10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2013
	or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-09587

ELECTRO-SENSORS, INC.
(Exact name of registrant as specified in its charter)

Minnesota	41-0943459
(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

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

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

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. Yes x No o

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 x No o

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. x

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 o	Accelerated filer o
Non-accelerated filer   o (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x 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 $5,200,000 based upon the closing price of the Common Stock as reported on The Nasdaq Stock Market® on June 30, 2013.

The number of shares outstanding of the registrant’s Common Stock, $0.10 par value, on March 19, 2014 was 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.

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ELECTRO-SENSORS, INC.
Form 10-K for the Year Ended December 31, 2013
TABLE OF CONTENTS

PART I
Item 1. Business	3
Item 1A. Risk Factors	7
Item 2. Properties	7
Item 3. Legal Proceedings	7
Item 4. Mine Safety Disclosures	8
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	8
Item 6. Selected Financial Data	8
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	12
Item 8. Financial Statements and Supplementary Data	13
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	32
Item 9A Controls and Procedures	32
Item 9B. Other Information	32
PART III
Item 10. Directors, Executive Officers and Corporate Governance	33
Item 11. Executive Compensation	33
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	33
Item 13. Certain Relationships and Related Transactions, and Director Independence	33
Item 14. Principal Accountant Fees and Services	33
PART IV
Item 15. Exhibits and Financial Statement Schedules	34
SIGNATURES	35

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PART I

Item 1. Business.

Introduction

Electro-Sensors, Inc. (“we”, “us”, “our”, the “Company” or “ESI”) is engaged in the manufacturing and distribution of 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 these investments will facilitate 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. As of March 19, 2014, our primary investment is 192,157 shares of Rudolph Technologies, Inc., 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, 2013, ESI had two consolidated subsidiaries: ESI Investment Company and Senstar Corporation. Senstar Corporation does not have any business operations.

ESI was incorporated in Minnesota in July 1968. 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 a 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 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 (the West German manufacturer of control and interface devices), giving us rights to distribute their products in the United States. These products interface with our products on various applications.

We believe that a wide variety of organizations can achieve significant savings in both time and materials by adding production monitoring and drive control technology to existing processes to coordinate the operation of related machines. Our products are sold into both the “retro-fit” market and into new manufacturing or processing systems.

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In 2008, we introduced our Electro-Sentry Hazard Monitoring System, which integrates our sensors for montioring temperature, belt misalignment, and shaft speed with a programmable logic controller and touch screen interface to create a complete system for hazard monitoring. The system enables our customers to locate which part of the material handling system is operating incorrectly, typically in less than ten seconds, by using visual diagrams on a 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.

February 2014 Acquisition of Wireless Hazard Monitoring System

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 will market the wireless hazard monitoring products under its new HazardPRO^TM product line and manufacture and service 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 a wide variety of monitoring applications.

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 both our internal sales team and a number of manufacturer’s representatives and distributors located throughout the United States, Canada, Mexico, Bolivia, Chile, Colombia, Guatemala, Peru, Great Britain, Egypt, Saudi Arabia, Australia, China, Korea, Malaysia, Philippines, Singapore, and Taiwan. 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 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 range of industrial products and attend several local, national and international tradeshows designated for the industry throughout the year. We also use our corporate website and other related industry websites for advertising and marketing purposes.

Competition

Competition for our monitoring products arises 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., Durant Corporation, and Contrex, Inc. We believe our competitive advantages include that our products are sold as ready-to-install units and that our products have 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 purchase parts and materials for our systems from various manufacturers and distributors. In some instances, these materials are manufactured in accordance with proprietary designs. Multiple sources of these parts and materials are generally 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 trademark registered with the U.S. Patent and Trademark Office (USPTO”), as Reg. No. 1,142,310. We believe our trademark has been and will continue to be useful in developing and protecting market recognition for our products. We established the HazardPRO^TM trademark in the first quarter of 2014 and will register the trademark with the USPTO during 2014.

We hold six patents relating to our production monitoring systems. The 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 protect its trade secrets and proprietary intellectual property, including know-how, in part, through confidentiality agreements with employees, 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

The Company continues to seek growth opportunities, both internally through the Company’s existing portfolio of products, technologies and markets, as well as externally through technology partnerships or related-product acquisitions.

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 of $560,000 and $443,000 during 2013 and 2012, 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 19, 2014, we had 31 employees, of whom all are 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 our key employees, or recruit 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. We cannot ensure that we will experience revenue 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.

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. Our product development requires us to commit financial resources, personnel and time, usually in advance of significant market demand for these products. In order to compete, we must anticipate both future demand and the technology available to meet that demand. We 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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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 the 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 such 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 to 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 such factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. These factors include:

• our ability to successfully develop new products;

• our ability to 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 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 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. The facility is anticipated to be adequate for our needs in 2014.

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.

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”. 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
2013	First Quarter	$	4.62	$	3.67
	Second Quarter	$	4.66	$	4.04
	Third Quarter	$	4.83	$	4.00
	Fourth Quarter	$	4.59	$	3.85
2012	First Quarter	$	4.37	$	3.59
	Second Quarter	$	4.40	$	3.99
	Third Quarter	$	4.20	$	3.29
	Fourth Quarter	$	4.11	$	3.61

Based on data provided by our transfer agent, management was informed that as of March 19, 2014, the number of share owner accounts of record was approximately 87. The Company is aware that there are additional shareholders in which the shares are held in the street name.

The Company paid cash dividends for a number of years, paying $272,000 in 2013 and $543,000 in 2012. In July 2013, the Company’s Board announced that it had temporarily suspended the Company’s dividend. 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 9 to our 2013 consolidated financial statements. We did not repurchase any equity securities during the years ended December 31, 2013 and 2012.

Item 6. Selected Financial Data.

Not 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” 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 percentages of net sales.

	Year Ended December 31,
	2013			2012
Net Sales		100.0	%		100.0	%
Cost of Goods Sold		42.8			44.0
Gross Profit		57.2			56.0
Operating Expenses
Selling and marketing		22.0			20.7
General and administrative		20.7			15.7
Research and development		8.6			6.8
Total Operating Expenses		51.3			43.2
Operating Income		5.9			12.8
Non-operating Income
Gain on sale of available-for-sale securities		8.1			12.2
Interest income		.1			.1
Other income		.2			.2
Total Non-operating Income		8.4			12.5
Income before Income Taxes		14.3			25.3
Income Taxes		3.5			8.6
Net Income		10.8	%		16.7	%

The following paragraphs discuss the Company’s performance for years ended December 31, 2013 and 2012.

Comparison of 2013 vs. 2012

Net Sales

Net sales increased $43,000 or 0.7%, to $6,541,000 in 2013 from $6,498,000 in 2012. Net sales increased steadily throughout the year reaching $3,104,000 for the six-month period ending June 30, 2013 and increasing by 10.7% to $3,438,000 in the second half of the year ending December 31, 2013. This increase was primarily driven by a 25.7% increase in system-level orders, which contain multiple pieces of monitoring equipment. We believe these larger projects were generally related to broader facility improvements, modernization programs, and capacity upgrades as companies responded to more favorable economic conditions and improved harvest yields. In addition, we experienced strong activity in the industrial and agricultural industries in the Canadian market resulting in a 32.7% year-over-year sales increase in that market.

Cost of Sales

Our cost of goods sold decreased $60,000 or 2.1%, to $2,798,000 from $2,858,000 in 2012, primarily due to a change in the mix of products, with a relative increase in the sale of higher margin products. We continue our efforts to maintain or reduce our production costs by manufacturing products in the most cost effective manner.

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Gross Profit

Gross profit for 2013 was 57.2% compared to 56.0% in 2012. The slight increase in the gross margin was primarily due to both a price increase that we put into effect in January 2013, and our focus on driving down manufacturing costs.

Operating Expenses

Total operating expenses increased by $545,000, or 19.4%, to $3,354,000 in 2013 compared to $2,809,000 in 2012. This increase was due to the following:

• Selling and marketing costs increased by $98,000, or 7.3%, to $1,442,000 in 2013 compared to $1,344,000 in 2012. The increase was due to increased wages and benefit expense related to additional sales personnel and increased travel costs related to a higher number of customer visits, partially offset by decreases in marketing expenses and bonuses.

• General and administrative costs increased by $330,000, or 32.3%, to $1,352,000 in 2013 compared to $1,022,000 in 2012. The increase was due primarily to noncash compensation expense on stock option grants for non-employee directors and our chief executive officer; depreciation and amortization expense related to the upgrade of our enterprise software system and related hardware; legal and professional fees related to our February 2014 acquisition of Harvest Engineering; compensation resulting from the July 2013 management transition; and a new director and officer liability insurance policy. These increases were partially offset by a decrease in bad debt expense due to 2012 write offs that did not occur in 2013. Stock-based compensation for 2013 was approximately $162,000 compared to approximately $6,000 in 2012.

• Research and development costs increased $117,000, or 26.4%, to $560,000 in 2013 compared to $443,000 in 2012. The 2013 increase resulted from higher wages and benefits due to changes in management responsibilities and lab testing fees for the certification of new products for use in hazardous locations.

Operating Income

Operating income decreased by $442,000 or 53.2%, to $389,000 in 2013 from $831,000 in 2012, due primarily to the operating expense increases discussed above.

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. 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 gains from the sale of investments, we also realize interest income from short-term holdings.

Non-operating income decreased by $262,000 to $549,000 in 2013 from $811,000 in 2012, primarily as a result of fewer gains on the sale of investments. The Company recognized a gain on sale of investments of $530,000 and $794,000 in 2013 and 2012, respectively, primarily from sales of shares of Rudolph Technologies, Inc.. The Company is in the process of 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 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.

Net Income After Tax

We reported 2013 net income of $706,000 as compared to net income of $1,086,000 in 2012, a decrease of $380,000, or 35.0%. Basic and diluted earnings per share were $0.20 in 2013, compared to basic and diluted earnings per share of $0.32 and $0.31, respectively, in 2012.

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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 $1,505,000 and $1,102,000 at December 31, 2013 and 2012, respectively. The increase was mainly due to net cash from investing activities, as described below. Working capital was $11,068,000 at 2013 year end compared to $11,400,000 at 2012 year end.

Cash generated from 2013 operating activities was $127,000, compared to $732,000 generated in 2012, a decrease of $605,000. The decrease was primarily a result of a decrease in our net income adjusted for the gain on the sale of investments and noncash stock compensation expense, an increase in trade receivable, and a decrease in income tax accruals, partially offset by the change in inventories. The net change in trade receivables was primarily due to an increase of $142,000 in the balance at December 31, 2013 compared to the prior year and a decrease of $57,000 in the balance at December 31, 2012 when compared to the prior year. The increase is due to increased sales in the fourth quarter of 2013. The net change in income taxes was due to an increase in the receivable balance of $314,000 at December 31, 2013 compared to the prior year and an increase in the payable balance of $330,000 at December 31, 2012 when compared to the prior year. The increase in the net receivable was due to the timing of tax payments to meet IRS safe harbor rules. In 2013, the Company made estimated tax payments based on income. The Company made tax payments in 2012 based on the 2011 tax liability and paid the 2012 balance in March 2013. Those changes were partially offset by the $270,000 inventory decrease in the balance at December 31, 2013 compared to the prior year and an increase of $102,000 in the balance at December 31, 2012 when compared to the prior year. The decrease as of December 31, 2013 was due to increased sales in the fourth quarter of 2013.

Cash generated from 2013 investing activities was $539,000, compared to $4,571,000 of cash used in 2012 investing activities. We received $536,000 on the sale of investments during 2013 compared to $874,000 during 2012. During 2012, the Company implemented a significant increase in the purchase of Treasury Bills with maturity dates of more than three months. During 2013, the Company’s proceeds from and purchases of Treasury Bills were roughly equivalent and the Company generated 2013 net proceeds of $26,000. We purchased $23,000 and $196,000 of property and equipment in the years ended December 31, 2013 and 2012, respectively.

Cash used in financing activities was $263,000 and $535,000 for 2013 and 2012, respectively. During 2013 and 2012, we paid aggregate dividends of $272,000 and $543,000, respectively. During 2013 and 2012, we had $9,000 and $8,000, respectively, in stock purchases under our 1996 Employee Stock Purchase Plan.

We intend that our ongoing cash requirements will be primarily used for capital expenditures, potential 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 231,336 and 273,267 shares of Rudolph Technologies, Inc. (“Rudolph”), as of December 31, 2013 and 2012, respectively, listed on the Nasdaq stock market. We account for the Rudolph investment using the available-for-sale method. The fair value of the Rudolph investment totaled $2,716,000 and $3,673,000 as of December 31, 2013 and 2012, 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 18, 2014 was approximately $2,169,000.

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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. Such 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.

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, inventory, investments, 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

We estimate the economic useful life of property and equipment used in the business. Expected asset lives may be shortened or an impairment would 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 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.

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.

12

Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	14
Financial Statements
Consolidated Balance Sheets	15
Consolidated Statements of Comprehensive Income	16
Consolidated Statements of Changes in Stockholders’ Equity	17
Consolidated Statements of Cash Flows	18
Notes to Consolidated Financial Statements	19

13

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, 2013, and 2012, and the related consolidated statements of comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2013. 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 purpose of expressing an opinion on the effectiveness of the company’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, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

/s/ Boulay PLLP
Certified Public Accountants

Minneapolis, Minnesota

March 21, 2014

14

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share amounts)

	December 31
	2013		2012
ASSETS
Current assets
Cash and cash equivalents	$	1,505	$	1,102
Treasury bills		5,227		5,248
Available-for-sale securities		2,718		3,677
Trade receivables, less allowance for doubtful accounts of $8 and $10, respectively		746		602
Inventories		1,060		1,330
Income tax receivable		1		0
Other current assets		135		75
Total current assets		11,392		12,034
Property and equipment, net		1,217		1,304
Total assets	$	12,609	$	13,338
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	59	$	94
Accrued expenses		265		227
Income tax payable		0		313
Total current liabilities		324		634
Deferred income tax liability		1,022		1,455
Commitments and contingencies
Stockholders’ equity
Common stock par value $0.10 per share; authorized 10,000,000 shares; issued and outstanding: 3,394,707 and 3,391,912 shares, respectively		339		339
Additional paid-in capital		1,746		1,575
Retained earnings		7,547		7,113
Accumulated other comprehensive income (unrealized gain on available-for-sale securities, net of income tax)		1,631		2,222
Total stockholders’ equity		11,263		11,249
Total liabilities and stockholders’ equity	$	12,609	$	13,338

See Notes to Consolidated Financial Statements

15

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands except share and per share amounts)

	Years ended December 31,
	2013			2012
Net Sales	$	6,541		$	6,498
Cost of Goods Sold		2,798			2,858
Gross Profit		3,743			3,640
Operating Expenses
Selling and marketing		1,442			1,344
General and administrative		1,352			1,022
Research and development		560			443
Total Operating Expenses		3,354			2,809
Operating Income		389			831
Non-operating Income
Gain on sale of available-for-sale securities		530			794
Interest income		5			4
Other income		14			13
Total Non-operating Income		549			811
Income before Income Taxes		938			1,642
Income Taxes		232			556
Net Income		706			1,086
Other Comprehensive Income:
Change in unrealized value of available-for-sale securities, net of income tax		(262	)		805
Reclassification of gains included in net income, net of income tax		(329	)		(492	)
Net increase (decrease) in other comprehensive income		(591	)		313
Total Comprehensive Income	$	115		$	1,399
Net Income per share data
Basic
Net income per share	$	0.20		$	0.32
Weighted average shares		3,394,208			3,391,332
Diluted
Net income per share	$	0.20		$	0.31
Weighted average shares		3,496,873			3,412,288
Dividends paid per common share	$	0.08		$	0.16

See Notes to Consolidated Financial Statements

16

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, 2012		3,389,577	$	339	$	1,561	$	6,570		$	1,909		$	10,379
Unrealized gains on available-for-sale securities, net of taxes											313			313
Stock issued through the employee stock purchase plan		2,335		0		8								8
Stock compensation expense						6								6
Dividend on common stock								(543	)					(543	)
Net income								1,086						1,086
Balance, December 31, 2012		3,391,912		339		1,575		7,113			2,222			11,249
Unrealized loss on available-for-sale securities, net of taxes											(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

See Notes to Consolidated Financial Statements

17

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	Years ended December 31,
	2013			2012
Cash flows from (used in) operating activities
Net Income	$	706		$	1,086
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		110			71
Realized gain on sale of available-for-sale securities		(530	)		(794	)
Interest accrued on investments		(5	)		1
Allowance for doubtful accounts		(2	)		1
Deferred income taxes		(71	)		38
Stock compensation expense		162			6
Changes in:
Trade receivables		(142	)		57
Inventories		270			(102	)
Other current assets		(60	)		41
Accounts payable		(35	)		(16	)
Accrued expenses		38			13
Accrued income taxes		(314	)		330
Net cash from operating activities		127			732
Cash flows from (used in) investing activities:
Proceeds from sale of available-for-sale securities		536			874
Purchase of treasury bills		(6,425	)		(5,249	)
Proceeds from the maturity of treasury bills		6,451			0
Purchase of property and equipment		(23	)		(196	)
Net cash from (used in) investing activities		539			(4,571	)
Cash flows from (used in) financing activities:
Proceeds from issuance of common stock		9			8
Dividends paid		(272	)		(543	)
Net cash used in financing activities		(263	)		(535	)
Net increase (decrease) in cash and cash equivalents		403			(4,374	)
Cash and cash equivalents, beginning		1,102			5,476
Cash and cash equivalents, ending	$	1,505		$	1,102
Supplemental cash flow information
Cash paid during the year for income taxes	$	617		$	207

See Notes to Consolidated Financial Statements

18

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
(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.”

Electro-Sensors, Inc. manufactures and markets a complete line of speed monitoring and motor control systems for industrial machinery. The Company uses 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 in a wide variety of manufacturers, OEMs and processors to monitor process machinery operations. The Company markets its products to a number of different industries located throughout the United States, Canada, Latin America, Europe, and Asia.

In addition, through its subsidiary ESI Investment Company, the Company has in the past made strategic investments in other businesses and companies, primarily when the Company believes that these 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, ESI does not intend to become an investment company and intends to remain primarily an operating company. The Company’s primary investment is 231,336 shares of Rudolph Technologies, Inc. (“Rudolph”) which is accounted for using the available-for-sale method. See Note 2 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, 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, realizability of accounts receivable, valuation of deferred tax assets/liabilities, inventory, investments, 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 these accounts. The Company believes it is not exposed to any significant credit risk on cash.

Trade receivables and credit policies

Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Accounts 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.

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

The carrying amount of accounts receivable 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 accounts 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 may not be collected. Management uses this information to estimate the allowance.

19

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
(in thousands except share and per share amounts)

Available-for-sale securities

The Company’s investments consist of equity securities, primarily common stocks and government debt securities. The estimated fair value of publicly traded equity securities is based on reported 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 this 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. 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 as income 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. There were no other-than-temporary impairments in the years ended December 31, 2013 and 2012.

Fair 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’s 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 equivalents, treasury bills, commercial paper, money market funds, trade receivables, accounts payable, and other financial working capital items approximate fair value at December 31, 2013 and 2012 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.

20

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
(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-line method. Maintenance and repairs are expensed as incurred. Major improvements and betterments are capitalized.

Long-lived assets, such as property and equipment, 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.

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 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 have historically been minimal and immaterial 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 $59 and $89 for the years ended December 31, 2013 and 2012, respectively.

Research and development

Expenditures for research and development are expensed as incurred. We incurred expenses of $560 and $443 during the years ended December 31, 2013 and 2012, respectively.

Depreciation

The cost of property and equipment is depreciated on the straight-line method over the estimated economic useful lives.

Estimated useful lives are as follows

	Years
Equipment		3-10
Furniture and Fixtures		3-10
Building		7-40

Depreciation expense for the years ended December 31, 2013 and 2012 was $110 and $71, respectively.

21

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
(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. 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.

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 comprehensive income.

	Income		Shares		Per share amount
2013:
Basic EPS	$	706		3,394,208	$	0.20
Effect of dilutive stock options				102,665
Diluted EPS	$	706		3,496,873	$	0.20
2012:
Basic EPS	$	1,086		3,391,332	$	0.32
Effect of dilutive stock options				20,956
Diluted EPS	$	1,086		3,412,288	$	0.31

Stock Compensation

The Company records compensation expense for 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, 2013, the Company had two stock-based compensation plans.

22

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
(in thousands except share and per share amounts)

Note 2. Investments

The cost and estimated fair value of the investments are as follows:

	Cost		Gross unrealized gain		Gross unrealized loss			Fair value
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
December 31, 2012
Money Market Funds	$	804	$	0	$	0		$	804
Commercial Paper		200		0		0			200
Treasury Bills		5,249		0		(1	)		5,248
Equity Securities		92		3,639		(54	)		3,677
		6,345		3,639		(55	)		9,929
Less Cash Equivalents		1,004		0		0			1,004
Total Investments, December 31, 2012	$	5,341	$	3,639	$	(55	)	$	8,925

Realized gains and losses on investments are as follows:

	Years Ended December 31,
	2013		2012
Gross Realized Gains	$	530	$	794
Gross Realized Losses		0		0
Net Realized Gain	$	530	$	794

At December 31, 2013 and 2012, the Company’s significant investment in equity securities is 231,336 and 273,267, respectively, shares of Rudolph, accounted for under the available-for-sale method. As of December 31, 2013 and 2012, the aggregate value of the Company’s Rudolph shares as reported on the Nasdaq Stock Exchange was approximately $2,716 and $3,673, respectively, with an approximate cost of $30 and $36, respectively. During the years ended December 31, 2013 and 2012, the Company sold 41,931 and 70,000 shares, respectively, of Rudolph stock and reported a gain of $529 and $794, respectively, in other income.

23

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
(in thousands except share and per share amounts)

Changes in Accumulated Other Comprehensive Income

Changes in Accumulated Other Comprehensive Income are as follows:

	December 31,
	2013			2012
Unrealized Gains (Losses)
Unrealized Holding Gains (Losses) arising during the Period	$	(422	)	$	1,299
Less: reclassification of gains included in net income		(530	)		(794	)
		(952	)		505
Deferred Taxes on Unrealized Gains (Losses):
Increase in Deferred Taxes on Unrealized Gains (Losses) arising during the Period		(160	)		494
Less: Reclassification of taxes on gains included in net income		(201	)		(302	)
		(361	)		192
Net Change in Accumulated Other Comprehensive Income	$	(591	)	$	313

Note 3. Fair Value Measurements

The following table provides information on those assets measured at fair value on a recurring basis.

	Carrying amount in consolidated balance sheet December 31, 2013		Fair Value December 31, 2013
					Fair Value Measurement Using
					Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents:
Money Market Funds	$	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

	Carrying amount in consolidated balance sheet December 31, 2012
			Fair Value December 31, 2012
					Fair Value Measurement Using
					Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents:
Money Market Funds	$	804	$	804	$	804	$	0	$	0
Commercial Paper		200		200		200		0		0
Treasury Bills		5,248		5,248		5,248		0		0
Available-for-sale:
Equities:
Small Cap Technology Sector		3,677		3,677		3,677		0		0

The fair value of the money market funds, commercial paper, and treasury bills are based on quoted market prices in an active market. Available-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.

24

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
(in thousands except share and per share amounts)

Note 4. Inventories

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

	December 31,
	2013		2012
Raw Materials	$	658	$	835
Work In Process		226		283
Finished Goods		176		212
Total Inventories	$	1,060	$	1,330

Note 5. Property and Equipment

The following is a summary of property and equipment:

	December 31,
	2013		2012
Equipment	$	272	$	259
Furniture and Fixtures		388		382
Building		1,365		1,365
Land		415		415
		2,440		2,421
Less Accumulated Depreciation		1,223		1,117
Total Property and Equipment	$	1,217	$	1,304

Note 6. Accrued Expenses

Accrued expenses include the following:

	December 31,
	2013		2012
Wages and Commissions	$	195	$	147
Other		70		80
Total Accrued Expenses	$	265	$	227

25

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
(in thousands except share and per share amounts)

Note 7. Commitments

Lease commitments

The Company is leasing office equipment under an operating lease expiring in 2017.

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

Year	Amount
2014	$	8
2015		8
2016		8
2017		3
Total Minimum Lease Payments	$	27

Rental expense charged to operations was $25 and $27 for the years ended December 31, 2013 and 2012, respectively.

Note 8. Common Stock Options and Stock Purchase Plan

Stock options

The 1997 Stock Option Plan (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 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. 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, 2013, options to purchase an aggregate of 225,000 shares were outstanding and 85,000 shares were exercisable under the 2013 Plan, and 75,000 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, 2013, options to purchase an aggregate of 21,980 shares were outstanding and exercisable under the 1997 Plan, and 250 shares were available for issuance pursuant to awards that may be granted under the 1997 Plan in the future. 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.

26

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
(in thousands except share and per share amounts)

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.

The following table summarizes the activity for outstanding incentive stock options 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, 2012		11,980	$	4.16		2.6
Granted		0
Exercised		0
Canceled/forfeited/expired		0
Balance at December 31, 2012		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
Vested and exercisable as of December 31, 2013		61,980					$	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, 2013.

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.

On July 18, 2012, the Company granted each of its four outside directors options to purchase 2,500 shares of common stock. The options were granted at fair market value, vested immediately, and expire ten years from the date of the grant.

During the year ended December 31, 2012, one former outside director forfeited options to purchase 5,000 shares of common stock.

27

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
(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, 2012		5,000	$	5.36		5.3
Granted		10,000		4.15		10.0
Exercised		0
Canceled/forfeited/expired		5,000		5.36
Balance at December 31, 2012		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
Vested and exercisable as of December 31, 2013		35,000					$	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, 2013.

The Company recognized compensation expense of approximately $162 and $6 during the years ended December 31, 2013 and 2012, 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
	2013			2012
Dividend Yield		0.00	%		0.00	%
Expected Volatility		44.27-45.00	%		22.98	%
Risk Free Interest Rate		1.33-1.92	%		2.21	%
Expected Life		5.5-6 Years			5 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, 2013 and 2012.

As of December 31, 2013, there was approximately $204 of unrecognized compensation expense under the 2013 Plan. The Company expects to recognize this expense over the 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.

28

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
(in thousands except share and 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 is authorized to sell and issue up to 150,000 shares of its Common Stock to its full-time employees. During 2013 and 2012, 2,795 shares and 2,335 shares, respectively, were issued under the ESPP. At December 31, 2013, 69,161 shares were available for future issuance pursuant to the ESPP. The plan was terminated effective January 1, 2014.

Note 9. 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 these loans. The shares are maintained in a suspense account until released and allocated to participant accounts. The Plan owns 168,382 shares of the Company’s stock at December 31, 2013. 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 participant accounts. The Plan had no debt to the Company at December 31, 2013.

The Company recognized compensation expense for contributions of $18 to the ESOP plan for both 2013 and 2012.

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 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, 2013, 168,382 shares of the Company’s stock, with an aggregate fair market value of approximately $675, are held by ESOP participants who, if terminated, would have rights under the repurchase 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 which 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 approved Company contributions of $0 and $18 for the years ended December 31, 2013 and 2012, respectively.

29

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
(in thousands except share and per share amounts)

Note 10. Income Taxes

The components of the income tax provision for the years ended December 31, 2013 and 2012 are as follows:

	2013			2012
Current:
Federal	$	302		$	513
State		1			5
Deferred:
Federal		(47	)		31
State		(24	)		7
Total Federal and State Income Taxes	$	232		$	556

The provision for income taxes for the years ended December 31, 2013 and 2012 differs from the amount obtained by applying the U.S. federal income tax rate to pretax income due to the following:

	2013			2012
Computed “Expected” Federal Tax Expense	$	319		$	560
Increase (Decrease) in Taxes Resulting From:
State Income Taxes, net of Federal Benefit		9			26
Credits		(70	)		(16	)
Domestic Production Activities Deduction		(18	)		(20	)
Permanent Differences		3			6
Rate Change for Deferred Taxes		(11	)		0
Total Federal and State Income Taxes	$	232		$	556

The components of the net deferred tax liability consist of:

	2013			2012
Deferred Tax Assets:
Vacation Accrual	$	27		$	26
Allowance for Doubtful Accounts		3			4
Stock Compensation		57			0
State Carryforward R&D Credit		12			0
Total Deferred Tax Assets	$	99		$	30
Deferred Tax Liabilities:
Prepaid Expenses	$	30		$	23
Depreciation		91			100
Net Unrealized Gain on Investments		1,000			1,362
Total Deferred Tax Liabilities	$	1,121		$	1,485
Net Deferred Tax Liability	$	(1,022	)	$	(1,455	)

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 2010 through 2013. The tax years that remain open to examination by the Minnesota Department of Revenue are 2010 through 2013. We have no accrued interest or penalties related to uncertain tax positions as of January 1, 2013 or December 31, 2013 and uncertain tax positions are not significant.

30

ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
(in thousands except share and per share amounts)

Note 11. Segment Information

As of December 31, 2013, 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:

	2013		2012
Net revenues
Production Monitoring	$	6,541	$	6,498
Total		6,541		6,498
Sales in foreign countries
Production Monitoring		932		809
Total		932		809
Interest income
Production Monitoring		1		1
ESI Investment Company		4		3
Total		5		4
Depreciation expense
Production Monitoring		110		71
Total		110		71
Capital purchases
Production Monitoring		23		196
Total		23		196
Total assets
Production Monitoring		3,022		3,016
ESI Investment Company		9,587		10,322
Total		12,609		13,338
Income before income taxes
Production Monitoring		404		845
ESI Investment Company		534		797
Total	$	938	$	1,642

Note 12. Subsequent Events

During the first quarter of 2014, the Company sold 39,179 shares of Rudolph Technology stock for proceeds of $439 resulting in a gain on the sale of $434.

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 an independent third party. The Company agreed to pay $1,200 for the product line, of which $400 was paid at closing, and additional payments of $400 will be paid on each of the first and second anniversary of the closing. The seller may earn up to an additional $550 of purchase price, depending upon the achievement of revenue measures during the four calendar years following the closing.

31

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, 2013 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’s internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether the Company’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’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’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’s management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, the Company used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework (1992).” These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. The Company’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, 2013.

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 2013, 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.

32

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 Statement”) for its Annual Meeting of Shareholders to be held April 23, 2014 (“Annual Meeting”).

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by Item 10 is incorporated herein by reference to the sections entitled “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance – Code of Ethics and Business Conduct” and “Corporate Governance – Audit Committee” that appear in the Company’s Definitive Proxy Statement for its Annual Meeting. Information concerning the Company’s sole executive officer is included in the sections referred to above.

Item 11. Executive Compensation.

The information required by Item 11 is incorporated herein by reference to the section entitled “Executive Compensation” that appears in the Company’s Definitive Proxy Statement for its Annual Meeting.

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

The information required by Item 12 relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the section entitled “Security Ownership of Certain Beneficial Owners and Management” that appears in the Company’s Definitive Proxy Statement for its Annual Meeting.

The following table provides information as of December 31, 2013 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		246,980	$4.53		144,411(1)
Equity compensation plans not approved by security holders		—	—		—
Total		246,980	$4.53		144,411(1)

⁽¹⁾ Includes 250 shares issuable pursuant to the 1997 Stock Option Plan, 75,000 shares issuable pursuant to the 2013 Equity Incentive Plan and 69,161 shares issuable pursuant to the 1996 Employee Stock Purchase Plan. The 1997 Stock Option Plan was terminated in January 2014 and the remaining 250 shares were cancelled. The 1996 Employee Stock Purchase Plan was terminated effective January 1, 2014.

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

The information required by Item 13 is incorporated herein by reference to the sections entitled “Corporate Governance – Independence,” “Election of Directors” and “Transactions with Related Persons, Promoters and Certain Control Persons” that appear in the Company’s Definitive Proxy Statement for its Annual Meeting.

Item 14. Principal Accountant Fees and Services.

The information required by Item 14 relating to principal accounting fees and services 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.

33

PART IV

Item 15. Exhibits and Financial Statement Schedules.

Financial Statements.

Reference is made to the Index to Consolidated Financial Statements appearing on Page 13 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.

34

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/ DAVID L. KLENK
	David L. Klenk
	President, Chief Executive Officer, and Chief Financial Officer
Date:	March 21, 2014

By:	/s/ GLORIA M. GRUNDHOEFER
	Gloria M. Grundhoefer
	Controller
Date:	March 21, 2014

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 DAVID 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/ David L. Klenk	President and Director (CEO and CFO)	March 21, 2014
/s/ Joseph A. Marino	Chairman and Director	March 21, 2014
/s/ Scott A. Gabbard	Director	March 21, 2014
/s/ Michael C. Zipoy	Director	March 21, 2014
/s/ Jeffrey D. Peterson	Director	March 21, 2014

35

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

EXHIBIT INDEX TO FORM 10-K

For the Fiscal Year Ended
December 31, 2013 Commission File No. 000-9587

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
^*10.1	Electro-Sensors, Inc.’s 1996 Employee Stock Purchase Plan — incorporated by reference to the Company’s 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 by reference to Exhibit 10.6 to the Company’s 1997 Form 10-KSB
^*10.3	Electro-Sensors, Inc.’s 2013 Stock Incentive Plan and forms of Incentive and Nonqualified Stock Option Agreements thereunder—incorporated by reference to the Company’s Proxy Statement for the Company’s 2013 Annual Meeting of Shareholders
**10.4	Asset Purchase Agreement dated as of February 14, 2014 by and among Harvest Engineering Inc., Harvest Engineering, LLC, Stephen Meyer, Bruce Meyer, and Electro-Sensors, Inc.
21	Subsidiaries of Registrant (Name and State of Incorporation):
	ESI Investment Company—Minnesota
	Senstar Corporation—Minnesota
23.1	Consent 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 17, 2014
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, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of December 31, 2013 and 2012, (ii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2013 and 2012, (iii) Consolidated Statements of Cash Flows for years ended December 31, 2013 and 2012, (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. 000-9587
*	Management contract or compensatory plan or arrangement
**	Pursuant to Rule 24b-2 adopted under the Securities Exchange Act of 1934, the Company has deleted certain information from these Agreements, as filed, on the basis that disclosure of this information would be detrimental to the Company and is not necessary for the protection of investors. The Company has filed a request for Confidential Treatment of this information.

36

EX-10.4

Exhibit 10.4

CERTAIN INFORMATION INDICATED BY [***] HAS BEEN DELETED FROM THIS EXHIBIT AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER RULE 24B-2.

ASSET PURCHASE AGREEMENT

          THIS ASSET PURCHASE AGREEMENT (the “Agreement”) is made as of February 14, 2014 by and among HARVEST ENGINEERING INC., a Delaware corporation (“Seller”), HARVEST ENGINEERING LLC, an Illinois limited liability company (the “Harvest, LLC”), STEPHEN MEYER (“S. Meyer”), BRUCE MEYER (“B. Meyer” and, together with S. Meyer, the “Members”) and ELECTRO-SENSORS, INC., a Minnesota corporation (the “Purchaser”).

          WHEREAS, the Seller owns hazard monitoring products known as the “Insta-Link” hazard monitoring system and product family and its related technologies and Seller and Harvest LLC are or have been in the business of designing, developing, manufacturing and selling such products and technologies (the “Business”).

          WHEREAS, the Seller wishes to sell to the Purchaser, and the Purchaser wishes to purchase from the Seller, all products and associated technologies, know-how, intellectual property rights and certain other assets relating to the Business, upon the terms and subject to the conditions of this Agreement.

          WHEREAS, each of Harvest, LLC and the Members have been actively involved in and closely identified with the Business and will directly and indirectly derive substantial economic benefits from the transactions set forth in and contemplated by this Agreement.

          NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows:

ARTICLE I
PURCHASE AND SALE OF ACQUIRED ASSETS

          1.1         Purchase and Sale. Upon the terms and subject to the conditions of this Agreement, the Seller agrees to sell, assign, transfer, convey and deliver, or caused to be sold, assigned, transferred, conveyed and delivered, to the Purchaser and the Purchaser agrees to purchase, on the Closing Date (as defined in Section 2.1), all of the Seller’s right, title and interest in and to the following assets, properties and rights of the Seller free and clear of all Liens (as defined in Section 3.1(e)):

(a)          all Insta-Link products and systems (including the large, basic and micro product lines and systems) and improvements thereto (collectively, the “Products”) and wireless hazard monitoring technologies and improvements thereto (collectively, the “Technologies”); and

(b)          all existing designs, engineering drawings, specifications, schematics, bills of materials, software, release notes, creative materials, advertising and promotional materials, studies, reports, installation and operation manuals, and other documentation necessary or desirable to enable the Purchaser to develop, build, market, sell, install, support, improve and otherwise exploit the Products and the Technologies (collectively, the “Documentation”); and

(c)          all inventions, patents, trademarks, servicemarks, trade names (including all rights to the name “Insta-Link”), brand names, logos, copyrights, trade secrets, confidential information, proprietary know-how, licenses, privileges, general intangibles, technology and other intellectual property rights of whatever kind or character relating to the Products, the Technologies and the Documentation as well as all remedies against past and future infringements thereof and rights to protection of interests therein under the laws of all jurisdictions (collectively, the “Intellectual Property Rights”); and

(d)          all inventories of Products and related parts, components, accessories and supplies (collectively, the “Inventories”); and

(e)          all goodwill associated with the Products and the other assets identified in this Section 1.1 (the “Goodwill”).

37

The Products, the Technologies, the Documentation, the Intellectual Property Rights, the Inventories and the Goodwill are hereinafter sometimes referred to collectively as the “Acquired Assets”.

          1.2          Open Orders. Unless otherwise agreed in writing, the Seller and Harvest, LLC shall be entitled to fulfill any open order for Products that remains open and unfilled as of the Closing Date (the “Open Orders”); provided, however, that that Seller and Harvest, LLC shall incur, assume and remain responsible for any and all of the costs, expenses, warranties, liabilities and obligations in connection with such Open Orders.

          1.3          No Assumption of Liabilities. The Purchaser shall acquire the Acquired Assets free and clear of all Liens, obligations and liabilities. The Purchaser does not assume and will in no way become liable or responsible for any obligations and liabilities of the Seller, Harvest LLC or the Members of any kind, whether now existing or hereafter arising, known or unknown, fixed or contingent, liquidated or unliquidated (“Excluded Liabilities”), including, without limitation, any obligation or liability with respect to federal, state or local income, employment, sales, use excise or real or personal property taxes or assessments, any product liability, breach of contract or warranty claim, any claims of creditors of the Seller or the Members, or any liabilities of Seller to its members, employees, consultants, agents and affiliates. The Seller shall assume and agree to pay, perform and discharge promptly when due, and each of the Seller, Harvest LLC and the Members agrees, jointly and severally, to indemnify the Purchaser against and hold it harmless from, all claims, suits, damages, losses, obligations, liabilities and expenses (including reasonable attorneys’ fees) of whatever kind or character that may arising in connection with any of the Excluded Liabilities. The Purchaser is purchasing the Acquired Assets only and shall not be liable for any of the Seller’s, Harvest, LLC’s or the Members’ liabilities or the performance of any of the Seller’s, Harvest, LLC’s or the Members’ obligations.

ARTICLE II
PURCHASE PRICE; CLOSING

          2.1          Purchase Price. The aggregate purchase price for the Acquired Assets (the “Purchase Price”) shall be $1,200,000 (the “Aggregate Fixed Payment”), plus an amount up to the Maximum Milestone Payment Amount (as defined below), if any, as and when such amounts may be payable in accordance with the terms of this Agreement.

          2.2          Payment of Aggregate Fixed Payment. The Purchaser shall pay the Aggregate Fixed Payment to the Seller in installments in accordance with the following schedule: (a) $400,000 shall be paid at Closing; (b) $400,000 shall be paid on the first anniversary of the Closing; and (c) $400,000 shall be paid on the second anniversary of the Closing.

          2.3          Milestone Payments. The Seller may be entitled to certain payments in the event that the Purchaser achieves specified levels of Net Revenues (as hereinafter defined) from the sale of the Products during the Measurement Period (as hereinafter defined), each such payment being referred to herein as an “Milestone Payment.” In the event that the Purchaser receives Net Revenue from the sale of Products during the Measurement Period of at least [***] then the Seller shall be entitled to a Milestone Payment of [***]. In the event that the Purchaser receives Net Revenue from the sale of Products during the Measurement Period of at least [***] in total, then the Seller shall be entitled to a Milestone Payment of an additional [***]. In the event that the Purchaser receives Net Revenue from the sale of Products during the Measurement Period of at least [***] in total during the Measurement Period, the Seller shall be entitled to a Milestone Payment of an additional [***]. The maximum aggregate Milestone Payments, if any, to which the Seller may be entitled to under this Agreement shall be $550,000 (the “Maximum Milestone Payment Amount”). The term “Net Revenues” shall mean the gross amount collected by the Purchaser from its customers arising from and attributable to the sale of the Products after the deduction of an allowance for (i) any amounts repaid or credited by reason of rejections, warranties or returns; (ii) sales, use, excise or similar taxes; (iii) unreimbursed freight or shipping charges; and (iv) promotion, volume discounts or rebates actually allowed and taken.

          2.4          Measurement Period. No later than forty-five (45) days after the last day of each calendar year following the Closing Date and continuing on an annual basis for a period of four (4) calendar years following the Closing (such four (4) year calendar period being referred to as a “Measurement Period”), the Purchaser shall prepare, or cause to be prepared, and deliver to the Seller a statement (each, a “Milestone Statement”) setting forth the Purchaser’s good faith calculations of actual Net Revenues received by the Purchaser from the sale of the Products and the resulting Milestone Payment, if any, to which the Seller is entitled for the annual, calendar period for the preceding year during the Measurement Period.

          2.5          Milestone Statement Review. The Seller shall have thirty (30) days following its receipt of the Milestone Statement (the “Milestone Payment Review Period”), to review the same. If no such statement is timely delivered by the Seller to the Purchaser within the Milestone Payment Review Period or the Seller delivers a statement of no objection to the Purchaser, the Seller shall be conclusively deemed to have accepted the Milestone Statement. If, however, the Seller shall object to the Milestone Statement, such statement shall include a detailed itemization of the Seller’s objections and its reasons for such objections and the Seller and the Purchaser shall work reasonably and in good faith to resolve such objections. If the parties are not able to resolve their disagreement and objections with respect to the Milestone Statement within thirty (30) days after the Seller delivers its objection, then the issues in dispute will be submitted for resolution to an independent accounting firm (the “Independent Accountant”), which shall be jointly selected and engaged by the Seller and the Purchaser pursuant to an engagement letter in customary form which shall be executed by each of the parties. The Independent Accountant shall consider only those items and amounts in the Milestone Statement which the Seller and the Purchaser are unable to resolve and each of the parties will be afforded the opportunity to present any material relating to the determination and to discuss the determination with the Independent Accountant. The determination of the Independent Accountant will be binding and conclusive on the parties. The fees, costs and expenses of the Independent Accountant will be apportioned between the Seller and the Purchaser based upon the inverse proportion of the disputed amounts in favor of such party (i.e. so that the prevailing party bears a lesser amount of such fees, costs and expenses).

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          2.6          Payment. Each Milestone Payment, if any, will be paid by the Purchaser to the Seller by wire transfer of immediately available funds to an accounts specified by the Seller within ten (10) days of the following, as applicable: (a) the expiration of the Milestone Review Period, (b) the receipt by the Purchaser of a statement of no objection from the Seller, or (c) final determination by the Independent Accountant.

          2.7          Purchase Price Allocation. For Tax purposes, the Purchase Price (including, for purposes of this Section 2.2) shall be allocated among the Acquired Assets in accordance with Exhibit A. Each party agrees (a) to act in accordance with such allocation schedule in the preparation of financial statements and filing of all tax returns (including IRS Form 8594), (b) not to voluntarily take any position inconsistent therewith in the course of any tax contest, unless required to do so by applicable law, and (c) to provide the other promptly after request with any other information required to timely complete IRS Form 8594.

          2.8          Closing Date. The closing of the sale and transfer of the Acquired Assets (hereinafter called the “Closing”) shall take place at the offices of Lindquist & Vennum LLP located at 4200 IDS Center, 80 South Eighth Street, Minneapolis, Minnesota 55402 at 10:00 a.m. on February 14, 2014 or at such other time, date and place as shall be fixed by agreement among the parties hereto (such date of the Closing being hereinafter referred to as the “Closing Date”). The exchange of executed documents and other materials to be delivered at the Closing by facsimile or other electronic copy shall be deemed sufficient.

          2.9          Transactions to Be Effected at the Closing. At the Closing, and as a condition to the Purchaser’s and the Seller’s obligation to close:

               (a)          the Seller shall deliver to the Purchaser (i) appropriately executed bills of sale, assignments and other instruments of transfer pursuant to Section 5.2(e) relating to the Acquired Assets in form and substance satisfactory to the Purchaser, (ii) a certificate (dated not more than ten days prior to Closing) as to the good standing of Seller and Harvest, LLC in its jurisdiction of organization, (iii) a certificate of an officer of the Seller, dated as of the Closing Date, (x) attaching true and correct copies of the resolutions or consents of the board and members authorizing and approving this Agreement and the transactions contemplated hereby, (y) certifying that the representations and warranties contained in Article III are true and correct in all respects as of the date of the Closing, (iv) and such other documents as the Purchaser may reasonably request to demonstrate satisfaction of the conditions and compliance with the agreements set forth in this Agreement; and

               (b)          the Purchaser shall deliver to the Seller (i) payment of that portion of the purchase price for the Acquired Assets due at the Closing as provided in Section 1.3(a), and (ii) such other documents as the Seller and Harvest, LLC may reasonably request to demonstrate satisfaction of the conditions and compliance with the agreements set forth in this Agreement.

ARTICLE III
REPRESENTATIONS AND WARRANTIES

          3.1          Representations and Warranties of the Seller, Harvest, LLC and the Members. The Seller, Harvest, LLC and the Members, jointly and severally, hereby represent and warrant to, and agree with, the Purchaser, with the intention that the Purchaser may rely upon the same in connection with its performance of its obligations under this Agreement, that as of the date hereof and as of the Closing Date the following:

               (a)          Organization, Standing and Power. The Seller is a corporation duly organized, validly existing and in good standing under the laws of its state of formation or organization and has all requisite corporate power and authority to own the Acquired Assets and to carry on its business related thereto. Harvest LLC is a limited liability company duly organized, validly existing and in good standing under the laws of its state of formation or organization and has all requisite corporate power and authority to own the Acquired Assets and to carry on its business related thereto.

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               (b)          Authority. The Seller, Harvest, LLC and the Members each has all requisite corporate or company power and authority to execute, deliver and perform its obligations under this Agreement and to transfer title to the Acquired Assets. The execution and delivery of this Agreement and the transfer of title to the Acquired Assets have been duly authorized by all necessary corporate or company action on the part of the Seller and Harvest, LLC, including the approval of its members and board of directors or governors. This Agreement has been duly executed and delivered by the Seller, Harvest, LLC and the Members and constitutes a valid and binding obligation of the Seller, Harvest, LLC and the Members enforceable in accordance with its terms except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors’ rights generally. The execution, delivery and performance of this Agreement by the Seller, Harvest, LLC and the Members do not (i) violate any law, (ii) conflict with any provision of the certificate of organization, by-laws, operating agreement or member control agreement of the Seller, Harvest, LLC or the Members or result in the creation of any Lien (as defined in Section 3.1(e)) upon any of the Acquired Assets pursuant to any mortgage, indenture, lease, agreement or other instrument to which the Seller, Harvest, LLC or any Member is a party or by which the Seller, the Members or any of their properties is bound, (iii) result in a default (with or without notice or lapse of time or both) or give rise to a right of termination, cancellation or acceleration or to loss of a benefit under any contract, agreement, indenture or instrument to which Seller, Harvest, LLC or any Member is a party or any permit, concession, franchise or license included in the Acquired Assets or (iv) require the consent, approval, order or authorization of, or the registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign (a “Governmental Entity”) or any individual, corporation, partnership, joint venture, trust, business association or other entity (hereinafter, a “Person”, which term shall include a Governmental Entity).

               (c)          Compliance with Applicable Laws. To the best knowledge of the Seller, Harvest, LLC and the Members, the Seller and Harvest, LLC each has complied in all material respects with all laws, regulations, rules and orders of Governmental Entities applicable to the Acquired Assets (including all applicable environmental laws, rules and regulations). Neither the Seller nor Harvest, LLC has received any notice of any asserted violation of any such laws, regulations, rules or orders. No investigation or review by any Governmental Entity with respect to any of the Acquired Assets is pending or has been threatened, nor has any Governmental Entity indicated an intention to conduct the same.

               (d)          Litigation. There is no suit, action or proceeding pending, or, to the knowledge of the Seller, Harvest, LLC and the Members, threatened against, by or affecting the Seller or Harvest, LLC, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding, in each case which (i) adversely affects or could adversely affect the Acquired Assets or (ii) seeks to enjoin or prohibit any of the transactions contemplated by this Agreement.

               (e)          Title to Acquired Assets. The Seller owns good, clear and marketable title to all the Acquired Assets free and clear of all mortgages, liens, security interests, encumbrances, claims, charges, licenses, pledges, limitations or restrictions of any nature whatsoever (collectively, “Liens”). At the Closing, the Purchaser shall acquire the Acquired Assets free and clear of all Liens.

               (f)          Intellectual Property. The Seller is the sole and exclusive owner of all of the Intellectual Property Rights. From and after the Closing, the Purchaser may exercise the rights in the Intellectual Property and use the Intellectual Property in the conduct of the Business in the manner and to the extent presently conducted by the Seller and previously conducted by Harvest, LLC, without infringement of any third party intellectual property right, the requirement of any license to any third party technology, invention or intellectual property right, or any obligation to make any payment of any kind to any third party. Neither the Seller nor Harvest, LLC (i) has licensed or granted to any third party any rights under any Intellectual Property Rights; (ii) has received any notices of infringement or misappropriation by, or conflict with the rights of, any third party with respect to the Intellectual Property Rights; and (iii) has violated and is violating, infringing upon or otherwise acting adversely to any copyright, trademark, trademark rights, patent, patent rights, service mark, service name, trade name, licenses, confidential information or trade secrets owned by any third party, and there is no claim or action by any third party pending or threatened with respect thereto.

               (g)          Fair Value. The Seller, Harvest, LLC and the Members will, directly and indirectly, derive substantial economic benefit from the transactions set forth in and contemplated by the Agreement and are receiving fair and reasonably equivalent value in exchange for the sale, assignment, transfer, conveyance and delivery of the Acquired Assets and other obligations and transactions set forth in and contemplated by the Agreement.

               (h)          Solvency. None of the Seller, Harvest, LLC or the Members is insolvent. After giving effect to the consummation of the transaction contemplated by this Agreement, the Seller and Harvest, LLC each (a) shall be able to pay its debts as they become due and shall own property which has a fair saleable value greater than the amounts required to pay its debts (including a reasonable estimate of the amount of all contingent liabilities), (b) shall have adequate capital to carry on its business, and (c) no transfer of property is being made and no obligation is being incurred in connection with the transactions contemplated by this Agreement with the present intent to hinder, delay or defraud either present or future creditors of the Seller, Harvest, LLC or the Members.

               (i)          Material Facts. Neither the Seller nor Harvest, LLC or the Members has withheld from the Purchaser any material facts relating to the Acquired Assets or the Business.

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(j)          Reliance. The Seller, Harvest, LLC and the Members hereby acknowledge that the Purchaser is actually relying, and has the right to actually rely, upon all of the facts, covenants, representations and warranties contained in this Agreement or in any document or instrument delivered by the Seller, Harvest, LLC or the Members in connection with this Agreement.

          3.2          Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to, and agree with, the Seller, Harvest, LLC and the Members, with the intention that such parties may rely upon the same in connection with its or their performance of its obligations under this Agreement, that as of the date hereof and as of the Closing Date the following:

(a)          Organization, Good Standing and Power. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has all requisite corporate power and authority to execute this Agreement and to consummate the transactions contemplated hereby.

(b)          Authority. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby has been duly authorized by all necessary corporate action on the part of the Purchaser. This Agreement has been duly executed and delivered by the Purchaser and constitutes the valid and binding obligation of the Purchaser enforceable in accordance with its terms except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors’ rights generally. The execution and delivery of this Agreement by the Purchaser does not (i) violate any law, (ii) conflict with any provision of the certificate of incorporation or by-laws of the Purchaser or (iii) require the consent, approval, order or authorization of, or the registration, declaration or filing with, any Governmental Entity or other Person.

ARTICLE IV
COVENANTS

          4.1          Covenants of the Seller Relating to Conduct of Business. During the period from the date of this Agreement and continuing until the Closing, the Seller and Harvest, LLC each agrees (except as expressly provided by this Agreement or to the extent that Purchaser shall otherwise consent in writing) that:

(a)           Ordinary Course. The Seller and Harvest, LLC shall carry on the Business and operate the Acquired Assets in the usual, regular and ordinary course in substantially the same manner as heretofore and use all reasonable efforts to preserve its relationships with customers, suppliers and others having dealings with the Seller and Harvest, LLC related to the Business to the end that its goodwill and ongoing Business shall be unimpaired in all material respects at the Closing.

(b)          No Dispositions. The Seller and Harvest, LLC shall not sell, license, lease, transfer or otherwise dispose of or encumber, or agree to sell, license, lease, transfer or otherwise dispose of or encumber, any of the Acquired Assets.

(c)          No Acquisitions or Commitments. The Seller and Harvest, LLC shall not acquire any assets or enter into any contract for the acquisition of any property or service related to the Acquired Assets other than as consistent with prior practice.

(d)          Other Actions. The Seller, Harvest, LLC and the Members shall not take any action that would or might result in any of the representations and warranties of the Seller or the Members set forth in this Agreement becoming untrue or in any of the conditions of the Closing set forth in Article V not being satisfied.

           4.2         Legal Conditions to Closing. The Purchaser and the Seller will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on it with respect to the Closing and will promptly cooperate with and furnish information to each other in connection with any such legal requirements. The Purchaser and the Seller will take all reasonable actions necessary to obtain (and will cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Person, required to be obtained or made by it in connection with any of the transactions contemplated by this Agreement.

           4.3         Expenses. Whether or not the Closing takes place, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses.

           4.4         Brokers or Finders. The Purchaser, the Seller and Harvest, LLC each represent to the other party, as to itself and its affiliates, that no agent, broker, investment banker or other firm or person is or will be entitled to any broker’s or finder’s fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement and each of Purchaser and Seller respectively agrees to indemnify and hold the other harmless from and against any and all claims, liabilities or obligations with respect to any other fees, commissions, or expenses asserted by any person on the basis of any act or statement alleged to have been made by such party or its affiliate.

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           4.5         Indemnification.

               (a)          The Seller, Harvest, LLC and the Members, jointly and severally, hereby agrees to indemnify the Purchaser and its affiliates and their respective officers, directors, employees, stockholders, agents and representatives against, and agrees to hold them harmless from, any loss, liability, claim, damage or expense (including reasonable legal fees and expenses), as incurred, for or on account of or arising from or in connection with or otherwise with respect to or any breach on the part of the Seller of any representation or warranty contained in this Agreement. In addition, the Seller shall also indemnify the Purchaser and its affiliates against, and hold them harmless from, any loss, liability, claim, damage or expense (including reasonable legal fees and expenses) arising out of, or resulting from the ownership of the Acquired Assets or operation of the Business prior to the Closing Date or the Excluded Liabilities.

               (b)          The Purchaser hereby agrees to indemnify the Seller and its affiliates and their respective officers, directors, employees, stockholders, agents and representatives against, and agrees to hold them harmless from, any loss, liability, claim, damage or expense (including reasonable legal fees and expenses), as incurred, for or on account of or arising from or in connection with or otherwise with respect to any breach of any representation or warranty of the Purchaser contained in this Agreement.

               (c)          If the Purchaser shall be entitled to indemnification pursuant to this Agreement, the Purchaser shall, in addition to any other right hereunder, have the right to set-off the amount of any and all such claims against the Milestone Payment Amounts, if any, and any other amounts for which the Purchaser may be required to pay to the Seller under this Agreement.

           4.6         Additional Agreements. The Seller, Harvest, LLC and the Members will use all reasonable efforts to facilitate and effect the implementation of the transfer of the Acquired Assets to the Purchaser and, for such purpose but without limitation, the Seller and Harvest, LLC promptly will at and after the Closing Date execute and deliver to the Purchaser such assignments, deeds, bills of sale, consents and other instruments necessary to effect the transfer of the Acquired Assets to the Purchaser as contemplated hereby, as the Purchaser or its counsel may reasonably request as necessary or desirable for such purpose. If, in order properly to prepare its tax returns, other documents or reports required to be filed with Governmental Entities or its financial statements, it is necessary that the Purchaser be furnished with additional information relating exclusively to the Acquired Assets or the Seller and such information is in the Seller’s, Harvest, LLC’s or the Members’ possession, the Seller, Harvest, LLC and the Members will use all reasonable efforts to furnish such information to the Purchaser.

           4.7         Services. The Seller hereby covenants and agrees to provide certain services to the Purchaser following the Closing (the “Services”) without any additional compensation or payment, including Services set forth on and contemplated by Exhibit B, which is attached hereto and made a part hereof, that provide for (a) Product improvements; (b) training at the Purchaser’s headquarters; (c) demonstration systems for the Products; and (d) field support for the first three (3) installations of the Products. The Seller may also render certain other services to the Purchaser; provided, however, that such services would be rendered, if at all, pursuant to the terms of a separate services or independent contractor agreement containing terms that are mutually acceptable to the parties (“Services Agreement”). All inventions, concepts, creations and work product arising from the Services rendered by or on behalf of the Seller to the Purchaser, whether rendered pursuant to this Agreement or a separate Services Agreement, shall be for the exclusive benefit of the Purchaser, shall be deemed “works made for hire,” the exclusive property of the Purchaser and assigned to the Purchaser.

           4.8         Right of First Review. If at any time following the Closing and during the Measurement Period the Seller or Harvest, LLC decides to explore the possibility of selling, licensing or transferring any interest in technologies or products that it develops or acquires following the Closing, the Seller and Harvest, LLC each hereby covenants and agrees to use reasonable efforts to give written notice to the Purchaser of the same in order to provide the Purchaser with an opportunity to evaluate such technologies or products and express an interest which it may have in any such transaction before proceeding beyond a preliminary phase of discussions with any third party (the “ROFR”). It is expressly understood and agreed that neither the Seller nor Harvest, LLC has any obligation to the Purchaser under this Section 4.8 other than as expressed herein and neither party is obligated to proceed with any negotiations or transactions or accept any terms or conditions which are not fully acceptable to the parties in their sole discretion.

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           4.9         Covenant Not to Compete. Each of the Seller, Harvest, LLC and the Members hereby represents, warrants, covenants and agrees with the Purchaser that for a period of five (5) years following the Closing Date, that neither the Seller, Harvest, LLC nor any of their governors, directors, officers, shareholders, members, employees, agents, or affiliates nor any of the Members will (a) anywhere within the United States of America or throughout the world, in any manner whatsoever, own, manage, operate, control or participate in, be employed by or be connected as a consultant, independent contractor or service provider with or the ownership, management, operation, control of any business of the type that designs, manufactures, distributes or sells products that are similar in purpose to the Products or otherwise, directly or indirectly, engage in the Business, or (b) take any other action which is designed, intended or might reasonably be anticipated with respect to the Products to compete with the Purchaser or injure or diminish the goodwill associated with the Business or the Acquired Assets. Notwithstanding the restrictive covenants contained in the preceding sentence, nothing in this Agreement shall be construed to prohibit or limit in any way the Seller of the Members or any of their affiliates from investing in any class of securities of any corporation which class of securities are listed on the National Securities Exchange or registered pursuant to Section 12(g) of the Securities Exchange Act of 1934 and traded in the over-the-counter market, if Seller and its affiliates, collectively, shall beneficially own less than 5% or any class of securities of such corporation.

           4.10       Confidentiality and Use Restrictions.

                 (a)         Neither the Seller, Harvest, LLC nor any of the Members or any of their affiliates will, without the prior written consent of the Purchaser, at any time after the Closing Date (a) disclose any Confidential Information relating to any material aspect of the Business or the Acquired Assets to any person or entity (including but not limited to any the Technologies, the Documentation, the Intellectual Property Rights and other information relating to the Products or the Business not otherwise publicly available), or (b) use or exploit any such Confidential Information for its or his own benefit or for the benefit of any other person or entity other than the Purchaser.

                 (b)         In the event that the Seller or Harvest, LLC furnishes any of its Confidential Information to the Purchaser in connection with the ROFR set forth in Section 4.8, the Purchaser agrees that it will not, without the prior written consent of the Seller, at any time after the Closing Date (a) disclose any such Confidential Information to any other person or entity except to the Purchaser’s directors, officers, employees, advisors and representatives who have a need to know in order to evaluate the Confidential Information furnished by the Seller in connection with the ROFR, or (b) use or exploit any such Confidential Information for its benefit or for the benefit of any other person or entity other than to further the purposes of the ROFR or other provisions of this Agreement.

                 (c)         The term “Confidential Information” means all confidential and proprietary technical, business and other information which (i) is possessed or hereafter acquired by a party and disclosed to the other party, (ii) derives economic value from not being generally known to persons other than the disclosing party, and (iii) is the subject of efforts by the disclosing party that are reasonable under the circumstances to maintain its secrecy or confidentiality. The term shall not include any information which (a) at the time of disclosure is, or thereafter becomes, generally available to and known by the public (other than as a result of a disclosure directly or indirectly by the recipient), (b) at the time of disclosure is, or thereafter becomes, available to the recipient on a non-confidential basis from a source other than the disclosing party, provided that such source is not and was not bound by a confidentiality agreement with the disclosing party or any other legal obligation of non-disclosure, or (c) independently acquired or developed by the recipient without violating any of its obligations under this Agreement or any other agreement by, between or among the parties.

           4.11          Reasonableness. Each of the Seller, Harvest, LLC and the Members acknowledges that the provisions of Section 4.9 and Section 4.10(a) served as a material inducement to the Purchaser to enter into this Agreement and consummate the transactions contemplated hereby and that the restrictions contained herein are reasonably necessary to protect the legitimate interests of the Purchaser, are reasonable in scope and duration and are not unduly restrictive.

           4.12          Injunctive Relief. Each of the Seller, Harvest, LLC, the Members and the Purchaser acknowledges and agrees that a breach of any of the terms of Section 4.9 and Section 4.10(a) will render irreparable harm to the Purchaser, and the Purchaser acknowledges and agrees that a breach of any of the terms of Section 4.10(b) will render irreparable harm to the Seller and Harvest, LLC. Each of the Seller, Harvest, LLC, the Members and the Purchaser acknowledges and agrees that a remedy at law for a breach of such provisions is inadequate, and that the non-breaching party shall therefore be entitled to any and all equitable relief, including but not limited to, injunctive relief.

ARTICLE V
CONDITIONS PRECEDENT

           5.1          Conditions to Each Party’s Obligation. The obligations of the Purchaser to purchase the Acquired Assets and the obligation of the Seller to sell the Acquired Assets to the Purchaser shall be subject to the satisfaction prior to the Closing Date of the following conditions:

                (a)          Approvals. All authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any Governmental Entity necessary for the consummation of the transactions contemplated by this Agreement shall have been obtained or filed or shall have occurred.

                (b)          No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other legal restraint or prohibition preventing the transfer of title to the Acquired Assets shall be in effect.

           5.2          Conditions to Obligations of the Purchaser. The obligations of the Purchaser to purchase the Acquired Assets are subject to the satisfaction on and as of the Closing Date of each of the following conditions:

                (a)          Representations and Warranties. The representations and warranties of the Seller, Harvest, LLC and the Members set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date, except as otherwise contemplated by this Agreement, and Purchaser shall have received a certificate signed by a duly authorized officer of the Seller and Harvest, LLC to such effect.

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                (b)          Performance of Obligations of the Seller. The Seller and Harvest, LLC each shall have performed all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and the Purchaser shall have received a certificate signed by a duly authorized officer of the Seller and Harvest, LLC to such effect.

          5.3          Conditions to the Seller’s Obligation. The obligation of the Seller to sell the Acquired Assets is subject to the satisfaction on and as of the Closing Date of each of the following conditions:

                (a)          Representations and Warranties. The representations and warranties of the Purchaser set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date, except as otherwise contemplated by this Agreement, and the Seller shall have received a certificate signed by an officer of the Purchaser to such effect.

                (b)          Performance of Obligations of the Purchaser. The Purchaser shall have performed all obligations required to be performed by them under this Agreement prior to the Closing Date, and the Seller shall have received a certificate signed by an officer of the Purchaser to such effect.

ARTICLE VI
TERMINATION AND WAIVER

6.1	Termination. This Agreement may be terminated at any time prior to the Closing:
	(a)	by mutual consent of Purchaser and the Seller; or
	(b)	by either Purchaser or the Seller if the Closing shall not have occurred before February 14, 2014.

          6.2          Extension; Waiver. At any time prior to the Closing, the parties hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party.

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ARTICLE VII
GENERAL PROVISIONS

           7.1          Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

(a)	if to the Purchaser, to:
	Electro-Sensors, Inc. 6111 Blue Circle Drive Minnetonka, MN 55343 Attn: David L. Klenk
	with a copy to:
	Lindquist & Vennum LLP 4200 IDS Center 80 South Eighth Street Minneapolis, MN 55402 Attn: George H. Singer
(b)	if to the Seller, Harvest, LLC or the Members, to:
	Harvest Engineering Inc. 25035 W. Black Rd. Shorewood, IL 60404
	with a copy to:
	Thomas E. Carey, Esq. 3033 W. Jefferson Street, Suite 208 Joliet, IL 60435

           7.2          Interpretation. The language used in this Agreement will be deemed to be the language chosen by all of the parties hereto to express their mutual intention and no rule of strict construction will be applied against any party. When a reference is made in this Agreement to a Section, Schedule or Exhibit, such reference shall be to a Section, Schedule or Exhibit of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include”, “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation”.

           7.3          Survival of Representations. The representations, warranties, covenants and agreements contained in this Agreement and in any document delivered in connection herewith shall remain in full force and effect following the Closing.

           7.4          Counterparts. This Agreement may be executed by facsimile or in pdf and in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart.

           7.5          Entire Agreement; No Third-Party Beneficiaries. This Agreement (including the documents and instruments referred to herein) (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (b) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder.

           7.6          Governing Law; Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota (without regard to its conflicts of laws principles). Any cause of action arising out of the execution or performance of this Agreement shall be venued in a court of competent jurisdiction located in the State of Minnesota and all of the parties hereto consent to the jurisdiction of such courts and hereby waive any argument that venue in any such forum is not convenient.

           7.7          Waver of Jury Trial. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY AND ALL RIGHT TO A TRIAL BY JURY IN CONNECTION WITH ANY MATTER, CAUSE OR DISPUTE ARISING OUT THIS AGREEMENT OR THE TRANSACTIONS SET FORTH HEREIN OR CONTEMPLATED HEREBY.

45

           7.8          Publicity. So long as this Agreement is in effect until the Closing Date, and unless otherwise required by applicable law, neither the Seller nor the Purchaser shall issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement without the consent of the other party, which consent shall not be unreasonably withheld.

           7.9          Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties. This Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns.

           7.10        Amendments. No amendment, modification or waiver of this Agreement will be effective unless specifically made in writing and duly signed by the party to be bound thereby. No other course of dealing between or among any of the parties or any delay in exercising any rights pursuant to this Agreement will operate as a waiver of any rights of any party.

46

          IN WITNESS WHEREOF, the Purchaser, the Seller, Harvest, LLC and the Members have caused this Agreement to be signed by their respective representatives thereunto duly authorized, all as of the date first written above.

SELLER:
HARVEST ENGINEERING INC.
By:	/s/ Bruce Meyer
Its:
HARVEST, LLC:
HARVEST ENGINEERING LLC
By:	/s/ Bruce Meyer
Its:
MEMBERS:
BRUCE MEYER
/s/ Bruce Meyer
STEPHEN MEYER
/s/ Stephen Meyer
PURCHASER:
ELECTRO-SENSORS, INC.
By:	/s/ David Klenk
Its:	President

47

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements of Form S 8 (Nos 333-08603 and 333-48995) of Electro-Sensors, Inc. of our report dated March 21, 2014 relating to the consolidated financial statements that appears in this Annual Report on Form 10-K for the year ended December 31, 2013.

/s/ Boulay PLLP
Minneapolis, MN
March 21, 2014

48

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES OXLEY-ACT OF 2002

I, David L. Klenk, certify that:

1.	I have reviewed this report on Form 10-K of Electro-Sensors Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
		(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;
		(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
		(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
		(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
		(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
		(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 21, 2014	/s/ David L. Klenk
	David L. Klenk
	Chief Executive Officer and Chief Financial Officer

49

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Electro-Sensors, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2013 as filed with the Securities and Exchange Commission (the “Report”), I, David L. Klenk, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

March 21, 2014	/s/ David L. Klenk
	David L. Klenk
	Chief Executive Officer and Chief Financial Officer

50

EX-99.1

Exhibit 99.1

March 17, 2014

Dear Shareholders:

          Welcome and thank you for your continued interest in Electro-Sensors. As I write my first annual letter, the temperature has finally risen above freezing and the snow is beginning to melt. By all accounts, it has been a brutal winter, even by Minnesota standards. Outside Electro-Sensors’ windows wild turkeys are once again foraging for the first signs of bare ground and spring appears to be right around the corner. Change is in the air and it’s delightfully refreshing.

          Within the Company, we have also experienced an invigorating season of change. As many of you know, I joined the Electro-Sensors board of directors in June of 2013, and was then appointed president and CFO in July. At that time, former president Brad Slye transitioned into the role of product development manager for the Company. For many years, Brad has successfully balanced multiple roles and can now focus on his true passion, technology and product development. Scott Gabbard also joined the board in July, bringing tremendous leadership experience and financial expertise to both the board and audit committee.

          Throughout this dynamic period, one thing that hasn’t changed is the Company’s solid performance. After getting off to a slow start in 2013 due to lingering effects of the drought in the southern half of the country, we saw a steady improvement in the numbers throughout the second half of the year and finished 2013 with revenue of $6,541,000 – up a little less than one percent from the prior year. Gross margins remained strong at just over 57 percent, reflecting the value we bring to our customers as well as our focus on manufacturing efficiencies.

          In July of 2013, the board of directors announced a temporary suspension of the quarterly dividend in order to evaluate opportunities to deploy the Company’s capital in pursuit of profitable growth. This strategy is off to an exciting start with the February 2014 acquisition of an advanced wireless hazard monitoring product line from Harvest Engineering Inc. The addition of these cutting-edge product offerings strengthens our technology leadership position and allows us to offer our existing and new customers industry-leading ways to safeguard their manufacturing equipment, facilities, and employees. We believe this technology platform should contribute meaningfully to our revenue in 2015 and provides us with opportunities to deploy wireless monitoring solutions to multiple applications and industries.

          So what’s next for Electro-Sensors? Going forward, we will continue to look for ways to prudently grow the business while being cautious to ensure our customers receive the quality products and top-of-the-line service they have grown accustomed to when choosing Electro-Sensors. In alignment with this strategy, the board has formally suspended the dividend program while we pursue this strategy of measured growth. We will continue to assess this position and keep you informed as opportunities present themselves.

          Amidst these changes, we remain thankful for your unwavering support of Electro-Sensors. While change can be uncomfortable at times, I firmly believe we have exciting opportunities ahead of us and a great team that is capable of achieving outstanding results. And, unlike the seasons in Minnesota that seem to change somewhat randomly, we’re working to grow Electro-Sensors upon a foundation that is built to stand the test of time.

          Thank you again for your role in this great company. We hope you can join us at our annual shareholder meeting at 2:00pm on April 23, 2014, at the Sheraton Minneapolis West Hotel in Minnetonka.

Sincerely,

David Klenk

51

EX-99.2

Exhibit 99.2

INVESTOR INFORMATION

Annual Meeting

The Annual Meeting of Shareholders will be held at the Sheraton Minneapolis West, 12201 Ridgedale Drive, Minnetonka, Minnesota on April 23, 2014 at 2:00 p.m. local time. All shareholders are welcome to attend and take part in the discussion of Company affairs.

Board of Directors
David L. Klenk
President, Electro-Sensors, Inc.

Joseph A. Marino
Chairman of the Board
President/CEO, Cardia, Inc.

Scott A. Gabbard
CFO, Magenic Technologies, Inc.

Michael C. Zipoy
Investment Executive, Feltl and Company

Jeffrey D. Peterson
Private Investor

Officers
David L. Klenk
President, Chief Executive Officer and Chief Financial Officer

Transfer Agent & Registrar
American Stock Transfer & Trust Company
Corporate Trust Services
59 Maiden Lane
New York, NY 10038

Auditors
Boulay P.L.L.P.
7500 Flying Cloud Drive, Ste. 800
Minneapolis, MN 55344

Counsel
Lindquist & Vennum LLP
4200 IDS Center
80 South Eighth Street
Minneapolis, MN 55402-2274

Exchange Listing
The Nasdaq Stock Market (Capital Market)
Common Stock
Stock Trading Symbol: ELSE

52

XML

Inventories (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Inventories [Abstract]
Raw Materials	$ 658	$ 835
Work in Process	226	283
Finished Goods	176	212
Total Inventories	$ 1,060	$ 1,330

XML

Income Taxes (Schedule Of Effective Income Tax Rate Reconciliation) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Income Taxes [Abstract]
Computed "Expected" Federal Tax Expense	$ 319	$ 560
State Income Taxes, net of Federal Benefit	9	26
Credits	(70)	(16)
Domestic Production Activities Deduction	(18)	(20)
Permanent Differences	3	6
Income Tax Reconciliation Deduction Change in Deferred Tax Rate	(11)	0
Income taxes	232	556
Accrued Interest or Penalties Related to Uncertain Tax Positions	$ 0	$ 0

XML

Common Stock Options And Stock Purchase Plan (Schedule Of Stock Options Activity) (Details) (USD $)	12 Months Ended
	Dec. 31, 2013		Dec. 31, 2012	Dec. 31, 2011
Employee Stock Option [Member]
Beginning balance, Number of Shares	11,980		11,980
Granted, Number of Shares	50,000		0
Exercised, Number of Shares	0		0
Canceled/forfeited/expired, Number of Shares	0		0
Ending balance, Number of Shares	61,980		11,980	11,980
Beginning balance, Weighted-Average Exercise Price	$ 4.16		$ 4.16
Granted, Weighted-Average Exercise Price	$ 4.21
Ending balance, Weighted-Average Exercise Price	$ 4.20		$ 4.16	$ 4.16
Balance, Weighted-Average Remaining Contractual Term	9 years 8 months 18 days		1 year 7 months 6 days	2 years 7 months 6 days
Sharebased Compensation Arrangement by Sharebased Payment Award Option Granted Weighted Average Remaining Contractual Term	10 years
Vested and exercisable, Aggregate Intrinsic Value	$ 0	[1]
Number of shares vested	61,980
Director Stock Option [Member]
Beginning balance, Number of Shares	10,000		5,000
Granted, Number of Shares	175,000		10,000
Exercised, Number of Shares	0		0
Canceled/forfeited/expired, Number of Shares	0		5,000
Ending balance, Number of Shares	185,000		10,000	5,000
Beginning balance, Weighted-Average Exercise Price	$ 4.15		$ 5.36
Granted, Weighted-Average Exercise Price	$ 4.67		$ 4.15
Canceled/forfeited/expired, Weighted-Average Exercise Price			$ 5.36
Ending balance, Weighted-Average Exercise Price	$ 4.64		$ 4.15	$ 5.36
Balance, Weighted-Average Remaining Contractual Term	9 years 6 months		9 years 6 months	5 years 3 months 19 days
Sharebased Compensation Arrangement by Sharebased Payment Award Option Granted Weighted Average Remaining Contractual Term	10 years		10 years
Vested and exercisable, Aggregate Intrinsic Value	$ 0	[1]
Number of shares vested	35,000

[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, 2013.

XML

Nature Of Business And Significant Accounting Policies (Schedule Of Net Income Per Common Share) (Details) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Nature Of Business And Significant Accounting Policies [Abstract]
Net income	$ 706	$ 1,086
Basic EPS, Per share amount	$ 0.20	$ 0.32
Diluted EPS, Per share amount	$ 0.20	$ 0.31
Basic EPS, Shares	3,394,208	3,391,332
Effect of dilutive stock options	102,665	20,956
Diluted EPS, Shares	3,496,873	3,412,288

XML

Property And Equipment (Tables)

12 Months Ended

Dec. 31, 2013

Property And Equipment [Abstract]

Schedule Of Property And Equipment

	December 31,
	2013		2012
Equipment	$	272	$	259
Furniture and Fixtures		388		382
Building		1,365		1,365
Land		415		415
		2,440		2,421
Less Accumulated Depreciation		1,223		1,117
Total Property and Equipment	$	1,217	$	1,304

XML

Segment Information (Continuing Operating Segments) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013 segment	Dec. 31, 2012
Net revenues	$ 6,541	$ 6,498
Interest income	5	4
Depreciation	110	71
Purchase of property and equipment	23	196
Total assets	12,609	13,338
Income before Income Taxes	938	1,642
Number of reportable segments	2
Foreign Country Revenue [Member]
Net revenues	932	809
Production Monitoring [Member]
Net revenues	6,541	6,498
Interest income	1	1
Depreciation	110	71
Purchase of property and equipment	23	196
Total assets	3,022	3,016
Income before Income Taxes	404	845
Production Monitoring [Member] | Foreign Country Revenue [Member]
Net revenues	932	809
ESI Investment Company [Member]
Interest income	4	3
Total assets	9,587	10,322
Income before Income Taxes	$ 534	$ 797

XML

Commitments (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Commitments [Abstract]
Annual minimum lease payment Year 1	$ 8
Annual minimum lease payment Year 2	8
Annual minimum lease payment Year 3	8
Annual minimum lease payment Year 4	3
Total Minimum Lease Payments	27
Rental expense	$ 25	$ 27

XML

Investments (Schedule Of Changes In Accumulated Other Comprehensive Income) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Investments [Abstract]
Unrealized Holding Gains (Losses) arising during the Period	$ (422)	$ 1,299
Less: reclassification of gains included in net income	(530)	(794)
Total unrealized gains (losses)	(952)	505
Increase in Deferred Taxes on Unrealized Gains (Losses) arising during the Period	(160)	494
Less: Reclassification of taxes on gains included in net income	(201)	(302)
Total unrealized gains tax	(361)	192
Net increase (decrease) in accumulated other comprehensive income	$ (591)	$ 313

XML

Income Taxes (Schedule Of Components Of The Income Tax Provision) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Income Taxes [Abstract]
Current, Federal	$ 302	$ 513
Current, State	1	5
Deferred, Federal	(47)	31
Deferred, State	(24)	7
Income taxes	$ 232	$ 556

XML

Fair Value Measurements

12 Months Ended

Dec. 31, 2013

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 3. Fair Value Measurements

The following table provides information on those assets measured at fair value on a recurring basis.

	Carrying amount
	in consolidated
	balance sheet		Fair Value		Fair Value Measurement Using
	December 31, 2013		December 31, 2013		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents:
Money Market Funds	$	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
	Carrying amount
	in consolidated
	Balance Sheet		Fair Value		Fair Value Measurement Using
	December 31, 2012		December 31, 2012		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents:
Money Market Funds	$	804	$	804	$	804	$	0	$	0
Commercial Paper		200		200		200		0		0
Treasury Bills		5,248		5,248		5,248		0		0
Available-for-sale:
Equities:
Small Cap Technology Sector		3,677		3,677		3,677		0		0

The fair value of the money market funds, commercial paper, and treasury bills are based on quoted market prices in an active market. Available-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.

XML

Benefit Plans (Details) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Benefit Plans [Abstract]
Minimum hours employees required to work per year to qualify for ESOP	0 months 1000 hours
Common shares owned by ESOP	168,382
Employee Stock Ownership Plan Debt to Company	$ 0
Common shares owned by ESOP, fair market value	675
ESOP compensation expense	18	18
Board of Directors' discretionary contribution to 401(k) plan	$ 0	$ 18

XML

Common Stock Options And Stock Purchase Plan (Tables)

12 Months Ended

Dec. 31, 2013

Employee Stock Option [Member]

Schedule Of Stock Options Activity

	Options Outstanding
	Number of		Weighted-		Weighted-	Aggregate
	Shares		Average		Average	Intrinsic Value
			Exercise		Remaining	(1)
			Price		Contractual
					Term
					(in years)
Balance at January 1, 2012		11,980	$	4.16	2.6
Granted		0
Exercised		0
Canceled/forfeited/expired		0
Balance at December 31, 2012		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
Vested and exercisable as of December 31, 2013		61,980				$	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, 2013.

Director Stock Option [Member]

Schedule Of Stock Options Activity

	Options Outstanding
	Number of		Weighted-		Weighted-	Aggregate
	Shares		Average		Average	Intrinsic Value
			Exercise		Remaining	(1)
			Price		Contractual
					Term
					(in years)
Balance at January 1, 2012		5,000	$	5.36	5.3
Granted		10,000		4.15	10.0
Exercised		0
Canceled/forfeited/expired		5,000		5.36
Balance at December 31, 2012		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
Vested and exercisable as of December 31, 2013		35,000				$	0

(1) The aggregateintrinsic 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, 2013.

XML

Income Taxes (Tables)

12 Months Ended

Dec. 31, 2013

Income Taxes [Abstract]

Schedule Of Components Of The Income Tax Provision

	2013		2012
Current:
Federal	$	302	$	513
State		1		5
Deferred:
Federal		(47)		31
State		(24)		7
Total Federal and State Income Taxes	$	232	$	556

Schedule Of Effective Income Tax Rate Reconciliation

	2013		2012
Computed “Expected” Federal Tax Expense	$	319	$	560
Increase (Decrease) in Taxes Resulting From:
State Income Taxes, net of Federal Benefit		9		26
Credits		(70)		(16)
Domestic Production Activities Deduction		(18)		(20)
Permanent Differences		3		6
Rate Change for Deferred Taxes		(11)		0
Total Federal and State Income Taxes	$	232	$	556

Schedule Of Components Of The Net Deferred Tax Liability

	2013		2012
Deferred Tax Assets:
Vacation Accrual	$	27	$	26
Allowance for Doubtful Accounts		3		4
Stock Compensation		57		0
State Carryforward R&D Credit		12		0
Total Deferred Tax Assets	$	99	$	30
Deferred Tax Liabilities:
Prepaid Expenses	$	30	$	23
Depreciation		91		100
Net Unrealized Gain on Investments		1,000		1,362
Total Deferred Tax Liabilities	$	1,121	$	1,485
Net Deferred Tax Liability	$	(1,022)	$	(1,455)

XML

Stock-Based Compensation (Narrative) (Details) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Stock options fair market value	100.00%
Options expiration from date of grant	10 years
Options expiration from date of death	1 year
Unrecognized Share Based Compensation	$ 204
Number of Years To Recognize Remaining Expense	4 years
Recognized compensation expense	$ 162	$ 6
Chief Executive Officer [Member]
Granted, Number of Shares	50,000
Director [Member]
Number of individuals receiving grants	3	4
Stock Option Vesting Period	4 years
Vesting Percentage	20%
Share Based Compensation Arrangement By Share Based Payment Award Options Granted To Each Director	50,000	2,500
Forfeited shares		5,000
Number of outside directors that forfeited options to purchase common shares		1
Other Outside Director [Member]
Granted, Number of Shares	25,000
Stock Option Vesting Period	4 years
Vesting Percentage	20%
2013 Equity Incentive Plan [Member]
Number of shares vested	85,000
Maximum amount of options authorized	300,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant	75,000
Number of shares available for purchase	225,000
1997 Stock Option Plan [Member]
Number of shares vested	21,980
Maximum amount of options authorized	450,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant	250
Number of shares available for purchase	21,980
1996 Stock Purchase Plan [Member]
Stock options fair market value	85.00%
Maximum amount of options authorized	150,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant	69,161
Maximum percentage of earning employees canuse to purchase company common stock	10.00%
Shares issued under the ESPP	2,795	2,335

XML

Segment Information (Tables)

12 Months Ended

Dec. 31, 2013

Segment Information [Abstract]

Financial Information Relating To Continuing Operating Segments

	2013		2012
Net revenues
Production Monitoring	$	6,541	$	6,498
Total		6,541		6,498
Sales in foreign countries
Production Monitoring		932		809
Total		932		809
Interest income
Production Monitoring		1		1
ESI Investment Company		4		3
Total		5		4
Depreciation expense
Production Monitoring		110		71
Total		110		71
Capital purchases
Production Monitoring		23		196
Total		23		196
Total assets
Production Monitoring		3,022		3,016
ESI Investment Company		9,587		10,322
Total		12,609		13,338
Income before income taxes
Production Monitoring		404		845
ESI Investment Company		534		797
Total		938		1,642

XML

Nature Of Business And Significant Accounting Policies (Narrative) (Details) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013 ShareBasedCompensationPlan	Dec. 31, 2012
Investment In Organization [Line Items]
Advertising expense	$ 59	$ 89
Research and development expense	560	443
Depreciation	110	71
Number of stock-based employee compensation plans	2
Other-than-Temporary Impairments Recognized in the Income Statement	$ 0	$ 0
Rudolph Technologies, Inc [Member]
Investment In Organization [Line Items]
Investments owned, shares	231,336	273,267

XML

Investments

12 Months Ended

Dec. 31, 2013

Investments [Abstract]

Investments

Note 2. Investments

The cost and estimated fair value of the investments are as follows:

			Gross		Gross		Fair
			unrealized		unrealized		value
	Cost		gain		loss
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
December 31, 2012
Money Market Funds	$	804	$	0	$	0	$	804
Commercial Paper		200		0		0		200
Treasury Bills		5,249		0		(1)		5,248
Equity Securities		92		3,639		(54)		3,677
		6,345		3,639		(55)		9,929
Less Cash Equivalents		1,004		0		0		1,004
Total Investments, December 31, 2012	$	5,341	$	3,639	$	(55)	$	8,925

Realized gains and losses on investments are as follows:

	Years Ended December 31,
	2013		2012
Gross Realized Gains	$	530	$	794
Gross Realized Losses		0		0
Net Realized Gain	$	530	$	794

At December 31, 2013 and 2012, the Company’s significant investment in equity securities is 231,336 and 273,267, respectively, shares of Rudolph, accounted for under the available-for-sale method.  As of December 31, 2013 and 2012, the aggregate value of the Company’s Rudolph shares as reported on the Nasdaq Stock Exchange was approximately $2,716 and $3,673, respectively, with an approximate cost of $30 and $36, respectively.  During the years ended December 31, 2013 and 2012, the Company sold 41,931 and 70,000 shares, respectively, of Rudolph stock and reported a gain of $529 and $794, respectively, in  other income.

Changes in Accumulated Other Comprehensive Income

Changes in Accumulated Other Comprehensive Income are as follows:

	December 31,
	2013		2012
Unrealized Gains (Losses)
Unrealized Holding Gains (Losses) arising during the Period	$	(422)	$	1,299
Less: reclassification of gains included in net income		530		794
		(952)		505
Deferred Taxes on Unrealized Gains (Losses):
Increase in Deferred Taxes on Unrealized Gains (Losses) arising during the Period		(160)		494
Less: Reclassification of taxes on gains included in net income		201		302
		(361)		192
Net Change in Accumulated Other Comprehensive Income	$	(591)	$	313

XML

Nature Of Business And Significant Accounting Policies (Schedule Of Estimated Useful Lives) (Details)	12 Months Ended
	Dec. 31, 2013
Minimum [Member] | Equipment [Member]
Estimated useful lives	3 years
Minimum [Member] | Furniture And Fixtures [Member]
Estimated useful lives	3 years
Minimum [Member] | Building [Member]
Estimated useful lives	7 years
Maximum [Member] | Equipment [Member]
Estimated useful lives	10 years
Maximum [Member] | Furniture And Fixtures [Member]
Estimated useful lives	10 years
Maximum [Member] | Building [Member]
Estimated useful lives	40 years

XML

Fair Value Measurements (Fair Value Measurements On A Recurring Basis) (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents, Carrying amount	$ 1,505,000	$ 1,102,000	$ 5,476,000
Treasury bills, fair value	5,227,000	5,248,000
Available for sale Securities	7,945,000	8,925,000
Small Cap Technology Sector [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities, Carrying amount	2,718,000	3,677,000
Available for sale Securities	2,718,000	3,677,000
Small Cap Technology Sector [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale Securities	2,718,000	3,677,000
Small Cap Technology Sector [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale Securities	0	0
Small Cap Technology Sector [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale Securities	0	0
Money Market [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents, Carrying amount	540,000	804,000
Cash and cash equivalents, Fair Value	540,000	804,000
Money Market [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents, Fair Value	540,000	804,000
Money Market [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents, Fair Value	0	0
Money Market [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents, Fair Value	0	0
Commercial Paper [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents, Carrying amount	601,000	200,000
Cash and cash equivalents, Fair Value	601,000	200,000
Commercial Paper [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents, Fair Value	601,000	200,000
Commercial Paper [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents, Fair Value	0	0
Commercial Paper [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents, Fair Value	0	0
Treasury Bills [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Treasury bills, carrying value	5,227,000	5,248,000
Treasury bills, fair value	5,227,000	5,248,000
Treasury Bills [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Treasury bills, fair value	5,227,000	5,248,000
Treasury Bills [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Treasury bills, fair value	0	0
Treasury Bills [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Treasury bills, fair value	$ 0	$ 0

XML

Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Current Assets
Cash and cash equivalents	$ 1,505	$ 1,102
Treasury bills	5,227	5,248
Available-for-sale securities	2,718	3,677
Trade receivables, less allowance for doubtful accounts of $8 and $10, respectively	746	602
Inventories	1,060	1,330
Income tax receivable	1	0
Other current assets	135	75
Total current assets	11,392	12,034
Property and equipment, net	1,217	1,304
Total assets	12,609	13,338
Current Liabilities
Accounts payable current	59	94
Accrued expenses current	265	227
Accrued income tax	0	313
Total current liabilities	324	634
Deferred income tax liability	1,022	1,455
Commitments and contingencies
Stockholders' equity
Common stock par value $0.10 per share; authorized 10,000,000 shares; issued and outstanding: 3,394,707 and 3,391,912 shares, respectively	339	339
Additional paid-in capital	1,746	1,575
Retained earnings	7,547	7,113
Accumulated other comprehensive income (unrealized gain on available-for-sale securities, net of income tax)	1,631	2,222
Total stockholders' equity	11,263	11,249
Total liabilities and stockholders' equity	$ 12,609	$ 13,338

XML

Stock Based Compensation (Valuation Assumptions) (Details)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Dividend Rate	0.00%	0.00%
Volatility Rate		22.98%
Risk Free Interest Rate		2.21%
Expected Life		5 years
Minimum [Member]
Volatility Rate	44.27%
Risk Free Interest Rate	1.33%
Expected Life	5 years 6 months
Maximum [Member]
Volatility Rate	45.00%
Risk Free Interest Rate	1.92%
Expected Life	6 years

XML

Consolidated Statements Of Changes In Stockholders' Equity (USD $) In Thousands, except Share data	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Total
Beginning Balance at Dec. 31, 2011	$ 339	$ 1,561	$ 6,570	$ 1,909	$ 10,379
Beginning Balance, Shares at Dec. 31, 2011	3,389,577
Unrealized gains (loss) on available-for-sale securities, net of tax				313	313
Stock issued through the employee stock purchase plan	0	8			8
Stock issued through the employee stock purchase plan, shares	2,335
Stock option compensation expense		6			6
Dividend on common stock			(543)		(543)
Net income			1,086		1,086
Ending Balance at Dec. 31, 2012	339	1,575	7,113	2,222	11,249
Ending Balance, Shares at Dec. 31, 2012	3,391,912
Unrealized gains (loss) on available-for-sale securities, net of tax				(591)	(591)
Stock issued through the employee stock purchase plan	0	9			9
Stock issued through the employee stock purchase plan, shares	2,795
Stock option compensation expense		162			162
Dividend on common stock			(272)		(272)
Net income			706		706
Ending Balance at Dec. 31, 2013	$ 339	$ 1,746	$ 7,547	$ 1,631	$ 11,263
Ending Balance, Shares at Dec. 31, 2013	3,394,707

XML

Investments (Cost And Estimated Fair Value Of Investments) (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Cost	$ 5,312,000	$ 5,341,000
Gross unrealized gain	2,687,000	3,639,000
Gross unrealized loss	54,000	55,000
Fair value, investments	7,945,000	8,925,000
Less cash equivalents, Carrying amount	1,505,000	1,102,000	5,476,000
Money Market [Member]
Schedule of Available-for-sale Securities [Line Items]
Cost	540,000	804,000
Gross unrealized gain	0	0
Gross unrealized loss	0	0
Fair value, investments	540,000	804,000
Commercial Paper [Member]
Schedule of Available-for-sale Securities [Line Items]
Cost	601,000	200,000
Gross unrealized gain	0	0
Gross unrealized loss	0	0
Fair value, investments	601,000	200,000
Treasury Bills [Member]
Schedule of Available-for-sale Securities [Line Items]
Cost	5,226,000	5,249,000
Gross unrealized gain	1,000	0
Gross unrealized loss	0	1,000
Fair value, investments	5,227,000	5,248,000
Equity Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Cost	86,000	92,000
Gross unrealized gain	2,686,000	3,639,000
Gross unrealized loss	54,000	54,000
Fair value, investments	2,718,000	3,677,000
Debt and Equity Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Cost	6,453,000	6,345,000
Gross unrealized gain	2,687,000	3,639,000
Gross unrealized loss	54,000	55,000
Fair value, investments	9,086,000	9,929,000
Less Cash Equivalents [Member]
Schedule of Available-for-sale Securities [Line Items]
Gross unrealized gain	0	0
Gross unrealized loss	0	0
Less cash equivalents, Carrying amount	1,141,000	1,004,000
Less cash equivalents, Fair value	$ 1,141,000	$ 1,004,000

XML

Accrued Expenses (Tables)

12 Months Ended

Dec. 31, 2013

Accrued Expenses [Abstract]

Schedule Of Accrued Expenses

	December 31,
	2013		2012
Wages and Commissions	$	195	$	147
Other		70		80
Total Accrued Expenses	$	265	$	227

XML

Investments (Schedule Of Realized Gains And Losses On Investments) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Investments [Abstract]
Gross Realized Gains	$ 530	$ 794
Gross Realized Losses	0	0
Net Realized Gain	$ 530	$ 794

XML

Fair Value Measurements (Tables)

12 Months Ended

Dec. 31, 2013

Fair Value Measurements [Abstract]

Fair Value Measurements On A Recurring Basis

	Carrying amount
	in consolidated
	balance sheet		Fair Value		Fair Value Measurement Using
	December 31, 2013		December 31, 2013		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents:
Money Market Funds	$	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
	Carrying amount
	in consolidated
	Balance Sheet		Fair Value		Fair Value Measurement Using
	December 31, 2012		December 31, 2012		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents:
Money Market Funds	$	804	$	804	$	804	$	0	$	0
Commercial Paper		200		200		200		0		0
Treasury Bills		5,248		5,248		5,248		0		0
Available-for-sale:
Equities:
Small Cap Technology Sector		3,677		3,677		3,677		0		0

XML

Nature Of Business And Significant Accounting Policies

12 Months Ended

Dec. 31, 2013

Nature Of Business And Significant Accounting Policies [Abstract]

Basis Of Presentation

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”.

Electro-Sensors, Inc. manufactures and markets a complete line of speed monitoring and motor control systems for industrial machinery. The Company uses 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 in a wide variety of manufacturers, OEMs and processors to monitor process machinery operations. The Company markets its products to a number of different industries located throughout the United States, Canada, Latin America, Europe, and Asia.

In addition, through its subsidiary ESI Investment Company, the Company has in the past made strategic investments in other businesses and companies, primarily when the Company believes that such 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, ESI does not intend to become an investment company and intends to remain primarily an operating company. The Company’s primary investment is 231,336 shares of Rudolph Technologies, Inc. (“Rudolph”) which is accounted for using the available-for-sale method.See Note 2 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, 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, realizability of accounts receivable, valuation of deferred tax assets/liabilities, inventory, investments, 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 these accounts. The Company believes it is not exposed to any significant credit risk on cash.

Trade receivables and credit policies

Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date.  Accounts 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.

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

The carrying amount of accounts receivable 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 accounts 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 may not be collected.  Management uses this information to estimate the allowance.

Available-for-sale securities

The Company’s investments consist of equity securities, primarily common stocks and government debt securities.  The estimated fair value of publicly traded equity securities is based on reported 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 this 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. 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 in income 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.  There were no other-than-temporary impairments in the years ended December 31, 2013 and 2012.

Fair 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’s 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 equivalents, treasury bills, commercial paper, money market funds, trade receivables, accounts payable, and other financial working capital items approximate fair value at December 31, 2013 and 2012 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.

Property and equipment

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

Long-lived assets, such as property and equipment, 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.

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 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 have historically been minimal and immaterial 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 $59 and $89 for the years ended December 31, 2013 and 2012, respectively.

Research and development

Expenditures for research and development are expensed as incurred.  We incurred expenses of $560 and $443 during the years ended December 31, 2013 and 2012, respectively.

Depreciation

The cost of property and equipment is depreciated on the straight-line method over the estimated economic useful lives.

Estimated useful lives are as follows

	Years
Equipment	3-10
Furniture and Fixtures	3-10
Building	7-40

Depreciation expense for the years ended December 31, 2013 and 2012 was $110 and $71, respectively.

Income taxes

Deferred income taxes are provided on an asset and liability approach to financial accounting and reporting for income taxes. The difference between the financial statement and tax bases of assets and liabilities is determined annually. Deferred income tax assets and liabilities are computed for those differences that have future tax consequences using the currently enacted tax laws and rates that apply to the periods in which they are expected to affect taxable income. Income tax expense is the current tax payable or refundable for the period plus or minus the net change in the deferred tax assets and liabilities, 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.  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.

Net income per common share

Basic 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 comprehensive income.

	Income		Shares		Per share amount
2013:
Basic EPS	$	706		3,394,208	$	0.20
Effect of dilutive stock options				102,665
Diluted EPS	$	706		3,496,873	$	0.20
2012:
Basic EPS	$	1,086		3,391,332	$	0.32
Effect of dilutive stock options				20,956
Diluted EPS	$	1,086		3,412,288	$	0.31

Stock Compensation

The Company records compensation expense for 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, 2013, the Company had two stock-based employee compensation plans.

XML

Consolidated Balance Sheet (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Condensed Consolidated Balance Sheets [Abstract]
Trade receivables, allowance for doubtful accounts	$ 8	$ 10
Common stock, par value	$ 0.10	$ 0.10
Common stock, shares authorized	10,000,000	10,000,000
Common stock, shares issued	3,394,707	3,391,912
Common stock, shares outstanding	3,394,707	3,391,912

XML

Segment Information

12 Months Ended

Dec. 31, 2013

Segment Information [Abstract]

Segment Information

Note 11. Segment Information

As of December 31, 2013, 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:

	2013		2012
Net revenues
Production Monitoring	$	6,541	$	6,498
Total		6,541		6,498
Sales in foreign countries
Production Monitoring		932		809
Total		932		809
Interest income
Production Monitoring		1		1
ESI Investment Company		4		3
Total		5		4
Depreciation expense
Production Monitoring		110		71
Total		110		71
Capital purchases
Production Monitoring		23		196
Total		23		196
Total assets
Production Monitoring		3,022		3,016
ESI Investment Company		9,587		10,322
Total		12,609		13,338
Income before income taxes
Production Monitoring		404		845
ESI Investment Company		534		797
Total		938		1,642

XML

Document And Entity Information (USD $)	12 Months Ended
	Dec. 31, 2013	Mar. 19, 2014	Jun. 30, 2013
Document And Entity Information [Abstract]
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	FY
Entity Filer Category	Smaller Reporting Company
Entity Registrant Name	ELECTRO SENSORS INC
Entity Central Index Key	0000351789
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Common Stock, Shares Outstanding		3,395,521
Entity Public Float			$ 5,200,000
Trading Symbol	ELSE

XML

Subsequent Events

12 Months Ended

Dec. 31, 2013

Subsequent Events [Abstract]

Subsequent Events

Note 12.  Subsequent Events

During the first quarter of 2014, the Company sold 39,179 shares of Rudolph Technology stock for proceeds of $439 resulting in a gain on the sale of $434.

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 an independent third party.  The Company agreed to pay $1,200 for the product line, of which $400 was paid at closing, and additional payments of $400 will be paid on each of the first and second anniversary of the closing.  The seller may earn up to an additional $550 of purchase price, depending upon the achievement of revenue measures during the four calendar years following the closing.

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Consolidated Statements Of Comprehensive Income (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Consolidated Statements Of Operations And Comprehensive Income [Abstract]
Net sales	$ 6,541	$ 6,498
Cost of goods sold	2,798	2,858
Gross profit	3,743	3,640
Operating expenses:
Selling and marketing	1,442	1,344
General and administrative	1,352	1,022
Research and development	560	443
Total operating expenses	3,354	2,809
Operating income	389	831
Non-operating income:
Gain on sale of available-for-sale securities	530	794
Interest income	5	4
Other income	14	13
Total non-operating income	549	811
Income before income taxes	938	1,642
Income taxes	232	556
Net income	706	1,086
Other comprehensive income:
Change in unrealized value of available-for-sale securities, net of income tax	(262)	805
Reclassification of gains included in net income, net of income tax	(329)	(492)
Net increase (decrease) in accumulated other comprehensive income	(591)	313
Total comprehensive income	$ 115	$ 1,399
Basic
Net income per share	$ 0.20	$ 0.32
Weighted average shares	3,394,208	3,391,332
Diluted
Net income per share	$ 0.20	$ 0.31
Weighted average shares	3,496,873	3,412,288
Dividends paid per common share	$ 0.08	$ 0.16

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Accrued Expenses

12 Months Ended

Dec. 31, 2013

Accrued Expenses [Abstract]

Accrued Expenses

Note 6. Accrued Expenses

Accrued expenses include the following:

	December 31,
	2013		2012
Wages and Commissions	$	195	$	147
Other		70		80
Total Accrued Expenses	$	265	$	227

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Property And Equipment

12 Months Ended

Dec. 31, 2013

Property And Equipment [Abstract]

Property And Equipment

Note 5. Property and Equipment

The  following is a summary of property and equipment:

	December 31,
	2013		2012
Equipment	$	272	$	259
Furniture and Fixtures		388		382
Building		1,365		1,365
Land		415		415
		2,440		2,421
Less Accumulated Depreciation		1,223		1,117
Total Property and Equipment	$	1,217	$	1,304

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Inventories (Tables)

12 Months Ended

Dec. 31, 2013

Inventories [Abstract]

Schedule Of Inventories

	December 31,
	2013		2012
Raw Materials	$	658	$	835
Work In Process		226		283
Finished Goods		176		212
Total Inventories	$	1,060	$	1,330

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Basis Of Presentation (Policy)

12 Months Ended

Dec. 31, 2013

Nature Of Business And Significant Accounting Policies [Abstract]

Revenue Recognition

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 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 have historically been minimal and immaterial 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. 

Available For Sale Securities

Available-for-sale securities

The Company’s investments consist of equity securities, primarily common stocks and government debt securities.  The estimated fair value of publicly traded equity securities is based on reported 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 this 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. 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 in income 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.  There were no other-than-temporary impairments in the years ended December 31, 2013 and 2012.

Fair Value Measurements

Fair 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’s 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 equivalents, treasury bills, commercial paper, money market funds, trade receivables, accounts payable, and other financial working capital items approximate fair value at December 31, 2013 and 2012 due to the short term maturity nature of these instruments.

Income Taxes

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.  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.

Use Of Estimates

Use of estimates

The preparation of the consolidated financial statements, in accordance with accounting principles generally accepted in the United States of America, 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, realizability of accounts receivable, valuation of deferred tax assets/liabilities, inventory, investments, and stock compensation expense. It is at least reasonably possible that these estimates may change in the near term.

Cash And Cash Equivalents

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 these accounts. The Company believes it is not exposed to any significant credit risk on cash.

Trade Receivables And Credit Policies

Trade receivables and credit policies

Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date.  Accounts 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.

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

The carrying amount of accounts receivable 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 accounts 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 may not be collected.  Management uses this information to estimate the allowance.

Inventories

Inventories

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

Property And Equipment

Property and equipment

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

Long-lived assets, such as property and equipment, 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.

Advertising Costs

Advertising costs

The Company expenses advertising costs as incurred. Total advertising expense was $59 and $89 for the years ended December 31, 2013 and 2012, respectively.

Research And Development

Research and development

Expenditures for research and development are expensed as incurred.  We incurred expenses of $560 and $443 during the years ended December 31, 2013 and 2012, respectively.

Depreciation

Depreciation

The cost of property and equipment is depreciated on the straight-line method over the estimated economic useful lives.

Estimated useful lives are as follows

	Years
Equipment	3-10
Furniture and Fixtures	3-10
Building	7-40

Depreciation expense for the years ended December 31, 2013 and 2012 was $110 and $71, respectively.

Net Income Per Common Share

Net income per common share

Basic 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 comprehensive income.

	Income		Shares		Per share amount
2013:
Basic EPS	$	706		3,394,208	$	0.20
Effect of dilutive stock options				102,665
Diluted EPS	$	706		3,496,873	$	0.20
2012:
Basic EPS	$	1,086		3,391,332	$	0.32
Effect of dilutive stock options				20,956
Diluted EPS	$	1,086		3,412,288	$	0.31

Stock Based Compensation

Stock Compensation

The Company records compensation expense for 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, 2013, the Company had two stock-based employee compensation plans.

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Benefit Plans

12 Months Ended

Dec. 31, 2013

Benefit Plans [Abstract]

Benefit Plans

Note 9. 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 these loans. The shares are maintained in a suspense account until released and allocated to participant accounts. The Plan owns 168,382 shares of the Company’s stock at December 31, 2013. 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, 2013.

The Company recognized compensation expense for contributions of $18 to the ESOP plan for both 2013 and 2012.

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, 2013, 168,382 shares of the Company’s stock, with an aggregate fair market value of approximately $675, are held by ESOP participants who, if terminated, would have rights under the repurchase 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 which 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 approved Company contributions of $0 and $18 for the years ended December 31, 2013 and 2012, respectively.

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Commitments

12 Months Ended

Dec. 31, 2013

Commitments [Abstract]

Commitments

Note 7. Commitments

Lease commitments

The Company is leasing office equipment under an operating lease expiring in 2017.

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

Year	Amount
2014	$	8
2015		8
2016		8
2017		3
Total Minimum Lease Payments	$	27

Rental expense charged to operations was $25 and $27 for the years ended December 31, 2013 and 2012, respectively.

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Stock-Based Compensation

12 Months Ended

Dec. 31, 2013

Stock-Based Compensation [Abstract]

Stock-Based Compensation

Note 8. Common Stock Options and Stock Purchase Plan

Stock options

The 1997 Stock Option Plan (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 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. 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, 2013, options to purchase an aggregate of 225,000 shares were outstanding and 85,000 shares were exercisable under the 2013 Plan, and 75,000 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, 2013, options to purchase an aggregate of 21,980 shares were outstanding and exercisable under the 1997 Plan, and 250 shares were available for issuance pursuant to awards that may be granted under the 1997 Plan in the future.  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.

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

	Options Outstanding
	Number of		Weighted-		Weighted-	Aggregate
	Shares		Average		Average	Intrinsic Value
			Exercise		Remaining	(1)
			Price		Contractual
					Term
					(in years)
Balance at January 1, 2012		11,980	$	4.16	2.6
Granted		0
Exercised		0
Canceled/forfeited/expired		0
Balance at December 31, 2012		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
Vested and exercisable as of December 31, 2013		61,980				$	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, 2013.

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.

On July 18, 2012, the Company granted each of its four outside directors options to purchase 2,500 shares of common stock.  The options were granted at fair market value, vested immediately, and expire ten years from the date of the grant.

During the year ended December 31, 2012, one former outside director forfeited options to purchase 5,000 shares of common stock.

The following table summarizes the activity for outstanding director stock options:

	Options Outstanding
	Number of		Weighted-		Weighted-	Aggregate
	Shares		Average		Average	Intrinsic Value
			Exercise		Remaining	(1)
			Price		Contractual
					Term
					(in years)
Balance at January 1, 2012		5,000	$	5.36	5.3
Granted		10,000		4.15	10.0
Exercised		0
Canceled/forfeited/expired		5,000		5.36
Balance at December 31, 2012		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
Vested and exercisable as of December 31, 2013		35,000				$	0

(1) The aggregateintrinsic 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, 2013.

The Company recognized compensation expense of approximately $162 and $6during the years ended December 31, 2013 and 2012, 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,

	2013	2012
Dividend yield	0.00%	0.00%
Expected volatility	44.27-45.00%	22.98%
Risk free interest rate	1.33-1.92%	2.21%
Expected life	5.5-6 Years	5 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, 2013 and 2012.

As of December 31, 2013, there was approximately $204 of unrecognized compensation expense under the 2013 Plan. The Company  expects to recognize this expense over the 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 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 is authorized to sell and issue up to 150,000 shares of its Common Stock to its full-time employees. During 2013 and 2012, 2,795 shares and 2,335 shares, respectively, were issued under the ESPP. At December 31, 2013, 69,161 shares were available for future issuance pursuant to the ESPP.  The plan was terminated effective January 1, 2014.

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Income Taxes

12 Months Ended

Dec. 31, 2013

Income Taxes [Abstract]

Income Taxes

Note 10. Income Taxes

The components of the income tax provision for the years ended December 31, 2013 and 2012 are as follows:

	2013		2012
Current:
Federal	$	302	$	513
State		1		5
Deferred:
Federal		(47)		31
State		(24)		7
Total Federal and State Income Taxes	$	232	$	556

The provision for income taxes for the years ended December 31, 2013 and 2012 differs from the amount obtained by applying the U.S. federal income tax rate to pretax income due to the following:

	2013		2012
Computed “Expected” Federal Tax Expense	$	319	$	560
Increase (Decrease) in Taxes Resulting From:
State Income Taxes, net of Federal Benefit		9		26
Credits		(70)		(16)
Domestic Production Activities Deduction		(18)		(20)
Permanent Differences		3		6
Rate Change for Deferred Taxes		(11)		0
Total Federal and State Income Taxes	$	232	$	556

The components of the net deferred tax liability consist of:

	2013		2012
Deferred Tax Assets:
Vacation Accrual	$	27	$	26
Allowance for Doubtful Accounts		3		4
Stock Compensation		57		0
State Carryforward R&D Credit		12		0
Total Deferred Tax Assets	$	99	$	30
Deferred Tax Liabilities:
Prepaid Expenses	$	30	$	23
Depreciation		91		100
Net Unrealized Gain on Investments		1,000		1,362
Total Deferred Tax Liabilities	$	1,121	$	1,485
Net Deferred Tax Liability	$	(1,022)	$	(1,455)

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 2010 through 2013. The tax years that remain open to examination by the Minnesota Department of Revenue are 2010 through 2013. We have no accrued interest or penalties related to uncertain taxpositions as of January 1, 2013 or December 31, 2013 and uncertain tax positions are not significant..

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Investments (Narrative) (Details) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Investment In Organization [Line Items]
Gain on sale of available-for-sale securities	$ 530	$ 794
Rudolph Technologies, Inc [Member]
Investment In Organization [Line Items]
Investments owned, shares	231,336	273,267
Aggregate value of shares	2,716	3,673
Approximate cost	30	36
Available-for-sale shares sold	41,931	70,000
Gain on sale of available-for-sale securities	$ 529	$ 794

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Subsequent Events (Details) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended		1 Months Ended				12 Months Ended		3 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Feb. 18, 2014 Subsequent Event [Member]	Feb. 18, 2014 Paid At Closing [Member] Subsequent Event [Member]	Feb. 18, 2014 Paid On First Anniversary [Member] Subsequent Event [Member]	Feb. 18, 2014 Paid On Second Anniversary [Member] Subsequent Event [Member]	Dec. 31, 2013 Rudolph Technologies, Inc [Member]	Dec. 31, 2012 Rudolph Technologies, Inc [Member]	Mar. 14, 2014 Rudolph Technologies, Inc [Member] Subsequent Event [Member]
Subsequent Event [Line Items]
Available-for-sale shares sold							41,931	70,000	39,179
Proceeds from Sale and Maturity of Available-for-sale Securities	$ 536	$ 874							$ 439
Gain on sale of available-for-sale securities	530	794					529	794	434
Payments for acquisition			1,200	400	400	400
Potential contingent consideration			$ 550

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Investments (Tables)

12 Months Ended

Dec. 31, 2013

Investments [Abstract]

Cost And Estimated Fair Value Of Investments

			Gross		Gross		Fair
			unrealized		unrealized		value
	Cost		gain		loss
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
December 31, 2012
Money Market Funds	$	804	$	0	$	0	$	804
Commercial Paper		200		0		0		200
Treasury Bills		5,249		0		(1)		5,248
Equity Securities		92		3,639		(54)		3,677
		6,345		3,639		(55)		9,929
Less Cash Equivalents		1,004		0		0		1,004
Total Investments, December 31, 2012	$	5,341	$	3,639	$	(55)	$	8,925

Schedule Of Realized Gains And Losses On Investments

	Years Ended December 31,
	2013		2012
Gross Realized Gains	$	530	$	794
Gross Realized Losses		0		0
Net Realized Gain	$	530	$	794

Schedule Of Changes In Accumulated Other Comprehensive Income

	December 31,
	2013		2012
Unrealized Gains (Losses)
Unrealized Holding Gains (Losses) arising during the Period	$	(422)	$	1,299
Less: reclassification of gains included in net income		530		794
		(952)		505
Deferred Taxes on Unrealized Gains (Losses):
Increase in Deferred Taxes on Unrealized Gains (Losses) arising during the Period		(160)		494
Less: Reclassification of taxes on gains included in net income		201		302
		(361)		192
Net Change in Accumulated Other Comprehensive Income	$	(591)	$	313

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Commitments (Tables)

12 Months Ended

Dec. 31, 2013

Commitments [Abstract]

Schedule Of Minimum Lease Payments

Year	Amount
2014	$	8
2015		8
2016		8
2017		3
Total Minimum Lease Payments	$	27

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Income Taxes (Schedule Of Components Of The Net Deferred Tax Liability) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Income Taxes [Abstract]
Vacation Disallowance	$ 27	$ 26
Allowance for Doubtful Accounts	3	4
State Carryforward R&D Credit	12	0
Stock Compensation	57	0
Total Deferred Tax Assets	99	30
Prepaid Expenses	30	23
Depreciation	91	100
Net Unrealized Gain on Investments	1,000	1,362
Total Deferred Tax Liabilities	1,121	1,485
Net Deferred Tax Liability	$ (1,022)	$ (1,455)

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Property And Equipment (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Property, Plant and Equipment [Line Items]
Property and Equipment, Gross	$ 2,440	$ 2,421
Less Accumulated Depreciation	1,223	1,117
Total Property and Equipment	1,217	1,304
Equipment [Member]
Property, Plant and Equipment [Line Items]
Property and Equipment, Gross	272	259
Furniture And Fixtures [Member]
Property, Plant and Equipment [Line Items]
Property and Equipment, Gross	388	382
Building [Member]
Property, Plant and Equipment [Line Items]
Property and Equipment, Gross	1,365	1,365
Land [Member]
Property, Plant and Equipment [Line Items]
Property and Equipment, Gross	$ 415	$ 415

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Consolidated Statements Of Cash Flows (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Cash flows from (used in) operating activities
Net income	$ 706	$ 1,086
Adjustments to reconcile net income to net cash from operating activities:
Depreciation	110	71
Realized gain on sale of available-for-sale securities	(530)	(794)
Deferred income taxes	(71)	38
Interest accrued on investments	(5)	1
Stock compensation expense	162	6
Change in allowance for doubtful accounts	(2)	1
Changes in:
Trade receivables	(142)	57
Inventories	270	(102)
Current assets, other	(60)	41
Accounts payable	(35)	(16)
Accrued expenses	38	13
Accrued income taxes	(314)	330
Net cash from operating activities	127	732
Cash flows from (used in) investing activities
Proceeds from sale of available-for-sale securities	536	874
Purchase of treasury bills	(6,425)	(5,249)
Proceeds from the maturity of treasury bills	6,451	0
Purchase of property and equipment	(23)	(196)
Net cash from (used in) investing activities	539	(4,571)
Cash flows from (used in) financing activities
Proceeds from issuance of common stock	9	8
Dividends paid	(272)	(543)
Net cash used in financing activities	(263)	(535)
Net increase (decrease) in cash and cash equivalents	403	(4,374)
Cash and cash equivalents, beginning	1,102	5,476
Cash and cash equivalents, ending	1,505	1,102
Supplemental cash flow information
Cash paid during the year for income taxes	$ 617	$ 207

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Inventories

12 Months Ended

Dec. 31, 2013

Inventories [Abstract]

Inventories

Note 4. Inventories

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

	December 31,
	2013		2012
Raw Materials	$	658	$	835
Work In Process		226		283
Finished Goods		176		212
Total Inventories	$	1,060	$	1,330

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Stock-Based Compensation (Tables)

12 Months Ended

Dec. 31, 2013

Stock-Based Compensation (Valuation Assumption) [Abstract]

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

Year Ended December 31,

	2013	2012
Dividend yield	0.00%	0.00%
Expected volatility	44.27-45.00%	22.98%
Risk free interest rate	1.33-1.92%	2.21%
Expected life	5.5-6 Years	5 Years

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Accrued Expenses (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Accrued Expenses [Abstract]
Wages and Commissions	$ 195	$ 147
Other	70	80
Total Accrued Expenses	$ 265	$ 227

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Basis Of Presentation (Tables)

12 Months Ended

Dec. 31, 2013

Nature Of Business And Significant Accounting Policies [Abstract]

Schedule Of Estimated Useful Lives

	Years
Equipment	3-10
Furniture and Fixtures	3-10
Building	7-40

Schedule Of Net Income Per Common Share

	Income		Shares		Per share amount
2013:
Basic EPS	$	706		3,394,208	$	0.20
Effect of dilutive stock options				102,665
Diluted EPS	$	706		3,496,873	$	0.20
2012:
Basic EPS	$	1,086		3,391,332	$	0.32
Effect of dilutive stock options				20,956
Diluted EPS	$	1,086		3,412,288	$	0.31