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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K


ý☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   
For the fiscal year ended December 31, 2014
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
For the fiscal year ended December 31, 2011
or
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission file number 000-09587

Commission file number 0-9587


ELECTRO-SENSORS, INC.

(Exact name of registrant as specified in its charter)


Minnesota41-0943459
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
6111 Blue Circle Drive
Minnetonka, Minnesota 55343-9108
(Address of principal executive offices, including zip code)
(952) 930-0100
(Registrant’s telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Common Stock, $0.10 par value, registered on the NASDAQ Capital Market
Securities registered under Section 12(g) of the Exchange Act: None

6111 Blue Circle Drive
Minnetonka, Minnesota 55343-9108

(Address of principal executive offices, including zip code)

(952) 930-0100

(Registrant’s telephone number)

Securities registered under Section 12(b) of the Exchange Act:

Common Stock, $0.10 par value, registered on the NASDAQ (Capital) Market

Securities registered under Section 12(g) of the Exchange Act:   None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐ No ☒


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.Act.  Yes ☐ No ☒


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.days. Yes ☒ No ☐


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

☐

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K.  ☐

☒


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer☐Accelerated filer☐
Non-accelerated filer☐ (Do not check if a smaller reporting company)Smaller reporting company☒


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐ Yes  ☒ No

☐   No ☒

The aggregate market value of the voting stock held by non-affiliates (persons other than officers, directors, or holders of more than 5% of the outstanding stock) of the registrant was approximately $6,300,000$7,000,000 based upon the closing price of the Common Stock as reported on The Nasdaq Stock Market® on June 30, 2011.

2014.


The number of shares outstanding of the registrant’s Common Stock, $0.10 par value, on March 22, 201213, 2015 was 3,390,785.

3,395,521.


DOCUMENTS INCORPORATED BY REFERENCE

Certain information called for by Part III of this Form 10-K is incorporated by reference from the registrant’s Definitive Proxy Statement, which will be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.


 


ELECTRO-SENSORS, INC.

Form 10-K for the Year Ended December 31, 2011
2014
TABLE OF CONTENTS

PARTI 
PARTI
Item 1. Business.Business
3
Item 1A. Risk Factors
6 7
Item 2. Properties.Properties
6 7
Item 3. Legal Proceedings.Proceedings
6 7
Item 4. Mine Safety Disclosures
6 8
  
PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Securities
7 8
Item 6. Selected Financial Data.Data
7 8
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations
79
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Risk
1012
Item 8. Financial Statements and Supplementary Data.Data
1113
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.Disclosure
3034
Item 9A Controls and Procedures.Procedures
3034
Item 9B. Other Information.Information
3034
  
PART III
 
Item 10. Directors, Executive Officers and Corporate Governance.Governance
3135
Item 11. Executive Compensation.Compensation
3135
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.Matters
3135
Item 13. Certain Relationships and Related Transactions, and Director Independence.Independence
3136
Item 14. Principal AccountingAccountant Fees and Services. Services
3136
  
PART IV
 
Item 15. Exhibits and Financial Statement Schedules.Schedules
3236
  
SIGNATURES
33

237

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PART I

Item 1.Business.

Introduction


Electro-Sensors, Inc. (“we”, “us”, “our”,we,” “us,” “our,” the “Company” or “ESI”) is engaged in the manufacturemanufacturing and distribution ofselling industrial production monitoring and process control systems.


In addition, through our subsidiary ESI Investment Company, we periodically make strategic investments in other businesses and companies, primarily when we believe that suchthese investments will facilitate the development of technology complementary to our existing products. Although we invest in other businesses and companies through our subsidiary ESI Investment Company, we do not intend to become an investment company and intend to remain primarily an operating company.  OurAs of March 12, 2015, our primary investment is 343,26749,066 shares of Rudolph Technologies, IncInc., which is accounted for using the available-for-sale method.


Unless indicated otherwise, the terms “Company” and “ESI” when used herein, include Electro-Sensors, Inc. and its consolidated subsidiaries. As of December 31, 2011,2014, ESI had two consolidated subsidiaries: ESI Investment Company and Senstar Corporation.  Senstar Corporation does not have anyhas no business operations.


ESI was incorporated in Minnesota in July 1968, has1968.  Our executive offices are located at 6111 Blue Circle Drive, Minnetonka, Minnesota, 55343-9108.  Our telephone number is (952) 930-0100.


Products


We manufacture and sell 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.


Our original products—speed monitoring systems—compare machine revolutions per minute or speed against acceptable rates as determined by thea customer. The monitors generally have the same relative operating principle and use a non-contacting sensing head that translates the speed of a rotating shaft into analog readouts. The systems include a signal-generating pulser disc or wrap that attaches to a rotating shaft, the sensing device, and a control unit. The systems vary in complexity, from a simple system that detects 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 the shaft speed.


The speed monitoring systems also 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.  The speed monitoring systems also include alarm systems, tachometers, and other devices that translate impulses from the sensors into alarm signals, computer inputs, or digital displays that are usable by the customer.


Three production monitoring devices that do not operate by measuring shaft speeds are also in the speed monitoring systems product line. These devices are the tilt switch, vibration monitor, and slide gate position monitor. A tilt switch is designed to alert the operator when a storage bin or production system reaches a certain capacity (e.g., when grain fills a silo).  A vibration monitor will alert an operator when the vibration of a machine in a production system exceeds or is below a specified level.  The slide gate position monitor is used in plant operations to provide feedback of the position of a slide gate. As part of our Electro-Sentry Hazard Monitoring system, we also have temperature sensors that are used to monitor bearing temperature and belt misalignment.


We have several products used in drive control systems that regulate the speed of motors on related machines in a production sequence to ensure that the performances of various operations are coordinated.  The products consist of a line of digital control products for motors that require a complete closed loop PID (Proportional Integral Derivative) control. The closed loop controllers coordinate production speed among process motors and reduce waste.


We have a sales agreement with Motrona GmbH, (thea West German manufacturer of control and interface devices),devices, giving us rights to distribute its products in the United States the products manufactured by Motrona GmbH.States.  These products interface with our products on various applications.


We believe that manufacturing companiesa wide variety of organizations can achieve significant savings in both time and materials by adding production monitoring and drive control technology to existing manufacturing processes to coordinate the operation of related machines. We intend to continue to market ourOur products to thisare sold into both the “retro-fit” market and also to companies buildinginto new manufacturing machinery or processing systems.

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In 2008, we introduced our Electro-Sentry Hazard Monitoring System,1 hazard monitoring system, which integrates our sensors for bearingmontioring temperature, belt misalignment, and shaft speed with a programmable logic controller and touch screen interface to create a complete system for hazard monitoring.  By doing this, we are enablingThe system enables our customercustomers to locate which part of thetheir material handling system is operating incorrectly, typically in less than ten seconds. This is doneseconds, by using visual diagrams on thea touch screen.

  In 2012, we introduced the Electro-Sentry 16 hazard monitoring system and added new features to the Electro-Sentry 1 system.


In 2013, the Company added ION Frequency/Discrete-In, a product that  allows users to remotely acquire shaft speed from  up to 12 pulse-frequency-output shaft speed sensors, or discrete state for up to 12 switches/sensors, or any combination (up to 12) of both.  This is our third ION product, completing the ION product line to support all ESI sensor products and providing the customer high-speed/accuracy signal acquisition at low cost and saved wiring costs.  The Company also expanded the Series 18 shaft speed sensors to include additional housings and connection options to reach a broader range of installations.  In addition, product upgrades for sensing capability and ruggedness were introduced on the Hall-effect sensors.

In 2014, we introduced a process meter for analog output sensors, such as our TT420, temperature sensors, ST420, speed sensors, and SG1000, slide gate position monitor.

On February 18, 2014, the Company purchased the Insta-Link wireless hazard technology monitoring system and product family, together with related technology and intellectual property rights,  from Harvest Engineering Inc., a privately held Illinois-based corporation, and its affiliated parties and owners (“Harvest”). The Company is marketing the wireless hazard monitoring products under its new HazardPROTM product line and manufacturing and servicing these products at its Minnetonka, Minnesota facility.  The Company agreed to pay $1,200,000 for the product line, of which $400,000 was paid at closing, and additional payments of $400,000 will be paid on each of the first and second anniversary of the closing.  Harvest may earn up to an additional $550,000 of purchase price, depending upon the achievement of revenue measures during the four calendar years following the closing.

We expect to continue to expend resources in new product development and the marketing of new and existing products for use in productiona wide variety of monitoring applications. We continue to expand our line of hazard monitoring products with new system displays and sensors to meet the requirements of a wider customer base. In 2011, we introduced the Electro-Sentry 1, a complete hazard monitoring and alarm system for individual bucket elevators and conveyors.


Our customers have diverse applications for our products in the grain, feed, bio-fuels, power generation, water utilities and waste water treatment, mining, chemical, and other processing areas.  We are continuing to look for new industries to expand sales and may also consider acquiring compatible businesses as part of our growth strategy.  Our corporate web site provides significant information and product application knowledge to existing and prospective customers and also direct knowledge to our sales partners.  Information on our website is not incorporated by reference herein and is not a part of this Form 10-K.


Marketing and Distribution


We sell our products primarily through home officeboth our internal sales people who deal directly with customersteam and a number of manufacturer’s representatives and distributors located throughout the United States, Canada, Mexico, Chile, Colombia, Guatemala, Peru, United Kingdom, Egypt, Saudi Arabia, Australia, China, Canada, Peru, Chile, Bolivia, Colombia, Thailand, Israel,Korea, Malaysia, Singapore, Great Britain,Philippines, and South Africa.Singapore.  Sales to customers outside the United States represent approximately 14% of sales.  The sensing and control units are sold under the Electro-Sensors, Inc. brand as a range of products from simple sensors to complex motor speed controllers.  These products are sold to businesses in all major standard industrial classifications,a wide variety of industries, including grain, feed, biofuels, 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.

We advertise in national industrial periodicals that cover a wide range of industrial products and attend several local, national and international tradeshows designated for the industry throughout the year.  AWe also use our corporate website and other related industry websites are also used for advertising and marketing purposes.

Competition

Competition for


We face substantial competition in the sale of our production monitoring products arisessystems from 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. We face substantial competition for our production monitoring systems.   Many of these competitors are well established and larger than us in terms of total sales volume. Among our larger competitors are Danaher Controls, Red Lion Controls, Control Concepts, 4B Elevator Components Ltd., and Durant Corporation, and Contrex, Inc.Corporation.  We believe our competitive advantages include our products superior design and quality, the fact that our products are sold as ready-to-install units, and that our products havethey can be used in a wide range of applications.  Our major disadvantages include the fact that our major competitors are much larger, have a broader variety of sensing instruments, and have larger sales forces and established names.

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Suppliers


We purchasepartspurchase parts and materials for our production monitoring systems from various manufacturers and distributors. In some instances, these materials are manufactured in accordance with proprietary designs.  Multiple sources of these suppliesparts and materials are readilygenerally available, and we are not dependent on any single source for these supplies and materials. We have not experienced any significant problem of short supply or delays from our suppliers.


Customers


We are not dependent upon a single or a few customers for a material (10% or more) portion of our sales.


Patents, Trademarks and Licenses


The Company relies on a combination of patent, trademark, and trade secret laws to establish proprietary right in its products.

The name “Electro-Sensors” is a trademark registered with the U.S. Patent and Trademark Office (“USPTO”), as Reg. No. 1,142,310. We believe ourthis trademark has been and will continue to be useful in developing and protecting market recognition for our products.

  We established the HazardPROTM trademark in the first quarter of 2014 and intend to register the trademark with the USPTO during 2015.


We hold foursix patents relating to our production monitoring systems.  PursuantThe Company believes strongly in protecting its intellectual property and has a long history of obtaining patents, when available, in connection with its research and product development programs.  The Company also relies upon trade secrets and proprietary know-how.

The Company seeks to a sales agreementprotect its trade secrets and proprietary intellectual property, including know-how, in part, through confidentiality agreements with Motrona GmbH, a West-German manufactureremployees, consultants, and other parties.  We cannot ensure, however, that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company’s trade secrets will not otherwise become known or independently developed by competitors.
Business Development Activities

We continue to seek growth opportunities, both internally through our existing portfolio of controlproducts, technologies and interface devices, we hold rights to distribute in the United States the products manufactured by Motrona GmbH.

4
markets, as well as externally through technology partnerships or related-product acquisitions.
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Governmental Approvals


We are not required to obtain governmental approval of our products.


Effect of Governmental Regulations


We do not believe that any existing or proposed governmental regulations will have a material effect on our business.


Research and Development


We invest in research and development programs to develop new products in related markets and to integrate state of the art technology into existing products.  We incurred research and development expenses attributable to our production monitoring systems of $470,000$810,000 and $436,000$560,000 during 20112014 and 2010,2013, respectively.  Our development projects are undertaken based upon the identified specific needs of our customer base.


Our future success is dependent in part upon our ability to develop new products in our varying segments.  Difficulties or delays in our ability to develop, produce, test and market new products could have a material adverse effect on future sales growth.


Compliance with Environmental Laws


Compliance with federal, state and local environmental laws has only a nominal effect on current or anticipated capital expenditures and has had no material effect on earnings or on our competitive position.

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Employees


As of March 22, 2012,13, 2015, we had 2833 employees, all of which 27whom are full-time and one is part-time.full-time.  We believe that our relations with our employees are good.  None of our employees are members of unions.

Our ability to maintain a competitive position and to continue to develop and market new products depends, in part, on our ability to retain key employees and qualified personnel.  If we are unable to retain and/our key employees, or recruit key employees,and train others, our product development, marketing and sales could be negatively impacted.


Fluctuations in Operating Results.


We have experienced fluctuations in our operating results in the past, and may experience fluctuations in the future, which may affect the market price of our Common Stock.  Sales can fluctuate as a result of a variety of factors, many of which are beyond our control. Some of these factors are: product competition and acceptance, timing of customer orders, cancellation of orders, the mix of products sold, downturns in the market and economic disruptions.  Because fluctuations can happen, we caution investors that results of our operations for preceding periods may not be indicative of how we will perform in the future.  There can be no assuranceWe cannot ensure that we will experience continuedrevenue or earnings growth.


Further, investments held by our subsidiary, ESI Investment Company, are subject to significant positive and negative changes in value. In particular, our significant investment in Rudolph Technologies, Inc. has experienced substantial value fluctuations, both negative and positive, which are expected to continue.  Our current intention is to continue to gradually liquidate our investment securities to finance our working capital needs as required.

securities.


Expending Funds for Changes in Industry Standards, Customer Preferences or Technology.


Our business depends upon periodically introducing new and enhanced products and solutions for customer needs. TheOur product development of products requires us to commit financial resources, personnel and time, usually in advance of significant market demand for suchthese products. In order to compete, we must anticipate both future demand and the technology available to meet that demand.  There can be no assuranceWe cannot ensure that our research and development efforts will lead to new products or product innovations that can be made available to or will be accepted by the market.



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5

Cautionary Statements


The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. We have made, and may continue to make, forward-looking statements with respect to our business and financial matters, including statements contained in this document, other filings with the Securities and Exchange Commission, and reports to shareholders. Forward-looking statements generally include discussion of 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. Any statement that does not relate solely to historical fact should be considered forward-looking.

Our forward-looking statements generally relate to our growth strategy, future financial results, product development and sales efforts. Forward-looking statements are made throughout this Annual Report, but primarily in this Item 1 and Item 7 -Management’s Discussion and Analysis of Financial Condition and Results of Operations, and include statements relating to management’s intentions that we not become an investment company, our expectations and intentions with respect to growth, statements relating to management’s beliefs with respect to our marketing and product development, our expectations and beliefs with respect to the value of our intellectual property, our beliefs with respect to our competitive position in the marketplace, our beliefs with respect to the effect of governmental regulations on our business, our beliefs with respect to our employee relations, our intention with respect to gradually liquidating our investment securities to finance working capital needs, our expectations and beliefs with respect to the future performance of our investment securities, the adequacy of our facilities, expansion of theour number of our manufacturer’s representatives and exclusive distributors, our intention to develop new products,the possibility of acquiring compatible businesses as part of our growth strategy, and our expectations with respect to our cash requirements and use of cash.

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, including our ability to successfully develop new products and manage our cash requirements. We undertake no obligations to update any forward-looking statements. We wish to caution investors that the following important factors, among others, in some cases have affected and in the future could affect our actual results of operations and cause suchthese results to differ materially from those anticipated in forward-looking statements made in this document and elsewhere by us or on our behalf. It is not possible toWe cannot foresee or identify all factors that could cause actual results to differ from expected or historical results. As such, investors should not consider any list of suchthese factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. These factors include:

include our ability to:

 •
●
our ability to successfully develop new products;

 
●
successfully integrate the wireless hazard technology and product line we purchased in February 2014;

 •
●
our ability to quickly and successfully adapt to changing industry technological standards;

 
●
•our ability to comply with existing and changing industry regulations;

 
●
•our ability to manage cash requirements;

 
●
•our ability to attract and retain new manufacturer’s representatives and exclusive distributors;

 
●
•our ability to attract and retain key personnel, including senior management;

 
●
•our ability to adapt to changing economic conditions and manage downturns in the economy in general; and

 
●
•our ability to keep pace with competitors, some of whom are much larger and have substantially greater resources than us.

Item 1A.Risk Factors.

Not applicable.

required for smaller reporting companies.
Item 2.Properties.

We own and occupy a 25,400 square foot facility at 6111 Blue Circle Drive, Minnetonka, Minnesota 55343-9108. All operations are conducted within this facility.  The facility is in excellent condition and we continue to maintain and update the facility as necessary.  TheWe believe the facility is anticipated towill be adequate for our needs in 2012.

2015.
Item 3.Legal Proceedings.

We are not the subject of any legal proceedings as of the date of this filing.  We are not aware of any threatened litigation.

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Item 4.Mine Safety Disclosures.

Not applicable.

6

Not applicable.
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PART II

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our Common Stock trades on the Nasdaq Capital Market of The Nasdaq Stock Market® under the symbol “ELSE”.“ELSE.” The following table sets forth the quarterly high and low reported last sales prices for our Common Stock for each period indicated as reported on the Nasdaq system.

  Period High Low 
        
2011 First Quarter $5.14 $4.12 
  Second Quarter $4.76 $4.14 
  Third Quarter $4.63 $3.30 
  Fourth Quarter $4.38 $3.31 
          
2010 First Quarter $4.00 $3.16 
  Second Quarter $4.25 $3.60 
  Third Quarter $4.63 $3.93 
  Fourth Quarter $4.54 $3.96 


 Period High  Low 
        
2014First Quarter $4.33  $3.94 
 Second Quarter $4.42  $3.86 
 Third Quarter $4.25  $3.42 
 Fourth Quarter $4.20  $3.09 
          
2013First Quarter $4.62  $3.67 
 Second Quarter $4.66  $4.04 
 Third Quarter $4.83  $4.00 
 Fourth Quarter $4.59  $3.85 
Based on data provided by our transfer agent, management believes that as of March 22, 2012,13, 2015, we had 77 shareholders of record who held 905,581 shares of the Company’s common stock.  In addition, nominees held an additional 2,489,940 shares for approximately 304 shareholders holding shares in street name.

The Company had paid cash dividends for a number of share owner accounts of record was approximately 101.

We paid annualyears, paying $272,000 in 2013 by paying cash dividends on our Common Stock of $0.16$.04 per share on February 22, 2013 and May 24, 2013.  The Board did not pay dividends in 2011the third and 2010.

fourth quarter of 2013 and in February 2014, the Board formally suspended the dividend to give the Company flexibility to pursue opportunities for future growth.  The Board will continue to assess its capital resources and its working capital and liquidity needs, as well as strategic opportunities.  The Company will consider various options for increasing shareholder value.  These options may include acquisitions, partnerships, purchasing our own shares in the open market and in privately negotiated transactions, and resuming the payment of cash dividends.


From time to time, we may be required to repurchase some of our equity securities as a result of obligations described in Note 912 to our 20112014 consolidated financial statements.  We did not repurchase any equity securities during the years ended December 31, 20112014 and 2010.

2013, respectively.

The information required by Item 201(d) is set forth in Item 12 of this Form 10-K.
Item 6.Selected Financial Data.

Not applicable.required for smaller reporting companies.

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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our consolidated financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated due to various factors discussed under "Forward-Looking Statements" and“Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K.


RESULTS OF OPERATIONS


The following table contains selected financial information, for the periods indicated, from our consolidated statements of comprehensive income expressed as a percentage of net sales.
  Year Ended December 31, 
  2014  2013 
Net Sales  100.0%  100.0%
Cost of Goods Sold  42.0   42.8 
Gross Profit  58.0   57.2 
         
Operating Expenses        
Selling and marketing  22.1   22.0 
General and administrative  18.9   20.7 
Research and development  11.5   8.6 
Total Operating Expenses  52.5   51.3 
         
Operating Income  5.5   5.9 
         
Non-operating Income (Expense)        
Gain on sale of available-for-sale securities  16.5   8.1 
Other income  0.2   0.2 
Interest income  0.0   0.1 
Interest expense  (0.2)  0.0 
Total Non-operating Income, Net  16.5   8.4 
         
Income before Income Taxes  22.0   14.3 
         
Income Taxes  6.5   3.5 
         
Net Income  15.5%  10.8%
The following paragraphs discuss the Company’s performance for years ended December 31, 2014 and 2013.
Comparison of Fiscal Year 20112014 vs. Fiscal Year 2010

2013


Net Revenues

Sales


Net revenues for fiscal year 2011 increased $321,000 to $6,115,000, or 5.5%, when compared to net revenues for fiscal year 2010. The increase was primarily due to growth in the agricultural-related industries that we serve. Throughout 2012, we expect to continue to expand the number of our manufacturer’s representatives and international distributors. New products developed and added to the product line in 2011 include the Electro-Sentry 1, ION Modbus Nodes for analog inputs and also discrete inputs and outputs. New mounting systems were also developed for speed sensors and switches, and product upgrades were made to our tachometer and counter product lines. Development continues on the Electro-Sentry product line and expansion of the software capability and related accessories for our customers.

Cost of Sales

Our cost of sales increased $500,000 or 7.6%, to $7,041,000 in 2014 from $2,442,000 to $2,613,000, a difference of $171,000, or 7.0%, when comparing fiscal year 2011 to fiscal year 2010.$6,541,000 in 2013.  This increase was primarily driven by a result of increased sales. We continue our efforts13.6% growth in sales to maintain or reduce production costs by manufacturing productscustomers in the most cost effective manner.

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North Central U.S. led by strong performances in our agriculture and bulk material handling industry segments.  We believe much of this growth was generated by record setting corn and soybean volumes which resulted in a strong demand for storage, processing, and handling facilities.
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Gross Margins

Gross margin for the fiscal year 2011 was 57.3%

On a product line basis, our Slide Gate Monitor family of products continued to be well received by our customers and achieved a greater than 30% increase in sales as compared to 57.9%2013. These products provide critical position data to our OEM and system integrator customers that typically supply systems to the bulk materials handling industry.

Additionally, our international business continues to represent an important part of our business strategy and represented approximately 14% of revenue.  Furthermore, during 2014 we sold and shipped into 46 countries.

Gross Profit

Gross profit for the prior fiscal year.2014 was 58.0% compared to 57.2% in 2013.  The slight decreaseincrease in the gross margin was primarily due to a slight shift in the mix of products sold.sold, and our focus on decreasing manufacturing costs.

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Operating Expenses


Total operating expenses increased by $129,000,$341,000, or 4.9%10.2%, when comparing fiscal year 2011 to fiscal year 2010.

Selling and marketing costs increased by $228,000, or 20.0%, when comparing fiscal year 2011$3,695,000 in 2014 compared to fiscal year 2010. The$3,354,000 in 2013.  This increase was due to anthe following:


●
Selling and marketing expenses increased by $114,000, or 7.9%, to $1,556,000 in 2014 compared to $1,442,000 in 2013, but only increased slightly as a percentage of sales to 22.1% from 22.0%.  The increase was due to increased wages and benefit expense related to additional sales personnel and increased outside sales representative commissions due to higher sales, partially offset by decreases in contract personnel.

●
General and administrative expenses decreased by $23,000, or 1.7%, to $1,329,000 in 2014 compared to $1,352,000 in 2013, and decreased as a percentage of sales to 18.9% from 20.7%.  The decrease was due primarily to a higher level of noncash compensation expense related to stock option grants to non-employee directors and our chief executive officer and legal fees incurred in 2013 versus 2014.  The decreases were partially offset by higher amortization expense associated with the February 2014 acquisition of the HazardPRO technology.  Stock-based compensation for 2014 was approximately $67,000 compared to approximately $162,000 in 2013.

●
Research and development expenses increased $250,000, or 44.6%, to $810,000 in 2014 compared to $560,000 in 2013, and increased as a percentage of sales to 11.5% from 8.6%.  The 2014 increase resulted from higher wages and benefits due to changes in management responsibilities, lab testing fees for the certification of new products for use in hazardous locations, and the development of new product prototypes.

Operating Income

Operating income increased by $2,000 or 0.5%, to $391,000 in wages2014 from $389,000 in 2013, but decreased slightly as a percentage of sales to 5.5% from 5.9%, due primarily to the sales and benefit expense (due to changes in the compensation package and two new hires), advertising and marketing expenses, travel (due to attendance at additional tradeshows and industry association events), trade shows (due to additional local and regional shows) and outside sales representatives’ commissions related togross profit increases, offset by the increase in sales.

General and administrative costs decreased by $66,000, or 6.5%, in fiscal year 2011 compared to fiscal year 2010. The decrease was primarily due to decreases in wages and benefits (due to an open position that will not be filled) and depreciation expense on software and related hardware. These decreases were offset by increases inoperating expenses relating to repairs and maintenance of our building and public reporting fees (including XBRL reporting requirements).

Research and development costs decreased $33,000, or 7.0%, in fiscal year 2011 when compared with fiscal year 2010. The decrease indiscussed above, particularly research and development costs was due to a decrease in prototypes and travel expense related to service calls. These decreases were offset by increases in salaries and wages due to the addition of a part-time employee. The decreased prototype expenses were due to printed circuit board layouts associated with new products and changes to existing products in 2010 which did not occur in 2011.

Operating Income

Operating income for fiscal year 2011 was $740,000, compared to operating income of $719,000 in 2010, an increase of $21,000 or 2.9%. The increase in operating income was mainly due to the increase in net sales.

development.


Non-Operating Income


ESI Investment Company continues to provide us with an alternative source of earnings through investments in available-for-sale securities and other investments; however, our intent isinvestments.  We intend to remain an operations-based company. Our investments in available-for-sale securities are subject to significant positive and negative changes in value.  In addition to incomegains from the sale of investments, we also realize interest income from ourcertain short-term holdings.

Investment


Non-operating income for fiscal year 2011 increased by $58,000$614,000 to $69,000.$1,163,000 in 2014 from $549,000 in 2013, primarily as a result of additional realized gains on sales of shares of Rudolph Technologies, Inc.  The increase was driven by an increaseCompany is in the gain on the saleprocess of investments. In December 2011, the Company’s investment in PPT Vision was liquidated, which resulted in a gain of $72,000. This gain from investments was offset by a loss of $18,000 on disposal of property and equipment related to the replacement of flooring in our building.

Interest income increased $4,000, or 200%, when comparing fiscal year 2011 to the same period in 2010. The change in interest income was due to the interest recognized on Treasury Bills.

slowly liquidating that investment.


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.

on the ex-dividend date.


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

Loss From Discontinued Operations

On September 16, 2011, the Company sold its entire interest in its AutoData Systems Division to Auto Data Inc. (ADI). The purchase price will be paid as an earn-out based on three percent of the software, hardware, and maintenance contracts that ADI sells over the next five years (four percent while ADI continues to occupy our building). The transaction was intended to allow us to focus on our core markets.

For the fiscal years ended December 31, 2011 and 2010, the AutoData Systems Division had an operating loss, net of income taxes, of $50,000 and $13,000, respectively. The increase in the net losses, net of income taxes, for both periods was primarily due to a decrease in sales, which we believe can be attributed to uncertainties in the healthcare industry.

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Net Income After Tax


We reported net income after tax for fiscal year 2011 of $548,000,$1,094,000 in 2014 as compared to net income of $527,000$706,000 in 2010,2013, an increase of $21,000,$388,000, or 4.0%55.0%.  Basic and diluted earnings per share from continuing operations were $0.17$0.32 and $0.30, respectively, in 2011,2014, compared to basic and diluted earnings per share from continuing operations of $0.16 and $0.15, respectively$0.20 in 2010.2013.

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OFF-BALANCE SHEET ARRANGEMENTS


We are not a party to any off-balance sheet transactions, arrangements or obligations that have, or are reasonably likely to have, a material effect on our financial condition, changes in the financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


LIQUIDITY AND CAPITAL RESOURCES


Cash and cash equivalents were $5,476,000$1,190,000 and $583,000$1,505,000 at December 31, 20112014 and 2010,2013, respectively.  The increasedecrease was mainly   fromdue to net cash used in investing activities, as described below.

  Working capital was $10,136,000 at 2014 year end compared to $11,068,000 at 2013 year end.


Cash generated from 2014 operating activities was $263,000, compared to $127,000 generated in 2013, an increase of $309,000 for the year ended December 31, 2011$136,000.  The increase was primarily a result of our net income adjusted for depreciation expense on capital assets, gain on the sale ofa decrease in trade receivable, an investment, and changesincrease in accounts receivablepayable and income tax activity. Cash from operating activities decreased $309,000 for the year ended December 31, 2011 when compared to the year ended December 31, 2010.accruals, partially offset by an increase in inventories.  The net changedecrease in trade receivables wasis due a decrease of $118,000to decreased sales in the balance at December 31, 2011 comparedfourth quarter of 2014.  The increase in accounts payable is due to the prior year and an increasetiming of $202,000 in the balance at December 31, 2010 when compared to the prior year. This was due to an increase in outstanding accounts receivable balances as of December 31, 2011.inventory purchases.  The net change in income taxes was due to a decreasean increase in the receivablepayable balance of $37,000$78,000 at December 31, 20112014 when compared to the prior year and an increasea decrease in the receivable balancepayable of $69,000$314,000 at December 31, 20102013 when compared to the prior year.  This decrease wasThe 2014 payable increase resulted from the increase in the gain of available-for-sale securities when comparing 2014 to 2013.  The Company paid the 2012 tax year balance due in March 2013.  Those changes were partially offset by an increase in inventory due to a decreaseincreased sales and the purchase of HazardPROTM components.

Cash used in estimated tax payments made in fiscal year 2011 when2014 investing activities was $581,000, compared to fiscal year 2010.

Cash$539,000 cash generated from investing activities was $5,106,000 forin 2013.  We received $1,178,000 on the year ended December 31, 2011,sale of available-for-sale securities during 2014 compared to cash used in investing of $253,000 for$536,000 during 2013.  During 2014, the year ended December 31, 2010.  The significant increase in cash from investing activities was due to an increase in net proceedsCompany’s sales and purchases of Treasury Bills with maturity dates of moregreater than three months withresulted in net purchases of $1,313,000, compared to net proceeds of $5,200,000 during 2011, compared to net purchases of $215,000 during 2010. During 2011,$26,000 in 2013.  In addition, the Company had $9,500,000acquired the Harvest Engineering, Inc. wireless hazard monitoring technology and Insta-Link product families in Treasury Bills matureFebruary 2014, paying $400,000 and financing the remaining purchase price through a seller-financed note. We purchased $4,300,000 in Treasury Bills. During 2010, the Company purchased $14,545,000 in Treasury Bills$46,000 and had $14,330,000 in Treasury Bills mature. The Company purchased $82,000 and $38,000$23,000 of property and equipment in the years ended December 31, 20112014 and 2010,2013, respectively.


Cash from financing activities in 2014 was $3,000 compared to cash used in financing activities was $522,000 and $528,000of $263,000 for the years ended December 31, 2011 and 2010, respectively.2013.  During the years ended December 31, 2011 and 2010,2013, we paid aggregate dividends of $543,000$272,000.  During 2014 and $540,000, respectively. During the years ended December 31, 2011 and 2010,2013, we had $10,000$3,000 and $12,000,$9,000, respectively, in stock purchases under the Company’sour 1996 Employee Stock Purchase Plan. Also, in the year ended December 31, 2011, $11,000 in stock options were exercised.

We intend that our


Our ongoing cash usage requirements will be primarily used for capital expenditures, researching potential acquisitions, acquisitions, research and development, and working capital.  Management believes that cash on hand and any cash provided by operations will be sufficient to meet our cash requirements through at least the next 12 months.


Our primary investment is 343,267122,649 and 231,336 shares of Rudolph Technologies, Inc. (“Rudolph”), as of December 31, 2014 and 2013, respectively, listed on the Nasdaq stock market.  TheWe account for the Rudolph investment is accounted for using the available-for-sale method.  The fair value of the Rudolph investment totaled $3,134,000$1,254,000 and $2,825,000$2,716,000 as of December 31, 20112014 and 2010,2013, respectively.  Our Rudolph shares are subject to fluctuations in price and could have a negative effect on our liquidity.  Liquid securities are periodically sold as deemed appropriate by management. The market value of the Rudolph stock as of March 21, 201212, 2015 was $3,783,000.approximately $584,000.

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CRITICAL ACCOUNTING ESTIMATES

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make decisions based upon estimates, assumptions, and factors it considers relevant to the circumstances. SuchThose decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in economic conditions or other business circumstances may affect the outcomes of management’s estimates and assumptions.

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Significant estimates, including the underlying assumptions, consist of the economic lives of property and equipment, realizability of accounts receivable, and valuation of deferred tax assets/liabilities, valuationinventory, investments, allocation of inventorythe purchase price for acquired tangible and valuation of investments.intangible assets, contingent earn-out and stock compensation expense.  It is at least reasonably possible that these estimates may change in the near term.


Economic lives of property and equipment

long-lived assets

We estimate the economic useful life of property and equipmentlong-lived assets used in the business.  Expected asset lives may be shortened or an impairment may be recorded based on a change in the expected use of the asset.


Realizability of accounts receivable

We estimate our allowance for doubtful accounts based on prior history and the aging of our accounts receivable.   We are unable to predict which, if any, of our customers will be unable to pay their open invoices at a future date.


Valuation of deferred tax assets/liabilities

We estimate our deferred tax assets and liabilities based on current tax laws and rates.  The tax laws and rates could change in the future to either disallow the deductions or increase/decrease the tax rates.


Valuation of inventory

We purchase inventory based on estimated demand of products.  It is possible that the inventory we have purchased will not be used in the products that our customers need or will not meet future technological requirements.


Valuation of investments

Our investments in equity securities are valued at market prices in an open market.  The prices are subject to the normal fluctuations that could be either negative or positive.


Valuation of stock-based compensation expense
We estimate the expected life and forfeiture rates of stock options granted when calculating the value of options using the Black-Sholes-Merton model.  The actual life and forfeiture rate could be different from what we estimated.

Allocation of the purchase price for acquired tangible and intangible assets
We estimated the noncompete agreement using a discounted cash flow model.  We estimated the value of the deferred service costs based on the estimated time and cost to complete.  The balance of the purchase price was allocated to the technology purchased.  It is possible that we over valued the components and that an impairment may be recorded to reflect the proper value.

Valuation of the contingent earn-out
We estimated the probability of meeting the revenue targets over the measurement period to determine the fair value of the contingent liability.  The actual payout could be more or less than what we have estimated.
Additional information regarding our significant accounting policies is provided below in Part II, Item 8,Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements, Note 1, Nature of Business and Significant Accounting Policies.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

10
Not applicable.

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Item 8.Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm
1214
Financial Statements 
Consolidated Balance SheetsSheets
1315
Consolidated Statements of Operations and Comprehensive Income
1416
Consolidated Statements of Changes in Stockholder’sStockholders’ Equity
1517
Consolidated Statements of Cash Flows
1618
Notes to Consolidated Financial Statements
17

1119


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Electro-Sensors, Inc. and Subsidiaries

Minnetonka, Minnesota


We have audited the accompanying consolidated balance sheets of Electro-Sensors, Inc. and Subsidiaries (the Company) as of December 31, 20112014, and 2010,2013, and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2011. The Company’s2014. Electro-Sensors, Inc. and Subsidiaries’ management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposespurpose of expressing an opinion on the effectiveness of the Company’scompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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, 20112014 and 2010,2013, and the results of itstheir operations and itstheir cash flows for each of the years in the two-year period ended December 31, 2011,2014 in conformity with accounting principles generally accepted in the United States of America.

/s/ Boulay Heutmaker, Zibell & Co. P.L.L.P.PLLP
Certified Public Accountants

Minneapolis, Minnesota

March 29, 2012

18, 2015


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ELECTRO-SENSORS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

SHEETS

(in thousands except share and per share amounts)

  December 31 
  2011  2010 
ASSETS        
         
Current assets        
         
Cash and cash equivalents $5,476  $583 
Treasury Bills  0   5,197 
Available-for-sale securities  3,181   2,830 
Trade receivables, less allowance for doubtful accounts of $9  731   577 
Inventories  1,228   1,057 
Income tax receivable  17   54 
Other current assets  116   81 
         
Total current assets  10,749   10,379 
         
Property and equipment, net  1,179   1,174 
         
Total assets $11,928  $11,553 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
         
Current liabilities        
         
Accounts payable $110  $75 
Accrued expenses  214   195 
Deferred revenue  0   70 
         
Total current liabilities  324   340 
         
Deferred income tax liability  1,225   1,078 
         
Commitments and contingencies        
         
Stockholders’ equity        
         
Common stock par value $0.10 per share; authorized 10,000,000 shares;  issued and outstanding: 3,389,577 and 3,381,999  shares, respectively  339   338 
Additional paid-in capital  1,561   1,541 
Retained earnings  6,570   6,565 
Accumulated other comprehensive income (unrealized gain on available-for-sale securities, net of income tax)  1,909   1,691 
         
Total stockholders’ equity  10,379   10,135 
         
Total liabilities and stockholders’ equity $11,928  $11,553 

       
  December 31 
  2014  2013 
ASSETS      
       
Current assets      
       
Cash and cash equivalents $1,190  $1,505 
Treasury bills  6,542   5,227 
Available-for-sale securities  1,256   2,718 
Trade receivables, less allowance for doubtful accounts of $10 and $8, respectively  738   746 
Inventories  1,224   1,060 
Other current assets  163   136 
         
Total current assets  11,113   11,392 
         
Intangible assets, net  1,505   0 
         
Property and equipment, net  1,146   1,217 
         
Total assets $13,764  $12,609 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
         
Current liabilities        
         
Current maturities of note payable $381  $0 
Accounts payable  126   59 
Accrued expenses  392   265 
       Income tax payable
  82   0 
         
Total current liabilities  981   324 
         
Long-term liabilities        
         
Note payable – long term  390   0 
Contingent earn-out  472   0 
Deferred income tax liability  391   1,022 
         
Total long-term liabilities  1,253   1,022 
         
Commitments and contingencies        
         
Stockholders’ equity        
         
Common stock par value $0.10 per share; authorized 10,000,000 shares; issued and outstanding: 3,395,521 and 3,394,707  shares, respectively  339   339 
Additional paid-in capital  1,816   1,746 
Retained earnings  8,641   7,547 
Accumulated other comprehensive income (unrealized gain on available-for-sale securities, net of income tax)  734   1,631 
         
Total stockholders’ equity  11,530   11,263 
         
Total liabilities and stockholders’ equity $13,764  $12,609 
See Notes to Consolidated Financial Statements


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ELECTRO-SENSORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands except share and per share amounts)

  Years ended December 31 
  2011  2010 
Net Sales $6,115  $5,794 
Cost of Goods Sold  2,613   2,442 
         
Gross Profit  3,502   3,352 
         
Operating Expenses        
         
Selling and marketing  1,369   1,141 
General and administrative  956   1,022 
Research and development  437   470 
         
Total Operating Expenses  2,762   2,633 
         
Operating Income  740   719 
         
Non-operating Income (Expense):        
         
Gain on sale of investment securities  73   0 
Interest income  6   2 
Loss on disposal of fixed assets  (18)  0 
Other income  8   9 
         
Total Non-operating Income  69   11 
         
Income from Continuing Operations before Income Taxes  809   730 
         
Income Taxes  211   190 
Income before Discontinued Operations  598   540 
Loss from Discontinued Operations, Net of Income Taxes  (50)  (13)
         
Net Income  548   527 
         
Other Comprehensive Income:        
Change in Unrealized Value of Available for Sale Securities, Net of Tax  218   321 
Total Comprehensive Income  766   848 
         
Net Income per share data        
         
Basic        
Net income per share continuing operations  0.17   0.16 
Net loss per share discontinued operations  (0.01)  0.00 
Net income per share  0.16   0.16 
Weighted average shares  3,387,192   3,381,905 
         
Diluted        
Net income per share continuing operations  0.17   0.15 
Net loss per share discontinued operations  (0.01)  0.00 
Net income per share  0.16   0.15 
Weighted average shares  3,405,738   3,404,443 
         
Dividends paid per common share  0.16   0.16 


    
  Years ended December 31, 
  2014  
2013
 
       
Net Sales $7,041  $6,541 
Cost of Goods Sold  2,955   2,798 
         
Gross Profit  4,086   3,743 
         
Operating Expenses        
         
Selling and marketing  1,556   1,442 
General and administrative  1,329   1,352 
Research and development  810   560 
         
Total Operating Expenses  3,695   3,354 
         
Operating Income  391   389 
         
Non-operating Income (Expense)        
         
Gain on sale of available-for-sale securities  1,163   530 
Other income  15   14 
Interest income  2   5 
Interest expense  (17)  0 
         
Total Non-operating Income, Net  1,163   549 
         
Income before Income Taxes  1,554   938 
         
Income Taxes  460   232 
         
Net Income  1,094   706 
         
Other Comprehensive Income (Loss)        
Change in unrealized value of available-for-sale securities, net of income tax  (176)  (262)
Reclassification of gains included in net income, net of income tax  (721)  (329)
         
Net decrease in comprehensive income  (897)  (591)
         
Net Comprehensive Income $197  $115 
         
Net Income per share data        
         
Basic        
Net income per share $0.32  $0.20 
Weighted average shares  3,395,510   3,394,208 
         
Diluted        
Net income per share $0.30  $0.20 
Weighted average shares  3,654,382   3,496,873 
         
Dividends paid per common share $0.00  $0.08 
         
See Notes to Consolidated Financial Statements

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands except share and per share amounts)

   Common Stock Issued  Additional     Accumulated
other		  Total  
  Shares  Amount  paid-in
capital		  Retained
earnings 		  comprehensive
income		  Stockholders’
equity		 
Balance, January 1, 2010  3,376,794  $338  $1,529  $6,578  $1,370  $9,815 
                         
Unrealized gains on investments net of  taxes                  321   321 
Stock issued through the employee stock purchase plan  5,205   0   12           12 
Dividend on common stock              (540)      (540)
Net income              527       527 
                         
Balance, December 31, 2010  3,381,999   338   1,541   6,565   1,691   10,135 
                         
Exercise of stock options  4,500   1   10           11 
Unrealized gains on investments net of taxes                  218   218 
Stock issued through the employee stock purchase plan  3,078   0   10           10 
Dividend on common stock              (543)      (543)
Net income              548       548 
                         
Balance, December 31, 2011  3,389,577  $339  $1,561  $6,570  $1,909  $10,379 

                   
              Accumulated    
  
 Common Stock Issued
  Additional     other  Total 
     paid-in  Retained  comprehensive  Stockholders’ 
  Shares  Amount  capital  earnings  income  equity 
                   
Balance, December 31, 2012  3,391,912  $339  $1,575  $7,113  $2,222  $11,249 
                         
Other comprehensive loss                  (591)  (591)
Stock issued through the employee stock purchase plan  2,795   0   9           9 
Stock compensation expense          162           162 
Dividend on common stock              (272)      (272)
Net income              706       706 
                         
                         
Balance, December 31, 2013  3,394,707   339   1,746   7,547   1,631   11,263 
                         
Other comprehensive loss                  (897)  (897)
Stock issued through the employee stock purchase plan  814   0   3           3 
Stock compensation expense          67           67 
Net income              1,094       1,094 
                         
Balance, December 31, 2014  3,395,521  $339  $1,816  $8,641  $734  $11,530 
See Notes to Consolidated Financial Statements


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ELECTRO-SENSORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

  Years ended
December 31,		 
  2011  2010 
Cash flows from (used in) operating activities        
         
Net Income $548  $527 
         
Adjustments to reconcile net income to net cash from (used in) operating activities:        
         
Depreciation  57   92 
Realized gain on sale of investments  (73)  0 
Interest accrued on investments  (3)  (2)
Loss on disposal of fixed assets  18   0 
Change in allowance for doubtful accounts  0   (2)
Deferred income taxes  14   3 
Changes in assets and liabilities:        
Trade receivables  (118)  202 
Inventories  (188)  (149)
Other current assets  (35)  3 
Accounts payable  35   (4)
Accrued expenses  29   23 
Deferred revenue  (12)  (6)
Accrued income taxes  37   (69)
         
Net cash from operating activities  309   618 
         
Cash flows from (used in) investing activities:        
         
Proceeds from sale of available-for-sale securities  2   0 
Purchase of treasury bills  (4,300)  (14,545)
Proceeds from the sale of treasury bills  9,500   14,330 
Amount paid on the sale of the AutoData Systems Division  (14)  0 
Purchase of property and equipment  (82)  (38)
         
Net cash from (used in) investing activities  5,106   (253)
         
Cash flows from (used in) financing activities:        
         
Proceeds from issuance of stock  21   12 
Dividends paid  (543)  (540)
         
Net cash used in financing activities  (522)  (528)
         
Net increase (decrease) in cash and cash equivalents  4,893   (163)
         
Cash and cash equivalents, beginning  583   746 
Cash and cash equivalents, ending $5,476  $583 
         
Supplemental schedule of non-cash investing and financing activities        
Net change in unrealized gain on investments, net of tax $218  $321 
Cash paid during the year for income taxes $152  $252 

    
  Years ended December 31, 
  2014  2013 
Cash flows from (used in) operating activities      
       
Net Income $1,094  $706 
         
Adjustments to reconcile net income to net cash from operating activities:        
         
Depreciation and amortization  209   110 
Realized gain on sale of available-for-sale securities  (1,163)  (530)
Allowance for doubtful accounts  2   (2)
Deferred income taxes  (81)  (71)
Stock compensation expense  67   162 
Other  (1)  (5)
Changes in operating assets and liabilities, net of acquisition:        
    Trade receivables  6   (142)
    Inventories  (164)  270 
    Other current assets  18   (60)
    Accounts payable  67   (35)
    Accrued expenses  127   38 
    Accrued income taxes  82   (314)
         
Net cash from operating activities  263   127 
         
Cash flows from (used in) investing activities:        
         
Proceeds from sale of available-for-sale securities  1,178   536 
Purchase of treasury bills  (14,184)  (6,425)
Proceeds from the maturity of treasury bills  12,871   6,451 
Cash paid for acquisition  (400)  0 
Purchase of property and equipment  (46)  (23)
         
Net cash from (used in) investing activities  (581)  539 
         
Cash flows from (used in) financing activities:        
         
Proceeds from issuance of common stock  3   9 
Dividends paid  0   (272)
         
Net cash from (used in) financing activities  3   (263)
         
Net increase (decrease) in cash and cash equivalents  (315)  403 
         
Cash and cash equivalents, beginning  1,505   1,102 
Cash and cash equivalents, ending $1,190  $1,505 
         
Supplemental cash flow information        
Cash paid during the year for income taxes $462  $617 
Cash paid during the year for interest $0  $0 
         
Supplemental disclosures of non-cash investment and financing activities        
Note payable issued to fund acquisition, net of discount $771  $0 
         
Contingent consideration liability recorded in connection with the acquisition $472  $0 

See Notes to Consolidated Financial Statements


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ELECTRO-SENSORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 20112014 AND 2010

2013
(in thousands except share and per share amounts)

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, ESI Investment Company and Senstar Corporation.  Senstar has no operations.  Intercompany accounts, transactions and earnings have been eliminated in consolidation. The consolidated entity is referred to as “the Company” or “ESI”.

“ESI.”


Electro-Sensors, Inc. manufactures and markets a complete line of speed monitoring and motor control systems for industrial machinery. The Company utilizesuses leading-edge technology to continuously improve its products and make them easier to use, with the ultimate goal of manufacturing the industry-preferred product for every market served. The Company’s products are sold through an internal sales staff, manufacturer’s representatives, and distributors toin a wide variety of manufacturers OEM’s and processors who use the products to monitor process machinery operations. The Company markets its products to a numbervariety of different industries located throughout the United States, Asia, CentralCanada, Latin America, Canada,Europe, and Europe.

Asia.


In addition, through its subsidiary ESI Investment Company, the Company periodically makes strategic investments in other businesses, and companies, primarily when the Company believes that suchthese investments will facilitate development of technology complementary to the Company’s products. Although ESI, through its subsidiary ESI Investment Company, invests in other businesses, or companies, ESIthe Company does not intend to become an investment company and intends to remain primarily an operating company. The Company’s primary investment is 343,267 shares of Rudolph Technologies, Inc. (“Rudolph”) which is accounted for using the available-for-sale method.SeeSee Note 23 for additional information regarding its investments.  The Company’s investments in securities are subject to normal market risks.


Significant accounting policies of the Company are summarized below:


Use of estimates


The preparation of the consolidated financial statements, in accordance with accounting principles generally accepted in the United States of America (US GAAP), requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates, including the underlying assumptions, consist of the economic lives of property and equipment,long lived assets, realizability of accounts receivable, and valuation of deferred tax assets/liabilities, valuationinventory, investments, allocation of inventorythe purchase price for acquired tangible and valuation of investments.intangible assets, contingent earn-out, and stock compensation expense. It is at least reasonably possible that these estimates may change in the near term.


Cash and cash equivalents


The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.  Cash equivalents are invested in commercial paper, money market accounts and may also be invested in three month Treasury Bills.  Cash equivalents are carried at cost plus accrued interest which approximates fair value.


The Company maintains its cash and cash equivalents in primarily one bank deposit account, which, at times, may exceed federally insured limits. The Company has not experienced any losses on suchthese accounts. The Company believes it is not exposed to any significant credit risk on cash.


Trade receivables and credit policies

Accounts receivable


Trade receivables are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date.  AccountsTrade receivables are stated at the amount billed to the customer.  Customer account balances with invoices over 90 days are considered delinquent. The Company does not accrue interest on delinquent accounts receivable.

trade receivables.


Payments of accounts receivabletrade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.


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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(in thousands except share and per share amounts)
The carrying amount of accounts receivabletrade receivables is reduced by an allowance for doubtful accounts that reflects management’s best estimate of the amounts that will not be collected.  Management individually reviews all accountstrade receivable balances that exceed 90 days from the invoice date and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that willmay not be collected. Management uses this information to estimate the allowance.

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Available-for-sale securities

The Company’s investments consist of equity securities, primarily common stocks and government debt securities and money market funds.securities.  The estimated fair value of publicly traded equity securities (other than those accounted for based upon the equity method of accounting) is based on quotedreported market prices, and therefore subject to the inherent risk of market fluctuations.

Management determines the appropriate classification of securities at the date individual investments are acquired, and evaluates the appropriateness of suchthis classification at each balance sheet date.

Since the Company does not buy and sell investments with the objective of generating profits on short-term fluctuations in market price, the investments in marketable equity securities have been classified as available-for-sale (unless accounted for on the equity method of accounting).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 and within accumulated other comprehensive income. Dividends on marketable equity securities are recognized inas income when declared.

on the ex-dividend date.

Realized gains and losses, including losses from declines in value of specific securities determined by management to be other-than-temporary, (unless accounted for on the equity method of accounting), are included in the statement of comprehensive income. Realized gains and losses are determined on the basis of the specific securities sold.

  There were no other-than-temporary impairments recognized in the years ended December 31, 2014 and 2013.

Fair Value Measurements

value measurements

The Company’s policies incorporate the guidance for accounting for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis.  The Company’sThese policies also incorporate the guidance for fair value measurement related to nonfinancial items that are recognized and disclosed at fair value in the consolidated financial statements on a nonrecurring basis.  The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:


 •
●
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
 •
●
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
 •
●
Level 3 inputs are unobservable inputs for the asset or liability.


The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.   The Company currently has no nonfinancial or financial items that are measured on a nonrecurring basis.


The carrying value of cash and cash equivalents, treasury bills, investments,commercial paper, money market funds, trade receivables, accounts payable, and other financial working capital items approximate fair value at December 31, 20112014 and 20102013 due to the short term maturity nature of these instruments.


Inventories


Inventories include material, labor and overhead and are valued at the lower of cost (first-in, first-out) or market.


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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(in thousands except share and per share amounts)
Property and equipment


Property and equipment are stated at cost. Depreciation is provided over estimated useful lives by use of the straight linestraight-line method. Maintenance and repairs are expensed as incurred.  Major improvements and betterments are capitalized.


Long-lived assets, such as property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset.  If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value.  Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values and third-party independent appraisals.

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Revenue recognition of production monitoring equipment

The Company recognizes revenue from the sale of its production monitoring equipment when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. The Company may offer discounts to its distributors or quantity discounts that are recorded at the time of sale. The Company recognizes revenue on products sold to customers and distributors upon shipment because the contracts do not include post-shipment obligations. In addition to exchanges and warranty returns, customers have refund rights. Our standard products are used in a wide variety of industries, returns are minimal and insignificant to the financial statements and are recognized when the returned product is received by the Company. In some situations, the Company receives advance payments from its customers. Revenue associated with these advance payments is deferred until the product is shipped or services performed.

Advertising costs

The Company expenses advertising costs as incurred. Total advertising expense was $184,000 and $166,000 for the years ended December 31, 2011 and 2010, 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 3-10 
Furniture and Fixtures 3-10 
Building 7-40 

Depreciation

Intangible assets

Intangible assets are comprised of a noncompete agreement and the HazardPROTM technology.  The cost of intangible assets is amortized on a straight-line method over the estimated useful lives.

Revenue recognition

The Company recognizes revenue from the sale of its production monitoring equipment when persuasive evidence of an arrangement exists, the product has been picked up by common carrier, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured.  The Company recognizes revenue on products sold to customers and distributors upon shipment because the contracts do not include post-shipment obligations.  The Company may offer discounts that are recorded at the time of sale.  In addition to exchanges and warranty returns, customers have limited refund rights.  Historically, returns and refunds have been minimal and immaterial to the financial statements and are generally recognized when the returned product is received by the Company.  In some situations, the Company receives advance payments from its customers.  The recognition of revenue associated with these advance payments is deferred until the product is shipped or services performed.

Advertising costs

The Company expenses advertising costs as incurred. Total advertising expense was $57 and $59 for the years ended December 31, 20112014 and 2010 was $57,0002013, respectively.

Research and $92,000,development

Expenditures for research and development are expensed as incurred.  The Company incurred expenses of $810 and $560 during the years ended December 31, 2014 and 2013, respectively.


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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(in thousands except share and per share amounts)
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, excluding the portion of the deferred liability allocated to other comprehensive income.  Deferred taxes are reduced by a valuation allowance to the extent that realization of the related deferred tax asset is not assured.  No valuation allowance was deemed necessary at December 31, 2014 and 2013.

The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely to be realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.


The Company records interest and penalties related to unrecognized tax benefits in income tax expense.

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Net income per common share


Basis EPS excludes dilution and is determined by dividing net income 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.


The following information presents the Company’s computations of basic and diluted EPS for the periods presented in the statements of operations.

  Income  Shares  Per share amount 
       
2011:            
Basic EPS from continuing operations $598,000   3,387,192  $0.17 
Effect of dilutive employee and director stock options      18,546     
Diluted EPS from continuing operations $598,000   3,405,738  $0.17 
             
2010:            
Basic EPS from continuing operations $540,000   3,381,905  $0.16 
Effect of dilutive employee and director stock options      22,538     
Diluted EPS from continuing operations $540,000   3,404,443  $0.15 

comprehensive income.

          
  Income  Shares  Per share
amount		 
          
2014:         
Basic EPS $1,094   3,395,510  $0.32 
Effect of dilutive stock options      258,872     
Diluted EPS $1,094   3,654,382  $0.30 
             
2013:            
Basic EPS $706   3,394,208  $0.20 
Effect of dilutive stock options      102,665     
Diluted EPS $706   3,496,873  $0.20 
Stock Compensation


The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton (“BSM”) model. The Company uses historical data, among other factors, to estimate the expected price volatility, the expected option life and the expected forfeiture rate.  The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option.  At December 31, 2011,2014, the Company had onetwo stock-based employee compensation plan,plans.

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(in thousands except share and per share amounts)
Note 2.  Business Combination

On February 18, 2014, the 1997 Stock Option Plan. There were no option grants in 2011 or 2010. During the year ended December 31, 2011, two employees exercised options to purchaseCompany acquired Harvest Engineering, Inc.’s wireless hazard monitoring technology and Insta-Link product family, together with related technology and intellectual property rights, for a total purchase price of 4,500 share$1,643.

The fair value of common stock. During the year ended December 31, 2010, one employee forfeited 3,300 shares.

Recently Issued Accounting Pronouncements

In June 2011,consideration transferred on the Financial Accounting Standards Board (FASB) issuedacquisition date consisted of the following:

     
Cash consideration $400 
Note payable issued to seller (Note 9)  771 
Contingent earn-out liability  472 
Total consideration $1,643 
The transaction was recorded as a new standard covering Presentationbusiness combination and the results of ComprehensiveIncome.  The standard requires that all nonowner changesoperations have been included in stockholders’ equity be presented either in a single continuousthe consolidated statement of comprehensive income orsince the date of acquisition. Acquisition fees of approximately $15 incurred in two separate but consecutive statements.  connection with the transaction are recorded as operating expenses in 2014.

In either case,connection with the acquisition, the Company is obligated to pay an entity is requiredearn-out of up to present each component$550 based upon the level of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  The standard is effective retrospectively for fiscalrevenues generated from the acquired products during the four calendar years and interim periods within those years, beginning after December 15, 2011, with early adoption permitted.following closing.  The Company implemented the new presentation rules with the current statements.

Reclassifications

Certain itemscurrently has recorded a liability of $472 related to discontinued operationsthis obligation.  This contingent liability represents the fair value estimate of the earn-out based upon the Company’s projected likelihood of meeting the revenue targets.


The following table summarizes the estimated fair value of the assets acquired at the acquisition date:
    
In process research and development $1,478 
Noncompete agreement  120 
Deferred service costs  45 
Total assets acquired $1,643 

The noncompete agreement is being amortized over a five-year period.  The fair value of the noncompete agreement was estimated using a discounted cash flow model.  The unobservable inputs are considered Level 3 inputs in the 2010fair value hierarchy.

The Company has not presented pro forma results of operations for this current acquisition because the acquisition is not material to the Company’s consolidated results of operations, financial statements have been reclassified to conform to 2011 presentation. These reclassifications had no effect on stockholders’ equity, net incomeposition or cash flows.


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ELECTRO-SENSORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(in thousands except share and per share amounts)
Note 2.3. Investments


The cost and estimated fair value of the investments (other than an investment accounted for under the equity method of accounting) are as follows:

  Cost  Gross
unrealized
gain		  Gross
unrealized
loss		  Fair
value		 
December 31, 2011                
Money Market Funds $5,373,000  $0  $0  $5,373,000 
Equity Securities  101,000   3,134,000   (54,000)  3,181,000 
   5,474,000   3,134,000   (54,000)  8,554,000 
Less Cash Equivalents  5,373,000   0   0   5,373,000 
Total Investments, December 31, 2011 $101,000  $3,134,000  $(54,000) $3,181,000 
                 
                 
December 31, 2010                
Treasury Bills $5,197,000  $0  $0  $5,197,000 
Money Market Funds  170,000   0   0   170,000 
Equity Securities  101,000   2,783,000   (54,000)  2,830,000 
   5,468,000   2,783,000   (54,000)  8,197,000 
Less Cash Equivalents  170,000   0   0   170,000 
Total Investments, December 31, 2010 $5,298,000  $2,783,000  $(54,000) $8,027,000 

             
  Cost  
Gross
unrealized
gain
  
Gross
unrealized
loss
  
Fair
value
 
December 31, 2014            
Money Market Funds $510  $0  $0  $510 
Commercial Paper  345   0   0   345 
Treasury Bills  6,542   0   0   6,542 
Equity Securities  72   1,238   (54)  1,256 
   7,469   1,238   (54)  8,653 
Less Cash Equivalents  855   0   0   855 
Total Investments, December 31, 2014 $6,614  $1,238  $(54) $7,798 
                 
December 31, 2013                
Money Market Funds $540  $0  $0  $540 
Commercial Paper  601   0   0   601 
Treasury Bills  5,226   1   0   5,227 
Equity Securities  86   2,686   (54)  2,718 
   6,453   2,687   (54)  9,086 
Less Cash Equivalents  1,141   0   0   1,141 
Total Investments, December 31, 2013 $5,312  $2,687  $(54) $7,945 
Realized gains and losses on investments are as follows:

  Years Ended December 31, 
  2011  2010 
         
Gross Realized Gains $73,000  $0 
Gross Realized Losses  0   0 
Net Realized Gain $ 73,000  $0 

    
  Years Ended December 31, 
  2014  2013 
       
Gross Realized Gains $1,163  $530 
Gross Realized Losses  0   0 
Net Realized Gain $1,163  $530 
At December 31, 20112014 and 2010,2013, the Company’s significant investment in equity securities is 343,267122,649 and 231,336, respectively, shares of Rudolph, Technologies (Rudolph), accounted for under the available-for-sale method.  As of December 31, 2011,2014 and 2013, the aggregate value of the Company’s Rudolph shares as reported on the Nasdaq Stock Exchange was approximately $3,134,000$1,254 and $2,716, respectively, with an approximate cost of $45,000.

As of December 30, 2011,$16 and $30, respectively.  During the shareholders of PPT Vision (PPT) voted to accept an offer to merge with Datalogic Scanning Holdings, Inc. (Datalogic). The terms of the merger required Datalogic to purchase all of the shares outstanding. Electro-Sensors, Inc. recognized a $72,000 gain on the sale of its PPT shares to Datalogic. The Company received the funds for their shares of PPT in January 2012.

Investment Reported on Equity Method

Atyears ended December 31, 2010,2014 and 2013, the Company owned 551,759sold 108,687 and 41,931 shares, respectively, of PPT, which was 1.4% of PPT’s outstanding common stock. The fair value of its holdings based on the quoted market price at December 31, 2010 was approximately $99,000 with an approximate cost of $2,434,000.

Because the Company owned approximately 1.4% of PPT’s outstandingRudolph stock and the Company’s Secretary ownedreported a controlling interestgain of $1,163 and $529, respectively, in PPT, it had been determined that the Company had “significant influence” over the operationsother income.


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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(in thousands except share and as a result its ownership interest should be reported using the equity method of accounting for investments. In the first quarter of 2011, it was determined that the Company no longer had “significant influence” over the operations of PPT and accordingly, the Company began accounting for its investmentper share amounts)
Changes in PPT as an available for sale security. Upon conversion to available-for-sale classification, the Company recorded the stock at its adjusted basis of $0 which reflected its carrying amount at that date.

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Changes inAccumulated Other Comprehensive Income


Changes in Accumulated Other Comprehensive Income are as follows:

  December 31, 
  2011  2010 
         
Unrealized Gains        
Unrealized Holding Gains arising during the Period $424,000  $519,000 
Less: reclassification of gains included in net income  (72,000)  0 
   352,000   519,000 
         
Deferred Taxes on Unrealized Gains:        
Increase in Deferred Taxes on Unrealized Gains arising during the Period  161,000   198,000 
Less: Reclassification of taxes on gains included in net income  (27,000)  0 
   134,000   198,000 
         
Net Change in Other Comprehensive Income $218,000  $321,000 

    
  December 31, 
  2014  2013 
Unrealized Gains (Losses)      
Unrealized holding losses arising during the period $(284)  $(422)
Less: Reclassification of gains included in net income  (1,163)  (530)
   (1,447)  (952)
         
Deferred Taxes on Unrealized Gains (Losses):        
Decrease in deferred taxes on unrealized losses arising during the period  (108)  (160)
Less: Reclassification of taxes on gains included in net income  (442)  (201)
   (550)  (361)
         
Net Change in Accumulated Other Comprehensive Income $(897)  $(591)

Note 3.4. Fair Value Measurements


The following table provides information on those assets measured at fair value on a recurring basis.
                
December 31, 2014
         
          
  Carrying       
  amount in       
  consolidated     Fair Value Measurement Using 
  balance sheet  Fair Value  Level 1  Level 2  Level 3 
Assets:               
Cash and cash equivalents:               
Money market $510  $510  $510  $0  $0 
Commercial paper  345   345   345   0   0 
Treasury bills  6,542   6,542   6,542   0   0 
Available for sale:                    
Equities:                    
Small cap technology sector  1,256   1,256   1,256   0   0 
Liabilities:                    
Contingent earn-out  472   472   0   0   472 
                
December 31, 2013
               
                
  Carrying             
  amount in             
  consolidated     Fair Value Measurement Using 
  balance sheet  Fair Value  Level 1  Level 2  Level 3 
Assets:               
Cash and cash equivalents:               
Money market $540  $540  $540  $0  $0 
Commercial paper  601   601   601   0   0 
Treasury bills  5,227   5,227   5,227   0   0 
Available for sale:                    
Equities:                    
Small cap technology sector  2,718   2,718   2,718   0   0 


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  Carrying amount
in consolidated
balance sheet
December 31,  		 Fair Value
December 31,  		 Fair Value Measurement Using 
  2011 2011 Level 1 Level 2 Level 3 
Assets:                
Cash and cash equivalents:                
Money Market Funds $5,373,000 $5,373,000 $5,373,000 $— $— 
Available-for-sale:                
Securities $3,181,000 $3,181,000 $3,181,000 $— $— 

                 
  Carrying amount
in consolidated
balance sheet
December 31,		 Fair Value
December 31, 		 Fair Value Measurement Using 
  2010 2010 Level 1 Level 2 Level 3 
Assets:                
Cash and cash equivalents:                
Money Market Funds $170,000 $170,000 $170,000 $— $— 
Treasury Bills $5,197,000 $5,197,000 $5,197,000 $— $— 
Available-for-sale:                
Securities $2,830,000 $2,830,000 $2,830,000 $— $— 

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(in thousands except share and per share amounts)
The fair value of the money market funds, commercial paper, and treasury bills areis based on quoted market prices in an active market. Available for saleAvailable-for-sale securities include equity securities that are traded in an active market.  Closing stock prices are readily available from active markets and are used as being representative of fair value.  The Company classifies these securities as level 1.

22
  Management estimated the probability of meeting the revenue targets over the measurement period to determine the fair value of the contingent earn-out, which is considered a level 3 input in the fair value hierarchy.
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The change in level 3 liabilities at fair value on a recurring basis is summarized as follows:
    
Balance at December 31, 2013 $0 
Additions (Note 2)  472 
Balance at December 31, 2014 $472 
Note 4.5. Inventories


Inventories used in the determination of cost of goods sold are as follows:

        
  December 31, 
  2011 2010 
Raw Materials $791,000 $714,000 
Work In Process  247,000  186,000 
Finished Goods  190,000  157,000 
Total Inventories $1,228,000 $1,057,000 


    
   December 31, 
  2014  2013 
Raw Materials $729  $658 
Work In Process  263   226 
Finished Goods  232   176 
Total Inventories $1,224  $1,060 
Note 5.6. Property and Equipment,

Net


The following is a summary of property and equipment:
    
   December 31, 
  2014  2013 
Equipment $266  $272 
Furniture and Fixtures  380   388 
Building  1,365   1,365 
Land  415   415 
   2,426   2,440 
Less Accumulated Depreciation  1,280   1,223 
Total Property and Equipment $1,146  $1,217 
Depreciation expense for the years ended December 31, 2014 and 2013 was $116 and $110, respectively.

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  December 31, 
  2011 2010 
Equipment $260,000 $287,000 
Construction in Progress  14,000  0 
Furniture and Fixtures  393,000  497,000 
Building  1,360,000  1,338,000 
Land  415,000  415,000 
   2,442,000  2,537,000 
Less Accumulated Depreciation 1,263,000 1,363,000 
Total Property and Equipment $1,179,000 $1,174,000 

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(in thousands except share and per share amounts)

Note 7. Net Intangible Assets

Intangible assets include the following:
                
     December 31, 2014 
  Average
Useful
Lives		  Gross
Carrying
Amount		  Accumulated
Amortization		  Net
Carrying
Amount		 
Noncompete 5 Years  $120  $22  $98 
Technology 7 Years   1,478   71   1,407 
   Net Intangible Assets    $1,598  $93  $1,505 
Amortization expense for the year ended December 31, 2014 was $93.

Estimated amortization expense over the next five years is as follows:
     
2015 $235 
2016  235 
2017  235 
2018  235 
2019  213 

Note 6.8. Accrued Expenses


Accrued expenses include the following:

        
  December 31, 
  2011 2010 
Wages and Commissions $163,000 $162,000 
Other  51,000  33,000 
Total Accrued Expenses $214,000 $195,000 


    
   December 31, 
  2014  2013 
Wages and Commissions $276  $195 
Other  116   70 
Total Accrued Expenses $392  $265 
Note 7.9.  Note Payable

The note payable consists of the following at December 31, 2014:
     
Note Payable to seller (Note 2) $800 
Payable in two annual installments of principal of $400 with a maturity date of February 2016.  This note is non-interest bearing and unsecured.    
     
Less: Discount of debt instrument listed above  (29)
Net note payable  771 
Less: Current maturities  381 
     
Note Payable – Long Term $390 


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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(in thousands except share and per share amounts)

Scheduled maturities of the note payable are as follows at December 31, 2014
    
2015 $381 
2016  390 
       Total $771 
Note 10. Commitments


Lease commitments


The Company is leasing office equipment under an operating leaseslease expiring at various dates through 2013.

in 2017.


Minimum lease payments required under non-cancelable operating leases are as follows:

     
Year Amount 
     
2012 $25,000 
2013  8,000 
Total Minimum Lease Payments $33,000 


    
Year Amount 
    
2015 $8 
2016  8 
2017  3 
Total Minimum Lease Payments $19 
Rental expense charged to operations was $27,000$21 and $28,000$25 for the years ended December 31, 20112014 and 2010,2013, respectively.

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Note 8.11. Common Stock Options and Stock Purchase Plan


Stock options


The 1997 Stock Option Plan includes(the “1997 Plan”) and 2013 Equity Incentive Plan (the “2013 Plan”) authorize the issuance of 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,plans, incentive stock options and non-qualified stock options are granted at a minimum of 100% of fair market value on the date of grant and may be exercised at various times depending upon the terms 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.

Stock-based compensation

Pursuant to the 2013 Plan, the Company is authorized to grant options to purchase up to 300,000 shares of its Common Stock.  As of December 31, 2014, options to purchase an aggregate of 250,000 shares were outstanding and 125,000 shares were exercisable under the 2013 Plan, and 50,000 shares were available for issuance pursuant to awards that may be granted under the plan in the future.

Pursuant to the 1997 Plan, the Company is authorized to grant options to purchase up to 450,000 shares of its Common Stock.  As of December 31, 2014, options to purchase an aggregate of 7,500 shares were outstanding and exercisable under the 1997 Plan.  The board terminated the plan in 2014.  The existing grants may be exercised according to the terms of the grant agreements but no additional options will be granted under the 1997 Plan.

During the third quarter of 2013, the Company granted to its Chief Executive Officer options to purchase 50,000 shares of common stock.  The options were granted at a strike price equal to the fair market value, vested immediately, and expire ten years from the date of the grant.

During the year ended December 31, 2014, options to purchase 11,980 shares of common stock expired for four employees.

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(in thousands except share and per share amounts)

The following table summarizes the activity for outstanding incentive stock options under both plans to employees of the company:

  Options Outstanding 
  Number of
Shares		 Weighted-
Average
Exercise
Price		 Weighted-
Average
Remaining
Contractual
Term
(in years)		 Aggregate
Intrinsic Value
(1)		 
              
Balance at January 1, 2010  19,780 $3.75 3.3     
Granted  0          
Exercised  0          
Canceled/forfeited/expired  3,300  4.16       
Balance at December 31, 2010  16,480  3.06 2.2     
Granted  0          
Exercised  4,500  2.37       
Canceled/forfeited/expired  0          
Balance at December 31, 2011  11,980 $4.16 2.6  0 
Vested and exercisable as of December 31, 2011  11,980 $4.16 2.6  0 

                 
  Options Outstanding 
  Number of
Shares		  Weighted-
Average
Exercise
Price		  
Weighted-
Average
Remaining Contractual
Term
(in years)
  
Aggregate
Intrinsic Value
(1)
 
                 
Balance at January 1, 2013  11,980  $4.16   1.6     
      Granted  50,000   4.21   10.0     
      Exercised  0             
      Canceled/forfeited/expired  0             
Balance at December 31, 2013  61,980   4.20   9.7     
      Granted  0             
      Exercised  0             
      Canceled/forfeited/expired  (11,980)  (4.16)        
Balance at December 31, 2014  50,000  $4.21   8.6     
   Vested and exercisable as of December 31, 2014  50,000          $0 
 (1)The aggregate intrinsic value is calculated as approximately the difference between the weighted average exercise price of the underlying awards and the Company’s estimated current fair market value at December 31, 2011.

242014.
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During the second quarter of 2014, the Company granted one outside director options to purchase 25,000 shares of common stock.  The options were priced above fair market value and vested 20% on the grant date, with an additional 20% vesting on the first four anniversaries of the grant date.  The options expire ten years from the date of grant.
During the third quarter of 2013, the Company granted to three of its outside directors options to each purchase 50,000 shares of common stock, and granted options to a fourth director to purchase 25,000 shares of common stock.  The options granted to outside directors had a strike price above fair market value and vested 20% on the grant date, with an additional 20% vesting on the first four anniversaries of the grant date thereafter.  All of the stock option grants expire ten years from the date of the grant.
During the year ended December 31, 2014, one former outside director forfeited options to purchase 2,500 shares of common stock.

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(in thousands except share and per share amounts)
The following table summarizes the activity for outstanding director stock options:

  Options Outstanding 
  Number of
Shares		 Weighted-
Average
Exercise
Price		 Weighted-
Average
Remaining
Contractual
Term
(in years)		 Aggregate
Intrinsic Value
(1)		 
              
Balance at January 1, 2010  5,000 $5.36 7.3     
Granted  0          
Exercised  0          
Canceled/forfeited/expired  0          
Balance at December 31, 2010  5,000  5.36 6.3     
Granted  0          
Exercised  0          
Canceled/forfeited/expired  0          
Balance at December 31, 2011  5,000 $5.36 5.3  0 
Vested and exercisable as of December 31, 2011  5,000 $5.36    0 

options under both plans:
                 
  Options Outstanding 
  Number of
Shares		  Weighted-
Average
Exercise
Price		  
Weighted-
Average
Remaining
Contractual
Term
(in years)
  
Aggregate
Intrinsic Value
(1)
 
                 
Balance at January 1, 2013  10,000  $4.15   9.5     
      Granted  175,000   4.67   10.0     
      Exercised  0             
      Canceled/forfeited/expired  0             
Balance at December 31, 2013  185,000   4.64   9.5     
      Granted  25,000   4.39   10.0     
      Exercised  0             
      Canceled/forfeited/expired  (2,500)  (4.15)        
Balance at December 31, 2014  207,500  $4.62   8.4     
   Vested and exercisable as of December 31, 2014  82,500          $0 
 
(1)
The aggregate intrinsic value is calculated as approximately the difference between the weighted average exercise price of the underlying awards and the Company’s estimated current fair market value at December 31, 2011.2014.

The weighted average grant date fair value of options granted during the years ended December 31, 2014 and 2013 was $35 and $367, respectively.  The Company recognized compensation expense of approximately $67 and $162 during the years ended December 31, 2014 and 2013, respectively, in connection with the issuance of the options.
The assumptions made in estimating the fair value of the options on the grant date based upon the BSM option-pricing model are as follows:
    
   Year Ended December 31 
  2014  2013 
Dividend Yield  0.00%  0.00%
Expected Volatility  44.11%  44.27-45.00%
Risk Free Interest Rate  2.02%  1.33-1.92%
Expected Life 6 Years  5.5-6 Years 
The Company calculates expected volatility for stock options and other awards using historical volatility as the Company believes the expected volatility will approximate historical volatility.

There were no options exercised during the years ended December 31, 2014 and 2013.

As of December 31, 2011 and 2010, respectively2014, there was noapproximately $172 of unrecognized compensation cost relatedexpense under the 2013 Plan.  The Company expects to stock options that is expected to be recognizedrecognize this expense over a period of 1-2the next four years.  To the extent the forfeiture rate is different than we have anticipated, stock-based compensation related to these awards will be different from our expectations.


Stock-based compensation

Pursuant to the 1997 Stock Option Plan (the “Option Plan”), the Company is authorized to grant options to purchase up to 450,000 sharesTable of its Common Stock. As of DecemberContents

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011, options to purchase an aggregate of 16,980 shares were outstanding2014 AND 2013
(in thousands except share and exercisable under the Option Plan, and 10,250 shares were available for issuance pursuant to awards that may be granted under the Option Plan in the future.

per share amounts)

Stock purchase plan


The 1996 Employee Stock Purchase Plan (the “ESPP”) allows employees to set aside up to 10% of their earnings for the purchase of shares of the Company’s Common Stock. The purchase price is the lower of 85% of the market value at the date of the grant or the exercise date, which is six months from the date of the grant.  Under the ESPP, the Company iswas authorized to sell and issue up to 150,000 shares of its Common Stock to its full-time employees.  There were 81,653 shares issued under the plan.   During 20112014 and 2010, 3,0782013, 814 shares and 5,2052,795 shares, respectively, were issued under the ESPP.  At December 31, 2011, 74,291 shares were available for future issuance pursuant to the ESPP.

25
The plan was terminated effective January 1, 2014.
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Note 9.12. Benefit Plans


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.these loans. The shares are maintained in a suspense account until released and allocated to participant accounts.  The Plan owns 150,088164,382 shares of the Company’s stock at December 31, 2011.2014. 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, 2011.

2014 or 2013.


The Company hadrecognized compensation expense for contributions of $18,000 and $0$18 to the ESOP plan for the years ended December 31, 2011in 2014 and 2010, respectively.

2013.


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. In addition, the Company may distribute the ESOP’s shares to the terminated participant at the Company’s election.  At December 31, 2011, 150,0882014, 164,382 shares of the Company’s stock, with an aggregate fair market value of approximately $590,000,$653, are held by ESOP participants who, if terminated, would be subject tohave rights under the repurchase requirement.

provisions.  The Company believes that the market for its shares meets the ESOP requirements and that there would not be a current obligation to repurchase shares.


Profit sharing plan and savings plan


The Company has a salary reduction and profit sharing plan whichthat conforms to IRS provisions for 401(k) plans. The Company may make profit sharing contributions with the approval of the Board of Directors. The Board of Directors decided to makeThere were no contribution for the years 2011 and 2010 other than its matching of 401(k) salary reductions, which totaled $64,000 and $63,000 for 2011 and 2010, respectively.

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Note 10. Discontinued Operations

On September 16, 2011,profit sharing contributions by the Company sold its entire interest in its AutoData Systems Division to Auto Data Inc. (ADI). The purchase price will be paid as an earn-out based on three percent2014 or 2013.


Table of the software, hardware,Contents

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(in thousands except share and maintenance contracts that ADI sells over the next five years (four percent while ADI continues to occupy our building). As of December 30, 2011, ADI owed the Company approximately $3,000 under the earn-out. The amount is included in other assets on the balance sheet.

The division, a separate operating segment as described in per share amounts)

Note 12, designed and marketed desktop software based systems that read hand printed characters, checkmarks and bar code information from scanned or faxed forms, in addition to collecting and reporting data from web forms.

The financial results of the discontinued operation are as follows:

  Years Ended
December 31,		 
  2011  2010 
     
Net sales $246,000  $407,000 
Expenses  (314,000)  (424,000)
Net loss before income taxes  (68,000)  (17,000)
Income tax benefit  18,000   4,000 
Net loss of discontinued operations $(50,000) $(13,000)

The effect of the discontinued operation on the financial position of the Company, as of December 31, 2011, is as follows:

Property and equipment $2,000
Inventories  17,000
Accounts receivable  35,000
Net assets disposed $54,000
    
Accrued expenses $10,000
Deferred revenue  58,000
Net liabilities disposed $68,000
Net cash paid to ADI $14,000

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Note 11.13. Income Taxes


The components of the income tax provision for the years ended December 31, 20112014 and 20102013 are as follows:

  2011  2010 
     
Current:        
Federal $179,000  $183,000 
State  0   0 
Deferred:        
Federal  12,000   3,000 
State  2,000   0 
Total Federal and State Income Taxes $193,000  $186,000 


  2014  2013 
       
Current:      
Federal $540  $302 
State  1   1 
Deferred:        
Federal  (60)  (47)
State  (21)   (24)
Total Federal and State Income Taxes $460  $232 

The provision for income taxes for the years ended December 31, 20112014 and 20102013 differs from the amount obtained by applying the U.S. federal income tax rate to pretax income due to the following:

  2011  2010 
     
Computed “Expected” Federal Tax Expense $251,000  $242,000 
Increase (Decrease) in Taxes Resulting From:        
State Income Taxes, net of Federal Benefit  12,000   16,000 
Credits  (51,000)  (53,000)
Domestic Production Activities Deduction  (22,000)  (21,000)
Permanent Differences  3,000   2,000 
Total Federal and State Income Taxes $193,000  $186,000 


  2014  2013 
       
Computed “Expected” Federal Tax Expense $529  $319 
Increase (Decrease) in Taxes Resulting From:        
State Income Taxes, net of Federal Benefit  10   9 
Credits  (47)  (70)
    Domestic Production Activities Deduction
  (17)  (18)
    Permanent Differences
  4   3 
   Rate Change for Deferred Taxes
  0   (11)
    Other
  (19)  0 
Total Federal and State Income Taxes $460  $232 

The components of the net deferred tax liability consist of:

  2011  2010 
     
Deferred Tax Assets:        
Vacation Disallowance $24,000  $26,000 
Allowance for Doubtful Accounts  4,000   4,000 
State Carryforward R&D Credit  3,000   3,000 
Investment in Equity Method Investee  0   976,000 
Valuation Allowance  0   (976,000)
Total Deferred Tax Assets $31,000  $33,000 
         
Deferred Tax Liabilities:        
Prepaid Expenses $26,000  $29,000 
Depreciation  60,000   45,000 
Net Unrealized Gain on Investments  1,170,000   1,037,000 
Total Deferred Tax Liabilities $1,256,000  $1,111,000 
         
Net Deferred Tax Liability $(1,225,000) $(1,078,000)

  2014  2013 
       
Deferred Tax Assets:      
Vacation Accrual $33  $27 
Allowance for Doubtful Accounts  4   3 
Stock Compensation  80   57 
State Carryforward R&D Credit  31   12 
Total Deferred Tax Assets $148  $99 
         
Deferred Tax Liabilities:        
Prepaid Expenses $35  $30 
    Depreciation and amortization  54   91 
Net Unrealized Gain on Investments  450   1,000 
Total Deferred Tax Liabilities $539  $1,121 
         
Net Deferred Tax Liability $(391)  $(1,022) 
The Company is subject to the following material taxing jurisdictions: U.S. and Minnesota.  The tax years that remain open to examination by the Internal Revenue Service are 20082011 through 2011. The tax years that remain open to examination by the Minnesota Department of Revenue are 2007 through 2011.2014.  We have no accrued interest or penalties related to uncertain tax positions as of January 1, 20112014 or December 31, 2011.

2014 and uncertain tax positions are not significant.

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(in thousands except share and per share amounts)

Note 12.14. Segment Information

Prior to September 16, 2011, the Company had three reportable operating segments based on the nature of its product lines: Production Monitoring, AutoData Systems, and Investments. The AutoData Systems segment was sold on September 16, 2011 as described in Note 10. The operations of that segment are presented as discontinued operations in the accompanying financial statements and are excluded from the presentation of segment information from continuing operations in this note. The reclassification of AutoData Systems to discontinued operations had no impact on the results of operations presented for the Production Monitoring or Investments segments.


As of December 31, 2011,2014, the Company has two reportable operating segments: Production Monitoring and Investments.  The Production Monitoring Division manufactures and markets a complete line of production monitoring equipment, in particular speed monitoring and motor control systems for industrial machinery.  ESI Investment Company holds investments in marketable and non-marketable 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. The Company has no inter-segment sales.


The following is financial information relating to the continuing operating segments:


  2014  2013 
       
Net revenues      
Production Monitoring $7,041  $6,541 
Total  7,041   6,541 
Sales in foreign countries        
Production Monitoring  973   932 
Total  973   932 
Interest income        
Production Monitoring  0   1 
ESI Investment Company  2   4 
Total  2   5 
Depreciation and amortization expense        
Production Monitoring  209   110 
Total  209   110 
Interest expense        
    Production Monitoring  17   0 
    Total  17   0 
Capital purchases        
Production Monitoring  46   23 
Total  46   23 
Total assets        
Production Monitoring  4,945   3,022 
ESI Investment Company  8,819   9,587 
Total  13,764   12,609 
Income before income taxes        
Production Monitoring  389   404 
ESI Investment Company  1,165   534 
Total $1,554  $938 
Note 15.  Subsequent Events

During the first quarter of 2015, through March 13, 2015, the Company sold 73,583 shares of Rudolph Technology stock for proceeds of $824 resulting in a gain on the sale of $815.

  2011  2010 
     
Net revenues        
Production Monitoring (products) $6,115,000  $5,794,000 
ESI Investment Company  0   0 
Total  6,115,000   5,794,000 
Sales in foreign countries        
Production Monitoring  633,000   536,000 
ESI Investment Company  0   0 
Total  633,000   536,000 
Interest income        
Production Monitoring  2,000   0 
ESI Investment Company  4,000   2,000 
Total  6,000   2,000 
Depreciation expense        
Production Monitoring  57,000   91,000 
ESI Investment Company  0   0 
Total  57,000   91,000 
Capital purchases        
Production Monitoring  82,000   38,000 
ESI Investment Company  0   0 
Total  82,000   38,000 
Total assets        
Production Monitoring  2,488,000   2,337,000 
ESI Investment Company  9,440,000   9,216,000 
Total  11,928,000   11,553,000 
Income before income taxes        
Production Monitoring  736,000   728,000 
ESI Investment Company  73,000   2,000 
Total  809,000   730,000 

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29
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Item 9.Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A.Controls and Procedures.


Evaluation of Disclosure Controls and Procedures


The person serving as our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”).  Based on this evaluation, the person serving as the Company’s principal executive officer and principal financial officer has concluded that the Company’s disclosure controls and procedures were effective as of December 31, 20112014 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.


Management’s Report on Internal Control over Financial Reporting


Under Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to assess the effectiveness of the Company'sCompany’s internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether the Company'sCompany’s internal control over financial reporting is effective.


Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company'sCompany’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company'sCompany’s financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.


Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


The Company'sCompany’s management has assessed the effectiveness of the Company'sCompany’s internal control over financial reporting as of December 31, 2011.2014. In making this assessment, the Company used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal“Internal Control-Integrated Framework.Framework (1992).” These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. The Company'sCompany’s assessment included extensive documenting, evaluating and testing the design and operating effectiveness of its internal control over financial reporting.  Based on this evaluation, the person serving as the Company’s principal executive officer and principal financial officer has concluded that the Company’s internal controls were effective as of December 31, 2011.

2014.


Changes in Internal Control over Financial Reporting


There were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2011,2014, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.Other Information.

None.

30

PART III


Certain information required by Part III is incorporated by reference to the Company’s Definitive Proxy Statement pursuant to Regulation 14A (the “Proxy“2015 Proxy Statement”) for its Annual Meeting of Shareholders to be held April 18, 201222, 2015 (“Annual Meeting”).


Item 10.Directors, Executive Officers and Corporate Governance.

The information required by Item 10401 under Regulation S-K, to the extent applicable to the Company’s directors, will be set forth under the caption “Election of Directors” in the 2015 Proxy Statement and is incorporated herein by referencereference.  The information required with respect to the sections entitledCompany sole executive officer, who is also a director, will be set forth under the caption “Election of Directors,Directors.”
The information required by Item 405 regarding compliance with Section 16 (a) will be set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance –Compliance” in the 2015 Proxy Statement, and is incorporated herein by reference.
Code of Ethics
The Company has adopted a Code of Ethics and Business Conduct” and “Corporate Governance – Audit Committee” that appear inapplicable to all officers of the Company as well as certain other key accounting personnel.  A copy of the Code of Ethics can be obtained free of charge upon written request directed to the Company’s Definitive Proxy Statement for its Annual Meeting. Information concerningSecretary at the Company’s executive officers is includedoffices.
The information required called for by Item 407 regarding corporate governance will be set forth under the caption “Corporate Governance” in the sections referred to above.

2015 Proxy Statement and is incorporated herein by reference.
Item 11.Executive Compensation.


The information requiredcalled for by Item 11402 under Regulation S-K, will be set forth under the caption “Executive Compensation” in the Company’s 2015 Proxy Statement and is incorporated herein by reference to the section entitled “Executive Compensation” that appears in the Company’s Definitive Proxy Statement for its Annual Meeting.

reference.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.


The information requiredcalled for by Item 12 relating to security ownership of certain beneficial owners and management is incorporated herein by reference to403 under Regulation S-K will be set forth under the section entitledcaptions “Security Ownership of Certain Beneficial Owners and Management” that appears in the Company’s Definitive2015 Proxy Statement, for its Annual Meeting.

and is incorporated herein by reference.


The following table provides information as of December 31, 20112014 about the Company’s equity compensation plans.


Equity Compensation Plan Information

  Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights		Weighted average
exercise price of
outstanding options,
warrants and rights		Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))
       
  (a)(b)(c)
Equity compensation plans approved by security holders 257,500 $4.54 50,000(1)
        
Equity compensation plans not approved by security holders — 
—
 
—
 
        
Total 257,500 $4.54 50,000(1)
(1) Shares issuable pursuant to the 2013 Equity Incentive Plan.

Table of Contents

 Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights		Weighted average
exercise price of
outstanding options,
warrants and rights		Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))
    
 (a)(b)(c)
    
Equity compensation plans approved by security holders16,980$4.5184,541(1)
    
Equity compensation plans not approved by security holders———
    
Total16,980$4.5184,541(1)

(1)Includes 10,250 shares issuable pursuant to the 1997 Stock Option Plan and 74,291 shares issuable pursuant to the 1996 Employee Stock Purchase Plan.

Item 13.Certain Relationships and Related Transactions, and Director Independence.

The information required by Item 13 is incorporated herein by reference to404 under Regulation S-K will be set forth under the sections entitled “Corporate Governance – Independence,” “Election of Directors” and “Transactionscaption “Transactions with Related Persons, Promoters and Certain Control Persons” that appear in the Company’s Definitive2015 Proxy Statement, for its Annual Meeting.

and is incorporated herein by reference.
The information required by Item 407(a) will be set forth in the Proxy Statement under the caption “Corporate Governance” and is incorporated herein by reference.
Item 14.Principal AccountingAccountant Fees and Services.

The information required by Item 14 relating to principal accounting feesof Form 10-K and services9(e) of Schedule 14A will be set forth under the caption “Ratification of Independent Registered Public Accounting Firm” in the Company’s 2015 Proxy Statement, and is incorporated herein by reference to the section entitled “Disclosure of Fees Paid to Independent Auditors” that appears in the Company’s Definitive Proxy Statement for its Annual Meeting of Shareholders.

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reference.
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PART IV

Item 15.Exhibits and Financial Statement Schedules.


Financial Statements.


Reference is made to the Index to Consolidated Financial Statements appearing on Page 1113 hereof.


Financial Statement Schedules.


The Financial Statement Schedules have been omitted either because they are not required or because the information has been included in the consolidated financial statements or the notes thereto included in this Annual Report.


Exhibits.


See “Exhibit Index” on the page following the signatures.


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Table of ContentsSIGNATURES

SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


 
ELECTRO-SENSORS, INC.
(“Registrant”)
 By:/s/ BRADLEY D. SLYEDAVID L. KLENK­ 
  Bradley D. SlyeDavid L. Klenk
  President, Chief Executive Officer, and Chief Financial Officer
 Date:March 29, 201218, 2015
By:/s/ GLORIA M. GRUNDHOEFER
Gloria M. Grundhoefer
Controller
Date:March 18, 2015

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


(Power of Attorney)


Each person whose signature appears below constitutes and appoints BRADLEY D. SLYEDAVID L. KLENK as his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, 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-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, 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 attorney-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.


Signature Title Date
     
/s/ Bradley D. SlyeDavid L. Klenk Chairman, President and Director (CEO and CFO) March 29, 201218, 2015
     
/s/ Joseph A. Marino Chairman and Director March 29, 201218, 2015
     
/s/ Geoffrey W. MillerScott A. Gabbard Director March 29, 201218, 2015
     
/s/ Robert W. HellerMichael C. Zipoy Director March 29, 201218, 2015
     
/s/ Jeffrey D. Peterson Director March 29, 201218, 2015
     

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Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


EXHIBIT INDEX TO FORM 10-K


For the Fiscal Year Ended
December 31, 20112014
Commission File No. 0-9587000-9587


Exhibit
Number
 Exhibit Description
   
^3.1 Registrant’s Restated Articles of Incorporation, as amended—incorporated by reference to Exhibit 3.1 to the Company’s 1991 Form 10-KSB
^3.2 Registrant’s Bylaws, as amended to date—incorporated by reference to Exhibit 3.2 to the Company’s 1997 Form 10-KSB
4.1Specimen Common Stock Certificate
^*10.1 Electro-Sensors, Inc.’s 1996 Employee Stock Purchase Plan —– incorporated by reference to the Company’s 1996 Proxy Statement for the Company’s 1996 Annual Meeting of Shareholders
^*10.2 Electro-Sensors, Inc.’s 1997 Stock Option Plan and forms of Incentive and Nonqualified Stock Option Agreements thereunder—incorporated—incorporated by reference to Exhibit 10.6 to the Company’s 1997 Form 10-KSB
^*10.3 SummaryElectro-Sensors, Inc.’s 2013 Equity Incentive Plan incorporated by reference to Appendix C of Compensation Arrangements with Directorsthe Company’s Proxy Statement for the Company’s 2013 Annual Meeting of Shareholders
*^10.4 SummaryAsset Purchase Agreement dated as of Compensation Arrangements with Executive OfficersFebruary 14, 2014 by and among Harvest Engineering Inc., Harvest Engineering, LLC, Stephen Meyer, Bruce Meyer, and Electro-Sensors, Inc. – incorporated by reference to exhibit 10.4 to the Company’s 2013 Form 10-K
*10.5Form of Incentive Stock Option Agreement under 2013 Equity Incentive Plan – incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 29, 2013
*10.6Form of Non-qualified Stock Option Agreement under 2013 Equity Incentive Plan – incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on April 29, 2013
21 
Subsidiaries of Registrant (Name and State of Incorporation):
ESI Investment Company—Minnesota
Senstar Corporation—Minnesota
23.1Consent of Independent Registered Public Accounting Firm
24.1 Power of Attorney (see Signature page)
31.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Letter to Shareholders dated March 8, 20126, 2015
99.2 Investor Information
101 

The following financial information from Electro-Sensors, Inc.’s Annual Report on Form 10-K for the annual period ended December 31, 2011,2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance SheetSheets as of December 31, 20112014 and 2010,2013, (ii) Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 20112014 and 2010,2013, (iii) Consolidated Statements of Cash Flows for years ended December 31, 20112014 and 2010,2013, (iv) Consolidated Statement of Changes in Stockholders’ Equity, and (v) Notes to Consolidated Financial Statements.**

^Incorporated by reference to a previously filed report or document—SEC File No. 0-9587000-9587
*
Management contract or compensatory plan or arrangement
**Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.

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