U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File Number 0-9587
ELECTRO-SENSORS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
MINNESOTA 41-0943459
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6111 Blue Circle Drive, Minnetonka, Minnesota 55343-9108
(Address of Principal Executive Offices) (Zip Code)
(612)930-0100
(Issuer's telephone number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
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. Yes X No
Shares of $.10 par value common stock outstanding at November 4, 1998: 1,971,522
Transitional Small Business Disclosure Format (check one):
Yes No X
<PAGE>
Part I. Financial Information
The interim financial statements included in this form 10-QSB are unaudited and
reflect in the opinion of management all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the results of
operations for these periods.
ELECTRO-SENSORS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $1,514,693 $1,596,353 $4,722,662 $4,835,188
COST OF SALES 674,619 658,531 2,023,558 1,997,834
--------- ---------- --------- ---------
GROSS MARGIN 840,074 937,822 2,699,104 2,837,354
--------- --------- --------- ---------
OPERATING EXPENSES:
Selling expense 386,265 419,215 1,359,187 1,135,538
Administrative expense 185,794 172,419 552,260 579,037
Research and development 178,667 161,282 474,747 495,314
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES 750,726 752,916 2,386,194 2,209,889
--------- --------- --------- ---------
INCOME FROM OPERATIONS 89,348 184,906 312,910 627,465
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Gain (loss) on sale of 23,748 4,397 23,748 9,929
investment securities
Interest income 29,537 29,224 83,206 88,529
Other (29,208) (28,272) (104,514) (110,680)
--------- --------- --------- ---------
TOTAL OTHER INCOME 24,077 5,349 2,440 (12,222)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 113,425 190,255 315,350 615,243
PROVISION FOR INCOME TAXES 41,400 69,600 115,300 225,200
--------- --------- --------- ---------
NET INCOME $ 72,025 $ 120,655 $ 200,050 $ 390,043
========= ========= ========= =========
(Continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES:
BASIC 1,971,522 1,958,362 1,971,522 1,958,362
========= ========= ========= =========
DILUTED 1,977,292 1,981,768 1,982,002 1,973,628
========= ========= ========= =========
EARNINGS PER COMMON
AND COMMON EQUIVALENT
SHARES:
BASIC $.04 $.06 $.10 $.20
=== === === ===
DILUTED $.04 $.06 $.10 $.20
=== === === ===
</TABLE>
<PAGE>
ELECTRO-SENSORS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $2,454,624 $ 2,536,685
Investment in available-for-sale securities 3,148,867 4,698,710
Trade receivables, less allowance for doubtful 669,117 746,049
accounts of $35,900 and $18,000, respectively
Inventories 1,024,042 876,189
Prepaid expenses 77,532 76,921
Prepaid income taxes 32,177 100,752
Deferred taxes 51,500 51,500
--------- ----------
TOTAL CURRENT ASSETS 7,457,859 9,086,806
PROPERTY AND EQUIPMENT, NET 1,791,569 1,807,950
--------- ----------
TOTAL ASSETS $9,249,428 $10,894,756
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 95,296 $ 240,775
Accounts payable 188,549 97,998
Accrued expense 170,802 263,688
--------- ----------
TOTAL CURRENT LIABILITIES 454,647 602,461
--------- ----------
DEFERRED INCOME TAXES 625,400 1,184,400
--------- ----------
SHAREHOLDERS' EQUITY:
Common stock - par value $.10 per share; 197,152 196,459
Authorized 10,000,000 shares;
issued 1,971,522 and 1,964,586
shares, respectively
Additional paid-in capital 694,642 674,284
Retained earnings 6,237,816 6,214,922
Unrealized holding gain on investment 1,040,073 2,023,566
securities, net
Notes receivable (302) (1,336)
--------- ----------
Total shareholders' equity 8,169,381 9,107,895
--------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,249,428 $10,894,756
========= ==========
</TABLE>
<PAGE>
ELECTRO-SENSORS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Cash received from customers $ 4,783,844 $4,791,217
Cash paid to suppliers and employees (4,546,929) (4,330,940)
Interest received 83,206 88,529
Income taxes paid (46,725) (240,569)
---------- ----------
Net cash provided by operating activities 273,396 308,237
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of investment in
available-for-sale securities 31,098 25,229
Purchase of property and equipment (86,005) (72,436)
Notes receivable 1,034 60,024
---------- ----------
Net cash (used in) investing activities (53,873) 12,817
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (177,156) (175,163)
Payments on short-term borrowings (145,479) (91,790)
Proceeds from issuance of stock 21,051 51,337
---------- ----------
Net cash (used in) financing activities (301,584) (215,616)
---------- ----------
Increase (decrease) in cash (82,061) 105,438
CASH AND CASH EQUIVALENTS
Beginning 2,536,685 2,581,588
---------- ----------
End $ 2,454,624 $ 2,687,026
========== ==========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Net income $ 200,050 $ 390,043
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 102,386 97,935
Provision for losses on trade receivables 15,750 74,250
Realized (gain) loss on sale of marketable securities (23,748) (9,929)
(Increase) decrease in:
Trade receivables 61,182 (43,971)
Inventory (147,853) (123,330)
Prepaid expenses (611) (10,900)
Prepaid income taxes 68,575 (621)
Increase (decrease) in: 90,551 62,962
Accounts payable
Accrued expenses (92,886) (113,454)
Accrued income taxes payable -0- (14,748)
--------- ---------
Net cash provided by operating activities $ 273,396 $ 308,237
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES
Tax benefit of stock options exercised $ -0- $ 1,160
Unrealized gain(loss) on marketable securities (1,542,493) 462,986
--------- ---------
Total noncash investing and financing $(1,542,493) $ 464,146
========= =========
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATION
The Company's sales decreased 5.1% and 2.3%, respectively during the third
quarter and first nine months of 1998 when compared to the same periods of 1997.
Sales increases were experienced by the Company's Drive Control Systems and
AutoData Systems divisions. However, their combined sales increases were unable
to offset decreases in sales during the third quarter of the Speed Monitoring
Systems division and the Company's wholly-owned subsidiary, Microflame, Inc.
The Company's Speed Monitoring Systems division experienced sluggish sales
during the third quarter resulting from current ecomonic uncertainties caused by
the Asian currency crisis, while the Drive Control Systems division experienced
an upswing in sales resulting from increased activity in both plant expansion
and retrofit projects. The increase in Drive Control Systems sales relates
primarily to its customers being allowed time to complete repairs, retrofit
projects and improvements to production lines due to their own slower production
demands. AutoData Systems sales also improved during the third quarter of 1998.
Increasing customer acceptance of the AutoData survey software and increased
scanner sales have been attributed to the rising AutoData sales levels during
1998.
The Company's wholly-owned subsidiary, Microflame, Inc., has experienced a 20.9%
decrease in sales during the first nine months of 1998. The decline in sales
reflects a decrease in two gas torch sales to its largest customer (Radio Shack)
which continues to reflect declining product demand.
Cost of sales increased as both a percentage of sales and when compared to a
year ago. The increased costs occurred in both the electronic control segment
and AutoData. The electronic controls segment experienced an increase in labor
and a slight increase in material costs. AutoData experienced an increase in
material costs as a result of increased scanner sales which have a lower gross
margin.
Operating expenses increased 8% during the first nine months of 1998 as compared
to the same period of 1997. The increased expense occurred in the marketing area
as the Company continues its efforts to expand its market in both the electronic
segments and AutoData Systems. The expenses were concentrated on development of
both new literature and ad campaigns. The Company has experienced positive
responses resulting from these updates. In addition, the AutoData marketing
campaign has been able to generate agreements with value added resellers in the
healthcare area.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months ended September 30, 1998, working capital decreased
$1,481,133 to a total of $7,003,212. The decrease in the fair market value of
marketable securities resulted from the decline in the quoted market price of
certain securities. This change in market value is the principal reason for the
reduction in working capital. Accounts receivable decreased due to lower sales
levels. Inventory and accounts payable increased as a result of additional
inventory purchased for AutoData and Drive Control Systems. In addition,
proceeds from the exercise of stock options and the employee stock purchase plan
generated $14,063 and $6,988, respectively, during the first nine months. The
Company received $31,098 from the sale of marketable securities. The Company
made dividend payments of $58,938, $59,072 and $59,146 during the first nine
months of 1998. In addition, the Company invested both an additional $86,005 in
office and manufacturing equipment and $145,479 into the repayment of short-term
borrowings. The Company believes it can pay projected capital and operating
expenses out of income and current reserves. The cost related to year 2000
conversion is not material to the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
OTHER INFORMATION
PART II
Item 1. Legal Proceedings
There were no material developments in previously reported legal
proceedings.
Item 2. Changes in Securities
No changes have been made in any registered securities.
Item 3. Defaults Upon Senior Securities
No event constituting a default has occurred respecting any senior
security of the Registrant.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to vote of shareholders during the
period covered by this Form 10-QSB.
<PAGE>
Item 5. Other Information
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: the uncertainty of market acceptance of products
of the Company's AutoData Systems division which is in an early stage
of development; fluctuations and declines in operating results of the
Company's Drive Control Systems, Speed Monitoring and Microflame
division; fluctuations in the value of the Company's investments,
particularly PPT Vision, and sales of such investments; competition,
particularly with regard to the pricing of products; the Company's
ability to develop new products; and dependence on suppliers. For
additional information, please see the Company's Annual Report on Form
10-KSB.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized.
ELECTRO-SENSORS, INC.
Date November 5, 1998 By /s/ Bradley D. Slye
Bradley D. Slye, President
Date November 5, 1998 By /s/ Mark D. Laumann
Mark D. Laumann, Treasurer
(principal financial officer)
<PAGE>
EXHIBIT INDEX
ELECTRO-SENSORS, INC.
FORM 10-QSB
For Fiscal Quarter Ended September 30, 1998
Exhibit No. Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,454,624
<SECURITIES> 3,148,867
<RECEIVABLES> 705,017
<ALLOWANCES> 35,900
<INVENTORY> 1,024,042
<CURRENT-ASSETS> 7,457,859
<PP&E> 2,631,648
<DEPRECIATION> 840,079
<TOTAL-ASSETS> 9,249,428
<CURRENT-LIABILITIES> 454,647
<BONDS> 0
0
0
<COMMON> 197,152
<OTHER-SE> 7,972,229
<TOTAL-LIABILITY-AND-EQUITY> 9,249,428
<SALES> 4,722,662
<TOTAL-REVENUES> 4,829,616
<CGS> 2,023,558
<TOTAL-COSTS> 4,409,752
<OTHER-EXPENSES> 104,514
<LOSS-PROVISION> 15,750
<INTEREST-EXPENSE> 11,391
<INCOME-PRETAX> 315,350
<INCOME-TAX> 115,300
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 200,050
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
