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**UNITED STATESSECURITES AND EXCHANGE COMMISSION****Washington, DC 20549**

**FORM 10-QSB**
| **ý**                                        | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|-----------------------------------------------------------------------------------------|
|                                              |                                                                                    |
| **For  the quarterly period ended June 30, 2001** |
|                                              |
| **o**                                             | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OR 1934** |
|                                              |                                                                                    |
| **For  the transition period from _____to _____** |

** **

**Commission file number 0-9587**

** **

**ELECTRO-SENSORS, INC.**(Exact name of small business issuer asspecified in its charter)

| **Minnesota**                                                   | **41-0943459**                        |
|-----------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) | (IRS Employer  Identification Number) |

 

**6111Blue Circle DriveMinnetonka, Minnesota 55343-9108**(Address of principal executive offices)

 

**(952)930-0100**(Issuer's telephone number)

 

(Former name, former address and former fiscalyear, if changed since last report)

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  Yes ý    No o

Shares of $0.10 par value common stock outstanding at August 10, 2001:3,118,948

Transitional Small Business Disclosure Format (Check one):  Yes o    No ý

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**TABLEOF CONTENTS**

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**PART I - FINANCIAL INFORMATION**

| Item 1. | Financial Statements                                       |
|---------|------------------------------------------------------------|
| Item 2. | Management's  Discussion and Analysis or Plan of Operation |

**PART II - OTHER INFORMATION**

| Item 1. | Legal  Proceedings                                   |
|---------|------------------------------------------------------|
| Item 2. | Changes in  Securities and Use of Proceeds           |
| Item 3. | Defaults Upon Senior  Securities                     |
| Item 4. | Submission  of Matters to a Vote of Security Holders |
| Item 5. | Other  Information                                   |
| Item 6. | Exhibits and Reports on  Form 8-K                    |

**SIGNATURES
**PartI – Financial Information**

**Item1**

**Financial Statements**

**Electro-Sensors, Inc.Balance Sheets(Unaudited)**
      **June 30, 2001**** ****December 31, 2000**** ** **** **** **Assets** ** ** ** ****Current Assets** ** ** ** ** Cash7,393,255  3,191,176   Investments1,500,000  3,266,753   Trade Receivables, less  allowance for doubtful  accounts of $37,140 and $26,500, respectively643,535  730,577   Inventories842,998  922,610   Other current assets213,696  127,177   Prepaid Income taxes- 74,606   **Total Current Assets****10,593,484**** ****8,312,899**** **Property & Equipment, net1,570,626  1,615,994  Investments15,433,042  17,202,689  **Total Assets****27,597,152**** ****27,131,582**** **     **Liabilities & Shareholders'  Equity** ** ** ** ****Current Liabilities** ** ** ** ** Accounts Payable90,460  108,482   Customer Deposits8,098  6,493   Accrued Expenses254,825  234,212   Deferred Taxes637,000  1,047,900   Accrued Income Taxes1,411,447  -  **Total Current Liabilities****2,401,830**** ****1,397,087**** **Deferred Income Taxes6,553,906  5,879,400  **Shareholders' Equity** ** ** ** ** Common Stock par value $.10 per share; authorized   10,000,000 shares; issued 3,118,948 and 2,077,112 shares, respectively.311,895 207,711   Additional Paid-In Capital988,378  985,410   Retained Earnings8,830,019  6,391,246   Accumulated other  Comprehensive Income8,511,124  12,270,728  **Total Shareholders' Equity****18,641,416**** ****19,855,095**** ****Total Liabilities and  Shareholders' Equity****27,597,152**** ****27,131,582**** **
 

**Electro-Sensors, Inc.Income Statements(Unaudited)**
          **Three Months Ended** **Six Months Ended**  **June 30,** **June 30,**  **2001** **2000** **2001** **2000**** ** **** **** **** ****   ** ** ** ** ** ** ** ****Sales**1,183,979 1,295,193 2,485,348 3,004,778 **Cost of Sales**440,472 497,205 915,168 1,113,485 **Gross Margin****743,507**** ****797,988**** ****1,570,180**** ****1,891,293**** ****Operating Expenses**         Selling317,609 342,597 611,914 704,410  Administrative247,785 207,162 510,485 491,459  Research & Development187,657 213,831 375,685 436,368 **Total Operating Expenses****753,051**** ****763,590**** ****1,498,084**** ****1,632,237**** ****Income from Operations****(9,544****)****34,398**** ****72,096**** ****259,056**** ****Other Income/(Expense)**         Interest Income65,006 29,542 98,504 58,236  Sale of Investments2,737,663 - 4,164,230 - **Total Other Income****2,802,669**** ****29,542**** ****4,262,734**** ****58,236**** ****Income/(Loss) before  Discontinued Operations    and Income Taxes****2,793,125** **63,940** **4,334,830** **317,292** Provision for Income Taxes980,434 21,800 1,535,459 113,150 **Income/(Loss) from Continuing  Operations****1,812,691**** ****42,140**** ****2,799,371**** ****204,142**** ****Discontinued Operations:**         Income/(Loss) from  Discontinued Operations(2,524)7,193 (3,510)9,167  Loss on Disposal of Segment(69,229)  (69,229)-               **Net Income**1,740,938 49,333 2,726,632 213,309                                 **Net Income/(Loss) Per Share  Data:**        **Basic:**         Income/(loss) from continuing  operations$0.58 $0.01 $0.90 $0.07  Net income/(loss) per share0.56 0.02 0.87 0.07  Shares used in per share  calculations3,118,948 2,988,945 3,118,948 2,985,384          **Diluted:**         Income/(loss) from continuing  operations$0.56 $0.01 $0.86 $0.07  Net income/(loss) per share0.54 0.02 0.85 0.07  Shares used in per share  calculations3,240,749 3,088,412 3,225,828 3,061,424 
 

**Electro-Sensors, Inc****Statements of Cash Flows(Unaudited)**
      **Six Months Ended** **Six Months Ended**  **June 30, 2001**** ****June 30, 2000**** ** **** **** **Reconciliation of Net Income to  Net Cash**    **Provided by Operating Activites:**         Net Income2,726,632 213,309      Adjustments to reconcile net income to net cash provided  by/(used in) operating activites:          Provision for losses on trade  receivables(10,640)   Loss on Disposal of Segment71,753    Depreciation60,919 69,696  Deferred Taxes219,533 6,367  Realized gain on sale of  investments(4,164,230)            Change in Assets and Liabilities:     Trade receivables(61,682)(4,157) Inventory(79,612)(91,890) Prepaid Expenses86,519 48,120  Prepaid Income Taxes(74,606)125,609  Accounts Payable(18,022)3,698  Customer Deposits1,605 (353,645) Accrued Expenses20,613 131,127  Accrued income taxes1,411,447 94,150  Deferred Income taxes-      Net cash provided by operating activities190,229 242,384         Cash flows from investing activities:     Proceeeds from sale of  investments4,205,032    Purchase of property and  equipment(18,475)(30,598)   Net cash provided by/(used in) investing activities4,186,557 (30,598)        Cash flows from financing activities:     Proceeds from issuance of  stock6,538 38,008  Proceeds from disposed segment5,000    Prinicipal payments received  on note receivable1,000    Dividends Paid(187,245)(119,431)    Net cash used in financing activities(174,707)(81,423)        Net increase in cash and cash equivalents4,202,079 130,363      Cash and cash equivalents, beginning3,191,176 2,507,689         Cash and cash equivalents, ending7,393,255 2,638,052              **Supplemental Schedule of  Non-Cash Investing and** **Financing Activities**         Net change in unrealized gain/(loss) on marketable securities.3,495,598 25,393,187         Issuance of Note Receivable related to sale of segment.36,000 -     
** **

**Electro-Sensors, Inc. and Subsidiaries****Notes toConsolidated Financial StatementsJune 30, 2001(Unaudited)**

Note A:             Nature ofBusiness

Electro-Sensors, Inc. (the Company), operates two 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 monitoringand motor control systems for industrial machinery. The Controls Divisionutilizes leading-edge technology to continuously improve its products and makethem easier to use. The Controls Division’s goal is to manufacture the industry-preferredproduct for every market served. These products are sold through an internalsales staff and distributors to a wide variety of manufacturers, OEMS andprocessors to monitor the efficiency of process machinery. The Company marketsits products to a number of different industries located throughout the UnitedStates and abroad. The Company owns marketable securities, which haveexperienced significant appreciation in value since the related company’s IPOin 2000. During late 2000 and the first six months of 2001, the Company hasrecognized income from the sale of a portion of its holdings.

The second business is AutoData Systems (ADS), a division ofElectro-Sensors, Inc. ADS designs and markets a desktop software based systemthat reads handprinted characters, checkmarks and bar code information fromscanned or faxed forms. ADS products are designed to provide capabilities toautomate data collection through telemarketing to end users, resellers anddevelopers in the United States, Canada, Europe and Asia.

The Company had previously operated a third business, Microflame, Inc.(MFI), a wholly owned subsidiary, which was sold in May 2001 (see Item 2:Results of Operations for further discussion). MFI produced small hand held gastorches used primarily by hobbyists, electronic kit assemblers and creators ofjewelry.  MFI products were sold throughdistributors to retailers of hardware, hobby craft and electronic products.

Note B:             Basis ofPresentation

The accompanying unaudited consolidated financial statements have beenprepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q and Rule10-01 of Regulation S-X. Accordingly, they do not include all of the informationand footnotes required by generally accepted accounting principles for completefinancial statements. In the opinion of management, all adjustments (consistingof normal recurring accruals) considered necessary for a fair presentation havebeen included.

Intercompany accounts, transactions and earnings are eliminated throughconsolidation.

The Balance Sheet at December 31, 2000 has been derived from theCompany’s audited financial statements for the year ended December 31, 2000,but does not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.

For further information, refer to the financial statements and footnotesthereto included in the Company’s annual report on Form 10-K for the year endedDecember 31, 2000.

Note C:             ComprehensiveIncome
 Three Months  Ended Six Months  Ended  June 30, June 30,    2001 2000 2001 2000   Net Income1,740,938 49,333 2,726,632 213,309          Other comprehensive gain:         Change in unrealized value of investments, net3,080,700 16,016,048 1,476,200 17,087,753            Less: Reclassification adjustment for gains  included in net income(3,412,608)- (5,236,804) -              Total comprehensive income1,409,030 16,065,981 (1,033,972) 17,301,062   
 

Note D:             Investments

The Company has a portfolio of investments. Management determines theappropriate classification of securities at the date individual investments areacquired, and evaluates the appropriateness of such classification at eachbalance sheet date.

The Company’s investments consist of marketable equity securities,primarily common stocks, government debt securities, money market funds andunregistered equity securities. The estimated fair value of marketable equitysecurities is based on quoted market prices and, therefore, is subject to theinherent risk of market fluctuations.

Since the Company does not buy investments in anticipation of short-termfluctuations in market prices, the investments in marketable equity securitieshave been classified as available-for-sale. Available-for-sale securities arestated at fair value, and unrealized holding gains and losses, net of therelated deferred tax effect, are reported as a separate component ofstockholders’ equity. Dividends on marketable equity securities are recognizedin income when declared. Investments in unregistered securities are reported atoriginal cost.

Realized gains and losses, including losses from declines in value ofspecific securities determined by management to be other-than-temporary, areincluded in income. Realized gains and losses are determined on the basis ofthe specific securities sold.

Note E:              New AccountingPronouncements

In December 1999, the Securities and Exchange Commission (SEC) issuedStaff Accounting Bulletin No.101 (SAB 101), “Revenue Recognition in FinancialStatements.” SAB 101 summarizes certain of the SEC’s views in applyinggenerally accepted accounting principles to revenue recognition in financialstatements. In October 2000, the SEC issued additional written guidance tofurther supplement SAB 101.  The Companyadopted SAB 101 upon its issuance by the SEC. The adoption of SAB 101 did not have any material effect on theCompany’s revenues or revenue recognition policy.
**Item2**

**Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

**Resultsof Operations**

Net sales decreased 8.6% to $1,183,979 for the three month period endedJune 30, 2001, compared to net sales of $1,295,193 for the same period infiscal 2000. Net sales decreased by a total of 17.8%, for the six month periodended June 30, 2001, to $2,485,348 compared to $3,004,778 for the same periodin fiscal 2000.The decrease is due primarily to a significant sale,approximately 400 units, which had occurred during the first quarter of fiscal2000 in the Controls Division to one of its customers. The decrease is also dueto decreased net sales in the Company’s AutoData Division. The primary decreasein net sales is due to the restructuring of the sales department and theredirection of its focus.  AlthoughAutoData’s net sales have decreased, the Division recognized net income for thesix months ended June 30, 2001 of $25,870 compared to a net loss of $75,480 inthe comparable period of fiscal 2000. The Company’s net sales, overall, hasalso been affected by the decrease in capital spending by its customers as aresult of the general decline of the global economy during the first half offiscal 2001.

The Company’s gross margin for the three and six month periods endedJune 30, 2001 remained consistent compared to the same periods in fiscal 2000.The Company expects the gross margin as a percentage of net sales to remainconsistent throughout the second half of fiscal 2001.

Selling and research & development expenses for the three and sixmonth periods ended June 30, 2001 decreased compared to the same periods infiscal 2000 due to a reduction in the employee base in the Company’s AutoDataDivision in the first half of fiscal 2001. Operating expenses in total as apercentage of net sales increased for the three and six month periods endedJune 30, 2001 when compared to the same periods in fiscal 2000. This isconsistent with management’s expectation that operating expenses would remainrelatively consistent between periods while experiencing a decrease in netsales.

The most significant increase in income from continuing operationsexperienced by the Company during the six months ended June 30, 2001 comparedto the same period in fiscal 2000 is due to the sale of investments inmarketable securities held by the Company.

In recent years, the Company’s wholly owned subsidiary, Microflame,Inc., has incurred operating losses. As a result, the Company made the decisionto sell the division. Microflame was sold during the second quarter of 2001,resulting in a loss from discontinued operations of $72,739 for the first sixmonths of 2001 as compared to income of $9,167 for the first six months in 2000.
**Liquidityand Capital Resources**

The Company continues to generate strong cash flows from operations.Working capital and funds for capital expenditures have been provided throughcurrent earnings. These funds have been placed in secure short-term investments.The funds are being used primarily for dividend distributions, working capitalneeds and general corporate purposes, which may include acquisitions.  The Company does not anticipate the need foradditional working capital from outside sources.

**PartII – Other Information**

**Item 1. Legal Proceedings**

There were no material developments in previously reported legalproceedings.

I**tem 2. Changes in Securities and Use ofProceeds**

No changes have been made to any registered securities.

**Item 3. DefaultsUpon Senior Securities**

No event constituting a default has occurred with respect to any seniorsecurity of the Registrant.

**Item 4. Submission of Matters to a Voteof Security Holders**

The following matters were voted on by shareholders during the periodcovered by this Form 10-Q:
(a)The Annual Meeting of shareholders was held  April 25, 2001.  (b)Approval of setting number of Directors at  five.  (c)Election of Directors as follows:   Brad D. Slye2,775,928For190,097Withheld Authority  Pete R. Peterson2,775,928For190,097Withheld Authority  Joseph A. Marino2,775,928For190,097Withheld Authority  John S. Strom2,775,928For190,097Withheld Authority  Geoffrey W. Miller2,775,928For190,097Withheld Authority        (d)Approval of Schweitzer Karon & Bremer  LLC as independent auditors.
**Item 5. Other Information**

This Form 10-Q contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934, including statements regarding the Company’sexpectations, beliefs, intentions or strategies regarding the future.Forward-looking statements include, without limitation, statements regardingthe extent and timing of future revenues and expenses and customer demand. Thesestatements include, but are not limited to, changes in worldwide generaleconomic conditions, cyclicality of capital spending by customers,Electro-Sensors, Inc. ability to keep pace with technological developments andevolving industry standards, worldwide competition and Electro-Sensors, Inc.ability to protect its existing intellectual property from challenges fromthird parties and other factors.

All forward-looking statements in the document are based on informationavailable to the Company as of the date hereof, and the Company assumes noobligation to update any such forward-looking statements. It is important tonote that the Company’s actual results could differ materially from those insuch forward-looking statements. The forward-looking statements of the Companyare subject to risks and uncertainties. Some of the factors that could causefuture results to materially differ from the Company’s recent results or thoseprojected in the forward-looking statements are detailed in our Annual Reporton Form 10-K for the year ended December 31, 2000, filed with the SEC.

**Item 6. Exhibits andReports on Form 8-K**
(a)Exhibits – No  exhibits are attached to this filing of Form 10-Q.  (b)Reports on Form 8-K  – No reports on Form 8-K were filed during the six months ended June 30,  2001.
 

**Signatures**

Pursuant to the requirements of the Securities and Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereto duly authorized.

 

Electro-Sensors, Inc.

 

**By:**/s/Bradley D. Slye                                        August14, 2001

Bradley D. Slye, President

(Principal Financial Officer)

 

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