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, 1999
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. [X]
The issuer's revenues for the fiscal year ended December 31, 1999 were
$5,682,301.
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 17, 2000, was approximately $3,635,000 based on
the closing sale price of the Issuer's Common Stock on such date).
Shares of Common Stock, $.10 par value, outstanding on March 17, 2000: 1,990,108
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1999 are incorporated into Part II of this Form 10-KSB.
Portions of the Registrant's Proxy Statement for its 2000 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. The Company's traditional 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 analog readouts. 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. The Company's Controls Division's traditional products
remain in the "Speed Monitoring Systems Unit."
The Speed Monitoring Systems monitoring controls include 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. Speed Monitoring Systems also manufactures and
sells alarm systems, tachometers, and other devices that translate
1
<PAGE>
impulses from the sensors into alarm signals, computer inputs, or digital
displays that are understandable to and usable by the customer.
Speed Monitoring Systems 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.
Speed Monitoring Systems production monitoring systems are sold to
businesses in all major standard industrial classifications, including food
processing, chemicals, agricultural, mining, utility, forest products, steel,
tire, glass and electronics. Any business that uses machinery with a rotating
shaft is a potential customer.
Speed Monitoring Systems 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 national industrial periodicals
that cover a wide range of industrial products.
2. Drive Control Systems
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. The distinct features have allowed the Company to
market these products under the Drive Control Systems name due to the intricate
customer needs.
Drive Control Systems markets a line of digital control products for
motors that require a complete closed loop control P.I.D. (proportional integral
derivative). The closed loop controllers increase production speed and reduce
waste. Product samples are the MicroSpeed, MS332, and MicroLength closed loop
controllers. The MicroSpeed functions as a speed control for 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 MS332 functions as a fully
digital, bi-directional event synchronizer for motors requiring precise control
of speed and angular position with no gain or loss of shaft revolution. The
MS332 digitally synchronizes the speed of two or more motors to maintain the
continuous position relationship between the independent motor applications. The
MicroLength functions as a position/length controller designed specifically to
replace preset counter systems by improving accuracy and cycle time
efficiencies. Typical MicroLength applications include cut-to-length and
material feed applications. The MicroLength converts shaft speed feedback into
given length motor advancement.
2
<PAGE>
In 1988, the Company entered into a sales agreement with MKS
MaschinenKontroll Systeme GmbH ("MKS"), the West German manufacturer of a
Synchronous Drive Controller ("SDC") product line giving the Company exclusive
rights to distribute in the United States the drive control products
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 was designed for use as a precision speed reference for use with DC
regenerative drives. The MKS product line enables manufacturers 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 that includes draw control
involving web processes, precision conveyors and electronic line shaft
applications.
The Drive Control Systems product sales accounted for approximately 16%
in 1997, 17% in 1998, and 15% in 1999. The Company expects to continue to expend
resources in 1998 in development and marketing of products for its Drive Control
Systems division.
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 handprint 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 allows Windows developers to embed the AutoData
DLL into their application in order to provide automated data entry from scanned
or faxed forms. AutoData released Survey in 1996. Survey is a software package
that utilizes the check mark recognition technology to automate the data entry
processing of responding participant questionnaires. AutoData has directed
Survey toward the Healthcare industry. Recently, AutoData has released Scannable
Office, a new software package that combines the forms processing and character
recognition technology with the versatility of Microsoft Office suite. The
software enhances
3
<PAGE>
Microsoft Word with tools to create scannable forms effortlessly. Scannable
Office "reads" and automatically places extracted data directly into an Excel
spreadsheet or Access database utilizing only a PC and scanner.
MICROFLAME GAS TORCHES. Microflame manufactures and sells four kinds of
miniature brazing torches, under the names Cub, Super Cub, Microflame and
Dragon. During the past several years, a significant portion of Microflame
product sales have been from its Cub and Super Cub miniature hand-held torches.
Both the Cub and Super Cub torches utilize butane, which mixes with ambient air
to develop a flame about the size of a pencil. The Cub torch is sold exclusively
to Radio Shack stores.
The Company's "Microflame" torch is composed of two high pressure
cylinders, one containing fuel and the other containing an oxidizer, which
produce a flame with a tip the size of a pencil point. Microflame sells several
kits based upon this basic torch. The kits differ in the number of replacement
cylinders, brazing rods and other accessories which they contain.
The Company's fourth torch, marketed under the name "Dragon," has a
unique flame-action lever that operates on isobutane, which, when mixed with
ambient air, produces a larger flame than the Company's other torches.
Microflame's products are used primarily by hobbyists, electronic kit
assemblers, creators of jewelry and do-it-yourselfers.
(2) MARKETING AND DISTRIBUTION.
Speed Monitoring Systems 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 closed loop controls and SDC 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 to both domestic and
international accounts. These accounts consist of hobby, hardware, electronic,
jewelry repair, do-it-yourselfers and other miscellaneous accounts. 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.
4
<PAGE>
The Company uses two 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.
(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, Control Concepts, 4B Elevator Components
Ltd., Durant Corp. and Contrex, Inc. 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.
5
<PAGE>
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
-------------------- ----------
Leland Limited, Inc. 27.7%
Nippon Tansan Gas Company, 72.3%
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 six
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.
6
<PAGE>
(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:
1999: $830,134
1998: $667,461
These expenditures were incurred by the Controls Division and AutoData Systems.
The Company is not conducting research and development with respect to products
sold by its Microflame subsidiary. The Company's development projects are
undertaken based upon the identified specific needs of the Company's customer
base.
During fiscal 1999 the Company has continued to fund the AutoData
Systems development activities. The project goal is to create low cost software
based systems that enable computers to accurately 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. The Company has also developed two recognition patents.
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, 2000, the Company had 38 employees, one of whom is
engaged by its Microflame subsidiary and 37 of whom are engaged in work for its
Controls Division.
7
<PAGE>
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. Forward-looking
statements provide current expectations or forecasts of future events and can be
identified by the use of terminology such as "believe," "estimate," "expect."
"intend." "may," "could," "will" and similar words or expressions. The Company's
forward-looking statements generally relate to its growth strategy, financial
results, product development and sales efforts. Forward-looking statements
cannot be guaranteed and actual results may vary materially due to the
uncertainties and risks, known and unknown, associated with such statements. The
Company undertakes no obligation to update any forward-looking statement.
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 AutoData Systems
division has experienced an increase in sales; however, the Company's Speed
Monitoring division, Drive Control Systems, and the Company's subsidiary,
Microflame, Inc., have experienced sales declines. Sales by the AutoData Systems
division have been, and are expected to continue to be, subject to quarterly
fluctuations due to product competition and acceptance. There can be no
assurance that the AutoData Systems division sales will continue to increase or
that sales by the Speed Monitoring division, Drive Control Systems 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.
8
<PAGE>
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.
The Company notes these factors as permitted by the Private Securities
Litigation Reform Act of 1995. It is not possible to foresee or identify all
factors that could cause actual results to differ from expected or historic
results. As such, investors should not consider any list of such factors to be
an exhaustive statement of all risks, uncertainties or potentially inaccurate
accumptions.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns and occupies a 25,000 square foot facility at 6111
Blue Circle Drive, Minnetonka, Minnesota 55343. All operating entities are
located within this facility.
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 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Section entitled "Price Range of Common Stock" in the Company's
1999 Annual Report to Shareholders is incorporated herein by reference. Although
there were [192] shareholders of record as of March 11, 2000, the Company has
approximately [550] beneficial shareholders.
9
<PAGE>
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 1999 Annual Report to Shareholders
is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements and notes contained in the 1999
Annual Report to Shareholders are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, ages and positions of the Company's executive officers are
as follows:
Name Age Office
---- --- ------
Bradley D. Slye 40 Chairman of the Board of
Directors and President
Peter R. Peterson 66 Secretary and Director
Mr. Slye has been the Chairman of the Board and President of the
Company since January 1997. Mr. Slye has served as a Design Engineer for the
Company since 1987 and as Engineering Manager since 1990. Mr. Slye is a director
of August Technology.
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.
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.
10
<PAGE>
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
2000 Annual Meeting of Shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by reference
to the section entitled "Executive Compensation" which appears in the Company's
definitive Proxy Statement for its 2000 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 2000 Annual
Meeting of Shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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, 1999.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ELECTRO-SENSORS, INC.
("Registrant")
Dated: March 27, 2000 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, 2000
- ------------------------- (Chief Executive Officer and
Bradley D. Slye Principal Accounting Officer)
/s/ Peter R. Peterson Director and Secretary March 27, 2000
- -------------------------
Peter R. Peterson
/s/ John S. Strom Director March 27, 2000
- -------------------------
John S. Strom
12
<PAGE>
Signature Title Date
--------- ----- ----
/s/ Joseph A. Marino Director March 27, 2000
- -------------------------
Joseph A. Marino
/s/ Geoffrey W. Miller Director March 27, 2000
- -------------------------
Geoffrey W. Miller
13
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-KSB
For the fiscal year
ended December 31, 1999 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*
10.5** Electro-Sensors, Inc. 1987 Stock Option Plan--incorporated by
reference to Exhibit A to the Company's Proxy Statement dated April
21, 1987 for the Company's 1987 Annual Meeting of Shareholders*
10.6** Electro-Sensors, Inc. 1997 Stock Option Plan and forms of Incentive
and Nonqualified Stock Option Agreements thereunder--incorporated by
reference to Exhibit 10.6 to the Company's 1997 Form 10-KSB*
13 1999 Annual Report to Shareholders
21 Subsidiaries of Registrant:
Name State of Incorporation
---- ----------------------
Microflame, Inc. Minnesota
ESI Investment Co. Minnesota
Senstar Corporation Minnesota
- -----------------
* Incorporated by reference to a previously filed report or document--SEC File
No. 0-9587
**Management contract or compensatory plan or arrangement
14
<PAGE>
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
15
EXHIBIT 13
[LOGO] ELECTRO-SENSORS
ANNUAL REPORT 1999
<PAGE>
[LOGO]ELECTRO-SENSORS
CORPORATE PROFILE
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
BRIEF SUMMARY OF BUSINESS
Electro-Sensors, Inc. operates three distinct businesses. The first is the
Controls Division which carries the name of Electro-Sensors, Inc. This division
manufactures and markets a complete line of speed monitoring and motor control
systems for industrial machinery. The Controls Division utilizes leading-edge
technology to continuously improve its products and make them easier to use. The
Controls Division's goal is to manufacture the industry-preferred product for
every market served. These products are sold through telemarketing and
distributors to a wide variety of manufacturers, OEMs and processors to monitor
the efficiency of process machinery.
The second business is AutoData Systems, a division of Electro-Sensors, Inc.
AutoData Systems designs and markets a desktop software-based system that reads
hand-printed characters, check marks and bar code information from scanned or
faxed forms. AutoData Systems products are designed to provide the capabilities
to automate data collection and meet customers' complete forms processing needs.
These software packages are sold through telemarketing to end users, resellers
and developers in the United States, Canada, Europe and Asia.
The third business is operated through a wholly-owned subsidiary, Microflame,
Inc. Microflame produces small hand held gas torches used primarily by
hobbyists, electronic kit assemblers, creators of jewelry and do-it-yourselfers.
The Microflame products are sold through distributors to retailers of hardware,
hobby craft and electronic products.
In addition, through its ESI Investment Company subsidiary, the Company has
invested funds in other companies and businesses. The value of the Company's
investments fluctuates. It is the Company's intention over a substantial period
of time to liquidate such investments in order to finance expansion of its
operating activities. Although the Company has invested in other companies and
businesses, Electro-Sensors, Inc. intends to remain primarily an operating
company.
SELECTED FINANCIAL DATA (CONSOLIDATED)
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31
---------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $5,682 $6,358 $ 6,441 $ 6,143 $ 6,185 $6,076
Gross Profit 3,187 3,587 3,743 3,502 3,525 3,424
Selling Expenses 1,717 1,806 1,637 1,339 1,214 1,501
General and Administrative Expenses 706 778 752 948 777 801
Research and Development Expenses 830 667 637 707 622 659
Provision for Income Taxes (55) 107 237 283 371 222
Net Income (22) 230 453 463 785 460
Earnings Per Share (.01) .12 .23 .24 .41 .24
Total Assets 8,379 9,078 10,895 11,485 13,181 7,941
Shareholders' Equity 7,440 8,133 9,108 9,147 9,466 6,693
</TABLE>
2
<PAGE>
[LOGO] ELECTRO-SENSORS
LETTER TO SHAREHOLDERS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
March 17, 2000
TO THE SHAREHOLDERS:
As I have traveled and worked with customers this past year, I have seen first
hand the need for products that make people and companies more productive. The
shortage of skilled workers and market requirement of low production cost means
that every person and machine in a company has to be as effective as possible.
At Electro-Sensors, Inc. we develop and sell products in each of our divisions
to enable our customers to maximize their productivity. The Controls division
sells two types of products. The monitoring products keep the customer informed
of the present speed of its machinery and if it is operating in the proper speed
range. The motor control products work with AC and DC drives to control and
coordinate the motors on machines that produce a wide variety of products. It's
very likely that you have sheetrock in your house, wire in your car, or have
eaten beef for dinner that has been processed at a plant that has our motor
control products coordinating the motors together for optimal production. Our
AutoData division develops and sells software products that allow customers to
quickly design forms for automated data collection of surveys, health-care
forms, and other business applications. The information on these forms is stored
in databases and can be analyzed by the customer as they look for trends or data
that will help them do their business in a better way. Many of you may have
filled out a Patient Satisfaction survey or proxy voting card that was designed
and processed using an AutoData software product.
The sales results for last year were not in line with our targets and we made
staff and operational adjustments accordingly. The production monitoring and
motor control segment had decreased sales of 12% as compared to 1998. We feel
this is due to reduced sales to our customers who operate in agricultural
related fields and experienced slowdowns due to effects of the Asian currency
crisis. The manufacturing plants that use our motor control products invested
large amounts of time and money to ensure that their control and computer
operating systems were compliant for the Year 2000 issues. This resulted in
reduced resources available for other productivity improvement projects that
would use our products. Concerning the AutoData division, the
government-mandated requirements for data collection and reporting in the
healthcare area were changed significantly from the original plans. We had
designed application software to work with this area and the expected sales did
not occur because of the changed requirements. We refocused AutoData on
developing the new Scannable Office product that uses our propriety
character-recognition algorithm and is integrated with the Microsoft Office
product suite. Sales of the existing products increased 13% over 1999, but we
feel that our new product to be shipped in 2000 will allow sales to a wider base
of customers in addition to the healthcare market. Our wholly owned subsidiary,
Microflame, Inc. moved into our corporate facility last April. Its sales for the
last half of the year were fairly constant and generated a small operating
profit.
3
<PAGE>
[LOGO] ELECTRO-SENSORS
LETTER TO SHAREHOLDERS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The Company has made investments in developing start-up companies in the hopes
of helping new business ideas reach their full potential. One such company,
August Technology Corporation has recently started the process of registering
their securities with the Securities Exchange Commission for sale in an
offering. At this point we are unable to predict the outcome of the registration
process or the markets acceptance of this the offering, but we are hopeful that
the value of the Company's investment will increase as a result.
As we move into the future, we will constantly look to develop products that
maximize productivity for our customers in all our divisions. We have a great
group of employees that work together for the success of the company. I want to
thank you for your support and confidence in us. Please join us for our annual
meeting on April 26, 2000 at the Decathlon Club in Bloomington at 2:00 p.m.
Sincerely,
/s/ Bradley D. Slye
Bradley D. Slye
President
4
<PAGE>
[LOGO] ELECTRO-SENSORS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS 1999 VS. 1998
The Company experienced sales of $5,682,301 for 1999, a decrease of 10.6% when
compared to 1998 sales of $6,358,262. Sales continued to decline 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 by the other
two operating segments.
The Production Monitoring segment includes both the Speed Monitoring Systems and
the Drive Control Systems divisions. The combined sales decreased 12% during the
year from both the residual effects of the Asian-currency crisis and customer
distractions caused by Year 2000 planning strategies. Volume declines in the
speed switch, tachometer, and Micro Speed products resulted as businesses held
back investments in plant and equipment improvements while they addressed their
own Y2K issues. Customer implementation of new equipment was placed on hold as
companies evaluated and tested their own equipment for Y2K compliance. In
addition, Y2K compliant companies were unable to change any equipment that could
present a possible non-compliant disruption at year end. In addition, price
reductions to high-end control products have resulted in greater competition for
the Company's line of the Production Monitoring products. Improved technology
has allowed these companies to lower selling prices and expand into new markets
that were once inaccessible due to product pricing strategies.
Sales by the Character Recognition Imaging segment, which contains AutoData
Systems, improved 13% during 1999. Increased scanner sales contributed a
significant amount of this growth. The awaited mandated healthcare reporting
requirements for which AutoData had positioned one of its products were released
in 1999. However, the final reporting requirements only applied to Medicaid and
Medicare participants requiring skilled nursing care visits. These changes to
the final requirements limits the Company's product to the Homecare agency
market. AutoData released a new software product titled Scannable Office late in
1999. The new product combines the Company's forms processing and character
recognition technology with the versatility of Microsoft's Office suite.
Scannable Office "reads" and automatically places extracted data directly into
an Excel spreadsheet or Access database utilizing only a PC and scanner.
AutoData is working aggressively to establish a marketing mix capable of
securing the lead position in an evolving market. The software is scheduled for
shipment in early 2000.
Microflame sales declined 34% in 1999. Diminished sales volume was felt equally
across all of its product lines. The sales decrease continues to reflect a
lessening demand and weak consumer marketplace for the gas torch products. Radio
Shack's 1998 decision to discontinue buying the Company's two-gas torch product
continues to impact 1999 sales as compared to 1998. Radio Shack sales decreased
48% during the year. The last six months of the year had relatively constant
sales of $23,000 per month. During 1999 the Company significantly reduced
Microflame's operating costs resulting in a small monthly profit by the year
end.
The Company's cost of sales decreased in 1999 as compared to 1998, but increased
slightly as a percentage of sales. The margin change resulted from increased
material and fixed production costs in the Production Monitoring segment from
the lower volume demand experienced in 1999. The increased fixed production
costs reflects a higher average unit manufacturing cost when fixed production
expenses are distributed over less manufactured units. In addition, Microflame
relocated into the Company's facility in April of 1999. The consolidation of
Microflame into the Company manufacturing facility resulted in fixed cost
savings during the final six months of the year.
5
<PAGE>
[LOGO] ELECTRO-SENSORS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Operating expenses increased slightly during 1999. The increased expenses
occurred primarily in the research and development area of AutoData systems, and
related directly to the development of the recently introduced Scannable Office
software. The new product required additional development time to improve the
reading capabilities and integrate the product with the Microsoft Office suite.
In addition, research and development expense also increased from inflationary
personnel costs and continued certification testing on existing products to meet
"UL" and international standards. Selling and administrative expenses decreased
during the year, but were unable to offset rising research and development
costs. The Company made several one-time expenditures in 1998 to improve overall
product visibility. Consequently, catalog brochure, product promotion, and
advertising expenses either decreased slightly or remained relatively unchanged
during the year. The Company also made a 15% reduction in its workforce during
the second quarter of 1999 due to the declining sales activities.
ESI Investment continues to provide an alternative source of earnings for the
Company through investments in marketable securities. Portfolio opportunities
were limited in 1998 and 1999 and, therefore, provided only nominal gains in
1998. The cumulative net unrealized gain on securities was $895,808, $1,602,820,
and $3,167,566 as of December 31, 1999, 1998 and 1997, 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 needs
and general corporate purposes, which may include acquisitions. Accounts
receivable and inventories decreased due to slowed sales activities. Accounts
payable increased slightly from timing differences. The customer deposit amount
resulted from an existing customer prepaying plant upgrade orders with expected
shipping dates from December 1999 to March 2000.
The Company experienced a decrease in investments and the related accumulated
other comprehensive income due to a decrease in unrealized gain on investment
securities. This decrease results primarily from the Company's holding of PPT
Vision, which has experienced a decrease in market value. The Company has made
investments in developing start-up companies in the hopes of helping new
business ideas reach their full potential. One such company, August Technology
Corporation, has recently started the process of registering their securities
with the Securities Exchange Commission for sale in an offering. At this point
we are unable to predict the outcome of the registration process or the market's
acceptance of this offering, but we are hopeful that the value of the Company's
investment will increase as a result.
The Company carries its investments in unregistered closely-held securities on
its balance sheet at cost which may not reflect the investments' fair value at
any given time. The Company believes that the current fair value of the
investments' fair value in unregistered holdings exceeds its carring value. The
value of the Company's investments in marketable securities should be expected
to fluctuate.
Principal payments made during the year completed repayment of 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 2000.
6
<PAGE>
[LOGO] ELECTRO-SENSORS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CHANGING PRICES AND INFLATION
The Company did not experience any significant inflationary pressure during
1999. Cost management programs and modest price increases have enabled the
Company to minimize inflation's impact on operating performance. The Company
continually works to control product cost increases through engineering
improvements, selection and use of more cost efficient product components and
through improved operating efficiency.
CAUTIONARY STATEMENT
This Annual Report includes certain forward-looking statements, which provide
current expectations or forecasts of future events and can be identified by the
use of terminology such as "believe," "estimate," "expect," "intend," "may,"
"could," "will," and similar words or expressions.
The Company cautions investors that actual results of future operations may
materially differ from those anticipated in forward looking statements made in
this document and elsewhere by or on behalf of the Company due to a number of
factors including: the uncertainty of market acceptance of products of the
Company's AutoData Systems division which are in relatively early stages of
development; fluctuations in operating results due to the impact of
non-recurring large orders for products and gains or losses from sales on
investment securities; competition from lower-priced and new products of
competitors; and the availability of components for certain of the Company's
products which may for periods of time be available only from a single supplier.
The Company's forward-looking statements generally relate to its growth
strategy, financial results, product development and sales efforts.
Forward-looking statements cannot be guaranteed and actual results may vary
materially due to the uncertainties and risks, known and unknown, associated
with such statements. The Company undertakes no obligation to update any
forward-looking statements. The Company notes these factors as permitted by the
Private Securities Litigation Reform Act of 1995. It is not possible to foresee
or identify all factors that could cause actual results to differ from expected
or historic results. As such, investors should not consider any list of such
factors to be an exhaustive statement of all risks, uncertainties or potentially
inaccurate assumptions. For additional information see the Company's periodic
filings with the Securities and Exchange Commission.
7
<PAGE>
[LOGO] ELECTRO-SENSORS
CONSOLIDATED BALANCE SHEETS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including temporary cash
deposits of $1,704,167 and $1,866,859, respectively $2,507,689 $2,313,606
Investments 254,699 215,778
Trade receivables, less allowance for doubtful
accounts, 1999 $23,000; 1998 $22,500 682,015 720,289
Inventories 867,144 974,612
Prepaid expenses 86,166 69,969
Prepaid income taxes 125,609 97,257
- -------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,523,322 4,391,511
- -------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT 1,690,387 1,775,369
- -------------------------------------------------------------------------------------------
INVESTMENTS 2,164,902 2,910,835
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $8,378,611 $9,077,715
===========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 0 $ 44,843
Accounts payable 144,324 142,249
Customer deposits 353,645 0
Accrued expenses 142,050 182,938
Deferred income taxes 1,500 12,800
- -------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 641,519 382,830
- -------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 297,100 561,900
- -------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)
STOCKHOLDERS' EQUITY:
Common stock, par value $.10 per share;
authorized 10,000,000 shares; issued
1,985,608 and 1,975,454, shares,
respectively 198,561 197,545
Additional paid-in capital 720,306 702,576
Retained earnings 5,949,317 6,209,044
Accumulated other comprehensive income 571,808 1,023,820
- -------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 7,439,992 8,132,985
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,378,611 $9,077,715
===========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
8
<PAGE>
[LOGO] ELECTRO SENSORS
CONSOLIDATED STATEMENTS OF INCOME
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $5,682,301 $6,358,262 $6,440,576
COST OF GOODS SOLD 2,495,508 2,771,496 2,697,223
- ----------------------------------------------------------------------------------------------
GROSS PROFIT 3,186,793 3,586,766 3,743,353
- ----------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling 1,717,480 1,805,995 1,637,334
Administrative 706,308 778,429 752,479
Research and development 830,134 667,461 637,114
- ----------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 3,253,922 3,251,885 3,026,927
- ----------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (67,129) 334,881 716,426
- ----------------------------------------------------------------------------------------------
NONOPERATING INCOME (EXPENSE):
Gain (loss) on sale of investment securities 0 23,748 7,223
Interest income 88,751 106,325 118,478
Other (99,135) (127,531) (151,772)
- ----------------------------------------------------------------------------------------------
TOTAL NONOPERATING INCOME (EXPENSE) (10,384) 2,542 (26,071)
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (77,513) 337,423 690,355
FEDERAL AND STATE INCOME TAXES (55,100) 107,000 237,000
- ----------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (22,413) $ 230,423 $ 453,355
==============================================================================================
INCOME PER COMMON SHARE:
Basic $ (0.01) $ 0.12 $ 0.23
Diluted $ (0.01) $ 0.12 $ 0.23
==============================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 1,977,630 1,968,935 1,951,597
Diluted 1,977,952 1,975,648 1,965,124
==============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
9
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash:
Received from customers $6,074,220 $ 6,384,022 $ 6,421,155
Paid to suppliers and employees (5,656,207) (6,141,524) (5,928,771)
Interest received 88,751 106,325 118,478
Income taxes paid 0 (96,705) (316,349)
Income tax refund received 5,648 0 0
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 512,412 252,118 294,513
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (54,918) (104,777) (106,069)
Sales of marketable securities 0 31,099 61,804
Repayments of notes receivable 0 1,336 60,990
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (54,918) (72,342) 16,725
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (237,314) (236,301) (233,913)
Net proceeds (payments) on short-term borrowings (44,843) (195,932) (180,608)
Proceeds from issuance of stock 18,746 29,378 58,380
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (263,411) (402,855) (356,141)
- ----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 194,083 (223,079) (44,903)
CASH AND CASH EQUIVALENTS:
BEGINNING 2,313,606 2,536,685 2,581,588
- ----------------------------------------------------------------------------------------------------------
ENDING $2,507,689 $ 2,313,606 $ 2,536,685
==========================================================================================================
(CONTINUED ON FOLLOWING PAGE)
</TABLE>
See Notes to Consolidated Financial Statements.
10
<PAGE>
[LOGO] ELECTRO-SENSORS
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net income (loss) $ (22,413) $ 230,423 $ 453,355
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 139,900 137,358 131,262
Realized (gain) loss on sale of:
Investment securities, net 0 (23,748) (7,223)
Property and equipment 0 0 5,127
Deferred taxes (21,100) 6,800 29,300
(Increase) decrease in:
Trade receivables 38,274 25,760 (19,421)
Inventories 107,468 (98,423) (46,761)
Prepaid:
Expenses (16,197) 6,952 (903)
Income taxes (28,352) 3,495 (108,649)
Increase (decrease) in:
Accounts payable 2,075 44,251 (17,668)
Customer deposits 353,645 0 0
Accrued expenses (40,888) (80,750) (123,906)
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 512,412 $ 252,118 $ 294,513
=======================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Net change in unrealized holding gains on
marketable securities $(707,012) $(1,564,746) $(602,919)
=======================================================================================================
Tax benefit of stock options exercised $ 0 $ 0 $ 6,851
=======================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
11
<PAGE>
[LOGO] ELECTRO-SENSORS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ISSUED ADDITIONAL
------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
Net income 230,423
- ------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 1,975,454 197,545 702,576 6,209,044
Unrealized gains (losses) on investments,
net of reclassification adjustment
Stock issued through the Employee Stock
Purchase Plan 10,154 1,016 17,730
Dividend on common stock $.12 per share (237,314)
Net income (loss) (22,413)
- ------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 1,985,608 $198,561 $720,306 $5,949,317
======================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
12
<PAGE>
[LOGO] ELECTRO-SENSORS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE COMPREHENSIVE NOTES STOCKHOLDERS'
INCOME INCOME RECEIVABLE EQUITY
- -----------------------------------------------------------------
<S> <C> <C> <C>
$2,408,385 $ (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 (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 8,132,985
(452,012) (452,012) (452,012)
18,746
(237,314)
(22,413) (22,413)
- -----------------------------------------------------------------
$ (474,425) $ 571,808 $ 0 $7,439,992
=================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
13
<PAGE>
[LOGO] ELECTRO-SENSORS
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 character
recognition 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
stockholders' 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
investments, short-term trade receivables and payables for which current
carrying amounts approximate fair market value.
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.
14
<PAGE>
[LOGO] ELECTRO-SENSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the assets. If these assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
SOFTWARE REVENUE RECOGNITION:
The Company recognizes revenue upon shipment of its character recognition
software. The product is sold to the end user and risk of loss is transferred,
and the Company has no continuing obligations, once its products are delivered
to the shipper. The Company recognizes revenue upon shipment, net of return
reserves based on historical experience. To recognize revenue, it must also be
probable that the Company will collect the accounts receivable from its
customers. In some situations, the Company receives advance payments from its
customers. Revenue associated with these advance payments is deferred until the
product is shipped. Warranty reserves are provided at the time revenue is
recognized for the estimated cost of replacing defective products.
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 $562,413, $518,433 and $568,910 for the years ended
December 31, 1999, 1998 and 1997 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
Depreciation expense for the years ended December 31, 1999, 1998, and 1997 was
$139,900, $137,358 and $131,262, 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:
Basic earnings per share (EPS) excludes dilution and is determined by dividing
income available to common stockholders 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
- ----------------------------------------------------------------
1999:
Basic EPS $(22,413) 1,977,630 $ (0.01)
Effect of dilutive
employee stock
options 322
- ----------------------------------------------------------------
Diluted EPS $(22,413) 1,977,952 $ (0.01)
================================================================
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
================================================================
15
<PAGE>
[LOGO] ELECTRO-SENSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
RECENT ACCOUNTING STANDARDS:
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income",
which requires disclosure of all changes in equity that result from transactions
and economic events other than transactions with owners. 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 consists
of unrealized gains (losses), net of income taxes and reclassification
adjustment for gains and losses included in net income. This reclassification
adjustment for gains and loses included in net income was $0, $23,600, and
$72,237 for 1999, 1998, and 1997, respectively. The Company does not have any
additional transactions or other economic events which qualify as other
comprehensive income as defined under SFAS No. 130, and adoption of SFAS No. 130
had no effect on the Company's results of operations, cash flows or financial
position.
The Company has also adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes new standards for
reporting information about business segments and related disclosures about
products and services, geographic areas and major customers, if applicable.
Under SFAS No. 131, operating segments are determined consistent with the way
management organizes and evaluates financial information internally for making
decisions and assessing performance. The Company's adoption of SFAS No. 131 had
no effect on the Company's results of operations, cash flows or financial
position.
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, 1999
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Treasury bills $ 1,704,167 $ 0 $ 0 $ 1,704,167
Money-market funds 203,807 0 0 203,807
Equity securities 1,523,793 1,324,775 (428,967) 2,419,601
- ---------------------------------------------------------------------------------------------------
3,431,767 1,324,775 (428,967) 4,327,575
Less cash equivalents (1,907,974) (1,907,974)
- ---------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 1,523,793 $1,324,775 $ (428,967) $ 2,419,601
===================================================================================================
DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------
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
===================================================================================================
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
===================================================================================================
</TABLE>
16
<PAGE>
[LOGO] ELECTRO-SENSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Realized gains and losses on investments are as follows:
DECEMBER 31,
----------------------------------
1999 1998 1997
- ------------------------------------------------------------
Gross realized gains $0 $23,748 $34,054
Gross realized losses 0 0 (26,831)
- ------------------------------------------------------------
NET REALIZED GAIN $0 $23,748 $ 7,223
============================================================
The change in the net unrealized holding gain on investments at December 31,
1999 and 1998 consisted of the following:
1999 1998
- -------------------------------------------------------------
Unrealized gain on current
portfolio of marketable
equity securities $1,324,775 $1,983,263
Unrealized loss on current
portfolio of marketable
equity securities (428,967) (380,443)
Related deferred tax effect (324,000) (579,000)
- -------------------------------------------------------------
TOTAL UNREALIZED HOLDING
GAIN, NET $ 571,808 $1,023,820
=============================================================
NOTE 3. INVENTORIES
Inventories used in the determination of cost of goods sold are as follows:
DECEMBER 31,
---------------------------------------
1999 1998 1997
- -------------------------------------------------------------
Raw materials $580,908 $671,545 $592,679
Work in process 126,151 124,055 128,791
Finished goods 160,085 179,012 154,719
- -------------------------------------------------------------
TOTAL INVENTORIES $867,144 $974,612 $876,189
=============================================================
NOTE 4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
DECEMBER 31,
-----------------------------
1999 1998
- ---------------------------------------------------------------
Equipment $ 366,454 $ 463,652
Furniture and fixtures 422,241 438,405
Building 1,333,823 1,333,823
Land 414,540 414,540
- ---------------------------------------------------------------
2,537,058 2,650,420
Less accumulated depreciation 846,671 875,051
- ---------------------------------------------------------------
TOTAL PROPERTY AND EQUIPMENT $1,690,387 $1,775,369
===============================================================
NOTE 5. ACCRUED EXPENSES
Accrued expenses at December 31, 1999 and 1998 include:
1999 1998
- ---------------------------------------------------
Wages and commissions $ 99,104 $126,128
Other 42,946 56,810
- ---------------------------------------------------
Total accrued expenses $142,050 $182,938
===================================================
NOTE 6. COMMITMENTS
LEASE COMMITMENTS:
The Company is leasing office equipment under operating leases expiring at
various dates through 2005.
Minimum lease payments required under non-cancelable operating leases are as
follows:
YEAR AMOUNT
- ---------------------------------------------
2000 $ 24,570
2001 23,652
2002 23,652
2003 22,012
2004 19,716
Thereafter 1,362
- ---------------------------------------------
TOTAL MINIMUM LEASE PAYMENTS $114,964
=============================================
Rental expense charged to operations was $36,451, $83,629, and $76,079 for years
ended December 31, 1999, 1998 and 1997, respectively.
NOTE 7. COMMON STOCK OPTIONS AND STOCK PURCHASE PLAN
STOCK-BASED COMPENSATION:
The Company has a stock option plan and an employee stock purchase and bonus
plan. Under the 1997 Stock Option Plan, the Company is authorized to grant up to
300,000 shares of its common stock. The Company granted 84,000 options under
this plan during 1999, and at December 31, 1999, 189,000 shares remained
available for grant under this plan. Under the Employee Stock Purchase and Bonus
Plan, the Company is authorized to sell and issue up to 100,000 shares of its
common stock to its full-time employees. During 1999, 1998 and 1997, 10,154,
5,994 and 9,147 shares, respectively, were issued under this plan. At December
31, 1999, 72,693 shares were available for future issuance.
The Company applies Accounting Principles Board ("APB") No. 25, Accounting for
Stock Issued to Employees, and related interpretations to account for its
stock-based compensation plans, when applicable, but has adopted the
disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, which requires pro forma disclosures regarding the Company's
stock-based compensation plans.
17
<PAGE>
[LOGO] ELECTRO-SENSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
STOCK OPTIONS:
The 1997 Stock Option Plan includes both nonqualified and incentive stock
options. Payment for the shares may be made in cash, shares of the Company's
common stock or a combination thereof. Under the terms of the plan, incentive
stock options are granted at 100% of fair market value on the date of grant and
may be exercised at various times depending upon the term of the option. The
nonqualified stock options were granted to directors to purchase shares of the
Company's common stock. All existing options expire 10 years from the date of
grant or one year from the date of death.
A summary of stock options outstanding and exercisable under the plans is as
follows:
NUMBER OF SHARES
---------------------------------------------------
INCENTIVE DIRECTOR
OPTIONS OPTIONS
------------------------ ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
STOCK EXERCISE STOCK EXERCISE
OPTIONS PRICE OPTIONS PRICE
- ----------------------------------------------------------------------
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
Granted 78,000 2.20 6,000 3.00
Expired 0 0 (4,500) 3.25
Forfeited (2,500) 3.73 0 0
- ----------------------------------------------------------------------
BALANCE,
DECEMBER 31,
1999 168,500 $ 2.84 59,500 $ 3.91
======================================================================
OPTIONS
EXERCISABLE AT
DECEMBER 31,
1999 112,500 $ 2.93 59,500 $ 3.91
======================================================================
Price Range of Outstanding Options
INCENTIVE DIRECTORS
AS OF DECEMBER 31, 1999 OPTIONS OPTIONS
- --------------------------------------------------------------
Options $2.00 TO $3.75 $2.63 to $4.75
Expiration dates 2007 TO 2009 2000 to 2009
==============================================================
STOCK PURCHASE PLAN:
The Employee Stock Purchase and Bonus Plan (the Employee Stock Plan) allows
employees to set aside up to 10% of their earnings for the purchase of shares of
the Company's common stock. Shares are purchased annually under the Employee
Stock Plan at a price equal to 85% of the market price on the last day of the
calendar year.
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, 1999 1998 1997
- ------------------------------------------------------------
Net income
As reported $(22,413) $230,423 $453,355
Pro forma $(65,142) $194,656 $399,237
Net income per
common share
As reported $ (.01) $ .12 $ .23
Pro forma $ (.03) $ .10 $ .20
============================================================
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
- -------------------------------------------------------
1997 grants $ 2.25 $ -- $ .28
1998 grants $ 1.22 $ 1.29 $ .63
1999 grants $ .98 $ 1.38 $ .45
=======================================================
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 1998 and 1999:
1999 1998
- ------------------------------------------------------------
Risk-free interest rate 4.71%-6.27% 5.76%-5.81%
Expected life of options 7 YEARS 7 years
Expected life of Employee
Stock Plan shares 3 MONTHS 6 months
Expected volatility 61%-76% 12%-13%
Expected dividend yield 5.34% 3.84%
===========================================================
18
<PAGE>
[LOGO] ELECTRO-SENSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 option outstanding at December 31, 1999:
WEIGHTED AVG.
EXERCISE CONTRACTUAL WEIGHTED AVG.
PRICE RANGE OPTIONS LIFE REMAINING EXERCISE PRICE
- ----------------------------------------------------------------
$2.00 - $3.00 88,500 9.14 $ 2.27
$3.01 - $4.52 121,500 6.52 $ 3.50
$4.53 - $4.75 18,000 2.85 $ 4.75
================================================================
NOTE 8. EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors an 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. When the Plan purchases shares with the
proceeds of the Company loans, the shares are pledged as collateral for its
debt. The shares are maintained in a suspense account until released and
allocated to participant accounts. The Plan owns 142,819 shares of the Company's
stock at December 31, 1999. All shares held by the Plan have been released and
allocated. The dividends paid by the Company on shares held by the Plan are
allocated to the participant accounts. The Plan had no debt to the Company at
December 31, 1999.
ESOP compensation expense was $0, $36,000, and $36,000, for the years ended
December 31, 1999, 1998 and 1997, respectively.
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, 1999, 142,819 shares of the Company's stock, with an aggregate
fair market value of approximately $285,000, are held by ESOP participants, who
if terminated, would be subject to the repurchase requirement.
NOTE 9. INCOME TAXES
The components of the income tax provision for the years ended December 31,
1999, 1998, and 1997, are as follows:
1999 1998 1997
- ----------------------------------------------------------------
Current:
Federal $(35,000) $ 96,371 $194,234
State 1,000 3,829 13,466
Deferred:
Federal (2,000) 6,300 28,900
State (19,100) 500 400
- ----------------------------------------------------------------
TOTAL FEDERAL AND
STATE INCOME TAXES $(55,100) $107,000 $237,000
================================================================
The 1999 current federal tax component consists of a net operating loss
carryback and a portion of a tax credit carryback.
The provision for income taxes for the years ended December 31, 1999, 1998 and
1997, differs from the amount obtained by applying the U.S. federal income tax
rate to pretax income due to the following:
1999 1998 1997
- -------------------------------------------------------------------
Computed 'expected'
tax expense $(26,000) $115,000 $242,000
Increase (decrease) in taxes
resulting from:
State income taxes,
net of Federal
benefit (11,900) 2,500 8,800
Credits (24,200) (15,700) (13,840)
Other 7,000 5,200 40
- -------------------------------------------------------------------
TOTAL FEDERAL AND
STATE INCOME TAXES $(55,100) $107,000 $237,000
===================================================================
The components of the net deferred tax asset (liability) consist of:
1999 1998
- ------------------------------------------------------------
Deferred tax assets:
Vacation disallowance $ 23,100 $ 27,000
Allowance for doubtful
accounts 8,300 8,100
Obsolete inventory 0 11,000
Tax carryforwards 31,600 0
- ------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS $ 63,000 $ 46,100
- ------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ (37,600) $ (41,800)
Unrealized investment
holding gain (324,000) (579,000)
- ------------------------------------------------------------
TOTAL DEFERRED LIABILITIES $(361,600) $(620,800)
- ------------------------------------------------------------
NET DEFERRED TAX ASSET
(LIABILITY) $(298,600) $(574,700)
============================================================
The 1999 tax carryforwards component of deferred tax assets in 1999 consists of
$1,500 resulting from state tax carryforward, $1,200 resulting from federal
charitable contributions carryforward, $16,800 state tax credit carryforward,
and $12,100 federal tax credit carryforward. These carryforwards expire in 2014,
2004, 2014, and 2019, respectively.
19
<PAGE>
[LOGO] ELECTRO-SENSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTE 10. SEGMENT INFORMATION
The Company has four reportable operating segments based on the nature of its
product lines: Production Monitoring, Character Recognition, Brazing Torches,
and Investments. The Production Monitoring Division manufactures and markets a
complete line of speed monitoring and motor control systems for industrial
machinery. The Character Recognition Division designs and markets a desktop
software-based system that reads hand-printed characters, check marks and bar
code information from
scanned or faxed forms. Sales of this system include software and can include
hardware. The Brazing Torches Division produces small hand held gas torches used
primarily by hobbyists, electronic kit assemblers, creators of jewelry and
do-it-yourselfers. The Investments Division holds investments in marketable and
nonmarketable securities.
The accounting policies of the segments are the same as those described in Note
1. In evaluating segment performance, management focuses on sales and income
before taxes.
Following is financial information relating to the operating segments:
1999 1998 1997
- -------------------------------------------------------------------------------
Net revenue
Production Monitoring $4,483,083 $5,099,753 $ 5,206,331
Character Recognition 887,967 785,680 614,687
Brazing Torches 311,251 472,829 619,558
Investments 0 0 0
- -------------------------------------------------------------------------------
TOTAL 5,682,301 6,358,262 6,440,576
- -------------------------------------------------------------------------------
Sales in foreign countries
Production Monitoring 280,673 305,400 205,301
Character Recognition 19,115 34,640 21,923
Brazing Torches 17,057 8,500 17,150
Investments 0 0 0
- -------------------------------------------------------------------------------
TOTAL 316,845 348,540 244,374
- -------------------------------------------------------------------------------
Interest income
Production Monitoring 82,499 100,875 115,846
Character Recognition 0 0 0
Brazing Torches 0 0 0
Investments 6,251 5,450 2,632
- -------------------------------------------------------------------------------
TOTAL 88,750 106,325 118,478
- -------------------------------------------------------------------------------
Depreciation expense
Production Monitoring 114,538 123,992 116,572
Character Recognition 23,836 11,840 12,980
Brazing Torches 1,526 1,526 1,710
Investments 0 0 0
- -------------------------------------------------------------------------------
TOTAL 139,900 137,358 131,262
- -------------------------------------------------------------------------------
Capital purchases
Production Monitoring 34,549 89,037 106,069
Character Recognition 20,369 15,740 0
Brazing Torches 0 0 0
Investments 0 0 0
- -------------------------------------------------------------------------------
TOTAL 54,918 104,777 106,069
- -------------------------------------------------------------------------------
Total assets
Production Monitoring 5,526,271 5,370,902 5,660,881
Character Recognition 225,513 263,070 226,162
Brazing Torches 58,003 175,328 203,733
Investments 2,568,824 3,268,415 4,803,980
- -------------------------------------------------------------------------------
TOTAL 8,378,611 9,077,715 10,894,756
- -------------------------------------------------------------------------------
Net income (loss) before taxes
Production Monitoring 543,271 824,676 1,202,794
Character Recognition (499,258) (316,545) (366,069)
Brazing Torches (85,074) (155,149) (128,718)
Investments (36,452) (15,559) (17,652)
- -------------------------------------------------------------------------------
TOTAL (77,513) 337,423 690,355
- -------------------------------------------------------------------------------
Income tax expense (benefit)
Production Monitoring 175,900 356,400 496,600
Character Recognition (200,600) (193,400) (211,600)
Brazing Torches (18,000) (51,000) (42,000)
Investments (12,400) (5,000) (6,000)
- -------------------------------------------------------------------------------
TOTAL $ (55,100) $ 107,000 $ 237,000
==============================================================================
20
<PAGE>
[LOGO] ELECTRO-SENSORS
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, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for the three years in the period ended December
31, 1999, in conformity with generally accepted accounting principles.
SCHWEITZER KARON & BREMER, LLC
Certified Public Accountants
Minneapolis, Minnesota
January 31, 2000
21
<PAGE>
[LOGO] ELECTRO-SENSORS
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(sm) 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
---------------- ------- ------
1999 FIRST QUARTER 3 1/2 2 11/16
SECOND QUARTER 3 1/4 2 7/16
THIRD QUARTER 3 2 1/16
FOURTH QUARTER 2 5/16 1 11/16
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
On March 10, 1999 there were approximately 550 shareholders of record.
Electro-Sensors, Inc. paid cash dividends on its common stock of $.12 per share
in 1998 and 1999 on a quarterly basis.
22
<PAGE>
[LOGO] ELECTRO-SENSORS
INDEPENDENT AUDITOR'S REPORT
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ANNUAL MEETING
The annual meeting of shareholders will be held at the Decathlon Club, 1700 East
79th Street, Bloomington, Minnesota on April 26, 2000, at 2:00 p.m. local time.
All shareholders are welcome to attend and take part in the discussion of
company affairs.
BOARD OF DIRECTORS
Bradley D. Slye
CHAIRMAN OF THE BOARD AND
PRESIDENT OF ELECTRO-SENSORS, INC.
P. R. Peterson
PRESIDENT OF P. R. PETERSON CO.
SECRETARY OF ELECTRO-SENSORS, INC.
John S. Strom
RETIRED
Joseph A. Marino
PRESIDENT/CHIEF EXECUTIVE OFFICER
CARDIA, INC.
Geoffrey W. Miller
VICE PRESIDENT OPERATIONS AND FINANCE
OF AMSAN MN INC.
OFFICERS
Bradley D. Slye
PRESIDENT
P. R. Peterson
SECRETARY
Mark D. Laumann
TREASURER
FORM 10-KSB AVAILABLE
A copy of Electro-Sensors, Inc. Form 10-KSB annual report filed with the
Securities and Exchange Commission is available without charge to shareholders
by writing to:
Mark D. Laumann
TREASURER
Electro-Sensors, Inc.
6111 Blue Circle Drive
Minnetonka, MN 55343-9108
TRANSFER AGENT & REGISTRAR
Firstar Trust Company
Corporate Trust Services
1555 North River Center Drive
Suite 301
Milwaukee, WI 53212
AUDITORS
Schweitzer Karon & Bremer, LLC
1400 TCF Tower
Minneapolis, MN 55402-9658
COUNSEL
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402-3397
CAUTIONARY STATEMENT
The Company cautions investors that actual results of future operations may
differ from those anticipated in forward looking statements due to a number of
factors including: the uncertainty of market acceptance of products of the
Company's AutoData Systems division which are in relatively early stages of
development; fluctuations in operating results due to the impact of
non-recurring large orders for products and gains or losses from sales on
investment securities; competition from lower-priced and new products of
competitors; and the availability of components for certain of the Company's
products which may for periods of time be available only from a single supplier.
For additional information see the Company's periodic filings with the
Securities and Exchange Commission.
23
<PAGE>
[LOGO] ELECTRO-SENSORS
1999 ANNUAL REPORT
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS
We have issued our report, dated January 31, 2000, 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, 1999. 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 22, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,507,689
<SECURITIES> 254,699
<RECEIVABLES> 705,015
<ALLOWANCES> (23,000)
<INVENTORY> 867,144
<CURRENT-ASSETS> 4,523,322
<PP&E> 2,537,058
<DEPRECIATION> 846,671
<TOTAL-ASSETS> 8,378,611
<CURRENT-LIABILITIES> 641,519
<BONDS> 0
0
0
<COMMON> 198,561
<OTHER-SE> 7,241,431
<TOTAL-LIABILITY-AND-EQUITY> 8,378,611
<SALES> 5,682,301
<TOTAL-REVENUES> 5,771,052
<CGS> 2,495,508
<TOTAL-COSTS> 5,749,430
<OTHER-EXPENSES> 99,135
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (77,513)
<INCOME-TAX> (55,100)
<INCOME-CONTINUING> (22,413)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,413)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
