UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________________
Commission file number 0-10355
COMMUNICATIONS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0957999
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
213 South Main, Hector, MN 55342
..............................................................................
(Address of principle executive offices) (Zip Code)
(612) 848-6231
..............................................................................
(Registrant's telephone number, including zip code)
..............................................................................
(Former name, former address, and former fiscal year,
if changed since last report)
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 ....
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes..... No .....
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.
Class Outstanding at April 30, 1995
- ------------------------ -----------------------
Common Stock, par value 9,035,715
$.05 per share
Total Pages (10) Exhibit Index at (NO Exhibits)
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page No.
---------
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information 10
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Item 1. Financial Statements
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(unaudited)
<S> <C> <C>
March 31 December 31
Assets: 1995 1994
------- ----
Current assets:
Cash $7,550,907 $8,829,776
Marketable securities 946,882 890,424
Receivables, net 14,377,935 12,535,306
Inventories - Note 2 16,050,353 16,190,879
Prepaid expenses 435,259 492,554
Deferred income taxes 1,108,000 1,108,000
---------- ---------
Total current assets 40,469,336 40,046,939
Property, plant and equipment 24,157,402 22,977,540
less accumulated depreciation (13,332,171) (12,707,397)
------------ ------------
Net property, plant and equipment 10,825,231 10,270,143
Assets of businesses transferred under
contractual arrangements (notes receivable) 527,498 592,838
Other assets:
Investments in mortgage backed and other securities 5,295,420 5,300,841
Excess of cost over net assets acquired 764,970 785,364
Deferred income taxes 376,047 376,047
Other assets 429,738 380,825
-------- -------
Total other assets 6,866,175 6,843,077
---------- ---------
Total Assets $58,688,240 $57,752,997
========== ==========
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable and current portion of long-term debt $378,179 $421,273
Accounts payable 4,942,496 5,843,729
Accrued expenses 2,743,101 2,833,987
Dividends payable 541,450 539,191
Income taxes payable 2,088,069 2,481,145
---------- ---------
Total current liabilities 10,693,295 12,119,325
Long-term debt 69,637 67,231
Stockholders' Equity 47,925,308 45,566,441
----------- ----------
Total Liabilities and Stockholders' Equity $58,688,240 $57,752,997
========== ==========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
1995 1994
<S> <C> <C>
Revenues:
Sales $24,805,947 $18,613,420
Costs and expenses:
Cost of sales 18,757,202 13,976,893
Selling, general and
administrative expenses 3,018,774 2,598,070
---------- ---------
Total costs and expenses 21,775,976 16,574,963
Operating income 3,029,971 2,038,457
Other income and (expenses):
Investment income 304,710 138,425
Interest expense (13,679) (17,008)
----------- -----------
Other income, net 291,031 121,417
Income before income taxes 3,321,002 2,159,874
Income taxes (Note 3) 800,000 450,000
-------- -------
Net income $2,521,002 $1,709,874
========= =========
Net income per share $ .28 $ .19
========= =========
Average common and common
equivalent shares outstanding 9,149,000 9,106,000
========= =========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Additional Cumulative
Common Stock Paid in Retained Advances Translation
Shares Amount Capital Earnings to ESOP Adjustment Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE at December 31, 1993 8,944,115 $447,206 $17,659,865 $22,779,139 ($194,000) ($327,163) $40,365,047
Net Income 6,803,630 6,803,630
Shareholder dividends (2,062,815) (2,062,815)
Issuance of common stock under
Employee Stock Purchase Plan 15,408 770 130,198 130,968
Issuance of common stock under
Employee Stock Option Plan 27,000 1,350 211,259 212,609
Repayment of advances to
Employee Stock Ownership Plan 122,000 122,000
Cumulative translation adjustment (4,998) (4,998)
------------- --------- --------------- ---------------- ----------- ----------- -------------
BALANCE at December 31, 1994 8,986,523 449,326 18,001,322 27,519,954 (72,000) (332,161) 45,566,441
Net Income 2,521,002 2,521,002
Shareholder dividends (541,450) (541,450)
Issuance of common stock under
Employee Stock Option Plan 26,000 1,300 190,831 192,131
Issuance of common stock to
Welsh Development Agency 20,142 1,007 219,325 220,332
Advances to Employee Stock
Ownership Plan (220,331) (220,331)
Cumulative translation adjustment 187,183 187,183
------------- ----------- --------------- --------------- ------------ ----------- ------------
BALANCE at March 31, 1995 9,032,665 $451,633 $18,411,478 $29,499,506 ($292,331) ($144,978) $47,925,308
============= =========== =============== =============== ============ =========== ============
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLODATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,521,002 $1,709,874
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 682,701 526,175
Deferred taxes 81,000
Adjustment to marketable securities reserve (96,458) (2,453)
Changes in assets and liabilities:
Decrease in marketable securities 40,000 129,275
Increase in accounts receivable (1,643,776) (3,324,628)
Decrease (increase) in inventory 196,841 (555,874)
Decrease in prepaid expenses 62,960 28,987
Decrease in accounts payable (955,414) (811,866)
Increase (decrease) in accrued expenses (116,249) 274,987
Increase (decrease) in income taxes payable (392,678) 4,691
--------- ----------
Net cash provided by (used in) operating activities 298,929 (1,939,832)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,141,682) (1,001,787)
Sales (purchases) of mortgage backed and other
investment securities 6,236 (6,799)
Decrease (increase) in other assets (53,305) 296,072
Collections from businesses transferred under
contractual arrangements 65,340 149,257
Collections from Hector Communications Corporation 348,055
----------- -------
Net cash used in investing activities (1,123,411) (215,202)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt (47,635) (24,887)
Dividends paid (539,191) (447,206)
Proceeds from issuance of notes payable and long-term debt 190,876
Proceeds from issuance of common stock 412,462 13,500
Advances to Employee Stock Ownership Plan (220,331)
--------- --------
Net cash used in financing activities (394,695) (267,717)
--------- ---------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (59,692) (19,949)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,278,869) (2,442,700)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,829,776 6,598,139
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $7,550,907 $4,155,439
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $1,193,076 $362,511
Interest paid 13,679 17,008
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The balance sheet and statement of stockholders' equity as of March 31, 1995,
and the statements of income and cash flows for the three month periods ended
March 31, 1995 and 1994 have been prepared by the company without audit. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, and cash flows at March 31, 1995 and 1994 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's December 31, 1994 Annual Report to Shareholders. The results of
operations for the periods ended March 31 are not necessarily indicative of the
operating results for the entire year.
NOTE 2 - INVENTORIES
Inventories summarized below are priced at the lower of cost (first-in,
first-out) or market:
<TABLE>
<CAPTION>
March 31 December 31
1995 1994
---------- ----------
<S> <C> <C>
Finished Goods $3,424,514 $3,525,693
Raw Materials 12,625,839 12,665,186
----------- ----------
Total $16,050,353 $16,190,879
=========== ===========
</TABLE>
NOTE 3 - INCOME TAXES
Income taxes are computed based upon the estimated effective rate applicable to
operating results for the full fiscal year. For the periods ended March 31, 1995
and 1994 income taxes do not bear a normal relationship to income before income
taxes, primarily because income from Puerto Rican operations are taxed at rates
lower than the U.S. rate.
NOTE 4 - NET INCOME PER COMMON SHARE
Net income per share is based on the weighted average number of common and
common equivalent shares outstanding during the periods. Common equivalent
shares reflect the dilutive effect of outstanding stock options. Primary and
fully diluted earnings per share are substantially the same.
-7-
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Three Months Ended March 31, 1995 Compared to
Three Months Ended March 31, 1994
Consolidated revenues increased $6,193,000 or 33% from the 1994 period.
Telephone station apparatus revenues increased $4,685,000, or 35%. Apparatus
sales to domestic (U.S. and Puerto Rico) customers increased $3,515,000, or 35%.
Sales to the Big 8 telephone companies (the Regional Bell Operating Companies
and GTE) increased $2,586,000 or 42% and accounted for 63% of domestic apparatus
sales in the 1995 period. Sales increases to these customers were due to strong
sales of the Company's Corroshield line of corrosion resistant products. Sales
to electrical distributors and original equipment manufacturers increased
$43,000 or 3%. Sales to retail customers increased $366,000 or 34%.
Sales of telephone station apparatus to international customers increased
$1,170,000 or 37% over 1994. Sales by Austin Taylor, the Company's United
Kingdom based subsidiary, increased $1,249,000 or 49%, due to strong sales
across the Company's product line. U.S. export sales declined $127,000 or 32%.
Sales in Canada increased $52,000 or 25%.
Contract manufacturing revenues increased $1,507,000, or 29%. Sales to
Thermo-King, the segment's principal customer, increased $825,000 over 1994, and
accounted for 49% of the segment's sales. Sales of multifunction display units
used by a major watercraft manufacturer increased $336,000 or 40%, accounting
for 17% of the segment's sales. Sales of printed circuit board assemblies to a
Minnesota original equipment manufacturer added $452,000 of new business in the
quarter. Sales of the Company's proprietary line of electronic fishing products
declined $76,000, or 14%.
Gross margin as a percentage of apparatus sales was 29%, unchanged from the 1994
period. Gains in overhead efficiencies in U.S. plants due to increased
production volume were offset by changes in product mix, particularly
Corroshield products which the Company sells at lower margins than standard
products. Margins earned on Austin Taylor products improved to 29% from 25% in
the 1994 period reflecting Austin Taylor's increased volume of business. Gross
margin on contract manufacturing sales declined to 12% compared to 15% in 1994
due to inventory reserves established on certain slow-moving inventory items in
the 1995 period.
Selling, general and administrative expenses increased $421,000 or 16% from
the 1994 period. Increased customer delivery charges in the U.S. and increased
selling expenses in the U.K. caused the increase. The Company used air freight
delivery to a much higher percentage of its U.S. customers than normal due to
tight production scheduling caused by the increased sales volumes.
-8-
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Managements' Discussion (continued)
Consolidated operating income increased $992,000 or 49%. Net other income
increased $170,000 from the 1994 period due to gains on sales of marketable
securities and increases in the value of the Company's marketable securities
portfolio. The Company's effective income tax rate was 24% for the 1995 period
compared to 21% in 1994. The Company's tax rate is lower than the full U.S. rate
due to tax exemptions and benefits received by the Company's Puerto Rico
operations. The Company's tax rate increased in 1995 due to limitations on the
possessions tax credit the Company receives against U.S. income taxes on the
earnings of its Puerto Rico subsidiary. Net income increased 47%.
Liquidity and Capital Commitments
At March 31, 1995 the Company had approximately $7,551,000 in cash compared to
$8,830,000 at December 31, 1994. Cash was utilized during the period to finance
increases in accounts receivable, finance new plant and equipment and pay
dividends and current liabilities. Working capital increased $1,848,000 from
year end to $29,776,000. The Company's current ratio was 3.8 to 1, compared to
3.3 to 1 at December 31, 1994.
Order input for U.S. apparatus products was $15,538,000 in the first quarter of
1995, up 58% from the 1994 period. First quarter shipments to customers were an
all-time record. Sales order backlog increased to $6,914,000. The Company has
responded to the increased demand by increasing production shifts, working
plants overtime, and increasing use of air shipments to reduce production lead
times and customer delivery times. The Company is also expanding its use of
outside contract manufacturers to increase its manufacturing capacity.
The Company's balance sheet remains strong, with stockholders' equity of
$47,925,000 and long-term debt of only $70,000. The Company has available a
$2,000,000 bank line of credit. The Company's cash flows from operations
exceeded $7,000,000 in 1994, and management expects a similar performance in
1995, despite first quarter cash used in operations of $1,100,000 made necessary
by the Company's increased volume of business. Management believes, based on the
Company's current financial position and projected future expenditures, that
sufficient funds are available to meet the Company's anticipated needs.
-9-
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Items 1-6. Not applicable
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Communications Systems, Inc.
By Paul N. Hanson
------------------------
Paul N. Hanson
Vice President and
Chief Financial Officer
Date: May 11, 1995
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000022701
<NAME> COMMUNICATIONS SYSTEMS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1
<CASH> 7,550,907
<SECURITIES> 946,882
<RECEIVABLES> 14,748,922
<ALLOWANCES> 370,987
<INVENTORY> 16,050,353
<CURRENT-ASSETS> 40,469,336
<PP&E> 24,157,402
<DEPRECIATION> 13,332,171
<TOTAL-ASSETS> 58,688,240
<CURRENT-LIABILITIES> 10,693,295
<BONDS> 69,637
<COMMON> 451,634
0
0
<OTHER-SE> 47,473,674
<TOTAL-LIABILITY-AND-EQUITY> 58,688,240
<SALES> 24,805,947
<TOTAL-REVENUES> 24,805,947
<CGS> 18,757,202
<TOTAL-COSTS> 18,757,202
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 13,679
<INCOME-PRETAX> 3,321,002
<INCOME-TAX> 800,000
<INCOME-CONTINUING> 2,521,002
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,521,002
<EPS-PRIMARY> 0.280
<EPS-DILUTED> 0.280
</TABLE>
