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 June 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
(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 July 31, 1998: 1,971,522
<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 BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,415,437 $ 2,536,685
Investment in available-for-sale securities 4,592,186 4,698,710
Trade receivables, less allowance
for doubtful accounts of $30,600
and $24,500, respectively 723,998 746,049
Inventories 1,036,476 876,189
Prepaid expenses 70,225 76,921
Prepaid income taxes 29,349 100,752
Deferred taxes 51,500 51,500
---------- ----------
TOTAL CURRENT ASSETS 8,919,171 9,086,806
PROPERTY AND EQUIPMENT, NET 1,799,278 1,807,950
---------- ----------
TOTAL ASSETS $10,718,449 $10,894,756
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 149,720 $ 240,775
Accounts payable 197,372 97,998
Accrued expense 153,831 263,688
---------- ----------
TOTAL CURRENT LIABILITIES 500,923 602,461
---------- ----------
DEFERRED INCOME TAXES 1,142,400 1,184,400
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock - par value $.10 per share;
Authorized 10,000,000 shares; issued
1,971,522 and 1,964,586
shares, respectively 197,152 196,459
Additional paid-in capital 694,642 674,284
Retained earnings 6,224,937 6,214,922
Unrealized holding gain on investment
securities, net 1,959,042 2,023,566
Notes receivable (647) (1,336)
---------- ----------
Total shareholders' equity 9,075,126 9,107,895
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,718,449 $10,894,756
========== ==========
</TABLE>
<PAGE>
ELECTRO-SENSORS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- --------------------
June 30, June 30,
--------------------- --------------------
1998 1997 1998 1997
------- ------- ------ ------
<S> <C> <C> <C> <C>
SALES $1,592,671 $1,570,126 $3,207,969 $3,238,835
COST OF SALES 666,000 634,878 1,348,939 1,339,303
--------- --------- --------- ---------
GROSS MARGIN 926,671 935,248 1,859,030 1,899,532
--------- --------- --------- ---------
OPERATING EXPENSES:
Selling expense 465,882 376,190 972,922 716,323
Administrative expense 185,122 201,630 366,466 406,618
Research and development 152,348 162,940 296,080 334,032
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES 803,352 740,760 1,635,468 1,456,973
--------- --------- --------- ---------
INCOME FROM OPERATIONS 123,319 194,488 223,562 442,559
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Gain (loss) on sale of
investment securities -0- -0- -0- 5,532
Interest income 26,392 29,724 53,669 59,305
Other (34,749) (38,067) (75,306) (82,408)
--------- --------- --------- ---------
TOTAL OTHER INCOME (8,357) (8,343) (21,637) (17,571)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 114,962 186,145 201,925 424,988
PROVISION FOR INCOME TAXES 42,100 68,100 73,900 155,600
--------- --------- --------- ---------
NET INCOME $ 72,862 $ 118,045 $ 128,025 $ 269,388
========= ========= ========= =========
</TABLE>
<PAGE>
(Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- --------------------
June 30, June 30,
--------------------- --------------------
1998 1997 1998 1997
------- ------- ------ ------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES:
BASIC 1,971,522 1,949,411 1,971,522 1,949,411
========= ========= ========= =========
DILUTED 1,984,129 1,962,838 1,984,713 1,962,838
========= ========= ========= =========
EARNINGS PER COMMON
AND COMMON EQUIVALENT
SHARES:
BASIC $.03 $.06 $.06 $.14
=== === === ===
DILUTED $.03 $.06 $.06 $.14
=== === === ===
</TABLE>
<PAGE>
ELECTRO-SENSORS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1998 1997
------------ ----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Cash received from customers $3,219,520 $3,186,235
Cash paid to suppliers and employees (3,145,608) (2,849,480)
Interest received 53,669 59,305
Income taxes paid (2,497) (164,768)
--------- ---------
Net cash provided by operating activities 125,084 231,292
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of investments in
available-for-sale securities -0- 6,583
Purchase of equipment (58,318) (43,755)
Repayments of notes receivable -0- 58,415
--------- ---------
Net cash (used in) investing activities (58,318) 21,243
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (118,010) (116,695)
Payments on short-term borrowings (91,055) (87,402)
Proceeds from exercise of stock options 14,063 15,750
Proceeds from Employee Stock Purchase Plan 6,988 7,261
--------- ---------
Net cash (used in) financing activities (188,014) (181,086)
--------- ---------
Increase (decrease) in cash (121,248) 71,449
CASH AND CASH EQUIVALENTS
Beginning 2,536,685 2,581,588
--------- ---------
End $2,415,437 $2,653,037
========= =========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 128,025 $ 269,388
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 66,990 64,252
Provision for losses on trade receivables 10,500 60,000
Realized (gain) loss on sale of marketable
securities -0- (5,532)
(Increase) decrease in:
Trade receivables 11,551 (6,780)
Inventory (160,287) (77,004)
Prepaid expenses 7,385 1,077
Prepaid income taxes 71,403 -0-
Increase (decrease) in:
Accounts payable 99,374 41,650
Accrued expenses (109,857) (106,591)
Accrued income taxes payable -0- (9,168)
-------- --------
Net cash provided by operating activities $ 125,084 $ 231,292
======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized gain(loss) on marketable securities (64,524) (724,692)
-------- --------
Total noncash investing and financing $ (64,524) $(724,692)
======== ========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATION
The Company's sales for the second quarter increased 1.4% but remained down 1%
for the first six months of 1998 when compared to the same periods of 1997.
Increased second quarter sales occurred in the Drive Control Systems segment as
the division felt a positive change in direction in the capital equipment arena.
Meanwhile, the Speed Monitoring Systems, AutoData Systems and the Company's
wholly-owned subsidiary, Microflame, Inc., experienced slight decreases during
the same period. The sluggish sales experienced by the Speed Monitoring Systems
are primarily related to the effect of economic uncertainties on our customer
base caused by the Asian currency crisis. Also, many of the AutoData customers
have held off software purchases as they await mandated healthcare changes,
which are scheduled for release during the second half of 1998.
The Company's wholly-owned subsidiary, Microflame, Inc., has experienced a 15.3%
decrease in sales during the first six months of 1998. The decline in sales
reflects an overall decrease in product sales as Microflame continues to
experience decreasing customer demand.
Cost of sales increased as both a percentage of sales and when compared to a
year ago. The increased costs were primarily related to increased labor cost and
a slight increase in material costs in our electronic control segments.
Operating expenses increased 12.2% during the first six months of 1998 when
compared to the same periods of 1997. The increased expense is attributed to our
continued emphasis on market expansion in 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
this change in direction.
Net income was down as the Company continued to invest heavily in its marketing
campaigns for both our electronic segments and AutoData Systems. The initial
setup or changeover costs have been primarily completed during the first six
months of 1998. We should feel the effectiveness of our marketing campaign
investment during the second half of this year.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months ended June 30, 1998, working capital decreased
$66,097 to a total of $8,418,248. The decrease in the fair market value of
marketable securities resulted from the declined quoted market price of certain
securities. This decline in market value is the principal reason for the
reduction in working capital. Accounts receivable remained relatively unchanged.
Inventory and accounts payable increased as a result of additional inventory
purchased for the AutoData Systems segment. In addition, proceeds from the
exercise of stock options and the employee stock purchase plan generated $14,063
and $15,750, respectively, during the first six months. The Company made
dividend payments of $58,938 and $59,072 during the first six months of 1998. In
addition, the Company invested both an additional $58,318 in office and
manufacturing equipment and $91,055 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.
<PAGE>
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
The following matters were voted on by shareholders during the period
covered by this Form 10-QSB:
a) The Annual Meeting of Shareholders was held April 29, 1998.
b) Election of Directors as Follows:
Peter R. Peterson 1,799,888 For 2,425 Withheld Authority
--------- -----
Brad D. Slye 1,799,888 For 2,425 Withheld Authority
--------- -----
Mark D. Laumann 1,799,888 For 2,425 Withheld Authority
--------- -----
John S. Strom 1,797,388 For 4,925 Withheld Authority
--------- -----
Joseph A. Marino 1,799,888 For 2,425 Withheld Authority
--------- -----
c) Approval of the amendment to the Electro-Sensors, Inc. 1997 Stock
Option Plan.
1,751,198 For 45,915 Against 5,200 Abstain
--------- ------ ------
d) Approval of Schweitzer Rubin Karon & Bremer as independent
Auditors.
1,797,363 For 3,200 Against 1,750 Abstain
--------- ----- ------
There were no other matters submitted to vote of shareholders
during the period covered by this Form 10-QSB.
<PAGE>
Item 5. Other Information
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: 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 June
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 August 11, 1998 By /s/ BRADLEY D. SLYE
Bradley D. Slye, President
Date August 11, 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 June 30, 1998
Exhibit No. Description
27 Financial Data Schedule (filed in electronic format only)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,415,437
<SECURITIES> 4,592,186
<RECEIVABLES> 754,598
<ALLOWANCES> 30,600
<INVENTORY> 1,036,476
<CURRENT-ASSETS> 8,919,171
<PP&E> 2,603,961
<DEPRECIATION> 804,683
<TOTAL-ASSETS> 10,718,449
<CURRENT-LIABILITIES> 500,923
<BONDS> 0
0
0
<COMMON> 197,152
<OTHER-SE> 8,877,974
<TOTAL-LIABILITY-AND-EQUITY> 10,718,449
<SALES> 3,207,969
<TOTAL-REVENUES> 3,261,638
<CGS> 1,348,939
<TOTAL-COSTS> 2,984,407
<OTHER-EXPENSES> 75,306
<LOSS-PROVISION> 10,500
<INTEREST-EXPENSE> 8,597
<INCOME-PRETAX> 201,925
<INCOME-TAX> 73,900
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128,025
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
