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, 1998
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, 1998 were
$6,358,262.
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, 1999, was approximately $2,746,205 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, 1999: 1,975,454
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1998 are incorporated into Part II of this Form 10-KSB.
Portions of the Registrant's Proxy Statement for its 1999 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
PART I Page
----
Item 1. Description of Business.................................... 1
Item 2. Description of Property.................................... 9
Item 3. Legal Proceedings.......................................... 9
Item 4. Submission of Matters to a Vote of Security Holders........ 9
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters................................... 9
Item 6. Management's Discussion and Analysis or
Plan of Operation..................................... 9
Item 7. Financial Statements....................................... 10
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 10
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act.......................................... 10
Item 10. Executive Compensation..................................... 11
Item 11. Security Ownership of Certain Beneficial Owners
and Management........................................ 11
Item 12. Certain Relationships and Related Transactions............. 11
Item 13. Exhibits and Reports on Form 8-K........................... 11
Signatures ........................................................... 12
<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 impulses from
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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.
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
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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 19% in 1996, 16% in 1997, and 17% in 1998. The Company expects to
continue to expend resources in 1998 in development and marketing of products
for its Drive Control Systems unit.
The Company believes that significant savings in both time and
materials can be achieved by manufacturing companies by adding drive control
technology to existing manufacturing processes to coordinate operation of
related machines. The Company intends to continue to market its products for
sale in this "retrofit" market and also to companies building new manufacturing
machinery or processing systems.
AUTODATA SYSTEMS. The Company initially invested in AutoData Systems
as a development project chartered to create opportunities using proprietary,
pattern recognition technology. The outcome of the project was a Windows(TM)
software-based system that reads hand-printed characters, check marks, and bar
code information from scanned or faxed forms.
The system offers customers a new data entry solution that converts
information from forms into a text file compatible with most computer databases.
This intelligent, data entry alternative saves time, strain and money compared
to the current method of manual data entry. The basis of the hand print reading
capability is the Associative Pattern Memory(TM) (APM), a patented, pattern
recognition algorithm. The APM is a trainable, neural network based memory that
was incorporated in a Windows Dynamic Link Library (DLL). This DLL is the
foundation of the two products marketed by AutoData Systems.
AutoData Systems became an operating unit in January 1993. The first
software package, AutoData PRO(TM), was released in May 1993. This software was
designed for the end user. AutoData PRO served as a utility software package
designed to process only check mark and hand print information from scanned
forms. The software would allow the user to export the data in an ASCII file
format. In September 1993, AutoData PRO II was released as an upgrade along with
AutoData SDK. AutoData SDK II was designed for Windows developers. The software
included the AutoData DLL which developers could embed in their application in
order to provide automated data entry from scanned or faxed forms. AutoData
Survey was released in the spring of 1996. Survey is a software package which
utilizes check mark recognition technology to automate the data entry processing
of responding participant questionnaires. AutoData Survey has been directed
toward the Healthcare industry.
MICROFLAME GAS TORCHES. Microflame manufactures and sells four kinds
of miniature brazing torches, under the names Cub, Super Cub, Microflame and
Dragon. During the past several years, a significant portion of Microflame
product sales have been from its Cub and Super Cub
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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
four home office salespeople who deal directly with customers, and a number of
non-exclusive distributors located throughout the United States, Canada, Europe
and Asia.
Microflame's products are sold both directly by the Company and
through manufacturers' representatives. Direct sales are made both domestically
and internationally to selected house accounts. The house accounts consist of
large accounts and miscellaneous accounts which do not fit into the general
categories of hobby, hardware and electronics. Examples of miscellaneous
accounts are catalog and mail order houses, premium and incentive gift outlets,
government and industrial users, and dental and optical users. There are also a
few dealers and consumers with whom the Company deals directly because they are
located in pockets of the country not served by existing sales outlets.
The Company uses three manufacturers' representatives in the sale of
its Microflame products, each of whom has an exclusive territory within the
United States. These representatives collectively have a network of wholesale
distributors and dealers in the hobby, hardware and electronics fields and are
responsible for seeking out additional qualified new distributors.
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(3) STATUS OF NEW PRODUCTS.
See Item (10) below.
(4) COMPETITION.
The potential market for the Company's monitoring products includes
a broad range of industrial and commercial businesses. Design, quality, and
multiplicity of application, rather than price, are the focus of competition in
selling these products. The Company has substantial competition for its
production monitoring systems. Many of these competitors are well established
and larger in terms of total sales volume. Among the larger competitors are
Danaher Controls, Red Lion Controls, Dazic Controls, Newport Elect., Durant
Corp. and Contrex/Fenner Controls. The Company's competitive advantages are that
its products are sold as ready-to-install units and that its products have a
wide range of applications. The Company's major disadvantages include the fact
that its major competitors are much larger, have a broader variety of sensing
instruments, and have larger sales forces and established names.
AutoData competitors are essentially in the same product entry phase
of marketing their software products to users and developers. The essential
differences are that few competitors have their own technology and some have
larger sales volume because they have been in the market longer.
The market for Microflame gas torches consists primarily of
hobbyists, electronic kit assemblers, creators of jewelry and do-it-yourselfers.
Competitive products come from foreign sources, but are of a totally different
design that projects them as a soldering iron rather than a torch. Large propane
torches are sold in the home improvement market by Cooper Tools and
Bernz-O-Matic which both have established names and broader product lines than
Microflame.
(5) SOURCES AND AVAILABILITY OF RAW MATERIALS.
The Controls Division purchases parts and materials for its
production monitoring systems from various manufacturers and distributors. In
some instances these materials are manufactured in accordance with proprietary
designs. Multiple sources of these supplies and materials are readily available,
and the Controls Division is not dependent on any single sources for these
supplies and materials. The Controls Division has not experienced any problem of
short supply or delays from its suppliers. AutoData Systems purchases supplies
and materials from various suppliers and is not dependent on any single source
for such supplies.
Except for the small compressed gas cylinders used in Microflame's
gas torches, Microflame's parts and materials are purchased from various
manufacturers and distributors. There are multiple sources of necessary supplies
and materials available to Microflame, and Microflame is not now dependent on
any single source for these supplies and materials. Compressed gas cylinders are
purchased from two sources, as follows:
Manufacturing Source Percentage
-------------------- ----------
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Leland Limited, Inc. 16.5%
Nippon Tansan Gas Company,83.5%
Ltd. (Japan)
The loss of either of these sources or significant delays in delivery from
either of these sources could result in serious shortages which would have a
material adverse effect on Microflame's business. However, the Company has not
yet experienced any shortage or delay in shipment from any of these suppliers.
The cylinders are shipped in compliance with applicable D.O.T. regulations for
gas containers.
(6) CUSTOMER DEPENDENCE.
The Company is not dependent upon a single customer or a few
customers for a material portion of sales of any of its products.
(7) PATENTS AND TRADEMARKS.
The Company holds no patents, concessions, licenses or franchises
that relate to its production monitoring systems; however, AutoData has obtained
two patents related to recognition technology.
The names "Microflame," "Electro-Sensors" and "Auto Data" are
trademarks registered with the U.S. Patent and Trademark Office, respectively as
Reg. No. 809916, Reg. No. 1,142,310 and Reg. No. 1,874,543. The Company believes
its trademarks have been and will be useful in developing and protecting market
recognition for its products.
PPT Vision, Inc. has granted the Company an exclusive license which
allows the Company to incorporate a patented neural network algorithm in its
products. The initial use of this algorithm will be in the Company's automated
computer entry group under the name "AutoData Systems."
(8) GOVERNMENT APPROVALS.
The Company is not required to obtain governmental approval of its
products.
(9) EFFECT OF GOVERNMENTAL REGULATIONS.
The Company does not believe that any existing or proposed
governmental regulations will have a material effect on its business.
(10) RESEARCH AND DEVELOPMENT.
The Company has spent the following amounts on research and
development during the past two fiscal years:
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1998: $667,461
1997: $637,114
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 1998 the Company has continued to fund the AutoData
Systems start-up activities. 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 database
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, 1999, 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 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:
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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 have
been, and are expected to continue to be, subject to quarterly fluctuations due
to large system orders. There can be no assurance that the Drive Control Systems
division sales will continue to increase or that sales by the Speed Monitoring
division or Microflame, Inc. will improve.
Further, investments by the Company's subsidiary, ESI Investment Co., are
subject to significant positive and negative changes in value. In particular, a
significant investment by ESI Investment Co. in PPT Vision has experienced
substantial value fluctuations, which are expected to continue. The Company's
current intention is to gradually liquidate its investment securities to finance
expansion of its operating activities. As a result of the foregoing factors, the
Company believes that its results of operations will continue to fluctuate from
period to period. Therefore, there can be no assurance that the Company's
earnings growth will equal that of prior years.
COMPETITION. The Company's operating activities are subject to intense
competition. There can be no assurance that the Company will be able to
effectively compete within its existing markets or the new market it is entering
through its AutoData Systems division. Further, there can be no assurance that
others will not enter these markets. Competition in these markets is based
primarily on price, which subjects the Company to increasing pressures to make
price adjustments to remain competitive. Such price adjustments, if any, may
have an adverse impact on the Company's results of operations if not offset by
an increase in revenues or a reduction in expenses. Many of the Company's
competitors are large, well-established companies.
NEW PRODUCT DEVELOPMENT. The Company's future success is dependent in part
on its ability to develop new products. Difficulties or delays in the Company's
ability to develop, produce, test and market new products would have a material
adverse effect on future sales growth.
DEPENDENCE ON SUPPLIERS. The Company currently purchases, and will in the
future purchase, parts and components from vendors. While the Company attempts
to have more than a single source of supply for each part and component, it is
possible from time to time that the Company will have only one supplier for any
single part or component. Should a supplier be unwilling or unable to supply any
such part or component in a timely manner, the Company's business could be
materially adversely affected.
ITEM 2. DESCRIPTION OF PROPERTY
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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 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Section entitled "Price Range of Common Stock" in the Company's
1998 Annual Report to Shareholders is incorporated herein by reference. Although
there were 192 shareholders of record as of March 11, 1999, the Company has
approximately 550 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 1998 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements and notes contained in the 1998
Annual Report to Shareholders are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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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 39 Chairman of the Board of
Directors and President
Peter R. Peterson 65 Secretary and Director
Mark D. Laumann 44 Treasurer and Director
Mr. Slye has been the Chairman of the Board and President of the
Company since January 6, 1997, when he was elected to succeed James P. Slattery,
the Company's former Chairman and President, who died on December 27, 1996. Mr.
Slye has served as a Design Engineer for the Company since 1987 and as
Engineering Manager since 1990. He received his BSEE degree from the University
of Minnesota in 1983, following which he was employed as an electrical engineer
by Micro Component Technology, Inc. in Shoreview, Minnesota prior to joining the
Company.
Mr. Peterson has served as Secretary of the Company since 1973 and
served as Chairman of the Board from 1969 to January 1989. Mr. Peterson is also
a director of PPT, Vision, Inc.
Mr. Laumann has been employed by the Company in various accounting
capacities since 1975, serving as Controller from March 1981 to January 1994,
when he was elected Treasurer and a Director.
The executive officers of the Company are elected each year by the
Board of Directors at its first meeting or by written action following the
annual meeting of shareholders to serve during the following year or until their
successors are elected and qualified.
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 1999 Annual Meeting of Shareholders.
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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 1999 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
1999 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 1999 Annual Meeting of Shareholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See "Exhibit Index" on page following signatures.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the fourth quarter ended December 31, 1998.
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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, 1999 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, 1999
- ------------------------- (Chief Executive Officer)
Bradley D. Slye
/s/ Mark D. Laumann Treasurer and Director March 27, 1999
- ------------------------- (Chief Financial and Accounting
Mark D. Laumann Officer)
/s/ Peter R. Peterson Director and Secretary March 27, 1999
- -------------------------
Peter R. Peterson
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/s/ John S. Strom Director March 27, 1999
- -------------------------
John S. Strom
/s/ Joseph A. Marino Director March 27, 1999
- -------------------------
Joseph A. Marino
/s/ Geoffrey W. Miller Director March 27, 1999
- -------------------------
Geoffrey W. Miller
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-KSB
For the fiscal year
ended December 31, 1998 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--incorporated by reference
to Exhibit 3.2 to the Company's 1997 Form 10-KSB*
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--incorporated by
reference to Exhibit 10.4 to the Company's 1997 Form 10-KSB*
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*
- ------------------
* Incorporated by reference to a previously filed report or document--SEC File
No. 0-9587
**Management contract or compensatory plan or arrangement
<PAGE>
10.6** Electro-Sensors, Inc. 1997 Stock Option Plan and forms of Incentive
and Nonqualified Stock Option Agreements thereunder--incorporated by
reference to Exhibit 10.6 to the Company's 1997 Form 10-KSB*
13 1998 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 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
1998 VS. 1997
The Company's sales for 1998 were $6,358,262, a decrease of 1.3% as compared to
1997 sales of $6,440,576. The decline in sales resulted from sales decreases in
both the Production Monitoring segment and the Company's wholly-owned
subsidiary, Microflame, Inc. Meanwhile, the Character Recognition Imaging
segment continued to grow during the year, but was unable to offset sales
declines experienced by the other two operating segments.
The Production Monitoring segment consists of two distinct operating entities,
the Speed Monitoring Systems and the Drive Control Systems divisions. The Speed
Monitoring segment sales decreased 2.6% in 1998 due to slowed activity during
the second half of the year. Many of the customers of this division have been
impacted by the Asian currency crisis. The impact is being felt within that
customer base in the form of both over accumulated inventory and decreased cash
supplies relative to the inability to export products to Asian markets. The
reduced demand was consistent throughout the Speed Monitoring product line.
During 1998, the Drive Control sales experienced an upswing beginning with the
second quarter that continued through the year end. Slowed economic conditions
provided customers with the needed downtime to perform equipment upgrades the
Drive Control products provide and which such customers are only able to install
during off-peak production periods. Equipment demand and run time often prevent
customers from purchasing capital equipment items during peak cycles.
The Character Recognition Imaging segment, which is comprised of AutoData
Systems, grew 27.8% during 1998. Increased scanner sales are attributed with the
improved AutoData performance during the year. Meanwhile, software unit sales
decreased slightly as customers have held off purchases awaiting final
determinations on the mandated healthcare reporting requirements scheduled for
release in the near future. AutoData has developed a scanning solution for the
accumulation of required information requested by governmental agencies. The
scanning method is a low cost alternative to a solution that requires each
individual to carry a laptop computer to the remote patient sites. AutoData has
also worked aggressively during 1998 to establish several value added resellers
(VAR) in the healthcare area in an effort to maximize its potential market share
resulting from increased governmental reporting.
Microflame sales declined 23.7% in 1998 as compared to a year ago. The sales
decrease resulted primarily from reduced sales volume of the two gas torch
products. Slowed sales performance of the two-gas torch products has caused
Radio Shack to remove the product from its in-store stock. Radio Shack does,
however, continue to make the two-gas torch available on an as needed basis
through warehouse distribution. Radio Shack sales decreased 27.4% during the
year. The falling Microflame sales levels continue to reflect a lessening demand
and weak consumer marketplace for gas torch products.
The Company's cost of sales increased in 1998 both as a percentage of sales and
when compared to 1997. The decreased margin resulted from increased
manufacturing costs in the Production Monitoring segment and changing product
mix in the Character Recognition Imaging segment. Manufacturing costs increased
from both inflationary wage increases and additional personnel required for
AutoData products. The changing product mix resulted from increased scanner
sales that have a lower gross margin percentage.
Operating expenses increased 7.4% during 1998. The increased expense occurred
primarily in the sales and marketing area. The Company continued its emphasis on
market expansion by committing additional funding in both the personnel and
marketing areas. Enhanced catalog brochures, increased trade show activities and
additional product advertising all contributed to the increased marketing
expense. In addition, administrative and R&D expense each increased slightly
during the year. Increased administrative expenses resulted from computer
hardware and software changes needed for Year 2000 readiness. Research and
development expense changes
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
resulted from inflationary personnel cost increases and certification testing on
existing products to meet "UL" and international standards.
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 1998 and 1997. The
investments provided a realized gain of $23,748 on proceeds of $31,099 during
the year. The cumulative net unrealized gain on securities was $1,602,820,
$3,167,566, and $3,770,485 as of December 31, 1998, 1997 and 1996, 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 decreased due to timing differences. Inventories and accounts payable
increased to accommodate a larger scanner selection for AutoData customers. 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. Also, the Company declared a first quarter
cash dividend payable in February 1999.
CHANGING PRICES AND INFLATION
The Company did not experience any significant inflationary pressure during
1998. 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.
YEAR 2000
The Company has been examining all internal processes since mid 1997. The first
phase has been completed and subsequently all major internal systems have been
upgraded to Year 2000 ("Y2K") readiness. Several electronic control products are
designed with microprocessors, but do not require date or time based processing
in their operation. AutoData software is Y2K compliant with two minor exceptions
to the PRO product that will be resolved prior to the 1999 year end. The Company
will continue to evaluate and test for additional issues as they arise. The
second phase is in progress and will include a formalized communication with
critical suppliers to confirm their Y2K readiness. Informal communications have
not revealed potential vendor Y2K concerns.
The Company cannot predict the outcome of other companies' corrective Y2K
efforts. At this time, the Company believes the worst-case scenario is temporary
disruption in channels of distribution of products and demand of end user
customers who become distracted by other Y2K problems. The Company does not
believe that this scenario will occur, but if it does, the Company does not
expect that it would have a material effect on the Company's financial position
or results. Contingency plans will be prepared to allow for continued operation
of critical business operations on January 1, 2000 and beyond. In addition,
remaining Y2K costs are not expected to be significant.
5
<PAGE>
CONSOLIDATED BALANCE SHEETS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including temporary cash
deposits of $1,866,859 and $1,936,047, respectively $ 2,313,606 $ 2,536,685
Investments 215,778 4,698,710
Trade receivables, less allowance for doubtful
accounts, 1998 $22,500; 1997 $18,000 720,289 746,049
Inventories 974,612 876,189
Prepaid expenses 69,969 76,921
Prepaid income taxes 97,257 100,752
Deferred income taxes 0 51,500
- -----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,391,511 9,086,806
- -----------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT 1,775,369 1,807,950
- -----------------------------------------------------------------------------------------------
OTHER ASSETS
Investments 2,910,835 0
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 9,077,715 $ 10,894,756
===============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 44,843 $ 240,775
Accounts payable 142,249 97,998
Accrued expenses 182,938 263,688
Deferred income taxes 12,800 0
- -----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 382,830 602,461
- -----------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 561,900 1,184,400
- -----------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 9)
SHAREHOLDERS' EQUITY:
Common stock, par value $.10 per share; authorized
10,000,000 shares; issued 1,975,454 and 1,964,586, shares,
respectively 197,545 196,459
Additional paid-in capital 702,576 674,284
Retained earnings 6,209,044 6,214,922
Unrealized holding gain on investments 1,023,820 2,023,566
Note receivable 0 (1,336)
- -----------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 8,132,985 9,107,895
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,077,715 $ 10,894,756
===============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 6,358,262 $ 6,440,576 $ 6,142,643
COST OF GOODS SOLD 2,771,496 2,697,223 2,640,508
- ------------------------------------------------------------------------------------------------
GROSS PROFIT 3,586,766 3,743,353 3,502,135
- ------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling 1,805,995 1,637,334 1,339,473
Administrative 778,429 752,479 948,228
Research and development 667,461 637,114 706,813
- ------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 3,251,885 3,026,927 2,994,514
- ------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 334,881 716,426 507,621
- ------------------------------------------------------------------------------------------------
NONOPERATING INCOME (EXPENSE):
Gain (loss) on sale of investment securities 23,748 7,223 263,244
Interest income 106,325 118,478 116,240
Other (127,531) (151,772) (141,402)
- ------------------------------------------------------------------------------------------------
TOTAL NONOPERATING INCOME (EXPENSE) 2,542 (26,071) 238,082
- ------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 337,423 690,355 745,703
FEDERAL AND STATE INCOME TAXES 107,000 237,000 282,850
- ------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 230,423 $ 453,355 $ 462,853
================================================================================================
INCOME PER COMMON SHARE:
Basic $ 0.12 $ 0.23 $ 0.24
Diluted $ 0.12 $ 0.23 $ 0.24
================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 1,968,935 1,951,597 1,941,163
Diluted 1,975,648 1,965,124 1,964,566
================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash:
Received from customers $ 6,384,022 $ 6,421,155 $ 6,207,460
Paid to suppliers and employees (6,141,524) (5,928,771) (5,497,248)
Interest received 106,325 118,478 116,240
Income taxes paid (96,705) (316,349) (406,233)
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 252,118 294,513 420,219
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (104,777) (106,069) (78,616)
Investment in marketable securities:
Sales 31,099 61,804 287,098
Purchases 0 0 (31,250)
Repayments (net of advances) from Employee Stock
Ownership Plan 0 0 67,500
Repayments of notes receivable 1,336 60,990 2,433
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (72,342) 16,725 247,165
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (236,301) (233,913) (1,203,087)
Net proceeds (payments) on short-term borrowings (195,932) (180,608) (165,133)
Proceeds from issuance of stock 29,378 58,380 8,551
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (402,855) (356,141) (1,359,669)
- ----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (223,079) (44,903) (692,285)
CASH AND CASH EQUIVALENTS:
BEGINNING 2,536,685 2,581,588 3,273,873
- ----------------------------------------------------------------------------------------------------------
ENDING $ 2,313,606 $ 2,536,685 $ 2,581,588
- ----------------------------------------------------------------------------------------------------------
(CONTINUED ON FOLLOWING PAGE)
</TABLE>
See Notes to Consolidated Financial Statements.
8
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net income (loss) $ 230,423 $ 453,355 $ 462,853
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 137,358 131,262 127,994
Provision for losses on trade receivables 0 0 (3,500)
Realized (gain) loss on sale of:
Investment securities, net (23,748) (7,223) (263,244)
Property and equipment 0 5,127 0
Deferred taxes 6,800 29,300 (49,200)
(Increase) decrease in:
Trade receivables 25,760 (19,421) 68,317
Inventories (98,423) (46,761) (41,146)
Prepaid:
Expenses 6,952 (903) 4,164
Income taxes 3,495 (108,649) 0
Increase (decrease) in:
Accounts payable 44,251 (17,668) 17,262
Accrued:
Expenses (80,750) (123,906) 170,902
Income taxes 0 0 (74,183)
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 252,118 $ 294,513 $ 420,219
===========================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Net change in unrealized holding gains on
marketable securities $(1,564,746) $ (602,919) $ (981,448)
===========================================================================================================
Tax benefit of stock options exercised $ 0 $ 6,851 $ 0
===========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
9
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ISSUED ADDITIONAL
------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 1,940,270 $ 194,027 $ 584,236 $ 5,758,728
Collection of ESOP note 25,549
Repayment of note receivable
Unrealized gains (losses) on investments,
net of reclassification adjustment
Stock issued through the Employee Stock
Purchase Plan 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 13,157 1,316 31,250
Repayment of note receivable
Unrealized gains (losses) on investments,
net of reclassification adjustment
Stock issued through the Employee Stock
Purchase Plan 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
Exercise of stock options 4,874 487 13,577
Repayment of note receivable
Unrealized gains (losses) on investments,
net of reclassification adjustment
Stock issued through the Employee Stock
Purchase Plan 5,994 599 14,715
Dividend on common stock $.12 per share (236,301)
Tax benefit of stock options exercised
Net income 230,423
- ------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 1,975,454 $ 197,545 $ 702,576 $ 6,209,044
============================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
OTHER UNALLOCATED EMPLOYEE TOTAL
COMPREHENSIVE COMPREHENSIVE STOCK OWNERSHIP NOTES SHAREHOLDERS'
INCOME INCOME PLAN SHARES RECEIVABLE EQUITY
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 0 $3,035,733 $ (41,951) $ (64,759) $ 9,466,014
41,951 67,500
2,433 2,433
(627,348) (627,348) (627,348)
8,551
(232,952)
462,853 462,853
- -----------------------------------------------------------------------------------------
(164,495) 2,408,385 0 (62,326) 9,147,051
==========
32,566
60,990 60,990
(384,819) (384,819) (384,819)
25,814
(233,913)
6,851
453,355 453,355
- -----------------------------------------------------------------------------------------
68,536 2,023,566 0 (1,336) 9,107,895
==========
14,064
1,336 1,336
(999,746) (999,746) (999,746)
15,314
(236,301)
230,423 230,423
- -----------------------------------------------------------------------------------------
$ (769,323) $1,023,820 $ 0 $ 0 $ 8,132,985
=========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
The accompanying consolidated financial statements include the accounts of
Electro-Sensors, Inc. and its wholly owned subsidiaries: Microflame, Inc., and
ESI Investment Co.
Electro-Sensors, Inc. manufactures production monitoring and software systems,
and Microflame, Inc. produces miniature brazing torches used for hobbies and
crafts. ESI Investment Co. manages a varied investment portfolio. Intercompany
accounts, transactions and earnings have been eliminated in consolidation.
Electro-Sensors, Inc. markets its products to a number of different industries
located throughout the United States and abroad. The Company grants credit to
customers under normal industry terms, generally 30 days. Microflame, Inc. also
markets its products throughout the U.S. and abroad under normal credit terms.
The majority of Microflame, Inc. sales are concentrated in the hobby and craft
industry. ESI Investment Co. has investments in marketable securities, which
are subject to normal market risks.
SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY ARE SUMMARIZED BELOW:
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents. Cash equivalents are carried at cost plus accrued interest
which approximates market value.
The Company maintains its cash in bank deposit accounts, which, at times, may
exceed federally insured limits. The Company has not experienced any losses on
such accounts. The Company believes it is not exposed to any significant credit
risk on cash.
INVESTMENTS:
The Company has a portfolio of investments. Management determines the
appropriate classification of securities at the date individual investments 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, government debt securities, money-market funds and unregistered
equity securities. 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 investments in anticipation of short-term
fluctuations in market prices, the investments 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. Investments in unregistered securities are reported at
original cost.
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.
REVENUE RECOGNITION:
The Company records sales revenue upon shipment to the customer.
ADVERTISING COSTS:
The Company generally charges to expense the production costs of advertising the
first time the advertising takes place, except for direct-response advertising,
which is capitalized and amortized over the expected period of future benefits.
Advertising expense was $518,433, $568,910 and $292,140 for the years ended
December 31, 1998, 1997 and 1996 respectively.
RESEARCH AND DEVELOPMENT:
Expenditures for research and development are expensed as incurred.
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
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Depreciation expense for the years ended December 31, 1998, 1997, and 1996 was
$137,358, $131,262, and $127,994, respectively.
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.
EARNINGS PER SHARE:
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share". SFAS No. 128 simplifies the standards
required under current accounting rules for computing earnings per share and
replaces the presentation of primary earnings per share and fully diluted
earnings per share with a presentation of basic earnings per share ("basic EPS")
and diluted earnings per share ("diluted EPS"). Basic EPS excludes dilution and
is determined by dividing income available to common shareholders by the
weighted average number of common shares outstanding during the period. Diluted
EPS reflects the potential dilution that could occur if securities and other
contracts to issue common stock were exercised or converted into common stock.
Diluted EPS is computed similarly to fully diluted earnings per share under
current accounting rules.
The following information presents the Company's computations of basic and
diluted EPS for the periods presented in the income statements.
PER SHARE
INCOME SHARES AMOUNT
- --------------------------------------------------------------------------------
1998:
Basic EPS $230,423 1,968,935 $ .12
Effect of dilutive
employee stock
options 6,713
- --------------------------------------------------------------------------------
Diluted EPS $230,423 1,975,648 $ .12
================================================================================
1997:
Basic EPS $453,355 1,951,597 $ .23
Effect of dilutive
employee stock
options 13,527
- --------------------------------------------------------------------------------
Diluted EPS $453,355 1,965,124 $ .23
================================================================================
1996:
Basic EPS $462,853 1,941,163 $ .24
Effect of dilutive
employee stock
options 23,403
- --------------------------------------------------------------------------------
Diluted EPS $462,853 1,964,566 $ .24
================================================================================
COMPREHENSIVE INCOME:
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 requires the reporting and display of comprehensive income and its
components. Comprehensive income includes the Company's net income plus other
comprehensive income items which are excluded from net income.
The Company's other comprehensive income items include unrealized gains
(losses), net of income taxes and reclassification adjustment for gains and
losses included in income. The reclassification adjustment for gains and losses
included in net income were $23,600, $72,237 and $169,700 for 1998, 1997 and
1996 respectively.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTE 2. INVESTMENTS
The cost and estimated fair value of the investments are as follows:
<TABLE>
<CAPTION>
GROSS GROSS FAIR
COST UNREALIZED GAIN UNREALIZED LOSS VALUE
- ---------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Treasury bills $ 1,866,859 $ 0 $ 0 $ 1,866,859
Money-market funds 208,230 0 0 208,230
Equity securities 1,523,793 1,983,263 (380,443) 3,126,613
- ---------------------------------------------------------------------------------------------------
3,598,882 1,983,263 (380,443) 5,201,702
Less cash equivalents (2,075,089) (2,075,089)
- ---------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 1,523,793 $ 1,983,263 $ (380,443) $ 3,126,613
===================================================================================================
<CAPTION>
GROSS GROSS FAIR
COST UNREALIZED GAIN UNREALIZED LOSS VALUE
- ---------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------
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 INVESTMENTS $ 1,531,144 $ 3,417,569 $ (250,003) $ 4,698,710
===================================================================================================
<CAPTION>
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 INVESTMENTS $ 1,585,725 $ 3,875,325 $ (104,840) $ 5,356,210
===================================================================================================
</TABLE>
Realized gains and losses on investments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
199 1997 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains $23,748 $34,054 $263,244
Gross realized losses 0 (26,831) 0
- ------------------------------------------------------------
NET REALIZED GAIN $23,748 $ 7,223 $263,244
============================================================
</TABLE>
The change in the net unrealized holding gain on investments at December 31,
1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Unrealized gain on current
portfolio of marketable
equity securities $1,983,263 $3,417,569
Unrealized loss on current
portfolio of marketable
equity securities (380,443) (250,003)
Related deferred tax effect (579,000) (1,144,000)
- ------------------------------------------------------------
TOTAL UNREALIZED HOLDING
GAIN, NET $1,023,820 $2,023,566
============================================================
</TABLE>
NOTE 3. INVENTORIES
Inventories used in the determination of cost of goods sold are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Raw materials $671,545 $592,679 $562,837
Work in process 124,055 128,791 139,905
Finished goods 179,012 154,719 126,686
- ------------------------------------------------------------
TOTAL INVENTORIES $974,612 $876,189 $829,428
============================================================
</TABLE>
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTE 4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
DECEMBER 31,
--------------------------
1998 1997
- ------------------------------------------------------------
Equipment $ 463,652 $ 454,815
Furniture and fixtures 438,405 354,887
Building 1,333,823 1,321,401
Land 414,540 414,540
- ------------------------------------------------------------
2,650,420 2,545,643
Less accumulated depreciation 875,051 737,693
- ------------------------------------------------------------
TOTAL PROPERTY AND EQUIPMENT $1,775,369 $1,807,950
============================================================
NOTE 5. NOTE PAYABLE
DECEMBER 31,
---------------------
1998 1997
- ------------------------------------------------------------
Unsecured bank note, paid
March 1999, with interest at
7.75% paid monthly $44,843 $240,775
============================================================
NOTE 6. ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1997 include:
1998 1997
- ------------------------------------------------------------
Wages and commissions $126,128 $181,564
Other 56,810 82,124
- ------------------------------------------------------------
Total accrued expenses $182,938 $263,688
============================================================
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 2003.
Minimum lease payments required under non-cancelable operating leases are as
follows:
YEAR AMOUNT
- ------------------------------------------------------------
1999 $34,909
2000 3,936
2001 3,936
2002 3,936
2003 2,624
- ------------------------------------------------------------
TOTAL MINIMUM LEASE PAYMENTS $49,341
============================================================
Rental expense charged to operations was $83,629, $76,079, and $78,760 for years
ended December 31, 1998, 1997 and 1996, 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 and 1997 Stock
Option Plans (Plans). 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.
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 plans, 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. 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 with no new options being granted under this plan.
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,
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
Granted 23,000 3.67 4,000 3.88
Exercised (374) 2.38 (4,500) 3.13
Forfeited (886) 2.38 0 0
- --------------------------------------------------------------------------------
BALANCE,
DECEMBER 31,
1998 93,000 $ 3.41 58,000 $ 3.95
================================================================================
Price Range of Outstanding Options
INCENTIVE DIRECTORS
AS OF DECEMBER 31, 1998 OPTIONS OPTIONS
- --------------------------------------------------------------------------------
Options $2.38 to $3.75 $2.63 to $4.75
Expiration dates 2007 to 2008 1999 to 2008
Options exercisable 63,000 58,000
================================================================================
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The Company granted 27,000 options under the 1997 Plan during 1998.
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 the lower
of 85% of the market price on the first day of the calendar year or 85% of the
market price on the last day of the calendar year. During 1998, 1997 and 1996,
5,994, 9,147 and 2,012 shares, respectively, were issued under this plan. At
December 31, 1998, 82,847 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, 1998 1997 1996
- -----------------------------------------------------------
Net income
As reported $230,423 $453,355 $462,853
Pro forma $194,656 $399,237 $461,222
Net income per
common share
As reported $ .12 $ .23 $ .24
Pro forma $ .10 $ .20 $ .24
===========================================================
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 AND 1997 PLAN
----------------------- EMPLOYEE
EMPLOYEES DIRECTORS STOCK PLAN
- ------------------------------------------------------------
1996 grants -- -- $ .56
1997 grants $ 2.25 $ -- $ .28
1998 grants $ 1.22 $ 1.29 $ .63
============================================================
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 1997 and 1998:
1998 1997
- ------------------------------------------------------------
Risk-free interest rate 5.76%-5.81% 5.1%-6.4%
Expected life of options 7 YEARS 7 years
Expected life of Employee
Stock Plan shares 6 MONTHS 6 months
Expected volatility 12%-13% 38%-64%
Expected dividend yield 3.84% 3.2%
============================================================
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.
The following table summarizes stock options outstanding at December 31, 1998:
WEIGHTED AVG.
EXERCISE CONTRACTUAL WEIGHTED AVG.
PRICE RANGE OPTIONS LIFE REMAINING EXERCISE PRICE
- ------------------------------------------------------------
$2.65-$3.94 115,000 7.50 $ 3.38
$3.94-$4.75 36,000 4.52 $ 4.38
============================================================
NOTE 9. EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors a leveraged employee stock ownership plan (ESOP) that
covers substantially all employees who work 1,000 or more hours during the year.
The ESOP has, at various times, secured financing from the Company to purchase
the Company's shares on the open market. Dividends on shares held by the ESOP
are used to pay debt service. The ESOP shares purchased with the proceeds of the
Company loans are pledged as collateral for its debt. The shares are maintained
in a suspense account until released and allocated to participant accounts.
ESOP compensation expense was $36,000, $36,000, and $36,000, for the years ended
December 31, 1998, 1997 and 1996, respectively.
Shares of the Company held by the ESOP at December 31, 1998 and 1997 are as
follows:
1998 1997
- ------------------------------------------------------------
Allocated shares 149,198 109,455
Shares released for allocation 0 0
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, 1998, approximately 149,198 shares of the Company's stock, with
an aggregate fair market value of approximately $485,000 are held by ESOP
participants, who if terminated, would be subject to the
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
repurchase requirement.
NOTE 10. NOTE RECEIVABLE FOR THE PURCHASE OF COMMON STOCK
DECEMBER 31, 1998 1997
- ------------------------------------------------------------
Note 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
were made through payroll
deductions. $0 $1,336
- ------------------------------------------------------------
TOTAL NOTE RECEIVABLE FOR THE PURCHASE
OF COMMON STOCK $0 $1,336
============================================================
NOTE 11. INCOME TAXES
The components of the income tax provision for the years ended December 31,
1998, 1997, and 1996, are as follows:
1998 1997 1996
- ------------------------------------------------------------
Current:
Federal $ 96,371 $194,234 $215,986
State 3,829 13,466 17,664
Deferred:
Federal 6,300 28,900 45,300
State 500 400 3,900
- ------------------------------------------------------------
TOTAL FEDERAL AND STATE
INCOME TAXES $107,000 $237,000 $282,850
============================================================
The provision for income taxes for the years ended December 31, 1998, 1997 and
1996, differs from the amount obtained by applying the U.S. federal income tax
rate to pretax income due to the following:
1998 1997 1996
- ------------------------------------------------------------
Computed `expected'
tax expense $115,000 $242,000 $261,000
Increase (decrease) in
taxes resulting from:
State income
taxes, net of
Federal benefit 2,500 8,800 11,500
Credits (15,700) (13,840) 0
Other 5,200 40 10,350
- ------------------------------------------------------------
TOTAL FEDERAL AND STATE
INCOME TAXES $107,000 $237,000 $282,850
============================================================
The components of the net deferred tax asset (liability) consist of:
1998 1997
- ------------------------------------------------------------
Deferred tax assets:
Salary accrual $ 0 $ 22,300
Vacation disallowance 27,000 22,700
Allowance for doubtful
accounts 8,100 6,500
Obsolete inventory 11,000 0
- ------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS $ 46,100 $ 51,500
- ------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ (41,800) $ (40,400)
Unrealized investment
holding gain (579,000) (1,144,000)
- ------------------------------------------------------------
TOTAL DEFERRED LIABILITIES $(620,800) $(1,184,400)
- ------------------------------------------------------------
NET DEFERRED TAX ASSET
(LIABILITY) $(574,700) $(1,132,900)
============================================================
NOTE 12. OPERATIONS IN DIFFERENT INDUSTRIES
The following is a breakdown of selected financial statement information by
operating unit:
PRODUCTION MONITORING SYSTEMS
------------------------------------
DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------
Total sales $5,099,756 $5,206,331 $5,132,829
Export sales 305,382 205,601 373,944
Income from
operations 943,360 1,357,040 1,075,134
Depreciation 122,490 116,572 109,582
Capital expenditures 89,030 106,069 59,698
Year end total assets 5,633,970 5,522,834 5,750,411
============================================================
CHARACTER RECOGNITION
IMAGING SYSTEMS
----------------------------------
DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------
Total sales $785,677 $614,687 $381,562
Export sales 34,644 21,923 49,709
(Loss) from
operations (517,680) (577,669) (468,163)
Depreciation 11,839 12,980 14,409
Capital expenditures 15,743 0 15,652
Year end total assets 263,070 220,593 115,080
============================================================
BRAZING TORCHES
-----------------------------------
DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------
Total sales $472,829 $619,558 $628,252
Export sales 8,491 17,150 28,415
(Loss) from
operations (90,782) (118,718) (99,350)
Depreciation 1,526 1,710 4,003
Capital expenditures 0 0 3,266
Year end total assets 210,328 196,433 220,998
============================================================
17
<PAGE>
INDEPENDENT AUDITOR'S REPORT
ELECTRO-SENSORS, 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
SCHWEITZER KARON & BREMER, LLC
Certified Public Accountants
Minneapolis, Minnesota
February 3, 1999
PRICE RANGE OF COMMON STOCK
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The Company's Common Stock trades on the Nasdaq Small Cap tier of The Nasdaq
Stock Market- 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
------ ---- ---
1998 FIRST QUARTER 4 1/4 3 11/16
SECOND QUARTER 4 3 3/8
THIRD QUARTER 4 3/16 2 7/8
FOURTH QUARTER 3 7/8 2 23/32
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
On March 12, 1999 there were approximately 550 shareholders of record.
Electro-Sensors, Inc. paid cash dividends on its common stock of $.12 per share
in 1997 and 1998 on a quarterly basis.
18
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS
We have issued our report, dated February 3, 1999, 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, 1998. We
hereby consent to the incorporation by reference of the above-mentioned report
in the Prospectus constituting part of the registration statements on Forms S-8
of Electro-Sensors, Inc. (File No. 33-40037), (File No. 333-08603), and (File
No. 333-48955).
/s/ Schweitzer Karon & Bremer, LLC
Certified Public Accountants
Minneapolis, Minnesota
March 24, 1999
<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 12/31/98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,313,606
<SECURITIES> 3,126,613
<RECEIVABLES> 742,789
<ALLOWANCES> 22,500
<INVENTORY> 974,612
<CURRENT-ASSETS> 4,391,511
<PP&E> 2,650,420
<DEPRECIATION> 875,051
<TOTAL-ASSETS> 9,077,715
<CURRENT-LIABILITIES> 382,830
<BONDS> 0
0
0
<COMMON> 197,545
<OTHER-SE> 7,935,440
<TOTAL-LIABILITY-AND-EQUITY> 9,077,715
<SALES> 6,358,262
<TOTAL-REVENUES> 6,488,335
<CGS> 2,771,496
<TOTAL-COSTS> 6,023,381
<OTHER-EXPENSES> 127,531
<LOSS-PROVISION> 42,612
<INTEREST-EXPENSE> 16,497
<INCOME-PRETAX> 337,423
<INCOME-TAX> 107,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230,423
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
