U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File Number 0-9587
ELECTRO-SENSORS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
MINNESOTA 41-0943459
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6111 BLUE CIRCLE DRIVE, MINNETONKA, MINNESOTA 55343
(Address of Principal Executive Offices) (Zip Code)
(612)930-0100
(Issuer's telephone number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No____
Shares of $.10 par value common stock outstanding at July 31, 1999: 1,979,773
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Part I. Financial Information
The interim financial statements included in this form 10-QSB are unaudited and
reflect in the opinion of management all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the results of
operations for these periods.
ELECTRO-SENSORS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30,
------------------------------ ------------------------------
1999 1998 1999 1998
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SALES $1,318,634 $1,592,671 $2,906,219 $3,207,969
COST OF SALES 616,879 666,000 1,303,977 1,348,939
---------- ---------- ---------- ----------
GROSS MARGIN 701,755 926,671 1,602,242 1,859,030
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling expense 444,724 465,882 942,309 972,922
Administrative expense 237,894 185,122 411,224 366,466
Research and development 190,530 152,348 373,906 296,080
---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 873,148 803,352 1,727,439 1,635,468
---------- ---------- ---------- ----------
INCOME(LOSS) FROM OPERATIONS (171,393) 123,319 (125,197) 223,562
---------- ---------- ---------- ----------
OTHER INCOME(EXPENSE)
Interest income 20,993 26,392 42,517 53,669
Other (28,996) (34,749) (53,853) (75,306)
---------- ---------- ---------- ----------
TOTAL OTHER INCOME(EXPENSE) (8,003) (8,357) (11,336) (21,637)
---------- ---------- ---------- ----------
INCOME(LOSS) BEFORE INCOME TAXES (179,396) 114,962 (136,533) 201,925
PROVISION FOR INCOME TAXES (65,600) 42,100 (51,100) 73,900
---------- ---------- ---------- ----------
NET INCOME(LOSS) $ (113,796) $ 72,862 $ (85,433) $ 128,025
========== ========== ========== ==========
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</TABLE>
<PAGE>
(Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES:
BASIC 1,979,773 1,971,522 1,979,773 1,971,522
========= ========= ========= =========
DILUTED 1,981,106 1,984,129 1,981,106 1,984,713
========= ========= ========= =========
EARNINGS PER COMMON
AND COMMON EQUIVALENT
SHARES:
BASIC $ (.05) $ .03 $ (.04) $ .06
========= ========= ========== =========
DILUTED $ (.05) $ .03 $ (.04) $ .06
========= ========= ========== =========
</TABLE>
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ELECTRO-SENSORS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $2,194,711 $2,313,606
Investment in available-for-sale securities 224,026 215,778
Trade receivables, less allowance
for doubtful accounts of $9,400
and $22,500, respectively 593,789 720,289
Inventories 927,567 974,612
Prepaid expenses 87,310 69,969
Prepaid income taxes 102,089 97,257
Deferred taxes 27,800 -0-
----------- ----------
TOTAL CURRENT ASSETS 4,157,292 4,391,511
PROPERTY AND EQUIPMENT, NET 1,747,904 1,775,369
INVESTMENTS 2,908,427 2,910,835
----------- ----------
TOTAL ASSETS $8,813,623 $9,077,715
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ -0- $ 44,843
Accounts payable 109,414 142,249
Accrued expense 198,618 182,938
Deferred taxes -0- 12,800
----------- ----------
TOTAL CURRENT LIABILITIES 308,032 382,830
----------- ----------
DEFERRED INCOME TAXES 562,000 561,900
----------- ----------
SHAREHOLDERS' EQUITY:
Common stock - par value $.10 per share;
Authorized 10,000,000 shares; issued
1,979,773 and 1,975,454
shares, respectively 197,977 197,545
Additional paid-in capital 710,970 702,576
Retained earnings 6,005,084 6,209,044
Unrealized holding gain on investment
securities, net 1,029,560 1,023,820
----------- ----------
Total shareholders' equity 7,943,591 8,132,985
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,813,623 $9,077,715
=========== ==========
</TABLE>
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ELECTRO-SENSORS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Cash received from customers $3,016,219 $3,219,520
Cash paid to suppliers and employees (2,984,030) (3,145,608)
Interest received 42,517 53,669
Income taxes paid 5,668 (2,497)
--------- ---------
Net cash provided by operating activities 80,374 125,084
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (44,725) (58,318)
--------- ---------
Net cash (used in) investing activities (44,725) (58,318)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (118,527) (118,010)
Payments on short-term borrowings (44,843) (91,055)
Proceeds from exercise of stock options -0- 14,063
Proceeds from Employee Stock Purchase Plan 8,826 6,988
--------- ---------
Net cash (used in) financing activities (154,544) (188,014)
--------- ---------
Increase (decrease) in cash (118,895) (121,248)
CASH AND CASH EQUIVALENTS
Beginning 2,313,606 2,536,685
--------- ---------
End $2,194,711 $2,415,437
========= =========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ (85,433) $ 128,025
Adjustments to reconcile net income(loss) to net
Cash provided by operating activities:
Depreciation and amortization 72,190 66,990
Provision for losses on trade receivables 16,500 10,500
Deferred taxes (40,600)
(Increase) decrease in:
Trade receivables 110,000 11,551
Inventory 47,045 (160,287)
Prepaid expenses (17,341) 7,385
Prepaid income taxes (4,832) 71,403
Increase (decrease) in:
Accounts payable (32,835) 99,374
Accrued expenses 15,680 (109,857)
--------- ---------
Net cash provided by operating activities $ 80,374 $ 125,084
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized gain(loss) on marketable securities 5,740 (64,524)
--------- ---------
Total noncash investing and financing $ 5,740 $ (64,524)
========= =========
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATION
The Company's sales for the second quarter decreased 17.2% and 9.4%,
respectively for the second quarter and first six months of 1999 when compared
to the same periods of 1998. The Company's AutoData Systems segment experienced
a strong sales increase during the period. However, the overall decrease in
sales occurred within the Speed Monitoring, Drive Control and Microflame, Inc.,
operating segments. Slowed sales for the Production Monitoring divisions
continued as a result of both the residual effects of the Asian currency crisis
and customer distractions caused by Year 2000 planning strategies. Businesses
are holding back investments in plant and equipment improvements while they
address their own Y2K issues. In addition, many of the AutoData customers are
still holding off software purchases as they await mandated healthcare changes
initially scheduled for release during the first half of 1999. The Company made
a 15% reduction in its workforce during the second quarter of 1999 due to the
declining sales activities.
The Company's wholly-owned subsidiary, Microflame, Inc., has experienced a 35%
decrease in sales during the first six months of 1999. The decline in sales
reflects the discontinued buying of the two-gas torch by its largest customer,
Radio Shack.
Cost of sales decreased, but increased as a percentage of sales when compared to
a year ago. The decreased margins resulted from both increased labor and
material costs in the production monitoring divisions and increased sales in the
AutoData division which carries a higher cost of sales. The Company also made a
$30,000 charge to the Microflame inventory based on declining sales activity.
Operating expenses increased 5.6% during the first six months of 1999 when
compared to the same periods of 1998. The increased expenses occurred in the
Administrative and Research and Development areas. Administrative expenses
increased primarily due to both employee severance costs and software
enhancements needed for Y2K compliance. Research and Development expenses
increased in both the Speed Monitoring and AutoData divisions. Both segments
continue to work aggressively toward new product development.
The Company reported a net loss for the second quarter of 1999. The net loss was
the direct result of declining sales in the Production Monitoring and Microflame
segments combined with increased manufacturing and operating expenses. In
addition, the second quarter net loss was affected by the one-time employee
severance and inventory write-down charges.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months ended June 30, 1999, working capital decreased
$159,421 to a total of $3,849,260. The slight increase in the fair market value
of marketable securities resulted from the increased quoted market price of
certain securities. Accounts receivable decreased due to lower sales levels.
Inventory and accounts payable decreased as a result of the sales decline. In
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addition, the employee stock purchase plan generated $8,826 during the first six
months. The Company made two dividend payments of $59,264 during the first six
months of 1999. In addition, the Company invested an additional $44,725 in
office and manufacturing equipment. The Company believes it can pay projected
capital and operating expenses out of income and current reserves. The cost
related to year 2000 conversion is not material to the Company.
YEAR 2000
The Company is presently requesting formal confirmation of supplier Y2K
compliance status. Informal communications have not revealed potential vendor
concerns. In addition, the Company continues to address new Y2K issues as they
are discovered. At this time the Company believes its most likely worst-case
scenario is that operations could be temporarily suspended; however, the Company
does not expect that it would have a material adverse effect on the Company's
financial position or results of operations.
OTHER INFORMATION
PART II
Item 1. Legal Proceedings
There were no material developments in previously reported
legal proceedings.
Item 2. Changes in Securities
No changes have been made in any registered securities.
Item 3. Defaults Upon Senior Securities
No event constituting a default has occurred respecting any
senior security of the Registrant.
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were voted on by shareholders during the
period covered by this Form 10-QSB:
a) The Annual Meeting of Shareholders was held April 28, 1999.
b) Election of Directors as Follows:
Peter R. Peterson 1,810,097 For 4,750 Withheld Authority
Brad D. Slye 1,810,097 For 4,750 Withheld Authority
Mark D. Laumann 1,810,097 For 4,750 Withheld Authority
John S. Strom 1,810,097 For 4,750 Withheld Authority
Joseph A. Marino 1,810,097 For 4,750 Withheld Authority
Geoffrey W. Miller 1,808,754 For 6,093 Withheld Authority
c) Approval of Schweitzer Karon & Bremer LLC as independent
Auditors.
1,807,447 For 1,000 Against 6,400 Abstain
There were no other matters submitted to vote of shareholders
during the period covered by this Form 10-QSB.
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Item 5. Other Information
As provided for under the Private Securities Litigation Reform Act of 1995, the
Company wishes to caution investors that the following important factors, among
others, in some cases have affected and in the future could affect the Company's
actual results of operations and cause such results to differ materially from
those anticipated in forward-looking statements made in this document and
elsewhere by or on behalf of the Company: the uncertainty of market acceptance
of products of the Company's AutoData Systems division which is in an early
stage of development; fluctuations and declines in operating results of the
Company's Drive Control Systems, Speed Monitoring and Microflame division;
fluctuations in the value of the Company's investments, particularly PPT Vision,
and sales of such investments; competition, particularly with regard to the
pricing of products; the Company's ability to develop new products; and
dependence on suppliers. For additional information, please see the Company's
Annual Report on Form 10-KSB.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
June 30, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized.
ELECTRO-SENSORS, INC.
Date August 12, 1999 By /s/ BRADLEY D. SLYE
Bradley D. Slye, President
Date August 12, 1999 By /s/ MARK D. LAUMANN
Mark D. Laumann, Treasurer
(principal financial officer)
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EXHIBIT INDEX
ELECTRO-SENSORS, INC.
FORM 10-QSB
For Fiscal Quarter Ended June 30, 1999
Exhibit No. Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 2,194,711
<SECURITIES> 3,132,453
<RECEIVABLES> 603,189
<ALLOWANCES> 9,400
<INVENTORY> 927,567
<CURRENT-ASSETS> 4,157,292
<PP&E> 2,695,145
<DEPRECIATION> 947,242
<TOTAL-ASSETS> 8,813,623
<CURRENT-LIABILITIES> 308,032
<BONDS> 0
0
0
<COMMON> 197,977
<OTHER-SE> 7,745,614
<TOTAL-LIABILITY-AND-EQUITY> 8,813,623
<SALES> 2,906,219
<TOTAL-REVENUES> 2,948,736
<CGS> 1,303,977
<TOTAL-COSTS> 3,031,416
<OTHER-EXPENSES> 53,853
<LOSS-PROVISION> 16,500
<INTEREST-EXPENSE> 537
<INCOME-PRETAX> (136,533)
<INCOME-TAX> (51,100)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (85,433)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
