**UNITED STATES**

**SECURITIES 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 September  30, 2001** |
|                                                   |   |                                                                                    |
| **o**                                                  |   | **TRANSITION REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 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)** |

** **

 

 

##### **6111 Blue Circle Drive**

**Minnetonka, Minnesota55343-9108**

(Address of principal executive offices)

 

 

**(952) 930-0100**

(Issuer’s telephone number)

 

 

 

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

 

** **

**Check whether the issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.**

Yes ý  No o

 

Sharesof $0.10 par value common stock outstanding at November 14, 2001: 3,120,323

 

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

 

 

# **Part I – Financial Information**

**Item1**

** **

**FinancialStatements**

 
|                                                                           |   | **Three Months Ended** |       | **Nine Months Ended** |       |
|--------------------------------------------------------------------------------|--------|------------------------|------------|-----------------------|------------|
|                                                                           |   | **September 30,**      |       | **September 30,**     |       |
|                                                                           |   | **2001**               |       | **2000**              |       | **2001** |   | **2000** |   |
|                                                                           |   |                   |       |                  |       |   |   |   |   |
| **Sales**                                                                      |   | 1,111,625              |       | 1,435,743             |       | 3,596,973 |   | 4,440,522 |   |
| **Cost of Sales**                                                              |   | 470,527                |       | 533,046               |       | 1,386,085 |   | 1,646,530 |   |
| **Gross Margin**                                                               |   | **641,098**            | ** ** | **902,697**           | ** ** | **2,210,888** | ** ** | **2,793,992** |   |
| **Operating Expenses**                                                         |   |                   |       |                  |       |   |   |   |   |
| Selling                                                                        |   | 285,233                |       | 357,090               |       | 897,147 |   | 1,061,500 |   |
| Administrative                                                                 |   | 192,055                |       | 191,956               |       | 704,445 |   | 612,065 |   |
| Research & Development                                                     |   | 206,115                |       | 217,013               |       | 581,800 |   | 653,381 |   |
| **Total Operating Expenses**                                                   |   | **683,403**            | ** ** | **766,059**           | ** ** | **2,183,392** | ** ** | **2,326,946** |   |
| **Income from Operations**                                                     |   | **(42,305**            | **)**      | **136,638**           | ** ** | **27,496** | ** ** | **467,046** |   |
| **Other Income/(Expense)**                                                     |   |                   |       |                  |       |   |   |   |   |
| Other Income (Expense)                                                         |   | (12,573                | )          | 34,633                |       | 125,220 |   | 21,516 |   |
| Sale of Investments                                                            |   | 1,214,425              |       | -                     |       | 5,341,871 |   | - |   |
| **Total Other Income**                                                         |   | **1,201,852**          | ** ** | **34,633**            | ** ** | **5,467,091** | ** ** | **21,516** |   |
| **Income/(Loss) before Discontinued Operations**** ****and Income Taxes** |   | **1,159,547**          | ** ** | **171,271**           | ** ** | **5,494,587** | ** ** | **488,562** |   |
| Provision for Income Taxes                                                     |   | 417,520                |       | 62,675                |       | 1,952,979 |   | 175,825 |   |
| **Income/(Loss) from Continuing Operations**                                   |   | **742,027**            | ** ** | **108,596**           | ** ** | **3,541,608** | ** ** | **312,737** |   |
| **Discontinued Operations:**                                                   |   |                   |       |                  |       |   |   |   |   |
| Income/(Loss) from Continuing Operations                                       |   | -                      |       | 8,203                 |       | (3,510 | ) | 17,371 |   |
| Loss on Disposal of Segment                                                    |   | -                      |       | -                     |       | (69,229 | ) | - |   |
|                                                                           |   |                   |       |                  |       |   |   |   |   |
| **Net Income**                                                                 |   | **742,027**            | ** ** | **116,799**           | ** ** | **3,468,869** | ** ** | **330,108** |   |
|                                                                           |   |                   |       |                  |       |   |   |   |   |
|                                                                           |   |                   |       |                  |       |   |   |   |   |
| **Net Income/(Loss) Per Share Data:**                                          |   |                   |       |                  |       |   |   |   |   |
| **Basic:**                                                                     |   |                   |       |                  |       |   |   |   |   |
| Income/(loss) from continuing operations                                       |   | $                      | 0.24       |                  | $          | 0.05 |   | $ | 1.14 |   | $ | 0.16 |   |
| Net income/(loss) per share                                                    |   | 0.24                   |       | 0.06                  |       | 1.11 |   | 0.16 |   |
| Shares used in per share calculations                                          |   | 3,120,323              |       | 2,006,433             |       | 3,120,323 |   | 2,004,153 |   |
|                                                                           |   |                   |       |                  |       |   |   |   |   |
| **Diluted:**                                                                   |   |                   |       |                  |       |   |   |   |   |
| Income/(loss) from continuing operations                                       |   | 0.23                   |       | 0.05                  |       | 1.12 |   | 0.15 |   |
| Net income/(loss) per share                                                    |   | 0.23                   |       | 0.06                  |       | 1.10 |   | 0.16 |   |
| Shares used in per share calculations                                          |   | 3,164,538              |       | 2,102,610             |       | 3,154,811 |   | 2,088,597 |   |
|                                                                                |        |                        |            |                       |            |  |  |  |  |  |  |  |  |

 

 
|                                                                                                                                  |   | **September  30, 2001** |       | **December  31, 2000** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|------------------------|--------|
| **Assets**                                                                                                                            |   |                    |       |                   |   |
| **Current  Assets**                                                                                                                   |   |                    |       |                   |   |
| Cash                                                                                                                                  |   | 8,449,916.00            |       | 3,191,176.00           |   |
| Investments in available-for-sale  securities                                                                                         |   | 1,500,000.00            |       | 3,266,753.00           |   |
| Trade Receivables, less allowance  for doubtful accounts of $37,140 and $26,500, respectively                                    |   | 631,822.00              |       | 730,577.00             |   |
| Inventories                                                                                                                           |   | 808,077.00              |       | 922,610.00             |   |
| Other current assets                                                                                                                  |   | 313,370.00              |       | 127,177.00             |   |
| Prepaid Income taxes                                                                                                                  |   | -                       |       | 74,606.00              |   |
| **Total  Current Assets**                                                                                                             |   | **11,703,185.00**       | ** ** | **8,312,899.00**       |   |
| Property & Equipment, net                                                                                                         |   | 1,539,610.00            |       | 1,615,994.00           |   |
| Investments                                                                                                                           |   | 7,741,562.00            |       | 17,202,689.00          |   |
| **Total  Assets**                                                                                                                     |   | **20,984,357.00**       | ** ** | **27,131,582.00**      |   |
|                                                                                                                                  |   |                    |       |                   |   |
| **Liabilities  & Shareholders' Equity**                                                                                           |   |                    |       |                   |   |
| **Current  Liabilities**                                                                                                              |   |                    |       |                   |   |
| Accounts Payable                                                                                                                      |   | 92,844.00               |       | 108,482.00             |   |
| Customer Deposits                                                                                                                     |   | 19,320.00               |       | 6,493.00               |   |
| Accrued Expenses                                                                                                                      |   | 310,603.00              |       | 234,212.00             |   |
| Deferred Taxes                                                                                                                        |   | 470,393.00              |       | 1,047,900.00           |   |
| Accrued Income Taxes                                                                                                                  |   | 1,760,082.00            |       | -                      |   |
| **Total  Current Liabilities**                                                                                                        |   | **2,653,242.00**        | ** ** | **1,397,087.00**       |   |
| Deferred Income Taxes                                                                                                                 |   | 2,396,618.00            |       | 5,879,400.00           |   |
| **Shareholders'  Equity**                                                                                                             |   |                    |       |                   |   |
| Common Stock par value $.10 per share;  authorized 10,000,000  shares; issued 3,120,323 and 2,077,112 shares, respectively. |   | 312,032.00              |       | 207,711.00             |   |
| Additional Paid-In Capital                                                                                                            |   | 991,620.00              |       | 985,410.00             |   |
| Retained Earnings                                                                                                                     |   | 9,478,646.00            |       | 6,391,246.00           |   |
| Accumulated other Comprehensive Income                                                                                                |   | 5,152,199.00            |       | 12,270,728.00          |   |
| **Total  Shareholder's Equity**                                                                                                       |   | **15,934,497.00**       | ** ** | **19,855,095.00**      |   |
| **Total  Liabilities and Shareholders' Equity**                                                                                       |   | **20,984,357.00**       | ** ** | **27,131,582.00**      |   |

 

**Electro-Sensors,Inc**

###### **Statement of Cash Flows**

**For theNine Month Periods Ending September 30, 2001 and 2000**

 
|                                                                                             |   | **Nine Months Ending** |       | **Nine Months Ending** |       |
|--------------------------------------------------------------------------------------------------|--------|------------------------|------------|------------------------|------------|
|                                                                                             |   | **September 30, 2001** |       | **September 30, 2000** |       |
| **Reconciliation of Net Income to Net Cash**** Provided by Operating  Activites**           |   |                   |       |                   |       |
|                                                                                             |   |                   |       |                   |       |
| Net Income                                                                                       |   | 3,468,869              | ** ** | 330,108                | ** ** |
|                                                                                             |   |                   |       |                   |       |
| Adjustments to reconcile net income to net cash provided by/(used  in) operating activites: |   |                   |       |                   |       |
|                                                                                             |   |                   |       |                   |       |
| Loss on Disposal of Equipment                                                                    |   | -                      |       |                   |       |
| Provision for losses on trade receivables                                                        |   | (10,863                | )          |                   |       |
| Loss on Disposal of Segment                                                                      |   | 69,229                 |       |                   |       |
| Depreciation                                                                                     |   | 93,109                 | ** ** | 69,696                 | ** ** |
| Deferred Taxes                                                                                   |   | 9,882                  | ** ** | 6,367                  | ** ** |
| Realized (gain)/loss on sale of investments                                                      |   | (5,341,871             | )          |                   |       |
|                                                                                             |   |                   |       |                   |       |
|                                                                                             |   |                   |       |                   |       |
| Change in Assets and Liabilities:                                                                |   |                   |       |                   |       |
| Trade receivables                                                                                |   | 99,096                 |       | (4,157                 | )          |
| Inventory                                                                                        |   | 55,594                 |       | (91,890                | )          |
| Prepaid Expenses                                                                                 |   | (188,612               | )          | 48,120                 | ** ** |
| Prepaid Income Taxes                                                                             |   | 72,767                 | ** ** | 125,609                | ** ** |
| Accounts Payable                                                                                 |   | (14,197                | )          | 3,698                  | ** ** |
| Customer Deposits                                                                                |   | (6,493                 | )          | (353,645               | )          |
| Accrued Expenses                                                                                 |   | 95,711                 | ** ** | 131,127                | ** ** |
| Accrued income taxes                                                                             |   | 1,760,082              | ** ** | 94,150                 | ** ** |
| Deferred Income taxes                                                                            |   | -                      |       |                   |       |
| Net cash provided by/(used in) operating activities                                              |   | 162,303                | ** ** | 359,183                | ** ** |
|                                                                                             |   |                   |       |                   |       |
| Cash flows from investing activities:                                                            |   |                   |       |                   |       |
| Proceeds from disposed segment                                                                   |   | 5,000                  |       |                   |       |
| Principal payments received on note receivable                                                   |   | 1,000                  |       |                   |       |
| Proceeeds from sale of investments                                                               |   | 5,380,801              |       |                   |       |
| Purchase of property and equipment                                                               |   | (19,649                | )          | (30,598                | )          |
| Net cash provided by/(used in) investing activities                                              |   | 5,367,152              |       | (30,598                | )          |
|                                                                                             |   |                   |       |                   |       |
| Cash flows from financing activities:                                                            |   |                   |       |                   |       |
| Proceeds from issuance of stock                                                                  |   | 10,140                 | ** ** | 38,008                 | ** ** |
| Dividends Paid                                                                                   |   | (280,855               | )          | (119,431               | )          |
| Net cash provided by/(used in) financing activities                                              |   | (270,715               | )          | (81,423                | )          |
|                                                                                             |   |                   |       |                   |       |
| Net increase/(decrease) in cash and cash equivalents                                             |   | 5,258,740              | ** ** | 247,162                | ** ** |
|                                                                                             |   |                   |       |                   |       |
| Cash and cash equivalents, beginning                                                             |   | 3,191,176              | ** ** | 2,507,689              | ** ** |
|                                                                                             |   |                   |       |                   |       |
| Cash and cash equivalents, ending                                                                |   | 8,449,916              | ** ** | 2,754,851              | ** ** |
|                                                                                             |   |                   | ** ** |                   | ** ** |
|                                                                                             |   |                   | ** ** |                   | ** ** |
| **Supplemental Schedule of Non-cash Investing  and**** Financing Activities**               |   |                   |       |                   |       |
|                                                                                             |   |                   | ** ** |                   | ** ** |
| Net change in unrealized gain/(loss) on marketable securities.                                   |   | (5,544,346             | )          | 25,393,187             |       |
|                                                                                             |   |                   | ** ** |                   | ** ** |
| Issuance of Note Receivable related to sale of segment.                                          |   | 36,000                 |       | -                      |       |

 

**Electro-Sensors, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements**

**September 30, 2001**

**(Unaudited)**

 

Note A:                        Natureof Business

**Electro-Sensors, Inc. (theCompany), operates two distinct businesses. The first is the Controls Division,which carries the name of Electro-Sensors, Inc. This division manufactures andmarkets a complete line of speed monitoring and motor control systems forindustrial machinery. The Controls Division utilizes leading-edge technology tocontinuously improve its products and make them easier to use. The ControlsDivision’s goal is to manufacture the industry-preferred product for everymarket served. These products are sold through an internal sales staff anddistributors to a wide variety of manufacturers, OEM’s and processors tomonitor the efficiency of process machinery. The Company markets its productsto a number of different industries located throughout the United States andabroad. The Company owns marketable securities, which have experiencedsignificant appreciation in value since the related company’s IPO in 2000. Duringlate 2000 and the first nine months of 2001, the Company has recognized incomefrom the sale of its holdings in August Technology Corporation.**

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 through distributors to retailers of hardware,hobby craft and electronic products.

 

Note B:                        Basisof Presentation

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 theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been 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 andfootnotes thereto included in the Company’s annual report on Form 10-K for theyear ended December 31, 2000.

 

Note C:                        ComprehensiveIncome

 
|                                                         |   | **Quarter  Ended** |   | **Nine  Months Ended** |   |
|--------------------------------------------------------------|--------|--------------------|--------|------------------------|--------|
| **September 30,**                                            |   | **2001**           |   | **2000**               |   | **2001** |   | **2000** |   |
|                                                         |   |               |   |                   |   |   |   |   |   |
| Net Income                                                   |   | 742,027            |   | 116,799                |   | 3,468,869 |   | 330,108 |   |
|                                                         |   |               |   |                   |   |   |   |   |   |
| Other Comprehensive Gain:                                    |   |               |   |                   |   |   |   |   |   |
| Change in Unrealized Value Investments, net                  |   | (2,955,125         | )      | (4,043,239             | )      | (1,478,925 | ) | (13,257,823 | ) |
|                                                         |   |               |   |                   |   |   |   |   |   |
| Less:                                                        |   |               |   |                   |   |   |   |   |   |
| Reclassification Adjustment for Gains Included in Net Income |   | (403,800           | )      | -                      |   | (5,639,604 | ) | - |   |
|                                                         |   |               |   |                   |   |   |   |   |   |
| Total Comprehensive Income                                   |   | (2,616,898         | )      | (3,926,440             | )      | (3,649,660 | ) | (12,927,715 | ) |
|                                                         |   |               |   |                   |   |   |   |   |   |

Note D:        Investments

The Company has a portfolio of investments.Management determines the appropriate classification of securities at the dateindividual investments are acquired, and evaluates the appropriateness of suchclassification at each balance sheet date.

The Company’s investments consist ofmarketable equity securities, primarily common stocks, government debtsecurities, money market funds and unregistered equity securities. Theestimated fair value of marketable equity securities is based on quoted marketprices and, therefore, is subject to the inherent risk of market fluctuations.

Since the Company does not buy investments inanticipation of short-term fluctuations in market prices, the investments inmarketable equity securities have been classified as available-for-sale.Available-for-sale securities are stated at fair value, and unrealized holdinggains and losses, net of the related deferred tax effect, are reported as aseparate component of stockholders’ equity. Dividends on marketable equitysecurities are recognized in income when declared. Investments in unregisteredsecurities are reported at original cost.

Realized gains and losses, including lossesfrom declines in value of specific securities determined by management to beother-than-temporary, are included in income. Realized gains and losses aredetermined on the basis of the 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.

 

Effective January 1, 2001, the Company adopted Financial AccountingStandards No. 133, “Accounting for Derivative Instruments and HedgingActivities,” amended by Standard No. 137 which provides guidance on accountingfor derivatives and hedge transactions.

 

The adoption of SAB 101 and FAS No.133 did not have any material effecton the Company’s revenues or revenue recognition policy.

 

The Company’s revenue recognition policy and procedures for “Accountingfor Derivative Instruments and Hedging Activities” are as follows:

 

Revenue recognition of production monitoring equipment and gas torches:

All production monitoring equipment and gas torches are shipped withoutan evaluation or acceptance period. Revenues from the sale of the products and any related warranty costsare recognized at the time of shipment. The Company’s distributors are not granted any price protection.  Sales to all customers includingdistributors are final and no right of return after shipment exists.

 

Software revenue recognition:

 

The Company recognizes revenue upon shipment of its character recognitionsoftware.  The product is sold to theend used and risk of loss is transferred, and the Company has no continuingobligations, once its products are delivered to the shipper.  The Company recognizes revenue uponshipment, net of return reserves based on historical experience.  To recognize revenue, it must be probablethat the Company will collect the accounts receivable from its customers.  In some situations, the Company receivesadvance payments from its customers. Revenue associated with these advance payments is deferred until theproduct is shipped.  Warranty reservesare provided at the time revenue is recognized for the estimated cost ofreplacing defective product.

 

SFAS No. 133:  Accounting forDerivative Instruments and Hedging Activities (as amended by SFAS No. 137 withrespect to the effective date) will be effective for the Company in January2001.  SFAS No. 133 requires allderivatives to be recognized as assets or liabilities on the balance sheet andmeasured at fair value on a mark-to-market basis.  This applies whether the derivatives are stand-alone instruments,such as forwarded currency exchange contracts and interest rate swaps orcollars, or embedded investments.  Alongwith the derivatives, the underlying hedged items are also to be marked tomarket on an ongoing basis.  Thesemarket value adjustments are to be included in net income (loss) in thestatement of operations or in other comprehensive income (and accumulated inshareholders’ equity), depending on the nature of the transaction.

 

Note F:  Segment Information:

 
|                                                            |   | **Quarter  Ended** |   | **Nine  Months Ended** |   |
|-----------------------------------------------------------------|--------|--------------------|--------|------------------------|--------|
| **September 30,**                                               |   | **2001**           |   | **2000**               |   | **2001** |   | **2000** |   |
|                                                            |   |               |   |                   |   |   |   |   |   |
| External Sales                                                  |   |               |   |                   |   |   |   |   |   |
| Production Monitoring                                           |   | 925,838            |   | 1,163,099              |   | 3,079,845 |   | 3,742,606 |   |
| Character Recognition                                           |   | 185,787            |   | 272,644                |   | 517,128 |   | 697,916 |   |
| Investments                                                     |   | -                  |   | -                      |   | - |   | - |   |
|                                                            |   |               |   |                   |   |   |   |   |   |
| **Total**                                                       |   | 1,111,625          |   | 1,435,743              |   | 3,596,973 |   | 4,440,522 |   |
|                                                            |   |               |   |                   |   |   |   |   |   |
| Net Income (Loss) Before Taxes and Discontinued Operations |   |               |   |                   |   |   |   |   |   |
| Production Monitoring                                           |   | (48,132            | )      | 211,922                |   | 60,690 |   | 668,242 |   |
| Character Recognition                                           |   | (6,746             | )      | (30,333                | )      | 33,673 |   | (149,288 | ) |
| Investments                                                     |   | 1,214,425          |   | (10,318                | )      | 5,400,224 |   | (30,392 | ) |
|                                                            |   |               |   |                   |   |   |   |   |   |
| **Total**                                                       |   | 1,159,547          |   | 171,271                |   | 5,494,587 |   | 488,562 |   |

 

The Company’ssubsidiary Microflame, Inc. was sold in May 2001.  See Note G below.  Segmentinformation related to Microflame, Inc. previously has been included as thebrazing torch operations segment.

 

The Company has no inter-segment sales.

Note G:  Disposal of Microflame,Inc.

On May 14, 2001, the Company disposed of its brazing torches segmentthrough a sale of all of its shares of stock in Microflame, Inc. to anunrelated party.  The Company hasrestated its prior financial statements to present the operating results of thebrazing torch operations as discontinued. Summary of the operating information for this segment is as follows:

 
|                                  |   | **Revenue** |    | **Taxes** |   |
|---------------------------------------|--------|-------------|---------|-----------|--------|
| Three Months Ended September 30, 2001 |   | $           | -       |      | $      | - |   |
| Three Months Ended September 30, 2000 |   | $           | 68,237  |      | $      | 4,675 |   |
|                                  |   |        |    |      |   |
| Nine Months Ended September 30, 2001  |   | $           | 149,421 |      | $      | 5,275 |   |
| Nine Months Ended September 30, 2000  |   | $           | 217,568 |      | $      | 9,950 |   |

 

Proceeds on the sale of the operations include a $5,000 cash paymentand a note receivable for $36,000.  Thenote is payable in 36-monthly payments of $1,000 plus interest at 9.5%.  The note is secured by the stock ofMicroflame, Inc.  The tax benefitresulting from the loss on the disposal of its investment is $30,000.

**Item 2**

** **

**Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

** **

**Resultsof Operations**

** **

**Net sales decreased 22.6% to $1,111,625 for thethree-month period ended September 30, 2001, compared to net sales of$1,435,743 for the same period in fiscal 2001. Net sales decreased by a totalof 19.0%, for the nine month period ended September 30, 2001, to $3,596,973compared to $4,440,522 for the same period in fiscal 2000.The decrease is dueprimarily to a significant sale, approximately 400 units, which had occurredduring the first quarter of fiscal 2000 in the Controls Division to one of itscustomers. The decrease is also due to decreased net sales in the Company’sAutoData Division. The primary decrease in net sales is due to therestructuring of the sales department and the redirection of its focus.Although AutoData’s net sales have decreased, the Division recognized netincome for the nine months ended September 30, 2001 of $33,673 compared to anet loss of $149,288 in the comparable period of fiscal 2000. The Company’s netsales, overall, has also been affected by the decrease in capital spending byits customers as a result of the general decline of the global economy duringthe nine months of fiscal 2001.**

** **

The Company’s gross margin for the three and nine month periods endedSeptember 30, 2001 remained consistent compared to the same periods in fiscal2000. The Company expects the gross margin as a percentage of net sales toremain consistent throughout the last quarter of fiscal 2001.

**Selling and research & development expenses forthe three and nine month periods ended September 30, 2001 decreased compared tothe same periods in fiscal 2000 due to a reduction in the employee base in theCompany’s AutoData Division in the nine month period of fiscal 2001. Operatingexpenses in total as a percentage of net sales increased for the three and sixmonth periods ended September 30, 2001 when compared to the same periods infiscal 2000. This is consistent with management’s expectation that operatingexpenses would remain relatively consistent between periods while experiencinga decrease in net sales.**

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The most significant increase in income from continuing operationsexperienced by the Company during the nine months ended September 30, 2001compared to the same period in fiscal 2000 is due to the sale of its investmentsin August Technology Corporation.

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 nine monthperiod ended September 30, 2001 as compared to income of $17,371 for the ninemonth period ended September 30, 2000.**Liquidity and Capital Resources**

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The Company continues togenerate strong cash flows from operations. Working capital and funds forcapital expenditures have been provided through current earnings. These fundshave been placed in secure short-term investments. The funds are being usedprimarily for dividend distributions, working capital needs and generalcorporate purposes, which may include acquisitions. Capital expendituresresulted mainly from the purchase of additional manufacturing and officeequipment. The Company does not anticipate the need for additional workingcapital from outside sources.

 

**PartII – Other Information**

 

**Item1. Legal Proceedings**

 

There were no materialdevelopments in previously reported legal proceedings.

 

**Item2. Changes in Securities and Use of Proceeds**

 

No changes have been made toany registered securities.

 

**Item3. Defaults Upon Senior Securities**

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No event constituting a defaulthas occurred with respect to any senior security of the Registrant.

 

**Item4. Submission of Matters to a Vote of Security Holders**

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No matters were voted on by theCompany’s security holders.

 

**Item5. Other Information**

 

This Form 10-Q contains forward-looking statements within the meaningof Section 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 if 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.

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**Item6. Exhibits and Reports on Form 8-K**

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(a)   Exhibits – No exhibits are attached to thisfiling of Form 10-Q.

(b)   Reports on Form 8-K – No reports on Form 8-Kwere filed during the nine months ended September 30, 2001.

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**Signatures**

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Pursuant to the requirements of the Securities and Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereto duly authorized.

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| **Electro-Sensors, Inc.**      |
|--------------------------------|
|                           |
| **By:**                        | /s/ Bradley  D. Slye |   |
| Bradley D.  Slye, President    |
| (Principal  Financial Officer) |

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