U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 55343-9108
(Address of Principal Executive Offices) (Zip Code)
(612)930-0100
(Issuer's telephone number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Shares of $.10 par value common stock outstanding at November 4, 1999:
1,979,773
Transitional Small Business Disclosure Format (check one):
Yes No X
1
<PAGE>
Part I. Financial Information
The interim financial statements included in this form 10-QSB are unaudited
and reflect in the opinion of management all adjustments (which include only
normal recurring adjustments) necessary for a fair presentation of the
results of operations for these periods.
ELECTRO-SENSORS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ----------------------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
SALES $1,362,883 $1,514,693 $4,269,102 $4,722,662
COST OF SALES 586,327 674,619 1,890,304 2,023,558
--------- --------- --------- ---------
GROSS MARGIN 776,556 840,074 2,378,798 2,699,104
--------- --------- --------- ---------
OPERATING EXPENSES:
Selling expense 368,929 386,265 1,311,238 1,359,187
Administrative expense 144,087 185,794 555,311 552,260
Research and development 227,764 178,667 601,670 474,747
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES 740,780 750,726 2,468,219 2,386,194
--------- --------- --------- ---------
INCOME FROM OPERATIONS 35,776 89,348 (89,421) 312,910
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Gain (loss) on sale of
Investment securities 1,185 23,748 1,185 23,748
Interest income 22,655 29,537 65,172 83,206
Other (24,431) (29,208) (78,284) (104,514)
--------- --------- --------- ---------
TOTAL OTHER INCOME (591) 24,077 (11,927) 2,440
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 35,185 113,425 (101,348) 315,350
PROVISION FOR INCOME TAXES 12,900 41,400 (38,200) 115,300
--------- --------- --------- ---------
NET INCOME $ 22,285 $ 72,025 $ (63,148) $ 200,050
========= ========= ========= =========
</TABLE>
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<PAGE>
(Continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 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 1,979,773 1,977,292 1,980,369 1,982,002
========= ========= ========= =========
EARNINGS PER COMMON
AND COMMON EQUIVALENT
SHARES:
BASIC $.01 $.04 $(.03) $.10
=== === === ===
DILUTED $.01 $.04 $(.03) $.10
=== === === ===
</TABLE>
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<PAGE>
ELECTRO-SENSORS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
- ------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $2,199,077 $2,313,606
Investment in available-for-sale securities 252,503 215,778
Trade receivables, less allowance
for doubtful accounts of $19,500
and $18,000, respectively 658,741 720,289
Inventories 875,497 974,612
Prepaid expenses 74,987 69,969
Prepaid income taxes 120,489 97,257
--------- ---------
TOTAL CURRENT ASSETS 4,181,294 4,391,511
PROPERTY AND EQUIPMENT, NET 1,722,785 1,775,369
INVESTMENTS 2,021,739 2,910,835
--------- ---------
TOTAL ASSETS $7,925,818 $9,077,715
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ -0- $ 44,843
Accounts payable 114,247 142,249
Accrued expense 197,799 182,938
Deferred taxes 3,500 12,800
--------- ---------
TOTAL CURRENT LIABILITIES 315,546 382,830
--------- ---------
DEFERRED INCOME TAXES 253,100 561,900
--------- ---------
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 5,967,976 6,209,044
Unrealized holding gain on investment
Securities, net 480,249 1,023,820
--------- ---------
Total shareholders' equity 7,357,172 8,132,985
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,925,818 $9,077,715
========= =========
4
</TABLE>
<PAGE>
ELECTRO-SENSORS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Cash received from customers $ 4,337,400 $ 4,783,844
Cash paid to suppliers and employees (4,258,217) (4,546,929)
Interest received 65,172 83,206
Income taxes paid 5,668 (46,725)
----------- ----------
Net cash provided by operating activities 150,023 273,396
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of investment in
Available-for-sale securities 1,185 31,098
Purchase of property and equipment (51,800) (86,005)
Notes receivable -0- 1,034
---------- ----------
Net cash (used in) investing activities (50,615) (53,873)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (177,920) (177,156)
Payments on short-term borrowings (44,843) (145,479)
Proceeds from issuance of stock 8,826 21,051
---------- ----------
Net cash (used in) financing activities (213,937) (301,584)
---------- ----------
Increase (decrease) in cash (114,529) (82,061)
CASH AND CASH EQUIVALENTS
Beginning 2,313,606 2,536,685
---------- ----------
End $ 2,199,077 $ 2,454,624
========== ==========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ (63,148) $ 200,050
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 104,384 102,386
Provision for losses on trade receivables (6,750) 15,750
Realized (gain) loss on sale of marketable
securities (1,185) (23,748)
(Increase) decrease in:
Trade receivables 68,298 61,182
Inventory 99,115 (147,853)
Prepaid expenses (5,018) (611)
Prepaid income taxes (23,232) 68,575
Increase (decrease) in:
Accounts payable (28,002) 90,551
Accrued expenses 14,861 (92,886)
Deferred income taxes (9,300) 0
---------- ----------
Net cash provided by operating activities $ 150,023 $ 273,396
========== ==========
NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized gain(loss) on marketable securities (852,371) (1,542,493)
---------- ----------
Total noncash investing and financing $ (852,371) $(1,542,493)
========== ==========
</TABLE>
5
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATION
The Company's sales for the third quarter decreased 10.0% and 9.6%, respectively
for the third quarter and the nine months of 1999 as compared to the same
periods of 1998. Each operating segment shared in the declining sales for the
third quarter of 1999. Slowed sales continued for the Controls division 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, price reductions to enhanced higher-end control
products are challenging the market of the Controls segment. The Controls
segment did, however, notice a resurgence in late August and September customer
sales. AutoData is awaiting an impending market application in the healthcare
industry initially scheduled for release during the first half of 1999. The
anticipated Medicare/Medicaid certified application would require the reporting
of statistical data on a state-by-state level.
The Company's wholly-owned subsidiary, Microflame, Inc., has experienced a 33.6%
decrease in sales during the nine months of 1999. The decline in sales
reflects the discontinued buying of the two-gas torch by its largest customer,
Radio Shack. Current sales have required the restructuring of Microflame
operations to a positive income producing level.
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 3.4% during the nine months of 1999 when
compared to the same period of 1998. The increased expenses occurred in
administrative and research and development areas. Administrative expenses
increased primarily from both software enhancements needed for Y2K compliance
and legal costs associated with employee benefit plan revisions. Research and
Development expenses increased in both the Speed Monitoring and AutoData
divisions. Both segments continue to work aggressively toward new product
development.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1999, working capital decreased
$142,933 to a total of $3,865,748. The decrease in the fair market value of
marketable securities resulted from the decreased quoted market price of certain
securities. In addition, the Company holds investments in securities that are
not readily marketable. These securities are included in the caption
`Investments' at their original cost. Management believes that the current fair
value of these investments exceeds the original cost. Accounts receivable
decreased due to lower sales levels. Inventory and accounts payable decreased as
a result of the sales decline. In addition, the employee stock purchase plan
generated $8,826 during 1999. The Company made three dividend payments of
6
<PAGE>
$59,264, $59,264 and $59,392 during the nine months of 1999. In addition,
the Company invested an additional $51,800 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 aware of the computer difficulties that the new millennium
presents for the Year 2000 (`Y2K'). The Y2K millennium problem will virtually
affect every computer operation in some form. Consequently, the Company has been
examining all internal processes using date-related data and the programming
code used in our computer systems since mid 1997. The first phase has been
completed and subsequently major internal systems have been upgraded to Y2K
readiness. Several electronic control products are designed with
microprocessors, but do not require date or time based processing in their
operations. 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 includes a formalized communication with critical
suppliers to confirm their Y2K readiness. To date, confirmations received from
the Company's vendors indicating that plans are being developed to address
processing of transactions in the Year 2000 have not been evaluated.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
PART II OTHER INFORMATION
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.
7
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to vote of shareholders during
the period covered by this Form 10-QSB.
Item 5. Other Information
The Company wishes to caution investors that the following
important factors, among others, in some cases have affected
and in the future could affect the Company's actual results of
operations and cause such results to differ materially from
those anticipated in forward-looking statements made in this
document and elsewhere by or on behalf of the Company: the
uncertainty of market acceptance of products of the Company's
AutoData Systems division which is in the continuing stage of
development; fluctuations and declines in operating results of
the Company's Drive Control Systems, Speed Monitoring and
Microflame divisions; fluctuations in the value of the
Company's investments, particularly PPT Vision, and sales of
such investments; competition, particularly with regard to the
pricing of products; the Company's ability to develop new
products; and dependence on suppliers. For additional
information, please see the Company's Annual Report on Form
10-KSB.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
ended September 30, 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 November 4, 1999 By Bradley D. Slye
Bradley D. Slye, President
Date November 4, 1999 By Mark D. Laumann
Mark D. Laumann, Treasurer
(principal financial officer)
8
<PAGE>
EXHIBIT INDEX
ELECTRO-SENSORS, INC.
FORM 10-QSB
For Fiscal Quarter Ended September 30, 1999
Exhibit No. Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 2,199,077
<SECURITIES> 252,503
<RECEIVABLES> 678,241
<ALLOWANCES> 19,500
<INVENTORY> 875,497
<CURRENT-ASSETS> 4,181,294
<PP&E> 2,702,221
<DEPRECIATION> 979,436
<TOTAL-ASSETS> 7,925,818
<CURRENT-LIABILITIES> 315,546
<BONDS> 0
0
0
<COMMON> 197,977
<OTHER-SE> 7,159,195
<TOTAL-LIABILITY-AND-EQUITY> 7,925,818
<SALES> 4,269,102
<TOTAL-REVENUES> 4,335,459
<CGS> 1,890,304
<TOTAL-COSTS> 4,358,523
<OTHER-EXPENSES> 77,746
<LOSS-PROVISION> (6,750)
<INTEREST-EXPENSE> 538
<INCOME-PRETAX> (101,348)
<INCOME-TAX> (38,200)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (63,148)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
