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, 1997
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, 1997 were
$6,440,576.
The aggregate market value of the Issuer's Common Stock held by non-affiliates
(persons other than officers, directors or holders of more than 5% of the
outstanding stock) as of March 18, 1998, was approximately $3,450,000 (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, 1998: 1,964,586
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1997 are incorporated into Part II of this Form 10-KSB.
Portions of the Registrant's Proxy Statement for its 1998 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
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I Page
----
<S> <C> <C>
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........................................... 12
Signatures ........................................................................... 13
</TABLE>
<PAGE>
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
<PAGE>
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 salespeople 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.
<PAGE>
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 23% in 1995, 19% in 1996, and 16% in 1997. 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.
<PAGE>
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 salespeople 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
<PAGE>
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
<PAGE>
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 20.2%
Nippon Tansan Gas Company, 79.8%
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.
<PAGE>
(10) RESEARCH AND DEVELOPMENT.
The Company has spent the following amounts on research and
development during the past two fiscal years:
1997: $637,114
1996: $706,813
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 1997 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, 1998, the Company had 45 employees, 3 of whom
are engaged by its Microflame subsidiary and 42 of whom are engaged in work for
its Controls Division.
CAUTIONARY STATEMENTS
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
<PAGE>
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.
<PAGE>
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, 1999.
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 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Section entitled "Price Range of Common Stock" in the
Company's 1997 Annual Report to Shareholders is incorporated herein by
reference. Although there were 199 shareholders of record as of March 12, 1998,
the Company has approximately 650 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 1997 Annual Report to
Shareholders is incorporated herein by reference.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements and notes contained in the
1997 Annual Report to Shareholders 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 38 Chairman of the Board of
Directors and President
Peter R. Peterson 64 Secretary and Director
Mark D. Laumann 43 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.
<PAGE>
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, 49, 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 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 1998 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 1998 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
1998 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 1998 Annual Meeting of Shareholders.
<PAGE>
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, 1997.
<PAGE>
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 27, 1998 By: /s/ Bradley D. 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.
Signature Title Date
/s/ Bradley D. Slye Chairman, President and Director March 27, 1998
- --------------------------- (Chief Executive Officer)
Bradley D. Slye
/s/ Mark D. Laumann Treasurer and Director March 27, 1998
- --------------------------- (Chief Financial and Accounting
Mark D. Laumann Officer)
/s/ Peter R. Peterson Director and Secretary March 27, 1998
- ---------------------------
Peter R. Peterson
/s/ John S. Strom Director March 27, 1998
- ---------------------------
John S. Strom
/s/ Joseph A. Marino Director March 27, 1998
- ---------------------------
Joseph A. Marino
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-KSB
For the fiscal year
ended December 31, 1997 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 Bylaws, as amended to date
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 Agreement to Extend Lease, dated June 18, 1997, relating to property
at 14857 DeVeau Place, Minnetonka, Minnesota
10.5** 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*
10.6** Electro-Sensors, Inc. 1997 Stock Option Plan and forms of Incentive
and Nonqualified Stock Option Agreements thereunder
- ----------------
* Incorporated by reference to a previously filed report or document--SEC File
No. 0-9587
**Management contract or compensatory plan or arrangement
<PAGE>
11.1 Statement Regarding Computation of Per Share Earnings
11.2 Restated Exhibit 11 for Years ended December 31, 1995 and 1996 and
Quarters ended March 31, June 30 and September 30, 1996
11.3 Restated Exhibit 11 for Quarters ended March 31, June 30 and September
30, 1997
13 1997 Annual Report to Shareholders
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
EXHIBIT 3.2
COMPOSITE BYLAWS
OF
ELECTRO-SENSORS INC.
(as of December 1, 1997)
ARTICLE 1.
Offices and Corporate Seal
1.1) Offices. The principal office of the corporation shall be 3726
Oregon Avenue South, Minneapolis, Minnesota, and the corporation may have
offices at such other places within or without the State of Minnesota as the
Board of Directors shall from time to time determine or the business of the
corporation requires.
1.2) Seal. The corporation shall have such corporate seal or no
corporate seal as the Board of Directors shall from time to time determine.
ARTICLE 2.
Meetings of Shareholders
2.1) Annual Meeting. The annual meeting of the shareholders of the
corporation entitled to vote shall be held at the principal office of the
corporation or at such other place, within or without the State of Minnesota, as
is designated by the Board of Directors, or by written consent of all the
shareholders entitled to vote thereat, at such time on such day of each year as
shall be determined by the Board of Directors or by the President. At the annual
meeting, the shareholders, voting as provided in the Articles of Incorporation,
shall elect directors and shall transact such other business as shall properly
come before the meeting.
2.2) Special Meetings. Special meetings of the shareholders entitled to
vote shall be called by the Secretary at any time upon request of the Chairman
of the Board, the President or the Board of Directors (acting upon majority
vote), or upon request by shareholders holding ten per cent (10%) or more of the
voting power of the shareholders.
2.3) Notice of Meetings. There shall be mailed to each shareholder
entitled to vote, at his address as shown by the books of the corporation, a
notice setting out the place, date and hour of the annual meeting or any special
meeting, which notice shall be mailed at least ten (10) days prior to the date
of the meeting. Notice of any special meeting shall state the purpose or
purposes of the proposed meeting, and the business transacted at all special
meetings shall be confined to purposes stated in the notice. Attendance at a
meeting by any shareholder, without objection in writing by him, shall
constitute his waiver of notice of the meeting.
<PAGE>
2.4) Quorum and Adjourned Meetings. The holders of a majority of all
shares outstanding and entitled to vote, represented either in person or by
proxy, shall constitute a quorum for the transaction of business at any annual
or special meeting of the shareholders. In case a quorum is not present at the
annual meeting, those present shall have the power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until the
requisite number of voting shares shall be represented. At such adjourned
meetings at which the required amount of voting shares shall be represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed.
2.5) Voting. At each meeting of the shareholders, every shareholder
having the right to vote shall be entitled to vote in person or by proxy duly
appointed by an instrument in writing subscribed by such shareholder. Each
shareholder shall have one (1) vote for each share having voting power standing
in his name on the books of the corporation except as may be otherwise required
to provide for cumulative voting (if not denied by the Articles). Upon the
demand of any shareholder, the vote for directors or the vote upon any question
before the meeting shall be by ballot. All elections shall be had and all
questions decided by a majority vote of the number of shares entitled to vote
and represented at any meeting at which there is a quorum except in such cases
as shall otherwise be required by statute, the Articles of Incorporation or
these Bylaws. Except as may otherwise be required to conform to cumulative
voting procedures, directors shall be elected by a plurality of the votes cast
by holders of shares entitled to vote thereon.
2.6) Closing of Books. The Board of Directors may fix a time, not
exceeding sixty (60) days preceding the date of any meeting of shareholders, as
a record date for the determination of the shareholders entitled to notice of
and to vote at such meeting, notwithstanding any transfer of any shares on the
books of the corporation after any record date so fixed. The Board of Directors
may close the books of the corporation against transfer of shares during the
whole or any part of such period. In the absence of action by the Board, only
shareholders of record twenty (20) days prior to a meeting may vote at such
meeting.
2.7) Order of Business. The suggested order of business at the annual
meeting and, to the extent appropriate, at all other meetings of the
shareholders, shall, unless modified by the presiding chairman, be:
(a) Call of roll
(b) Proof of due notice of meeting or waiver of notice
(c) Determination of existence of quorum
(d) Reading and disposal of any unapproved minutes
(e) Annual reports of officers and committees
(f) Election of directors
(g) Unfinished business
(h) New business
(i) Adjournment.
<PAGE>
ARTICLE 3.
Directors
3.1) General Powers. The property, affairs and business of the
corporation shall be managed by the Board of Directors.
3.2) Number, Term and Qualifications. The Board of Directors shall
consist of one or more members. At each annual meeting, the shareholders shall
determine the number of directors; provided, that between annual meetings the
authorized number of directors may be increased or decreased by the shareholders
or increased by the Board of Directors. Each director shall serve for an
indefinite term that expires at the next annual meeting of shareholders, and
until his successor is elected and qualified, or until his earlier death,
resignation, disqualification or removal as provided by statute.
3.3) Vacancies. Vacancies in the Board of Directors shall be filled by
the- remaining members of the Board, though less than a quorum; provided that
newly created directorships resulting from an increase in the authorized number
of directors shall be filled by two-thirds (2/3) of the directors serving at the
time of such increase. Persons so elected shall be directors until their
successors are elected by the shareholders, who may make such election at their
next annual meeting or at any special meeting duly called for that purpose.
3.4) Quorum. A majority of the entire Board of Directors shall
constitute a quorum for the transaction of business; provided, however, that if
any vacancies exist by reason of death, resignation or otherwise, a majority of
the remaining directors shall constitute a quorum for the purpose of filling of
such vacancies.
3.5) First Meeting. As soon as practicable after each annual election
of directors, the Board of Directors shall meet for the purpose of organization,
electing or appointing officers of the corporation, and transaction of other
business, at the place where the shareholders' meeting is held or at the place
where regular meetings of the Board of Directors are held. No notice of such
meeting need be given. Such first meeting may be held at any other time and
place specified in a notice given as hereinafter provided for special meetings
or in a waiver of notice signed by all the directors.
3.6) Regular Meetings. Regular meetings of the Board of Directors shall
be held from time to time at such time and place as may from time to time be
fixed by resolution adopted by a majority of the entire Board of Directors. No
notice need be given of any regular meeting.
3.7) Special Meetings. Special meetings of the Board of Directors may
be held at such time and place as may be designated in the notice or the waiver
of notice of the meeting. Special meetings of the Board of Directors may be
called by the Chairman of the Board, the President or by any two (2) directors.
Unless notice shall be waived by all directors, notice of such special meeting
(including a statement of the purposes thereof) shall be given to each director
at least
<PAGE>
twenty-four (24) hours in advance of the meeting if oral or two (2) days in
advance of the meeting if by mail, telegraph or other written communication;
provided, however, that meetings may be held without waiver of notice from or
giving notice to any director while he is in the armed forces of the United
States or outside the continental limits of the United States. A director, by
his attendance at any directors' meeting without objection in writing by him,
shall be deemed to have waived notice of such meeting.
3.8) Compensation. Directors and members of any committee of the Board
contemplated by these Bylaws or otherwise provided for by resolution of the
Board of Directors, shall receive only such compensation therefor as may be
determined from time to time by resolution of the Board of Directors. Nothing
herein contained shall be construed to preclude any director from serving the
corporation in any other capacity and receiving proper compensation therefor.
3.9) Indemnification. The corporation shall indemnify such persons, for
such expenses and liabilities, in such manner, under such circumstances, and to
such extent, as permitted by Minnesota Statutes, Section 302A.521, as now
enacted or hereafter amended.
3.10) Executive Committee. The Board of Directors may, by unanimous
affirmative action of the entire Board, designate two or more of its number to
constitute an Executive Committee, which, to the extent determined by unanimous
affirmative action of the entire Board, shall have and exercise the authority of
the Board in the management of the business of the corporation. Any such
Executive Committee shall act only in the interval between meetings of the Board
and shall be subject at all times to the control and direction of the Board.
3.11) Order of Business. The suggested order of business at any meeting
of the Board of Directors shall, to the extent appropriate and unless modified
by the presiding chairman, be:
(a) Roll call
(b) Proof of due notice of meeting or waiver of notice, or
unanimous presence and declaration by President
(c) Determination of existence of quorum
(d) Reading and disposal of any unapproved minutes
(e) Reports of officers and committees
(f) Election of officers
(g) Unfinished business
(h) New business
(i) Adjournment.
<PAGE>
ARTICLE 4.
Officers
4.1) Number and Designation. The Board of Directors shall elect a
resident, one or more Vice Presidents, a Secretary and a Treasurer, and may
elect or appoint a Chairman of the Board and such other officers and agents as
it may from time to time determine. Any two offices except those of President
and Vice President may be held by one person.
4.2) Election, Term of Office and Qualifications. At each annual
meeting of the Board of Directors, the Board shall elect the officers provided
for in Section 4.1 and such officers shall hold office until the next annual
meeting of the Board or until their successors are elected or appointed and
qualify; provided, however, that any officer may be removed with or without
cause by the affirmative vote of a majority of the entire Board of Directors
(without prejudice, however, to any contract rights of such officer).
4.3) Resignations. Any officer may resign at any time by giving written
notice to the Board of Directors or to the Chairman, President or Secretary. The
resignation shall take effect at the time specified in the notice and, unless
otherwise specified therein, acceptance of the resignation shall not be
necessary to make it effective.
4.4) Vacancies in Offices. If there be a vacancy in any office of the
corporation, by reason of death, resignation, removal or otherwise, such vacancy
shall be filled for the unexpired term by the Board of Directors at any regular
or special meeting.
4.5) Chairman of the Board. The Board of Directors may, in its
discretion, elect one of its number as Chairman of the Board. The Chairman shall
preside at all meetings of the shareholders and of the Board and shall exercise
general supervision and direction over the more significant matters of policy
affecting the affairs of the corporation, including particularly its financial
and fiscal affairs. The Chairman of the Board may call a meeting of the Board
whenever he deems It advisable.
4.6) President. The President shall have general active management of
the business of the corporation. In the absence of the Chairman of the Board, he
shall preside at all meetings of the shareholders and Board of Directors. He
shall be the chief executive officer of the corporation and shall see that all
orders and resolutions are carried into effect. He shall be ex-officio a member
of all standing committees and shall perform all duties usually incident to the
office of President and such other duties as may from time to time be assigned
to him by the Board.
4.7) Vice President. Each Vice President shall have such powers and
shall perform such duties as may be specified in these Bylaws or prescribed by
the Board of Directors. In the event of absence or disability of the President,
the Vice Presidents shall succeed to his powers and duties in the order in which
they are elected.
<PAGE>
4.8) Secretary. The Secretary shall be secretary of and shall attend
all meetings of the shareholders and Board of Directors. He shall act as clerk
thereof and shall record all the proceedings of such meetings in the minute book
of the corporation. He shall give proper notice of meetings of shareholders and
directors. He may, with the Chairman of the Board, President or Vice President,
sign all certificates representing shares of the corporation and shall perform
the duties usually incident to his office and such other duties as may be
prescribed by the Board of Directors from time to time.
4.9) Treasurer. The Treasurer shall keep accurate accounts of all
monies of the corporation received or disbursed, and shall deposit all monies,
drafts and checks in the name of and to the credit of the corporation in such
banks and depositories as a majority of the whole Board of Directors shall
designate from time to time. He shall have power to endorse for deposit the
funds of the corporation as authorized by the Board of Directors. He shall
render to the Chairman of the Board, President and the Board of Directors,
whenever required, an account of all of his transactions as Treasurer and
statements of the financial condition of the corporation, and shall perform the
duties usually incident to his office and such other duties as may be prescribed
by the Board of Directors from time to time.
4.10) Other Officers. The Board of Directors may appoint one or more
Assistant Secretaries, one or more Assistant Treasurers, and such other
officers, agents and employees as the Board may deem advisable. Each officer,
agent or employee so appointed shall hold office at the pleasure of the Board
and shall perform such duties as may be assigned to him by the Board, Chairman
of the Board or President.
ARTICLE 5.
Shares and Their Transfer
5.1) Certificates of Stock. Every owner of stock of the corporation
shall be entitled to a certificate, to be in such form as the Board of Directors
may prescribe, certifying the number of shares of stock of the corporation owned
by him. The certificates for such stock shall be numbered (separately for each
class) in the order in which they shall be issued and shall be signed in the
name of the corporation by the Chairman of the Board, President or a Vice
President, and by the Secretary, Treasurer or any other proper officer of the
corporation thereunto authorized by the Board of Directors. Signatures of the
officers upon a certificate may be facsimiles if the certificate is
countersigned by a transfer agent or registered by a registrar other than the
corporation. Certificates on which a facsimile signature of a former officer
appears may be issued with the same effect as if he were such officer on the
date of issue.
5.2) Stock Record. As used in these Bylaws, the term "shareholder"
shall mean the person, firm or corporation in whose name outstanding shares of
capital stock of the corporation are currently registered on the stock record
books of the corporation. A record shall be kept of the name of the person, firm
or corporation owning the stock represented by such certificates respectively,
the respective dates thereof and, in the case of cancellation, the respective
dates of
<PAGE>
cancellation. Every certificate surrendered to the corporation for exchange or
transfer shall be cancelled and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing certificate
shall have been so cancelled (except as provided for in Section 5.4 of this
Article 5).
5.3) Transfer of Shares. Transfer of shares on the books of the
corporation may be authorized only by the shareholder named in the certificate
(or his legal representative or duly authorized attorney-in-fact) and upon
surrender for cancellation of the certificate or certificates for such shares.
The shareholder in whose name shares of stock stand on the books of the
corporation shall be deemed the owner thereof for all purposes as regards the
corporation; provided, that when any transfer of shares shall be made as
collateral security and not absolutely, such fact, if known to the Secretary of
the corporation or to the transfer agent, shall be so expressed in the entry of
transfer.
5.4) Lost Certificates. Any shareholder claiming a certificate of stock
to be lost or destroyed shall make an affidavit or affirmation of that fact in
such form as the Board of Directors may require, and shall, if the directors so
require, give the corporation a bond of indemnity in form and with one or more
sureties satisfactory to the Board of at least double the value, as determined
by the Board, of the stock represented by such certificate in order to indemnify
the corporation against any claim that may be made against it on account of the
alleged loss or destruction of such certificate, whereupon a new certificate may
be issued in the same tenor and for the same number of shares as the one alleged
to have been destroyed or lost.
5.5) Treasury Stock. Treasury stock shall be held by the corporation
subject to disposal by the Board of Directors in accordance with the Articles
and these Bylaws, and shall not have voting rights nor participate in dividends.
5.6) Inspection of Books by Shareholders. Shareholders shall be
permitted to inspect the books of the corporation for a proper purpose at all
reasonable times.
ARTICLE 6.
Dividends, Surplus, Reserves
6.1) Dividends. Subject to the provisions of the Articles of
Incorporation and of these Bylaws, the Board of Directors may declare dividends
from the net earnings or net assets of the corporation available for dividends
whenever and in such amounts as, in its opinion, the condition of the affairs of
the corporation shall render it advisable.
6.2) Use of Surplus; Reserves. Subject to the provisions of the
Articles of Incorporation and of these Bylaws, the Board of Directors in its
discretion may use and apply any of the net earnings or net assets of the
corporation available for such purpose to purchase or acquire any of the shares
of the capital stock of the corporation in accordance with law, or any of its
bonds, debentures, notes, scrip or other securities or evidences of
indebtedness, or from time
<PAGE>
to time may set aside from its net assets or net earnings such sums as it, in
its absolute discretion, may think proper as a reserve fund to meet
contingencies, for the purpose of maintaining or increasing the property or
business of the corporation, or for any other purpose it may think conducive to
the best interests of the corporation.
ARTICLE 7.
Fiscal Year and Audit
7.1) Fiscal Year. The fiscal year of the corporation shall be
established by the Board of Directors.
7.2) Audit of Books and Accounts. The books and accounts of the
corporation shall be audited at least once in each fiscal year or at such times
as may be ordered by the Board of Directors.
ARTICLE 8.
Waiver of Notice and Unanimous Consent
8.1) Requirement of Waiver in Writing. Whenever any notice whatever is
required to be given by these Bylaws, the Articles of Incorporation or any of
the laws of the State of Minnesota, a waiver thereof in writing, signed by the
person or persons entitled to such notice, whether before, at or after the time
stated therein, shall be deemed equivalent to the actual required notice.
8.2) Authorization Without Meeting. Any action of the shareholders, the
Board of Directors, or any lawfully constituted Executive Committee of the
corporation which may be taken at a meeting thereof, may be taken without a
meeting if authorized by a writing signed by all of the holders of shares who
would be entitled to notice of a meeting for such purpose, by all of the
directors or by all of the members of such Executive Committee, as the case may
be.
ARTICLE 9.
Amendments
9.1) Amendments. These Bylaws may be altered, amended, added to or
repealed by the affirmative vote of Fifty-one percent (51%) of the members of
the Board of Directors at any regular meeting of the Board or at any special
meeting of the Board called for that purpose, subject to the power of the
shareholders to change or repeal such Bylaws and subject to any other
limitations on such authority of the Board provided by the Minnesota Business
Corporation Act.
EXHIBIT 10.4
AGREEMENT TO EXTEND LEASE
This Agreement, made this 18th day of June, 1997, by and between 7100
BUILDING COMPANY, a General Partnership, successor in interest to Minnetonka
Business Associates, a General Partnership, (hereinafter called "Landlord") and
MICROFLAME, INC., a Minnesota Corporation (hereinafter called "Tenant").
WITNESSETH:
WHEREAS, Minnetonka Business Associates, a General Partnership and
Tenant entered into a certain Lease Agreement, dated June 1, 1990, and amended
on May 25, 1994 and June 26, 1995 (hereinafter called the "Lease") under which
Landlord demised to Tenant the Leased Premises commonly known as 14873 DeVeau
Place, Minnetonka, Minnesota 55343; and
WHEREAS, said Lease is scheduled to expire by lapse of time on July 31,
1997; and
WHEREAS, Landlord and Tenant desire to amend said Lease so as to extend
the term thereof and to amend the rents payable thereunder during such period;
and
WHEREAS, it is intended by this Agreement to amend said Lease.
NOW THEREFORE, in consideration of the premises, and of the covenants
and agreements herein undertaken to be kept and performed, it is agreed as
follows:
1. TERM. The Term of the Lease is hereby extended for a period of two
(2) years commencing on the 1st day of August, 1997, and expiring on the 31st
day of July, 1999, unless the Lease shall sooner terminate as provided therein.
2. BASE RENT. Tenant shall remain paying Landlord the base rent of
$2,611.00 per month from the 1st day of August, 1997 through and including the
31st day of July, 1999, over and above the other additional payments to be made
by Tenant for the Leased Premises, payable in advance on the first day of each
and every calendar month.
3. Except as herein specifically amended, all other terms, covenants,
and conditions of the Lease shall remain in full force and effect, and the same
are hereby ratified and confirmed.
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed the within
Agreement as of the day and year first above written.
LANDLORD: TENANT:
7100 BUILDING COMPANY MICROFLAME, INC.
A General Partnership A Minnesota Corporation
By: /s/ William Lipschultz By: /s/ Richard A. Kurzeka
Its: Partner Its: General Manager
Date: 6/23/97 Date: 6/18/97
EXHIBIT 10.6
ELECTRO-SENSORS, INC.
1997 STOCK OPTION PLAN
SECTION 1. DEFINITIONS
As used herein, the following terms shall have the meanings indicated below:
(a) "Committee" shall mean a Committee of two or more directors who shall
be appointed by and serve at the pleasure of the Board. As long as the
Company's securities are registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended, then, to the extent
necessary for compliance with Rule 16b-3, or any successor provision,
each of the members of the Committee shall be a "Non-Employee
Director." For purposes of this Section 1(a) "Non-Employee Director"
shall have the same meaning as set forth in Rule 16b-3, or any
successor provision, as then in effect, of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended.
(b) The "Company" shall mean Electro-Sensors, Inc., a Minnesota
corporation.
(c) "Fair Market Value" shall mean (i) if such stock is reported by the
Nasdaq National Market or Nasdaq SmallCap Market or is listed upon an
established stock exchange or exchanges, the reported closing price of
such stock by the Nasdaq National Market or Nasdaq SmallCap Market or
on such stock exchange or exchanges on the date the option is granted
or, if no sale of such stock shall have occurred on that date, on the
next preceding day on which there was a sale of stock; (ii) if such
stock is not so reported by the Nasdaq National Market or Nasdaq
SmallCap Market or listed upon an established stock exchange, the
average of the closing "bid" and "asked" prices quoted by the National
Quotation Bureau, Inc. (or any comparable reporting service) on the
date the option is granted, or if there are no quoted "bid" and "asked"
prices on such date, on the next preceding date for which there are
such quotes; or (iii) if such stock is not publicly traded as of the
date the option is granted, the per share value as determined by the
Board, or the Committee, in its sole discretion by applying principles
of valuation with respect to all such options.
(d) The "Internal Revenue Code" is the Internal Revenue Code of 1986, as
amended from time to time.
(e) "Non-Employee Director" shall mean members of the Board who are not
employees of the Company or any subsidiary.
(f) "Option Stock" shall mean Common Stock of the Company (subject to
adjustment as described in Section 12) reserved for options pursuant to
this Plan.
<PAGE>
(g) The "Optionee" means an employee of the Company or any Subsidiary to
whom an incentive stock option has been granted pursuant to Section 9;
or a consultant or advisor to or director (including a Non-Employee
Director), employee or officer of the Company or any Subsidiary to whom
a nonqualified stock option has been granted pursuant to Section 10.
(h) "Parent" shall mean any corporation which owns, directly or indirectly
in an unbroken chain, fifty percent (50%) or more of the total voting
power of the Company's outstanding stock.
(i) The "Plan" means the Electro-Sensors, Inc. 1997 Stock Option Plan, as
amended hereafter from time to time, including the form of Option
Agreements as they may be modified by the Board from time to time.
(j) A "Subsidiary" shall mean any corporation of which fifty percent (50%)
or more of the total voting power of outstanding stock is owned,
directly or indirectly in an unbroken chain, by the Company.
SECTION 2. PURPOSE
The purpose of the Plan is to promote the success of the Company and its
Subsidiaries by facilitating the retention of competent personnel and by
furnishing incentive to officers, directors, employees, consultants, and
advisors upon whose efforts the success of the Company and its Subsidiaries will
depend to a large degree.
It is the intention of the Company to carry out the Plan through the granting of
stock options which will qualify as "incentive stock options" under the
provisions of Section 422 of the Internal Revenue Code, or any successor
provision, pursuant to Section 9 of this Plan, and through the granting of
"nonqualified stock options" pursuant to Section 10 of this Plan. Adoption of
this Plan shall be and is expressly subject to the condition of approval by the
shareholders of the Company within twelve (12) months before or after the
adoption of the Plan by the Board of Directors. Any incentive stock options
granted after adoption of the Plan by the Board of Directors shall be treated as
nonqualified stock options if shareholder approval is not obtained within such
twelve-month period.
SECTION 3. EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the date of adoption by the Board of
Directors, subject to approval by the shareholders of the Company as required in
Section 2.
<PAGE>
SECTION 4. ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(hereinafter referred to as the "Board") or by a Committee which may be
appointed by the Board from time to time (collectively referred to as the
"Administrator"). The Administrator shall have all of the powers vested in it
under the provisions of the Plan, including but not limited to exclusive
authority (where applicable and within the limitations described herein) to
determine, in its sole discretion, whether an incentive stock option or
nonqualified stock option shall be granted, the individuals to whom, and the
time or times at which, options shall be granted, the number of shares subject
to each option and the option price and terms and conditions of each option. The
Administrator shall have full power and authority to administer and interpret
the Plan, to make and amend rules, regulations and guidelines for administering
the Plan, to prescribe the form and conditions of the respective stock option
agreements (which may vary from Optionee to Optionee) evidencing each option and
to make all other determinations necessary or advisable for the administration
of the Plan. The Administrator's interpretation of the Plan, and all actions
taken and determinations made by the Administrator pursuant to the power vested
in it hereunder, shall be conclusive and binding on all parties concerned.
No member of the Board or the Committee shall be liable for any action taken or
determination made in good faith in connection with the administration of the
Plan. In the event the Board appoints a Committee as provided hereunder, any
action of the Committee with respect to the administration of the Plan shall be
taken pursuant to a majority vote of the Committee members or pursuant to the
written resolution of all Committee members.
SECTION 5. PARTICIPANTS
The Administrator shall from time to time, at its discretion and without
approval of the shareholders, designate those employees, officers, directors,
consultants, and advisors of the Company or of any Subsidiary to whom
nonqualified stock options shall be granted under this Plan; provided, however,
that consultants or advisors shall not be eligible to receive stock options
hereunder unless such consultant or advisor renders bona fide services to the
Company or Subsidiary and such services are not in connection with the offer or
sale of securities in a capital-raising transaction. The Administrator shall,
from time to time, at its discretion and without approval of the shareholders,
designate those employees of the Company or any Subsidiary to whom incentive
stock options shall be granted under this Plan. The Administrator may grant
additional incentive stock options or nonqualified stock options under this Plan
to some or all participants then holding options or may grant options solely or
partially to new participants. In designating participants, the Administrator
shall also determine the number of shares to be optioned to each such
participant. The Board may from time to time designate individuals as being
ineligible to participate in the Plan.
<PAGE>
SECTION 6. STOCK
The Stock to be optioned under this Plan shall consist of authorized but
unissued shares of Option Stock. Three Hundred Thousand (300,000) shares of
Option Stock shall be reserved and available for options under the Plan;
provided, however, that the total number of shares of Option Stock reserved for
options under this Plan shall be subject to adjustment as provided in Section 12
of the Plan. In the event that any outstanding option under the Plan for any
reason expires or is terminated prior to the exercise thereof, the shares of
Option Stock allocable to the unexercised portion of such option shall continue
to be reserved for options under the Plan and may be optioned hereunder.
SECTION 7. DURATION OF PLAN
Incentive stock options may be granted pursuant to the Plan from time to time
during a period of ten (10) years from the effective date as defined in Section
3. Nonqualified stock options may be granted pursuant to the Plan from time to
time after the effective date of the Plan and until the Plan is discontinued or
terminated by the Board. Any incentive stock option granted during such ten-year
period and any nonqualified stock option granted prior to the termination of the
Plan by the Board shall remain in full force and effect until the expiration of
the option as specified in the written stock option agreement and shall remain
subject to the terms and conditions of this Plan.
SECTION 8. PAYMENT
Optionees may pay for shares upon exercise of options granted pursuant to this
Plan with cash, personal check, certified check or, if approved by the
Administrator in its sole discretion, Common Stock of the Company valued at such
Stock's then Fair Market Value, or such other form of payment as may be
authorized by the Administrator. The Administrator may, in its sole discretion,
limit the forms of payment available to the Optionee and may exercise such
discretion any time prior to the termination of the option granted to the
Optionee or upon any exercise of the option by the Optionee.
With respect to payment in the form of Common Stock of the Company, the
Administrator may require advance approval or adopt such rules as it deems
necessary to assure compliance with Rule 16b-3, or any successor provision, as
then in effect, of the General Rules and Regulations under the Securities
Exchange Act of 1934, if applicable.
SECTION 9. TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
Each incentive stock option granted pursuant to this Section 9 shall be
evidenced by a written stock option agreement (the "Option Agreement"). The
Option Agreement shall be in such form as may be approved from time to time by
the Administrator and may vary from Optionee to Optionee;
<PAGE>
provided, however, that each Optionee and each Option Agreement shall comply
with and be subject to the following terms and conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state the
total number of shares covered by the incentive stock option. To the
extent required to qualify the Option as an incentive stock option
under Section 422 of the Internal Revenue Code, or any successor
provision, the option price per share shall not be less than one
hundred percent (100%) of the Fair Market Value of the Common Stock per
share on the date the Administrator grants the option; provided,
however, that if an Optionee owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of
stock of the Company or of its Parent or any Subsidiary, the option
price per share of an incentive stock option granted to such Optionee
shall not be less than one hundred ten percent (110%) of the Fair
Market Value of the Common Stock per share on the date of the grant of
the option. The Administrator shall have full authority and discretion
in establishing the option price and shall be fully protected in so
doing.
(b) Term and Exercisability of Incentive Stock Option. The term during
which any incentive stock option granted under the Plan may be
exercised shall be established in each case by the Administrator. To
the extent required to qualify the Option as an incentive stock option
under Section 422 of the Internal Revenue Code, or any successor
provision, in no event shall any incentive stock option be exercisable
during a term of more than ten (10) years after the date on which it is
granted; provided, however, that if an Optionee owns stock possessing
more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or of its parent or any Subsidiary, the
incentive stock option granted to such Optionee shall be exercisable
during a term of not more than five (5) years after the date on which
it is granted.
The Option Agreement shall state when the incentive stock option
becomes exercisable and shall also state the maximum term during which
the option may be exercised. In the event an incentive stock option is
exercisable immediately, the manner of exercise of the option in the
event it is not exercised in full immediately shall be specified in the
Option Agreement. The Administrator may accelerate the exercisability
of any incentive stock option granted hereunder which is not
immediately exercisable as of the date of grant.
(c) Other Provisions. The Option Agreement authorized under this Section 9
shall contain such other provisions as the Administrator shall deem
advisable. Any such Option Agreement shall contain such limitations and
restrictions upon the exercise of the option as shall be necessary to
ensure that such option will be considered an "incentive stock option"
as defined in Section 422 of the Internal Revenue Code or to conform to
any change therein.
<PAGE>
SECTION 10. TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS
Each nonqualified stock option granted pursuant to this Section 10 shall be
evidenced by a written Option Agreement. The Option Agreement shall be in such
form as may be approved from time to time by the Administrator and may vary from
Optionee to Optionee; provided, however, that each Optionee and each Option
Agreement shall comply with and be subject to the following terms and
conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state the
total number of shares covered by the nonqualified stock option. Unless
otherwise determined by the Administrator, the option price per share
shall be one hundred percent (100%) of the Fair Market Value of the
Common Stock per share on the date the Administrator grants the option;
provided, however, that the option price may not be less than
eighty-five percent (85%) of the Fair Market Value of the Common Stock
per share on the date of grant.
(b) Term and Exercisability of Nonqualified Stock Option. The term during
which any nonqualified stock option granted under the Plan may be
exercised shall be established in each case by the Administrator. The
Option Agreement shall state when the nonqualified stock option becomes
exercisable and shall also state the maximum term during which the
option may be exercised. In the event a nonqualified stock option is
exercisable immediately, the manner of exercise of the option in the
event it is not exercised in full immediately shall be specified in the
stock option agreement. The Administrator may accelerate the
exercisability of any nonqualified stock option granted hereunder which
is not immediately exercisable as of the date of grant.
(c) Withholding. The Company or its Subsidiary shall be entitled to
withhold and deduct from future wages of the Optionee all legally
required amounts necessary to satisfy any and all withholding and
employment-related taxes attributable to the Optionee's exercise of a
nonqualified stock option. In the event the Optionee is required under
the Option Agreement to pay the Company, or make arrangements
satisfactory to the Company respecting payment of, such withholding and
employment-related taxes, the Administrator may, in its discretion and
pursuant to such rules as it may adopt, permit the Optionee to satisfy
such obligation, in whole or in part, by electing to have the Company
withhold shares of Common Stock otherwise issuable to the Optionee as a
result of the option's exercise equal to the amount required to be
withheld for tax purposes. Any stock elected to be withheld shall be
valued at its Fair Market Value, as of the date the amount of tax to be
withheld is determined under applicable tax law. The Optionee's
election to have shares withheld for this purpose shall be made on or
before the date the option is exercised or, if later, the date that the
amount of tax to be withheld is determined under applicable tax law.
Such election shall be approved by the Administrator and otherwise
comply with such rules as the Administrator may adopt to assure
compliance with Rule 16b-3, or any successor provision, as then in
effect, of the General Rules and Regulations under the Securities
Exchange Act of 1934, if applicable.
<PAGE>
(d) Other Provisions. The Option Agreement authorized under this Section 10
shall contain such other provisions as the Administrator shall deem
advisable.
SECTION 11. TRANSFER OF OPTION
No incentive stock option shall be transferable, in whole or in part, by the
Optionee other than by will or by the laws of descent and distribution and,
during the Optionee's lifetime, the option may be exercised only by the
Optionee. If the Optionee shall attempt any transfer of any incentive stock
option granted under the Plan during the Optionee's lifetime, such transfer
shall be void and the incentive stock option, to the extent not fully exercised,
shall terminate.
The Administrator may, in its sole discretion, permit the Optionee to transfer
any or all nonqualified stock options to any member of the Optionee's "immediate
family" as such term is defined in Rule 16a-1(e) promulgated under the
Securities Exchange Act of 1934, or any successor provision, or to one or more
trusts whose beneficiaries are members of such Optionee's "immediate family" or
partnerships in which such family members are the only partners; provided,
however, that the Optionee receives no consideration for the transfer and such
transferred nonqualified stock option shall continue to be subject to the same
terms and conditions as were applicable to such nonqualified stock option
immediately prior to its transfer.
SECTION 12. RECAPITALIZATION, SALE, MERGER,
EXCHANGE OR LIQUIDATION
In the event of an increase or decrease in the number of shares of Common Stock
resulting from a subdivision or consolidation of shares or the payment of a
stock dividend or any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the Company, the
number of shares of Option Stock reserved under Section 6 hereof and the number
of shares of Option Stock covered by each outstanding option and the price per
share thereof shall be adjusted by the Board to reflect such change. Additional
shares which may be credited pursuant to such adjustment shall be subject to the
same restrictions as are applicable to the shares with respect to which the
adjustment relates.
Unless otherwise provided in the stock option agreement, in the event of an
acquisition of the Company through the sale of substantially all of the
Company's assets and the consequent discontinuance of its business or through a
merger, consolidation, exchange, reorganization, reclassification, extraordinary
dividend, divestiture or liquidation of the Company (collectively referred to as
a "transaction"), all outstanding options shall become immediately exercisable,
whether or not such options had become exercisable prior to the transaction;
provided, however, that if the acquiring party seeks to have the transaction
accounted for on a "pooling of interests" basis and, in the opinion of the
Company's independent certified public accountants, accelerating the
exercisability of such options would preclude a pooling of interests under
generally accepted accounting principles, the exercisability of such options
shall not accelerate. In addition to the
<PAGE>
foregoing, in the event of such a transaction, the Board may provide for one or
more of the following:
(a) the complete termination of this Plan and cancellation of outstanding
options not exercised prior to a date specified by the Board (which
date shall give Optionees a reasonable period of time in which to
exercise the options prior to the effectiveness of such transaction);
(b) that Optionees holding outstanding incentive or nonqualified options
shall receive, with respect to each share of Option Stock subject to
such options, as of the effective date of any such transaction, cash in
an amount equal to the excess of the Fair Market Value of such Option
Stock on the date immediately preceding the effective date of such
transaction over the option price per share of such options; provided
that the Board may, in lieu of such cash payment, distribute to such
Optionees shares of stock of the Company or shares of stock of any
corporation succeeding the Company by reason of such transaction, such
shares having a value equal to the cash payment herein; or
(c) the continuance of the Plan with respect to the exercise of options
which were outstanding as of the date of adoption by the Board of such
plan for such transaction and provide to Optionees holding such options
the right to exercise their respective options as to an equivalent
number of shares of stock of the corporation succeeding the Company by
reason of such transaction.
The Board may restrict the rights of or the applicability of this Section 12 to
the extent necessary to comply with Section 16(b) of the Securities Exchange Act
of 1934, the Internal Revenue Code or any other applicable law or regulation.
The grant of an option pursuant to the Plan shall not limit in any way the right
or power of the Company to make adjustments, reclassifications, reorganizations
or changes of its capital or business structure or to merge, exchange or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
SECTION 13. SECURITIES LAW COMPLIANCE
No shares of Common Stock shall be issued pursuant to the Plan unless and until
there has been compliance, in the opinion of Company's counsel, with all
applicable legal requirements, including without limitation, those relating to
securities laws and stock exchange listing requirements. As a condition to the
issuance of Option Stock to Optionee, the Administrator may require Optionee to
(i) represent that the shares of Option Stock are being acquired for investment
and not resale and to make such other representations as the Administrator shall
deem necessary or appropriate to qualify the issuance of the shares as exempt
from the Securities Act of 1933 and any other applicable securities laws, and
(ii) represent that Optionee shall not dispose of the shares of Option Stock in
violation of the Securities Act of 1933 or any other applicable securities laws.
As a further condition to the grant of any incentive or nonqualified stock
option or the issuance of Option Stock to Optionee, Optionee agrees to the
following:
<PAGE>
(a) In the event the Company advises Optionee that it plans an underwritten
public offering of its Common Stock in compliance with the Securities
Act of 1933, as amended, and the underwriter(s) seek to impose
restrictions under which certain shareholders may not sell or contract
to sell or grant any option to buy or otherwise dispose of part or all
of their stock purchase rights of the underlying Common Stock, Optionee
will not, for a period not to exceed 180 days from the prospectus, sell
or contract to sell or grant an option to buy or otherwise dispose of
any incentive or nonqualified stock option granted to Optionee pursuant
to the Plan or any of the underlying shares of Common Stock without the
prior written consent of the underwriter(s) or its representative(s).
(b) In the event the Company makes any public offering of its securities
and determines in its sole discretion that it is necessary to reduce
the number of issued but unexercised stock purchase rights so as to
comply with any states securities or Blue Sky law limitations with
respect thereto, the Board of Directors of the Company shall have the
right (i) to accelerate the exercisability of any incentive or
nonqualified stock option and the date on which such option must be
exercised, provided that the Company gives Optionee prior written
notice of such acceleration, and (ii) to cancel any options or portions
thereof which Optionee does not exercise prior to or contemporaneously
with such public offering.
(c) In the event of a transaction (as defined in Section 12 of the Plan)
which is treated as a "pooling of interests" under generally accepted
accounting principles, Optionee will comply with Rule 145 of the
Securities Act of 1933 and any other restrictions imposed under other
applicable legal or accounting principles if Optionee is an "affiliate"
(as defined in such applicable legal and accounting principles) at the
time of the transaction, and Optionee will execute any documents
necessary to ensure compliance with such rules.
The Company reserves the right to place a legend on any stock certificate issued
upon exercise of an option granted pursuant to the Plan to assure compliance
with this Section 13.
SECTION 14. RIGHTS AS A SHAREHOLDER
An Optionee (or the Optionee's successor or successors) shall have no rights as
a shareholder with respect to any shares covered by an option until the date of
the issuance of a stock certificate evidencing such shares. No adjustment shall
be made for dividends (ordinary or extraordinary, whether in cash, securities or
other property), distributions or other rights for which the record date is
prior to the date such stock certificate is actually issued (except as otherwise
provided in Section 12 of the Plan).
<PAGE>
SECTION 15. AMENDMENT OF THE PLAN
The Board may from time to time, insofar as permitted by law, suspend or
discontinue the Plan or revise or amend it in any respect; provided, however,
that no such revision or amendment, except as is authorized in Section 12, shall
impair the terms and conditions of any option which is outstanding on the date
of such revision or amendment to the material detriment of the Optionee without
the consent of the Optionee. Notwithstanding the foregoing, no such revision or
amendment shall (i) materially increase the number of shares subject to the Plan
except as provided in Section 12 hereof, (ii) change the designation of the
class of employees eligible to receive options, (iii) decrease the price at
which options may be granted, or (iv) materially increase the benefits accruing
to Optionees under the Plan without the approval of the shareholders of the
Company if such approval is required for compliance with the requirements of any
applicable law or regulation. Furthermore, the Plan may not, without the
approval of the shareholders, be amended in any manner that will cause incentive
stock options to fail to meet the requirements of Section 422 of the Internal
Revenue Code.
SECTION 16. NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the Optionee to
exercise such option. Further, the granting of an option hereunder shall not
impose upon the Company or any Subsidiary any obligation to retain the Optionee
in its employ for any period.
<PAGE>
INCENTIVE STOCK OPTION AGREEMENT
ELECTRO-SENSORS, INC.
1997 STOCK OPTION PLAN
THIS AGREEMENT, made effective as of this ____ day of _____________,
19____, by and between Electro-Sensors, Inc., a Minnesota corporation (the
"Company"), and _________________ ("Optionee").
W I T N E S S E T H:
WHEREAS, Optionee on the date hereof is a key employee or officer of
the Company or one of its Subsidiaries; and
WHEREAS, the Company wishes to grant an incentive stock option to
Optionee to purchase shares of the Company's Common Stock pursuant to the
Company's 1997 Stock Option Plan (the "Plan"); and
WHEREAS, the Administrator of the Plan has authorized the grant of an
incentive stock option to Optionee and has determined that, as of the effective
date of this Agreement, the fair market value of the Company's Common Stock is
$_______ per share;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Optionee on the date
set forth above (the "Date of Grant"), the right and option (the "Option") to
purchase all or portions of an aggregate of _____________________ (___________)
shares of Common Stock at a per share price of $_______ on the terms and
conditions set forth herein, and subject to adjustment pursuant to Section 12 of
the Plan. Except as otherwise provided in Paragraphs 2(b) and 2(c), this Option
is intended to be an incentive stock option within the meaning of Section 422,
or any successor provision, of the Internal Revenue Code of 1986, as amended
(the "Code"), and the regulations thereunder.
2. DURATION AND EXERCISABILITY.
a. The term during which this Option may be exercised
shall terminate on _______________, 20__, except as otherwise provided in
Paragraphs 2(b) through 2(e) below. This Option shall become exercisable
according to the following schedule:
Vesting Date Percentage/Number of Shares
<PAGE>
Once the Option becomes exercisable to the extent of one hundred percent (100%)
of the aggregate number of shares specified in Paragraph 1, Optionee may
continue to exercise this Option under the terms and conditions of this
Agreement until the termination of the Option as provided herein. If Optionee
does not purchase upon an exercise of this Option the full number of shares
which Optionee is then entitled to purchase, Optionee may purchase upon any
subsequent exercise prior to this Option's termination such previously
unpurchased shares in addition to those Optionee is otherwise entitled to
purchase.
b. TERMINATION OF EMPLOYMENT (OTHER THAN CHANGE OF
CONTROL, DISABILITY OR DEATH). If Optionee's employment with the Company or any
Subsidiary is terminated for any reason other than because of a "change of
control transaction" as described in Paragraph 2(c) or because of disability or
death, this Option shall completely terminate on the earlier of (i) the close of
business on the three-month anniversary date of such termination of employment,
and (ii) the expiration date of this Option stated in Paragraph 2 above.
Notwithstanding the foregoing, if, upon such termination of employment, Optionee
continues to serve as a consultant, advisor or nonemployee director of the
Company or Subsidiary, this Option shall terminate on the earlier of (i) the
close of business on the three-month anniversary date of the termination of all
of Optionee's relationships with the Company or Subsidiary, and (ii) the
expiration date of this Option stated in Paragraph 2(a) above, and the Option
shall not, upon Optionee's termination of employment, be treated as an incentive
stock option within the meaning of Code Section 422.
In such period following the termination of Optionee's
employment or, if applicable, such other relationship, this Option shall be
exercisable only to the extent the Option was exercisable on the vesting date
immediately preceding such termination of employment or such other relationship,
but had not previously been exercised. To the extent this Option was not
exercisable upon such termination of employment or such other relationship, or
if Optionee does not exercise the Option within the time specified in this
Paragraph 2(b), all rights of Optionee under this Option shall be forfeited.
c. CHANGE OF CONTROL. If (i) Optionee's employment with the
Company or any Subsidiary is terminated because of a "change of control
transaction," (ii) such transaction is treated as a "pooling of interests" under
generally accepted accounting principles, and (iii) Optionee is an "affiliate"
of the Company or Subsidiary under applicable legal and accounting principles,
this Option shall completely terminate on the later of (A) the close of business
on the three-month anniversary date of such termination of employment or (B) the
close of business on the date that is sixty (60) days after the date on which
affiliates are no longer restricted from selling, transferring or otherwise
disposing of the shares of stock received in the change of control transaction.
Notwithstanding the foregoing, if, upon such termination of employment, Optionee
continues to serve as a consultant, advisor or nonemployee director of the
Company or Subsidiary, this Option shall terminate on the later of (X) the close
of business on the three-month anniversary date of the termination of all of
Optionee's relationships with the Company or Subsidiary, and (Y) the close of
business on the date that is sixty (60) days after the date on which affiliates
are no longer restricted from selling, transferring or otherwise disposing of
the shares of stock received in the change of
<PAGE>
control transaction, and this Option shall not, upon Optionee's termination of
employment, be treated as an incentive stock option within the meaning of Code
Section 422.
In such period following the termination of Optionee's
employment or, if applicable, such other relationship, this Option shall be
exercisable only to the extent the Option was exercisable on the vesting date
immediately preceding such termination of employment or such other relationship,
but had not previously been exercised, unless the exercisability of this Option
has been accelerated as provided in Section 12 of the Plan. To the extent this
Option was not exercisable upon such termination of employment or such other
relationship, or if Optionee does not exercise the Option within the time
specified in this Paragraph 2(c), all rights of Optionee under this Option shall
be forfeited. If Optionee exercises this Option on a date that is after the
three-month anniversary of the termination of Optionee's employment or on a date
that is more than ten years (or five years, if applicable) after the Date of
Grant, this Option shall not be treated as an incentive stock option within the
meaning of Code Section 422.
For purposes of this Paragraph 2(c), a "change of control
transaction" means an acquisition of the Company through the sale of
substantially all of the Company's assets and the consequent discontinuance of
its business or through a merger, consolidation, exchange, reorganization,
reclassification, extraordinary dividend, divestiture (including a spin-off) or
liquidation of the Company.
d. DISABILITY. If Optionee ceases to be an employee of the
Company or any Subsidiary due to disability (as such term is defined in Code
Section 22(e)(3), or any successor provision), this Option shall completely
terminate on the earlier of (i) the close of business on the twelve-month
anniversary date of such termination of employment, and (ii) the expiration date
under this Option stated in Paragraph 2(a) above. In such period following such
termination of employment, this Option shall be exercisable only to the extent
the Option was exercisable on the vesting date immediately preceding the date of
Optionee's termination of employment. If Optionee does not exercise the Option
within the time specified in this Paragraph 2(d), all rights of Optionee under
this Option shall be forfeited.
e. DEATH. In the event of Optionee's death, this Option shall
terminate on the earlier of (i) the close of business on the twelve-month
anniversary date of the date of Optionee's death, and (ii) the expiration date
of this Option stated in Paragraph 2(a) above. In such period following
Optionee's death, this Option shall be exercisable by the person or persons to
whom Optionee's rights under this Option shall have passed by Optionee's will or
by the laws of descent and distribution only to the extent the Option was
exercisable on the vesting date immediately preceding the date of Optionee's
death. If such person or persons do not exercise this Option within the time
specified in this Paragraph 2(e), all rights under this Option shall be
forfeited.
3. MANNER OF EXERCISE.
a. GENERAL. The Option may be exercised only by Optionee (or
other proper party in the event of death or incapacity), subject to the
conditions of the Plan and subject to such other administrative rules as the
Administrator may deem advisable, by delivering within the
<PAGE>
Option Period written notice of exercise to the Company at its principal office.
The notice shall state the number of shares as to which the Option is being
exercised and shall be accompanied by payment in full of the Option price for
all shares designated in the notice. The exercise of the Option shall be deemed
effective upon receipt of such notice by the Company and upon payment that
complies with the terms of the Plan and this Agreement. The Option may be
exercised with respect to any number or all of the shares as to which it can
then be exercised and, if partially exercised, may be so exercised as to the
unexercised shares any number of times during the Option period as provided
herein.
b. FORM OF PAYMENT. Subject to approval by the Administrator,
payment of the Option price by Optionee shall be in the form of cash, personal
check, certified check or previously acquired shares of Common Stock of the
Company, or any combination thereof. Any stock so tendered as part of such
payment shall be valued at its Fair Market Value as provided in the Plan. For
purposes of this Agreement, "previously acquired shares of Common Stock" shall
include shares of Common Stock that are already owned by Optionee at the time of
exercise.
c. STOCK TRANSFER RECORDS. As soon as practicable after the
effective exercise of all or any part of the Option, Optionee shall be recorded
on the stock transfer books of the Company as the owner of the shares purchased,
and the Company shall deliver to Optionee one or more duly issued stock
certificates evidencing such ownership. All requisite original issue or transfer
documentary stamp taxes shall be paid by the Company.
4. MISCELLANEOUS.
a. EMPLOYMENT; RIGHTS AS SHAREHOLDER. This Agreement shall not
confer on Optionee any right with respect to continuance of employment by the
Company or any of its Subsidiaries, nor will it interfere in any way with the
right of the Company to terminate such employment. Optionee shall have no rights
as a shareholder with respect to shares subject to this Option until such shares
have been issued to Optionee upon exercise of this Option. No adjustment shall
be made for dividends (ordinary or extraordinary, whether in cash, securities or
other property), distributions or other rights for which the record date is
prior to the date such shares are issued, except as provided in Section 12 of
the Plan.
b. SECURITIES LAW COMPLIANCE. The exercise of all or any parts
of this Option shall only be effective at such time as counsel to the Company
shall have determined that the issuance and delivery of Common Stock pursuant to
such exercise will not violate any state or federal securities or other laws.
Optionee may be required by the Company, as a condition of the effectiveness of
any exercise of this Option, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held, until such time that such
Common Stock is registered and freely tradable under applicable state and
federal securities laws, for Optionee's own account without a view to any
further distribution thereof, that the certificates for such shares shall bear
an appropriate legend to that effect and that such shares will be not
transferred or disposed of except in compliance with applicable state and
federal securities laws.
<PAGE>
c. MERGERS, RECAPITALIZATIONS, STOCK SPLITS, ETC. Pursuant and
subject to Section 12 of the Plan, certain changes in the number or character of
the Common Stock of the Company (through sale, merger, consolidation, exchange,
reorganization, divestiture (including a spin-off), liquidation,
recapitalization, stock split, stock dividend or otherwise) shall result in an
adjustment, reduction or enlargement, as appropriate, in Optionee's rights with
respect to any unexercised portion of the Option (i.e., Optionee shall have such
"anti-dilution" rights under the Option with respect to such events, but shall
not have "preemptive" rights).
d. SHARES RESERVED. The Company shall at all times during the
option period reserve and keep available such number of shares as will be
sufficient to satisfy the requirements of this Agreement.
e. WITHHOLDING TAXES ON DISQUALIFYING DISPOSITION. In the
event of a disqualifying disposition of the shares acquired through the exercise
of this Option, Optionee hereby agrees to inform the Company of such
disposition. Upon notice of a disqualifying disposition, the Company may take
such action as it deems appropriate to insure that, if necessary to comply with
all applicable federal or state income tax laws or regulations, all applicable
federal and state payroll, income or other taxes are withheld from any amounts
payable by the Company to Optionee. If the Company is unable to withhold such
federal and state taxes, for whatever reason, Optionee hereby agrees to pay to
the Company an amount equal to the amount the Company would otherwise be
required to withhold under federal or state law. Optionee may, subject to the
approval and discretion of the Administrator or such administrative rules it may
deem advisable, elect to have all or a portion of such tax withholding
obligations satisfied by delivering shares of the Company's Common Stock having
a fair market value equal to such obligations.
f. NONTRANSFERABILITY. During the lifetime of Optionee, the
accrued Option shall be exercisable only by Optionee or by the Optionee's
guardian or other legal representative, and shall not be assignable or
transferable by Optionee, in whole or in part, other than by will or by the laws
of descent and distribution.
g. 1997 STOCK OPTION PLAN. The Option evidenced by this
Agreement is granted pursuant to the Plan, a copy of which Plan has been made
available to Optionee and is hereby incorporated into this Agreement. This
Agreement is subject to and in all respects limited and conditioned as provided
in the Plan. The Plan governs this Option and, in the event of any questions as
to the construction of this Agreement or in the event of a conflict between the
Plan and this Agreement, the Plan shall govern, except as the Plan otherwise
provides.
h. LOCKUP PERIOD LIMITATION. Optionee agrees that in the event
the Company advises Optionee that it plans an underwritten public offering of
its Common Stock in compliance with the Securities Act of 1933, as amended, and
that the underwriter(s) seek to impose restrictions under which certain
shareholders may not sell or contract to sell or grant any option to buy or
otherwise dispose of part or all of their stock purchase rights of the
underlying Common Stock, Optionee hereby agrees that for a period not to exceed
180 days from the prospectus, Optionee will not sell or contract to sell or
grant an option to buy or otherwise dispose of this option or any of the
<PAGE>
underlying shares of Common Stock without the prior written consent of the
underwriter(s) or its representative(s).
i. BLUE SKY LIMITATION. Notwithstanding anything in this
Agreement to the contrary, in the event the Company makes any public offering of
its securities and determines in its sole discretion that it is necessary to
reduce the number of issued but unexercised stock purchase rights so as to
comply with any state securities or Blue Sky law limitations with respect
thereto, the Board of Directors of the Company shall have the right (i) to
accelerate the exercisability of this Option and the date on which this Option
must be exercised, provided that the Company gives Optionee 15 days' prior
written notice of such acceleration, and (ii) to cancel any portion of this
Option or any other option granted to Optionee pursuant to the Plan which is not
exercised prior to or contemporaneously with such public offering. Notice shall
be deemed given when delivered personally or when deposited in the United States
mail, first class postage prepaid and addressed to Optionee at the address of
Optionee on file with the Company.
j. ACCOUNTING COMPLIANCE. Optionee agrees that, in the event a
"change of control transaction" (as defined in Paragraph 4(g) above) is treated
as a "pooling of interests" under generally accepted accounting principles and
Optionee is an "affiliate" of the Company or any Subsidiary (as defined in
applicable legal and accounting principles) at the time of such change of
control transaction, Optionee will comply with all requirements of pooling
accounting rules and Rule 145 under the Securities Act of 1933, as amended, and
the requirements of such other legal or accounting principles as may be
applicable, and will execute any documents necessary to ensure such compliance.
k. STOCK LEGEND. The certificates for any shares of Common
Stock purchased by Optionee (or, in the case of death, Optionee's successors)
shall bear an appropriate legend to reflect the restrictions of Paragraphs 4(b),
4(h), 4(i) and 4(j) of this Agreement.
l. SCOPE OF AGREEMENT. This Agreement shall bind and inure to
the benefit of the Company and its successors and assigns and Optionee and any
successor or successors of Optionee permitted by Paragraph 4(f) above.
m. ARBITRATION. Any dispute arising out of or relating to this
Agreement or the alleged breach of it, or the making of this Agreement,
including claims of fraud in the inducement, shall be discussed between the
disputing parties in a good faith effort to arrive at a mutual settlement of any
such controversy. If, notwithstanding, such dispute cannot be resolved, such
dispute shall be settled by binding arbitration. Judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. The arbitrator shall be a retired state or federal judge or an attorney
who has practiced securities or business litigation for at least 10 years. If
the parties cannot agree on an arbitrator within 20 days, any party may request
that the chief judge of the District Court for Hennepin County, Minnesota,
select an arbitrator. Arbitration will be conducted pursuant to the provisions
of this Agreement, and the commercial arbitration rules of the American
Arbitration Association, unless such rules are inconsistent with the provisions
of this Agreement, without submitting the dispute to such Association. Limited
civil discovery shall be permitted for the production of documents and taking of
depositions. Unresolved discovery
<PAGE>
disputes may be brought to the attention of the arbitrator who may dispose of
such dispute. The arbitrator shall have the authority to award any remedy or
relief that a court of this state could order or grant; provided, however, that
punitive or exemplary damages shall not be awarded. The arbitrator may award to
the prevailing party, if any, as determined by the arbitrator, all of its costs
and fees, including the arbitrator's fees, administrative fees, travel expenses,
out-of-pocket expenses and reasonable attorneys' fees. Unless otherwise agreed
by the parties, the place of any arbitration proceedings shall be Hennepin
County, Minnesota.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
ELECTRO-SENSORS, INC.
By:
Its:
Optionee
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
ELECTRO-SENSORS, INC.
1997 STOCK OPTION PLAN
THIS AGREEMENT, made effective as of this _______ day of ___________,
19__, by and between Electro-Sensors, Inc., a Minnesota corporation (the
"Company"), and ____________________ ("Optionee").
W I T N E S S E T H:
WHEREAS, Optionee on the date hereof is a key employee, officer,
consultant, nonemployee director or advisor of the Company or one of its
Subsidiaries; and
WHEREAS, the Company wishes to grant a nonqualified stock option to
Optionee to purchase shares of the Company's Common Stock pursuant to the
Company's Stock Option Plan (the "Plan"); and
WHEREAS, the Administrator has authorized the grant of a nonqualified
stock option to Optionee and has determined that, as of the effective date of
this Agreement, the fair market value of the Company's Common Stock is $ per
share;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Optionee on the date
set forth above (the "Date of Grant"), the right and option (the "Option") to
purchase all or portions of an aggregate of _______________________ (________)
shares of Common Stock at a per share price of $___________ on the terms and
conditions set forth herein, and subject to adjustment pursuant to Section 11 of
the Plan. This Option is a nonqualified stock option and will not be treated as
an incentive stock option, as defined under Section 422, or any successor
provision, of the Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations thereunder.
2. DURATION AND EXERCISABILITY.
a. The term during which this Option may be exercised shall
terminate on _______________, _____, except as otherwise provided in Paragraphs
2(b) through 2(e) below. This Option shall become exercisable according to the
following schedule:
Percentage/Number
Vesting Date of Shares
------------ ------------------
<PAGE>
Once the Option becomes exercisable to the extent of one hundred percent (100%)
of the aggregate number of shares specified in Paragraph 1, Optionee may
continue to exercise this Option under the terms and conditions of this
Agreement until the termination of the Option as provided herein. If Optionee
does not purchase upon an exercise of this Option the full number of shares
which Optionee is then entitled to purchase, Optionee may purchase upon any
subsequent exercise prior to this Option's termination such previously
unpurchased shares in addition to those Optionee is otherwise entitled to
purchase.
b. TERMINATION OF RELATIONSHIP (OTHER THAN CHANGE OF CONTROL,
DISABILITY OR DEATH). If Optionee ceases to be an employee, consultant,
nonemployee director or an advisor of the Company or any Subsidiary for any
reason other than because of a "change of control transaction" as described in
Paragraph 2(c) or because of disability or death, this Option shall completely
terminate on the earlier of (i) the close of business on the three-month
anniversary date of the termination of all such relationships, and (ii) the
expiration date of this Option stated in Paragraph 2(a) above. In such period
following such termination, this Option shall be exercisable only to the extent
the Option was exercisable on the vesting date immediately preceding the date on
which all of Optionee's relationships with the Company or Subsidiary have
terminated, but had not previously been exercised. To the extent this Option was
not exercisable upon the termination of such relationship, or if Optionee does
not exercise the Option within the time specified in this Paragraph 2(b), all
rights of Optionee under this Option shall be forfeited.
c. CHANGE OF CONTROL. If (i) Optionee ceases to be an
employee, consultant, nonemployee director or advisor of the Company or any
Subsidiary because of a "change of control transaction," (ii) such transaction
is treated as a "pooling of interests" under generally accepted accounting
principles, and (iii) Optionee is an "affiliate" of the Company or Subsidiary
under applicable legal and accounting principles, this Option shall completely
terminate on the later of (A) the close of business on the three-month
anniversary date of the termination of all such relationships, and (B) the close
of business on the date that is sixty (60) days after the date on which
affiliates are no longer restricted from selling, transferring or otherwise
disposing of the shares of stock received in the change of control transaction.
In such period following such termination, this Option shall be exercisable only
to the extent the Option was exercisable on the vesting date immediately
preceding the date on which all of Optionee's relationships with the Company or
Subsidiary have terminated, but had not previously been exercised, unless the
exercisability of this Option has been accelerated as provided in Section 13 of
the Plan. To the extent this Option was not exercisable upon such termination of
such relationships, or if Optionee does not exercise the
<PAGE>
Option within the time specified in this Paragraph 2(c), all rights of Optionee
under this Option shall be forfeited.
For purposes of this Paragraph 2(c), a "change of control
transaction" means an acquisition of the Company through the sale of
substantially all of the Company's assets and the consequent discontinuance of
its business or through a merger, consolidation, exchange, reorganization,
reclassification, extraordinary dividend, divestiture or liquidation of the
Company.
d. DISABILITY. If Optionee ceases to be an employee,
consultant, nonemployee director or advisor of the Company or any Subsidiary
because of disability (as such term is defined in Code Section 22(e)(3), or any
successor provision), this Option shall completely terminate on the earlier of
(i) the close of business on the twelve-month anniversary date of the
termination of all such relationships, and (ii) the expiration date under this
Option stated in Paragraph 2(a) above. In such period following such
termination, this Option shall be exercisable only to the extent the Option was
exercisable on the vesting date immediately preceding the termination of all of
Optionee's relationships. If Optionee does not exercise the Option within the
time specified in this Paragraph 2(d), all rights of Optionee under this Option
shall be forfeited.
e. DEATH. In the event of Optionee's death, this Option shall
terminate on the earlier of (i) the close of business on the twelve-month
anniversary date of the date of Optionee's death, and (ii) the expiration date
of this Option stated in Paragraph 2(a) above. In such period following
Optionee's death, this Option may be exercised by the person or persons to whom
Optionee's rights under this Option shall have passed by Optionee's will or by
the laws of descent and distribution only to the extent the Option was
exercisable on the vesting date immediately preceding the date of Optionee's
death. If such person or persons fail to exercise this Option within the time
specified in this Paragraph 2(e), all rights under this Option shall be
forfeited.
3. MANNER OF EXERCISE.
a. GENERAL. The Option may be exercised only by Optionee (or
other proper party in the event of death or incapacity), subject to the
conditions of the Plan and subject to such other administrative rules as the
Administrator may deem advisable, by delivering within the option period written
notice of exercise to the Company at its principal office. The notice shall
state the number of shares as to which the Option is being exercised and shall
be accompanied by payment in full of the option price for all shares designated
in the notice. The exercise of the Option shall be deemed effective upon receipt
of such notice by the Company and upon payment that complies with the terms of
the Plan and this Agreement. The Option may be exercised with respect to any
number or all of the shares as to which it can then be exercised and, if
partially exercised, may be exercised as to the unexercised shares any number of
times during the option period as provided herein.
b. FORM OF PAYMENT. Subject to the approval of the
Administrator, payment of the option price by Optionee shall be in the form of
cash, personal check, certified check or previously acquired shares of Common
Stock of the Company, or any combination thereof. Any stock so tendered as part
of such payment shall be valued at its Fair Market Value as provided in
<PAGE>
the Plan. For purposes of this Agreement, "previously acquired shares of Common
Stock" shall include shares of Common Stock that are already owned by Optionee
at the time of exercise.
c. STOCK TRANSFER RECORDS. As soon as practicable after the
effective exercise of all or any part of the Option, Optionee shall be recorded
on the stock transfer books of the Company as the owner of the shares purchased,
and the Company shall deliver to Optionee one or more duly issued stock
certificates evidencing such ownership. All requisite original issue or transfer
documentary stamp taxes shall be paid by the Company.
4. MISCELLANEOUS.
a. RIGHTS AS SHAREHOLDER. This Agreement shall not confer on
Optionee any right with respect to the continuance of any relationship with the
Company or any of its Subsidiaries, nor will it interfere in any way with the
right of the Company to terminate any such relationship. Optionee shall have no
rights as a shareholder with respect to shares subject to this Option until such
shares have been issued to Optionee upon exercise of this Option. No adjustment
shall be made for dividends (ordinary or extraordinary, whether in cash,
securities or other property), distributions or other rights for which the
record date is prior to the date such shares are issued, except as provided in
Section 11 of the Plan.
b. SECURITIES LAW COMPLIANCE. The exercise of all or any parts
of this Option shall only be effective at such time as counsel to the Company
shall have determined that the issuance and delivery of Common Stock pursuant to
such exercise will not violate any state or federal securities or other laws.
Optionee may be required by the Company, as a condition of the effectiveness of
any exercise of this Option, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held, until such time that such
Common Stock is registered and freely tradable under applicable state and
federal securities laws, for Optionee's own account without a view to any
further distribution thereof and that such shares will be not transferred or
disposed of except in compliance with applicable state and federal securities
laws.
c. MERGERS, RECAPITALIZATIONS, STOCK SPLITS, ETC. Pursuant and
subject to Section 12 of the Plan, certain changes in the number or character of
the Common Stock of the Company (through sale, merger, consolidation, exchange,
reorganization, divestiture (including a spin-off), liquidation,
recapitalization, stock split, stock dividend or otherwise) shall result in an
adjustment, reduction or enlargement, as appropriate, in Optionee's rights with
respect to any unexercised portion of the Option (i.e., Optionee shall have such
"anti-dilution" rights under the Option with respect to such events, but shall
not have "preemptive" rights).
d. SHARES RESERVED. The Company shall at all times during the
option period reserve and keep available such number of shares as will be
sufficient to satisfy the requirements of this Agreement.
e. WITHHOLDING TAXES. In order to permit the Company to comply
with all applicable federal or state income tax laws or regulations, the Company
may take such action as it deems appropriate to insure that, if necessary, all
applicable federal or state payroll, income or other
<PAGE>
taxes are withheld from any amounts payable by the Company to Optionee. If the
Company is unable to withhold such federal and state taxes, for whatever reason,
Optionee hereby agrees to pay to the Company an amount equal to the amount the
Company would otherwise be required to withhold under federal or state law.
Optionee may, subject to the approval and discretion of the Administrator or
such administrative rules it may deem advisable, elect to have all or a portion
of such tax withholding obligations satisfied by delivering shares of the
Company's Common Stock having a fair market value equal to such obligations.
f. TRANSFERABILITY OF OPTIONS. Optionee may, for no
consideration, transfer this Option to a member of Optionee's immediate family,
to a trust for the benefit of Optionee's immediately family member(s) or to a
partnership in which such family member(s) are the only partners. The family
member to whom, or the trust or partnership to which, this Option has been
transferred shall be subject to all terms and conditions set forth herein, and
shall not subsequently assign or transfer this Option, either voluntarily or
involuntarily, unless such transfer is to another family member, trust or
partnership which meets the requirements of this Paragraph 4(f). If Optionee
does not transfer this Option to such a family member, trust or partnership,
this Option shall be exercisable only by Optionee or by Optionee's guardian or
other legal representative and, upon Optionee's death, shall be exercisable by
the person or persons to whom Optionee's rights under this Option have passed by
will or by the laws of descent and distribution.
g. 1997 STOCK OPTION PLAN. The Option evidenced by this
Agreement is granted pursuant to the Plan, a copy of which Plan has been made
available to Optionee and is hereby incorporated into this Agreement. This
Agreement is subject to and in all respects limited and conditioned as provided
in the Plan. The Plan governs this Option and, in the event of any questions as
to the construction of this Agreement or in the event of a conflict between the
Plan and this Agreement, the Plan shall govern, except as the Plan otherwise
provides.
h. LOCKUP PERIOD LIMITATION. Optionee agrees that in the event
the Company advises Optionee that it plans an underwritten public offering of
its Common Stock in compliance with the Securities Act of 1933, as amended, and
that the underwriter(s) seek to impose restrictions under which certain
shareholders may not sell or contract to sell or grant any option to buy or
otherwise dispose of part or all of their stock purchase rights of the
underlying Common Stock, Optionee hereby agrees that for a period not to exceed
180 days from the prospectus, Optionee will not sell or contract to sell or
grant an option to buy or otherwise dispose of this option or any of the
underlying shares of Common Stock without the prior written consent of the
underwriter(s) or its representative(s).
i. BLUE SKY LIMITATION. Notwithstanding anything in this
Agreement to the contrary, in the event the Company makes any public offering of
its securities and determines in its sole discretion that it is necessary to
reduce the number of issued but unexercised stock purchase rights so as to
comply with any state securities or Blue Sky law limitations with respect
thereto, the Board of Directors of the Company shall have the right (i) to
accelerate the exercisability of this Option and the date on which this Option
must be exercised, provided that the Company gives Optionee 15 days' prior
written notice of such acceleration, and (ii) to cancel any portion of this
Option or any other option granted to Optionee pursuant to the Plan which is not
exercised prior to
<PAGE>
or contemporaneously with such public offering. Notice shall be deemed given
when delivered personally or when deposited in the United States mail, first
class postage prepaid and addressed to Optionee at the address of Optionee on
file with the Company.
j. ACCOUNTING COMPLIANCE. Optionee agrees that, in the event a
"change of control transaction" (as defined in Paragraph 4(g) above) is treated
as a "pooling of interests" under generally accepted accounting principles and
Optionee is an "affiliate" of the Company or any Subsidiary (as defined in
applicable legal and accounting principles) at the time of such change of
control transaction, Optionee will comply with all requirements of pooling
accounting rules and Rule 145 under the Securities Act of 1933, as amended, and
the requirements of such other legal or accounting principles as applicable, and
will execute any documents necessary to ensure such compliance.
k. STOCK LEGEND. The certificates for any shares of Common
Stock purchased by Optionee (or, in the case of death, Optionee's successors)
shall bear an appropriate legend to reflect the restrictions of Paragraph 4(b),
4(h), 4(i) and 4(j) of this Agreement.
l. SCOPE OF AGREEMENT. This Agreement shall bind and inure to
the benefit of the Company and its successors and assigns and Optionee and any
successor or successors of Optionee permitted by Paragraph 2(b) above.
m. ARBITRATION. Any dispute arising out of or relating to this
Agreement or the alleged breach of it, or the making of this Agreement,
including claims of fraud in the inducement, shall be discussed between the
disputing parties in a good faith effort to arrive at a mutual settlement of any
such controversy. If, notwithstanding, such dispute cannot be resolved, such
dispute shall be settled by binding arbitration. Judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. The arbitrator shall be a retired state or federal judge or an attorney
who has practiced securities or business litigation for at least 10 years. If
the parties cannot agree on an arbitrator within 20 days, any party may request
that the chief judge of the District Court for Hennepin County, Minnesota,
select an arbitrator. Arbitration will be conducted pursuant to the provisions
of this Agreement, and the commercial arbitration rules of the American
Arbitration Association, unless such rules are inconsistent with the provisions
of this Agreement. Limited civil discovery shall be permitted for the production
of documents and taking of depositions. Unresolved discovery disputes may be
brought to the attention of the arbitrator who may dispose of such dispute. The
arbitrator shall have the authority to award any remedy or relief that a court
of this state could order or grant; provided, however, that punitive or
exemplary damages shall not be awarded. The arbitrator may award to the
prevailing party, if any, as determined by the arbitrator, all of its costs and
fees, including the arbitrator's fees, administrative fees, travel expenses,
out-of-pocket expenses and reasonable attorneys' fees. Unless otherwise agreed
by the parties, the place of any arbitration proceedings shall be Hennepin
County, Minnesota.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
ELECTRO-SENSORS, INC.
By:
Its:
Optionee
EXHIBIT 11.1
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
CALCULATION OF WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
INCOME FOR DETERMINATION OF EARNINGS PER SHARE OF COMMON STOCK
- --------------------------------------------------------------------
1997
- --------------------------------------------------------------------
Common shares:
Weighted average shares outstanding:
Basic 1,951,597
Stock options 13,527
- --------------------------------------------------------------------
Diluted 1,965,124
- --------------------------------------------------------------------
Net income applicable to basic
earnings per share $ 453,355
====================================================================
Net income applicable to diluted
earnings per share $ 453,355
====================================================================
Earnings per share:
Basic $ 0.23
Diluted $ 0.23
====================================================================
EXHIBIT 11.2
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
CALCULATION OF WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
INCOME FOR DETERMINATION OF EARNINGS PER SHARE OF COMMON STOCK
RESTATED
<TABLE>
<CAPTION>
===============================================================================================================================
Years Ended December 31, Three Months Ended
----------------------- ----------------------------------------------------
1996 1995 September 30, 1996 June 30, 1996 March 31, 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common shares:
Weighted average shares outstanding:
Basic 1,941,163 1,901,840 1,942,753 1,942,243 1,940,270
Stock options 23,403 13,085 26,617 28,835 26,312
- -----------------------------------------------------------------------------------------------------------------------------
Diluted 1,964,566 1,914,925 1,969,370 1,971,078 1,966,582
=============================================================================================================================
Net income applicable to basic
earnings per share $ 462,853 $ 785,256 $ 163,328 $ 111,045 $ 151,343
- -----------------------------------------------------------------------------------------------------------------------------
Net income applicable to diluted
earnings per share $ 462,853 $ 785,256 $ 163,328 $ 111,045 $ 151,343
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.24 $ 0.41 $ 0.20 $ 0.11 $ 0.06
Diluted $ 0.24 $ 0.41 $ 0.20 $ 0.11 $ 0.06
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXHIBIT 11.3
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
CALCULATION OF WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
INCOME FOR DETERMINATION OF EARNINGS PER SHARE OF COMMON STOCK
RESTATED
<TABLE>
<CAPTION>
===========================================================================================
Three Months Ended
----------------------------------------------
1997 September 30, June 30, March 31,
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common shares:
Weighted average shares outstanding:
Basic 1,971,343 1,949,411 1,947,839
Stock options 10,425 13,427 6,548
---------- ---------- ----------
Diluted 1,981,768 1,962,838 1,954,387
===========================================================================================
Basic earnings per share $ 120,655 $ 118,045 $ 151,343
---------- ---------- ----------
Diluted earnings per share $ 120,655 $ 118,045 $ 151,343
===========================================================================================
----------
Earnings per share:
Basic $ 0.06 $ 0.06 $ 0.08
Diluted $ 0.06 $ 0.06 $ 0.08
===========================================================================================
</TABLE>
ELECTRO-SENSORS, INC.
1997 ANNUAL REPORT
<PAGE>
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 motor 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, OEMs 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)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Sales $ 6,441 $ 6,143 $ 6,185 $6,076 $5,231
Gross Profit 3,743 3,502 3,525 3,424 2,920
Selling Expenses 1,637 1,339 1,214 1,501 1,128
General and Administrative Expenses 752 948 777 801 718
Research and Development Expenses 637 707 622 659 647
Provision for Income Taxes 237 283 371 222 246
Net Income 453 463 785 460 505
Earnings Per Share .23 .24 .41 .24 .26
Working Capital 8,484 8,708 9,332 4,772 5,711
Total Assets 10,895 11,485 13,181 7,941 6,771
Shareholders' Equity 9,108 9,147 9,466 6,693 6,398
</TABLE>
2
<PAGE>
LETTER TO SHAREHOLDERS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
March 5, 1998
TO THE SHAREHOLDERS:
I am pleased to report the annual corporate results for 1997. This has been a
challenging and growing year for the company. The combined total sales for 1997
increased 4.8% to $6,440,576 and the combined operating income increased 41.1%
to $716,426. These results reflect the strong national economy. By division,
there were increases in the Speed Monitoring Systems and Autodata Systems, and
slight decreases in the Drive Control Systems and Microflame Inc. Our goal is to
have increases in all divisions.
In the second half of the year, we began an aggressive marketing campaign for
the Speed Monitoring Systems, Drive Control Systems, and AutoData Systems. We
are continuing in this effort to increase our sales levels by developing new
advertising materials, using more extensive ads in trade magazines, and
exhibiting our products at new trade shows. To support this effort, we have
added sales and marketing personnel, and also new networked software that allows
access to necessary information across the corporation. We are engaged in this
campaign to position ourselves for growth and market leadership. This effort is
costly and we intend to use a significant portion of our operating income in the
first half of this year to solidify and continue the program. The second half of
1998 should start to show the sales results we are aiming for. In our product
areas, we are driving to be the preferred supplier for new and existing
customers. To accomplish this, the customers need to be not only aware of us,
but also to know how our products meet their needs better than competitive
products. I personally want to thank each of our great employees who are
diligently working together to achieve our goals. We are striving for continued
and increased growth in both sales and market share.
As can be seen in the financial report, Electro-Sensors Incorporated is a strong
and healthy company. We generated the 1997 income from operations with only a
minor portion coming from the ESI Investment division. Your confidence in us as
we expand our marketing efforts is appreciated. Please join us for our annual
meeting on April 29, 1998, at the Decathlon Club in Bloomington at 2:00 p.m.
Sincerely,
/s/ Bradley D. Slye
Bradley D. Slye
President
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
1997 VS. 1996
The Company's sales for 1997 were $6,440,576, an increase of 4.8% above 1996
sales of $6,142,643. The increase in sales is attributed to both the Speed
Monitoring Systems and AutoData Systems segments. The Drive Control Systems
experienced declining sales during the year which resulted from decreased sales
to its OEM customers. Meanwhile, sales decreased slightly for the Company's
wholly-owned subsidiary, Microflame, Inc.
The increased Speed Monitoring sales have been provided by strong economic
growth. Many of our customers have been required to maintain or slightly improve
their existing manufacturing equipment to meet increasing production capacities.
This has provided an increased demand for our Speed Monitoring products as both
replacement and minor improvements. However, the same increased production
demands have prevented plants from performing major plant expansion and retrofit
projects. This has caused slowed Drive Control Systems sales throughout the year
as a result of our customers being unable to temporarily stop production to
install enhancement devices capable of improving overall plant performance.
AutoData Systems sales improved 61% during 1997. Increasing customer acceptance
of the AutoData survey software and increased scanner sales have been attributed
with the rising AutoData sales levels throughout 1997. The survey software
package utilizes our optical mark recognition technology to automate the data
entry processing of responding participant questionnaires. AutoData Systems has
experienced positive customer response since the release of its automated survey
software in 1996 and continues to concentrate marketing efforts in this area.
Microflame sales declined slightly in 1997 as compared to 1996. The sales
decrease resulted from a reduction in sales volume of the single gas torch
products. Sales to Microflame's largest customer decreased 2% 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 increased slightly during 1997 but decreased as a
percentage of sales when compared to 1996. The improved margin resulted from a
change in product mix due to the increased AutoData sales which contain a higher
margin. In addition, decreased manufacturing costs were able to offset a slight
increase in material cost of semiconductor components which are utilized by the
electronic manufacturing segments of our business.
Operating expenses increased slightly during 1997. Marketing expense did
increase 22% during the year, but was almost entirely offset by reductions in
both administrative and research and development expense. During 1997, the
Company acquired the services of an outside marketing and advertising agency to
increase market awareness in the Speed Monitoring, Drive Control and AutoData
Systems segments. This has resulted in significant increased cost for
advertising and product literature. In addition, AutoData also experienced
expense increases from both the formation of a sales and marketing staff and the
continued promotion costs associated with the introduction of the AutoData
Survey software package to health care providers. Also, the 1996 administrative
expense included a charge for the employment agreement benefit payable on behalf
of the former president, James Slattery. The agreement provided for a one year
base salary upon his death.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
ESI Investment continues to provide an alternative source of earnings for the
Company through investments in marketable securities. However, present portfolio
opportunities were limited and produced only nominal gains in 1997. The
investments provided a realized gain of $7,223 on proceeds of $61,804 during the
year. The cumulative net unrealized gain on securities was $3,167,566,
$3,770,485, and $4,751,933 as of December 31, 1997, 1996 and 1995, 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 periods. The
Company's investments in marketable securities are subject to significant
positive and negative changes in value.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to generate strong cash flows from operations. 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 and inventories increased due to increased sales. Accounts payable
decreased due to timing differences. The Company experienced a decrease in
shareholders' equity and marketable securities due to a decrease in unrealized
gain on investment securities. This decrease results primarily from the
Company's holding of PPT Vision and Firstat of America, which have experienced a
decrease in market value. The value of the Company's investment securities
should be expected to fluctuate. 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. The
cost related to year 2000 conversion is not material to the Company. Also, the
Company declared a first quarter cash dividend payable in February 1998.
CHANGING PRICES AND INFLATION
The Company did not experience any significant inflationary pressure during
1997. 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
The Company cautions investors that actual results of future operations may
differ from those anticipated in forward looking statements due to a number of
factors including: the uncertainty of market acceptance of products of the
Company's AutoData Systems Division which are in relatively early stages of
development; fluctuations in operating results due to the impact of
non-recurring large orders for products and gains or losses from sales of
investment securities; competition from lower-priced and new products of
competitors; and the availability of components for certain of the Company's
products which may for periods of time be available only from a single supplier.
For additional information see the Company's periodic filings with the
Securities and Exchange Commission.
5
<PAGE>
CONSOLIDATED BALANCE SHEETS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including temporary cash
deposits of $1,936,047 and $1,727,981, respectively $ 2,536,685 $ 2,581,588
Marketable securities (Note 2) 4,698,710 5,356,210
Trade receivables, less allowance for doubtful
accounts $18,000 for both years 746,049 726,628
Inventories (Note 3) 876,189 829,428
Prepaid expenses 76,921 76,018
Prepaid income taxes 100,752 0
Deferred income taxes (Note 11) 51,500 77,200
------------ ------------
TOTAL CURRENT ASSETS 9,086,806 9,647,072
------------ ------------
PROPERTY AND EQUIPMENT (Note 4) 1,807,950 1,838,270
------------ ------------
TOTAL ASSETS $ 10,894,756 $ 11,485,342
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable (Note 5) $ 240,775 $ 421,383
Accounts payable 97,998 115,666
Accrued expenses (Note 6) 263,688 387,594
Accrued income taxes 0 14,748
------------ ------------
TOTAL CURRENT LIABILITIES 602,461 939,391
------------ ------------
DEFERRED INCOME TAXES (Note 11) 1,184,400 1,398,900
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 9)
SHAREHOLDERS' EQUITY:
Common stock, par value $.10 per share; authorized
10,000,000 shares; issued 1,964,586 and 1,942,282,
shares, respectively (Note 8) 196,459 194,228
Additional paid-in capital 674,284 618,135
Retained earnings 6,214,922 5,988,629
Unrealized holding gain on investment securities,
net (Note 2) 2,023,566 2,408,385
Notes receivable (Note 10) (1,336) (62,326)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 9,107,895 9,147,051
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,894,756 $ 11,485,342
============ ============
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $ 6,440,576 $ 6,142,643 $ 6,184,880
COST OF GOODS SOLD 2,697,223 2,640,508 2,659,733
----------- ----------- -----------
GROSS PROFIT 3,743,353 3,502,135 3,525,147
----------- ----------- -----------
OPERATING EXPENSES:
Selling 1,637,334 1,339,473 1,214,073
Administrative 752,479 948,228 777,379
Research and development 637,114 706,813 621,763
----------- ----------- -----------
TOTAL OPERATING EXPENSES 3,026,927 2,994,514 2,613,215
----------- ----------- -----------
OPERATING INCOME (LOSS) 716,426 507,621 911,932
----------- ----------- -----------
NONOPERATING INCOME (EXPENSE):
Gain (loss) on sale of investment
securities (Note 2) 7,223 263,244 222,608
Interest income 118,478 116,240 156,187
Other (151,772) (141,402) (134,521)
----------- ----------- -----------
TOTAL NONOPERATING INCOME (EXPENSE) (26,071) 238,082 244,274
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 690,355 745,703 1,156,206
FEDERAL AND STATE INCOME TAXES (Note 11) 237,000 282,850 370,950
----------- ----------- -----------
NET INCOME (LOSS) $ 453,355 $ 462,853 $ 785,256
=========== =========== ===========
INCOME PER COMMON SHARE:
Basic $ 0.23 $ 0.24 $ 0.41
Diluted $ 0.23 $ 0.24 $ 0.41
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 1,951,597 1,941,163 1,901,840
Diluted 1,965,124 1,964,566 1,914,925
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash:
Received from customers $ 6,421,155 $ 6,207,460 $ 6,122,647
Paid to suppliers and employees (5,928,771) (5,497,248) (5,424,528)
Interest received 118,478 116,240 156,187
Income taxes paid (316,349) (406,233) (178,065)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 294,513 420,219 676,241
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (106,069) (78,616) (34,006)
Investment in marketable securities:
Sales 61,804 287,098 246,063
Purchases 0 (31,250) (143,500)
Repayments (net of advances) from Employee
Stock Ownership Plan 0 67,500 1,946
Repayments of notes receivable 60,990 2,433 8,743
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 16,725 247,165 79,246
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (233,913) (1,203,087) (189,850)
Net proceeds (payments) on short-term borrowings (180,608) (165,133) (222,354)
Proceeds from issuance of stock 58,380 8,551 103,812
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (356,141) (1,359,669) (308,392)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (44,903) (692,285) 447,095
CASH AND CASH EQUIVALENTS:
BEGINNING 2,581,588 3,273,873 2,826,778
----------- ----------- -----------
ENDING $ 2,536,685 $ 2,581,588 $ 3,273,873
----------- ----------- -----------
(CONTINUED ON FOLLOWING PAGE)
</TABLE>
See Notes to Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- -----------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net income (loss) $ 453,355 $ 462,853 $ 785,256
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 131,262 127,994 125,245
Provision for losses on trade receivables 0 (3,500) (10,500)
Realized (gain) loss on sale of:
Investment securities, net (7,223) (263,244) (222,608)
Property and equipment 5,127 0 1,360
Deferred taxes 29,300 (49,200) 8,600
(Increase) decrease in:
Trade receivables (19,421) 68,317 (51,734)
Inventories (46,761) (41,146) (95,461)
Prepaid:
Expenses (903) 4,164 8,961
Income taxes (108,649) 0 51,754
Increase (decrease) in:
Accounts payable (17,668) 17,262 (77,430)
Accrued:
Expenses (123,906) 170,902 12,767
Income taxes 0 (74,183) 140,031
--------- --------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 294,513 $ 420,219 $ 676,241
========= ========= ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Net change in unrealized holding gains on
marketable securities $(384,819) $(627,348) $ 2,982,494
========= ========= ===========
Accrued dividends $ 0 $ 0 $ 970,135
========= ========= ===========
Tax benefit of stock options exercised $ 6,851 $ 0 $ 43,600
========= ========= ===========
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ISSUED ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Tax benefit of stock options exercised 43,600
Dividend on common stock
$.10 per share (189,850)
Dividend 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
Exercise of stock options (Note 8) 13,157 1,316 31,250
Repayment of note receivable
Net change in unrealized gain on
marketable securities
Stock issued through the Employee
Stock Purchase Plan, 9,147 shares 9,147 915 24,899
Dividend on common stock
$.12 per share (233,913)
Tax benefit of stock options exercised 6,851
Net income 453,355
- ------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 1,964,586 $196,459 $674,284 $6,214,922
================================================================================================
</TABLE>
See Notes to Financial Statements
10
<PAGE>
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
GAIN ON UNALLOCATED EMPLOYEE TOTAL
INVESTMENT STOCK OWNERSHIP NOTE SHAREHOLDERS'
SECURITIES, NET PLAN SHARES RECEIVABLE EQUITY
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 53,239 $(43,897) $(73,502) $6,692,648
103,812
8,743 8,743
2,982,494 2,982,494
1,946 1,946
43,600
(189,850)
(962,635)
785,256
- --------------------------------------------------------------------------------
3,035,733 (41,951) (64,759) 9,466,014
41,951 67,500
2,433 2,433
(627,348) (627,348)
8,551
(232,952)
462,853
- --------------------------------------------------------------------------------
2,408,385 0 (62,326) 9,147,051
32,566
60,990 60,990
(384,819) (384,819)
25,814
(233,913)
6,851
453,355
- --------------------------------------------------------------------------------
$2,023,566 $ 0 $ (1,336) $9,107,895
================================================================================
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENCORS, 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 statement 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:
The Company has a portfolio of investment securities. Management determines the
appropriate classification of securities at the date individual investment
securities are acquired, and evaluates the appropriateness of such
classification at each balance sheet date. The Company's investments consist of
marketable equity securities, primarily 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.
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. 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. 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.
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, 1997, 1996, and 1995 was
$131,262, $127,994, and $125,245, respectively.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENCORS, INC. AND SUBSIDIARIES
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,
1997 1996 1995
Total weighted
average outstanding
shares 1,951,597 1,941,163 1,901,840
Assumed exercise of
options at average
market price 13,527 23,403 13,085
Weighted average
common and
common equivalent
shares 1,965,124 1,964,566 1,914,925
NOTE 2. INVESTMENT IN MARKETABLE SECURITIES
The cost and estimated fair value of the investment in marketable securities are
as follows:
<TABLE>
<CAPTION>
GROSS GROSS FAIR
COST UNREALIZED GAIN UNREALIZED LOSS VALUE
DECEMBER 31, 1997
<S> <C> <C> <C> <C>
Treasury bills $ 1,936,047 $ 0 $ 0 $ 1,936,047
Money-market funds 167,968 0 0 167,968
Equity securities 1,531,144 3,417,569 (250,003) 4,698,710
3,635,159 3,417,569 (250,003) 6,802,725
Less cash equivalents (2,104,015) (2,104,015)
TOTAL INVESTMENT SECURITIES $ 1,531,144 $3,417,569 $(250,003) $ 4,698,710
GROSS GROSS FAIR
COST UNREALIZED GAIN UNREALIZED LOSS VALUE
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
</TABLE>
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENCORS, INC. AND SUBSIDIARIES
Realized gains and losses on investment securities are as follows:
DECEMBER 31,
1997 1996 1995
Gross realized gains $ 34,054 $263,244 $224,119
Gross realized
losses (26,831) 0 (1,511)
NET REALIZED GAIN $ 7,223 $263,244 $222,608
At January 31, 1998, the fair value of equity securities was $4,567,000. The
Company holds an investment in a single security which represents 88.7% of the
fair value of equity securities held at January 31, 1998.
The change in the net unrealized holding gain on investment securities at
December 31, 1997 and 1996 consisted of the following:
1997 1996
Unrealized gain on current
portfolio of marketable
equity securities $ 3,417,569 $ 3,875,325
Unrealized loss on current
portfolio of marketable
equity securities (250,003) (104,840)
Related deferred tax
effect (1,144,000) (1,362,100)
TOTAL UNREALIZED HOLDING
GAIN, NET $ 2,023,566 $ 2,408,385
NOTE 3. INVENTORIES
Inventories used in the determination of cost of goods sold are as follows:
DECEMBER 31,
1997 1996 1995
Raw materials $592,679 $562,837 $518,524
Work in process 128,791 139,905 128,371
Finished goods 154,719 126,686 141,387
TOTAL INVENTORIES $876,189 $829,428 $788,282
NOTE 4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
DECEMBER 31,
1997 1996
Equipment $ 454,815 $ 483,890
Furniture and fixtures 354,887 324,606
Building 1,321,401 1,301,711
Land 414,540 414,540
2,545,643 2,524,747
Less accumulated depreciation 737,693 686,477
TOTAL PROPERTY AND EQUIPMENT $1,807,950 $1,838,270
NOTE 5. NOTE PAYABLE
DECEMBER 31,
1997 1996
Unsecured bank note,
due July 1998, with
interest at 8.5% paid monthly $240,775 $421,383
NOTE 6. ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1996 include:
1997 1996
Wages and commissions $181,564 $320,525
Other 82,124 67,069
TOTAL ACCRUED EXPENSES $263,688 $387,594
NOTE 7. COMMITMENTS
LEASE COMMITMENTS:
The Company is currently renting office space under a lease agreement which
expires July 1999. 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
1998 $52,463
1999 32,204
2000 723
TOTAL MINIMUM LEASE PAYMENTS $85,390
Rental expense charged to operations was $76,079, $78,760, and $78,114, for
years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 8. COMMON STOCK OPTIONS AND STOCK PURCHASE PLAN
STOCK OPTIONS:
The Company has granted nonqualified and incentive stock options to certain
employees and directors through the Electro-Sensors, Inc. 1987 Stock Option Plan
(1987 Plan). 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 plan, incentive
stock 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 purchase 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 1987 plan expired as of December 31, 1997.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENCORS, INC. AND SUBSIDIARIES
During 1997, the Company adopted the Electro-Sensors, Inc. 1997 Stock Option
Plan. The Company reserved 300,000 shares to be issued under this plan. At
December 31, 1997, 300,000 shares were available for future grants.
A summary of stock options outstanding and exercisable under the plans are as
follows:
NUMBER OF SHARES
INCENTIVE DIRECTOR
OPTIONS OPTIONS
WEIGHTED WEIGHTED
AVERAGE AVERAGE
STOCK EXERCISE STOCK EXERCISE
OPTIONS PRICE OPTIONS PRICE
Balance,
December 31,
1994 1,260 $2.38 94,500 $3.82
Granted 0 0 22,500 3.13
Exercised 0 0 (13,500) 3.13
- --------------------------------------------------------------------------------
Balance,
December 31,
1995 1,260 2.38 103,500 3.76
Granted 0 0 0 0
Exercised 0 0 0 0
- --------------------------------------------------------------------------------
Balance,
December 31,
1996 1,260 2.38 103,500 3.76
Granted 75,000 3.25 0 0
Exercised (5,000) 3.25 (18,000) 3.06
Expired 0 0 (27,000) 3.96
- --------------------------------------------------------------------------------
BALANCE,
DECEMBER 31,
1997 71,260 $3.23 58,500 $3.88
No options have been granted under the 1997 Plan during 1997.
STOCK PURCHASE PLAN:
The Company established an Employee Stock Purchase and Bonus Plan (the Employee
Stock Plan) during 1996, which allows employees to set aside up to 10% of their
earnings for the purchase of shares of the Company's common stock. Shares are
purchased annually under the Employee Stock Plan at a price equal to 85% of the
market price on the last day of the calendar year. During 1997 and 1996, 9,147
and 2,012 shares, respectively, were issued under this plan and, at December 31,
1997, 88,841 shares were available for future issuance.
COMPENSATION COSTS:
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized in the
accompanying statements of operations. Had compensation cost been recognized
based on the fair values of options at the grant dates consistent with the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and net income per common share would have been decreased
to the following pro forma amounts:
YEARS ENDED
DECEMBER 31, 1997 1996 1995
Net Income
As Reported $453,355 $462,853 $785,256
Pro forma $399,237 $461,222 $764,258
Net income per
common share
As reported $ .23 $ .24 $ .41
Pro forma $ .20 $ .24 $ .40
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to December 31, 1994, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
The weighted average fair values of options granted and Employee Stock Plan
shares were as follows:
1987 PLAN EMPLOYEE
EMPLOYEES DIRECTORS STOCK PLAN
1995 grants $ -- $ 1.48 $ --
1996 grants $ -- $ -- $.56
1997 grants $ 2.25 $ -- $.28
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1995, 1996 and 1997:
1997 1996 1995
Risk-free interest rate 6.30% 5.13% 6.90%
Expected life of options 7 years 7 years
Expected life of
Employee Stock
Plan shares 6 months 6 months
Expected volatility 33 % 78 % 63 %
Expected dividend yield 3.2 % 3.0 % 3.0 %
The tax benefits associated with the exercise of stock options or issuance of
shares under the Company's stock option plans, not related to expenses
recognized for financial reporting purposes, have been credited to capital in
excess of par value in the accompanying consolidated balance sheets.
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.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENCORS, INC. AND SUBSIDIARIES
ESOP compensation expense was $36,000, $36,000, and $42,781, for the years ended
December 31, 1997, 1996 and 1995, respectively.
Shares of the Company held by the ESOP at December 31, 1997 and 1996 are as
follows:
1997 1996
Allocated shares 109,455 112,890
Shares released for allocation 0 15,000
Unreleased (unearned) shares 0 0
Fair value of unreleased
(unearned) shares $0 $0
Debt outstanding to the Company $0 $0
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, 1997, approximately 109,455 shares of the Company's stock, with
an aggregate fair market value of approximately $400,000 are held by ESOP
participants, who if terminated, would be subject to the repurchase requirement.
NOTE 10. NOTES RECEIVABLE FOR THE PURCHASE OF COMMON STOCK
DECEMBER 31, 1997 1996
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. $ 0 $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. 1,336 5,326
TOTAL NOTES RECEIVABLE FOR THE
PURCHASE OF COMMON STOCK $1,336 $62,326
NOTE 11. INCOME TAXES
The components of the income tax provision for the years ended December 31,
1997, 1996, and 1995, are as follows:
1997 1996 1995
Current:
Federal $194,234 $215,986 $337,539
State 13,466 17,664 24,811
Deferred:
Federal 28,900 45,300 8,450
State 400 3,900 150
TOTAL FEDERAL AND
STATE INCOME TAXES $237,000 $282,850 $370,950
The provision for income taxes for the years ended December 31, 1997, 1996 and
1995, differs from the amount obtained by applying the U.S. federal income tax
rate to pretax income due to the following:
1997 1996 1995
Computed 'expected'
tax expense $242,000 $261,000 $405,000
Increase (decrease) in
taxes resulting from:
State income
taxes, net of
federal benefit 8,800 11,500 16,127
Credits (13,840) 0 (27,479)
Other 40 10,350 (22,698)
TOTAL FEDERAL AND
STATE INCOME TAXES $237,000 $282,850 $370,950
The components of the net deferred tax asset (liability) consist of:
1997 1996
Deferred tax assets:
Salary accrual $ 22,300 $ 47,000
Vacation disallowance 22,700 23,700
Allowance for doubtful
accounts 6,500 6,500
TOTAL DEFERRED TAX ASSETS $ 51,500 $ 77,200
Deferred tax liabilities:
Depreciation $ (40,400) $ (36,800)
Unrealized investment
holding gain (1,144,000) (1,362,100)
TOTAL DEFERRED LIABILITIES $(1,184,400) $(1,398,900)
NET DEFERRED TAX ASSET
(LIABILITY) $(1,132,900) $(1,321,700)
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENCORS, INC. AND SUBSIDIARIES
NOTE 12. OPERATIONS IN DIFFERENT INDUSTRIES
The following is a breakdown of selected financial statement information by
operating unit:
PRODUCTION MONITORING SYSTEMS
DECEMBER 31, 1997 1996 1995
Total sales $5,206,331 $5,132,829 $5,164,674
Export sales 205,601 373,944 239,005
Income from operations 1,333,025 1,075,134 1,344,487
Depreciation 116,572 109,582 106,984
Capital expenditures 106,069 59,698 23,989
Year end total assets 5,522,834 5,750,411 6,360,711
CHARACTER RECOGNITION IMAGING SYSTEMS
DECEMBER 31, 1997 1996 1995
Total sales $ 614,687 $ 381,562 $ 349,256
Export sales 21,923 49,709 66,712
(Loss) from operations (577,669) (468,163) (363,101)
Depreciation 12,980 14,409 13,443
Capital expenditures 0 15,652 8,856
Year end total assets 220,593 115,080 73,549
BRAZING TORCHES
DECEMBER 31, 1997 1996 1995
Total sales $ 619,558 $ 628,252 $ 670,950
Export sales 17,150 28,415 26,998
(Loss) from operations (38,930) (99,350) (69,454)
Depreciation 1,710 4,003 4,818
Capital expenditures 0 3,266 1,161
Year end total assets 196,433 220,998 239,260
17
<PAGE>
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, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
SCHWEITZER RUBIN KARON & BREMER
Certified Public Accountants
Minneapolis, Minnesota
February 3, 1998
18
<PAGE>
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, 1998, at 2:00 p.m local
time. 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
Firstar Trust Company
Corporate Trust Services
1555 North River Center Drive
Suite 301
Milwaukee, WI 53212
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
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|PS 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
1997 FIRST QUARTER 4 3/8 3 1/4
SECOND QUARTER 4 3 1/4
THIRD QUARTER 5 3 5/8
FOURTH QUARTER 5 3 5/8
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
On March 12, 1998 there were approximately 650 shareholders of record.
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 cash dividends on its common stock of $.12 per share in 1996 and 1997 on
a quarterly basis.
19
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS
We have issued our report, dated February 3, 1998, 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, 1997. 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).
/s/ SCHWEITZER RUBIN KARON & BREMER
Certified Public Accountants
Minneapolis, Minnesota
March 22, 1998
<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 12/31/97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,536,685
<SECURITIES> 4,698,710
<RECEIVABLES> 764,049
<ALLOWANCES> 18,000
<INVENTORY> 876,189
<CURRENT-ASSETS> 9,086,806
<PP&E> 2,545,643
<DEPRECIATION> 737,693
<TOTAL-ASSETS> 10,894,756
<CURRENT-LIABILITIES> 602,461
<BONDS> 0
0
0
<COMMON> 196,459
<OTHER-SE> 8,911,436
<TOTAL-LIABILITY-AND-EQUITY> 10,894,756
<SALES> 6,440,576
<TOTAL-REVENUES> 6,566,277
<CGS> 2,697,223
<TOTAL-COSTS> 5,724,150
<OTHER-EXPENSES> 151,772
<LOSS-PROVISION> 54,149
<INTEREST-EXPENSE> 38,842
<INCOME-PRETAX> 690,355
<INCOME-TAX> 237,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 453,355
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
