 1996 on a quarterly basis.
QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
FISCAL YEAR 1996
FOR THE THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- --------------------------------------------------------------------------------
Net sales $1,575,421 $1,469,931 $1,508,733 $1,588,558
Gross Profit 894,922 843,066 866,243 897,904
Income Before Taxes 197,348 175,145 240,328 132,882
Net Income 115,948 111,045 163,328 72,532
Income Per Share .06 .05 .09 .04
FISCAL YEAR 1995
FOR THE THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- --------------------------------------------------------------------------------
Net sales $1,543,451 $1,600,614 $1,733,628 $1,307,187
Gross Profit 885,487 857,490 1,021,723 760,447
Income Before
Taxes 161,986 332,385 465,006 196,829
Net Income 102,786 214,385 295,606 172,479
Income Per Share .05 .11 .16 .09
18
INVESTOR INFORMATION
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
ANNUAL MEETING
The annual meeting of shareholders will be held at the Decathlon Club, 1700 East
79th Street, Bloomington, Minnesota on April 29, 1997. All shareholders are
welcome to attend and take part in the discussion of company affairs.
BOARD OF DIRECTORS
Bradley D. Slye
Chairman of the Board and
President of Electro-Sensors, Inc.
P.R. Peterson
President of P.R. Peterson Co.
Secretary of Electro-Sensors, Inc.
Mark D. Laumann
Treasurer of Electro-Sensors, Inc.
John S. Strom
Retired
Joseph A. Marino
President/Chief Executive Officer
Applied Biometrics, Inc.
OFFICERS
Bradley D. Slye
President
P.R. Peterson
Secretary
Mark D. Laumann
Treasurer
FORM 10-KSB AVAILABLE
A copy of Electro-Sensors, Inc. Form 10-KSB annual report filed with the
Securities and Exchange Commission is available without charge to shareholders
by writing to:
Mark Laumann
Treasurer
Electro-Sensors, Inc.
6111 Blue Circle Drive
Minnetonka, MN 55343-9108
TRANSFER AGENT & REGISTRAR
Chase Mellon
Shareholder Services
Securities Transfer Services
111 Founders Plaza -- 11th Floor
East Hartford, CT 06108-3212
AUDITORS
Schweitzer Rubin Karon & Bremer
1400 TCF Tower
Minneapolis, MN 55402-9658
COUNSEL
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402-3397
19
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS
We have issued our report, dated January 28, 1997, accompanying the consolidated
financial statements included or incorporated by reference in the Annual Report
on Form 10-KSB of Electro-Sensors, Inc. for the year ended December 31, 1996. We
hereby consent to the incorporation by reference of the above-mentioned report
in the Prospectus constituting part of the registration statement on Form S-8 of
Electro-Sensors, Inc. (File No. 2-97845), in the registration statement on Form
S-8 of Electro-Sensors, Inc. (File No. 33-40037) and in the registration
statement on Form S-8 of Electro-Sensors, Inc. (File No. 333-08603).
SCHWEITZER RUBIN KARON & BREMER
Certified Public Accountants
Minneapolis, Minnesota
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE REGISTRANT'S FORM 10-KSB FOR THE FISCAL
YEAR ENDED 12/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,581,588
<SECURITIES> 5,356,210
<RECEIVABLES> 744,628
<ALLOWANCES> 18,000
<INVENTORY> 829,428
<CURRENT-ASSETS> 9,647,072
<PP&E> 2,524,747
<DEPRECIATION> 686,477
<TOTAL-ASSETS> 11,485,342
<CURRENT-LIABILITIES> 939,391
<BONDS> 0
0
0
<COMMON> 194,228
<OTHER-SE> 8,952,823
<TOTAL-LIABILITY-AND-EQUITY> 11,485,342
<SALES> 6,142,643
<TOTAL-REVENUES> 6,522,127
<CGS> 2,640,508
<TOTAL-COSTS> 5,635,022
<OTHER-EXPENSES> 141,402
<LOSS-PROVISION> 10,485
<INTEREST-EXPENSE> 43,068
<INCOME-PRETAX> 745,703
<INCOME-TAX> 282,850
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 462,853
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
