===============================================================================
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 SEPTEMBER 30, 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 (Federal Employer
incorporation or organization) Identification No.)
213 South Main Street, Hector, MN 55342
...............................................................................
(Address of principal executive offices) (Zip Code)
(612) 848-6231
...............................................................................
Registrant's telephone number, including area 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 October 31, 1995
Common Stock, par value 9,171,210
$.05 per share
<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>
September 30 December 31
Assets: 1995 1994
Current assets:
Cash $11,804,923 $8,829,776
Marketable securities 889,599 890,424
Receivables, net 12,860,289 12,535,306
Inventories - Note 2 17,344,296 16,190,879
Prepaid expenses 480,321 492,554
Deferred income taxes 1,108,000 1,108,000
------------------- --------------------
Total current assets 44,487,428 40,046,939
Property, plant and equipment 25,344,486 22,977,540
Less accumulated depreciation (14,435,336) (12,707,397)
-------------------- ---------------------
Net property, plant and equipment 10,909,150 10,270,143
Other assets:
Assets of businesses transferred under contractual
arrangements (notes receivable) 75,831 592,838
Investments in mortgaged backed and other securities 5,300,150 5,300,841
Excess of cost over net assets acquired 724,389 785,364
Deferred income taxes 376,047 376,047
Other assets 395,103 380,825
------------------- --------------------
Total other assets 6,871,520 7,435,915
------------------- --------------------
Total Assets $62,268,098 $57,752,997
================== ==================
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable and current portion of long-term debt $284,927 $421,273
Accounts payable 4,056,944 5,843,729
Accrued expenses 3,125,487 2,833,987
Dividends payable 641,985 539,191
Income taxes payable 1,888,765 2,481,145
------------------- --------------------
Total current liabilities 9,998,108 12,119,325
Long-term debt 68,004 67,231
Stockholders' Equity 52,201,986 45,566,441
------------------- --------------------
Total Liabilities and Stockholders' Equity $62,268,098 $57,752,997
=================== ====================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Sept.30 Nine Months Ended Sept.30
1995 1994 1995 1994
------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Sales $20,205,631 $17,549,831 $66,877,595 $54,464,507
Costs and expenses:
Cost of sales 15,049,512 13,193,465 50,810,156 40,977,444
Selling, general and
administrative expenses 2,613,250 2,577,285 7,780,023 7,862,289
------------------- ------------------- ------------------- --------------------
Total costs and expenses 17,662,762 15,770,750 58,590,179 48,839,733
Operating income 2,542,869 1,779,081 8,287,416 5,624,774
Other income and (expenses):
Investment income 218,608 105,766 739,671 304,667
Interest expense (11,104) (16,734) (39,025) (44,938)
-------------------- -------------------- -------------------- ---------------------
Other income, net 207,504 89,032 700,646 259,729
Income before income taxes 2,750,373 1,868,113 8,988,062 5,884,503
Income taxes (Note 3) 595,000 380,000 2,015,000 1,160,000
------------------- ------------------- ------------------- --------------------
Net income $2,155,373 $1,488,113 $6,973,062 $4,724,503
=================== ================== ================== ===================
Net income per share $.23 $.16 $.76 $.52
=================== =================== =================== ====================
Average common and common
equivalent shares outstanding 9,318,000 9,089,000 9,214,000 9,089,000
=================== =================== =================== ====================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
===============================================================================
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
===============================================================================
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(unaudited)
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 6,973,062 6,973,062
Shareholder dividends (1,820,834) (1,820,834)
Issuance of common stock under
Employee Stock Option Plan 140,978 7,049 1,081,050 1,088,099
Issuance of common stock under
Employee Stock Purchase Plan 23,567 1,179 193,956 195,135
Issuance of common stock to
Welsh Development Agency 20,142 1,007 219,325 220,332
Advances to Employee Stock
Ownership Plan (220,332) (220,332)
Cumulative translation adjustment 200,083 200,083
---------- --------- ------------ ------------- ---------- ---------- --------------
BALANCE at September 30, 1995 9,171,210 $458,561 $19,495,653 $32,672,182 $(292,332) $(132,078) $52,201,986
========== ========= ============ ============= ========== =========== ==============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30
1995 1994
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $6,973,062 $4,724,503
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,906,358 1,606,830
Adjustment to marketable securities reserve (79,175) 75,698
Deferred tax items 418,202
Changes in assets and liabilities:
Decrease in marketable securities 80,000 129,275
Increase in receivables (174,483) (2,792,653)
Increase in inventories (1,138,759) (126,124)
Decrease (increase) in prepaid expenses 13,482 (96,894)
Increase (decrease) in accounts payable (1,696,485) 219,398
Increase in accrued expenses 171,162 923,804
Decrease in income taxes payable (592,688) (348,672)
----------------------- -----------------------
Net cash provided by operating activities 5,462,474 4,733,367
Cash Flows from Investing Activities:
Capital expenditures (2,450,041) (3,333,538)
Decrease in mortgaged-backed and other securities 15,324 22,226
Collections from Hector Communications Corp. 348,055
Collections from businesses transferred under
contractual arrangements 517,007 262,099
Decrease (increase) in other assets (29,083) 285,885
----------------------- ----------------------
Net cash used in investing activities (1,946,793) (2,415,273)
Cash Flows from Financing Activities:
Repayments of notes payable and long-term debt (138,405) (100,752)
Proceeds from issuance of long-term debt 174,290
Dividends paid (1,718,040) (1,431,819)
Proceeds from issuance of common stock 1,503,566 318,265
Advances to Employee Stock Ownership Plan (220,332)
-----------------------
Net cash used in financing activities (573,211) (1,040,016)
----------------------- -----------------------
Effect of Foreign Exchange Rate Changes on Cash 32,677 41,061
---------------------- ----------------------
Net Increase in Cash and Cash Equivalents 2,975,147 1,319,139
Cash and Cash Equivalents at Beginning of Period 8,829,776 6,598,139
---------------------- ----------------------
Cash and Cash Equivalents at End of Period $11,804,923 $7,917,278
====================== ======================
Supplemental disclosures of cash flow information:
Income taxes paid during the period $2,607,380 $1,088,672
Interest paid during the period 39,025 44,938
</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 September 30,
1995, the statements of income for the three and nine month periods ended
September 30, 1995 and 1994 and the statements of cash flows for the nine month
periods ended September 30, 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 changes in cash flows at September 30, 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 condensed 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 September 30 are
not necessarily indicative of the operating results for the entire year.
NOTE 2 - INVENTORIES
Inventories summarized below are priced at the lower of first-in, first-out cost
or market:
<TABLE>
<CAPTION>
September 30 December 31
1995 1994
<S> <C> <C>
Finished Goods $3,928,587 $3,525,693
Raw Materials 13,415,709 12,665,186
---------------------- ----------------------
Total $17,344,296 $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 September 30,
1995 and 1994 income taxes do not bear a normal relationship to income before
income taxes, primarily because income from Puerto Rico 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
Nine Months Ended September 30, 1995 Compared to
Nine Months Ended September 30, 1994
Consolidated revenues increased $12,413,000 or 23% from the 1994 period.
Telephone station apparatus revenue increased $9,583,000 or 23%. Apparatus sales
to domestic (U.S. and Puerto Rico) customers increased $8,319,000 or 27%. Sales
to the Big 8 telephone companies (the seven Regional Bell Operating Companies
and GTE) increased $6,521,000 or 36% and accounted for 62% 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
$541,000 or 14%. Sales to retailers increased $551,000 or 15%.
Sales of telephone station apparatus to international customers increased
$2,144,000 or 19%. Sales by Austin Taylor, the Company's United Kingdom based
subsidiary, increased $1,128,000 or 12%. U.S. export sales increased $879,000 or
90%. Sales in Canada increased $136,000 or 21%.
Contract manufacturing sales increased $2,830,000 or 22%. Sales to Thermo-King,
the segment's principal customer, declined $295,000 or 4%, due to Thermo-King's
decision to move more of its manufacturing process to a plant it owns in Puerto
Rico. Sales to Thermo-King accounted for 44% of Zercom's sales in the 1995
period compared to 56% of sales in the 1994 period. Sales of multi-function
display units used by a major watercraft manufacturer increased $1,252,000 or
111%. Sales of the Company's proprietary line of electronic fishing products
increased $522,000 or 96%. Sales of printed circuit board assemblies to a
Minnesota original equipment manufacturer added $768,000 of new business in the
period.
Gross margin as a percentage of apparatus sales was 27%, compared to 28% in 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 declined to 20% from 25% in
the 1995 period due to increased raw material costs. Gross margin on contract
manufacturing sales declined to 13% 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 decreased $82,000 or 1% from the
1994 period. Increased customer delivery charges in the U.S. were offset by
lower selling expenses and lower corporate expenses.
Consolidated operating income increased $2,663,000 or 47%. Net other income
increased $441,000 from the 1994 period due to increased interest income on the
Company's increased cash reserves, 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 22% compared to 20% in the 1994 period.
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 $2,249,000, or 48%.
8
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Three Months Ended September 30, 1995 Compared to
Three Months Ended September 30, 1994
Consolidated revenues increased $2,656,000 or 15% from the 1994 period.
Telephone station apparatus revenues increased $2,524,000 or 18%. Apparatus
sales to domestic (U.S. and Puerto Rico) customers increased $1,916,000 or 19%.
Sales to the Big 8 telephone companies increased $2,319,000 or 38% and accounted
for 67% 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. The Company made first time volume shipments of
CorroShield products to one RBOC in the 1995 period. Sales to retail customers
increased $77,000 or 7%. Sales to electrical distributors and original equipment
manufacturers increased $320,000 or 32%. Sales to other distributor decreased
$685,000 or 49%.
Sales of telephone station apparatus to international customers increased
$608,000 or 16% over 1994. U.S. export sales increased $489,000 or 185% due to
sales of CorroShield products to Latin America and Caribbean island customers.
Sales by Austin Taylor increased $52,000 or 2%. Sales in Canada increased
$66,000 or 32%.
Contract manufacturing revenues increased $131,000 or 4%. Sales to Thermo-King
declined $431,000 or 20%. The sales decline was due to Thermo-King's decision to
perform certain manufacturing functions in-house which were previously done by
the Company. Sales of video cables and wiring harnesses increased $150,000.
Sales of electronic fishing products increased $130,000. Sales of printed
circuit board assemblies to a Minnesota original equipment manufacturer added
$113,000 of business in the 1995 period. Sales of multi-function display units
for watercraft increased $51,000.
Gross margin as a percentage of apparatus sales was 29%, compared to 28% in the
1994 period. Margin improvements were due to gains in overhead efficiencies in
U.S. plants associated with increased production volumes, reductions in
production overtime premiums paid, and reduced use of air freight to move
inventory. Margins earned on Austin Taylor products declined to 22% from 26% in
the 1994 period due to increased raw material costs. Gross margin on contract
manufacturing sales was 12% compared to 13% in the 1994 period.
Selling, general and administrative expenses increased $36,000 or 1%. Increased
customer delivery expenses offset lower selling and corporate expenses in the
period.
Consolidated operating income increased $764,000 or 43%. Net other income
increased $118,000 from the 1994 period due to increased interest income on the
Company's increased cash reserves. The Company's effective income tax rate was
22% for the 1995 period compared to 20% 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
$667,000, or 45%.
9
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Liquidity and Capital Commitments
At September 30, 1995 the Company had approximately $11,805,000 in cash compared
to $8,830,000 at December 31, 1994. Working capital increased $6,562,000 from
year end to $34,489,000. The Company's current ratio was 4.4 to 1, compared to
3.3 to 1 at December 31, 1994.
Net cash provided by operating activities increased 15% from the 1994 nine
months to $5,462,000. Cash was utilized during the period to finance increases
in inventory, purchase new plant and equipment and pay dividends and current
liabilities. The Company received $1,504,000 from issuance of common stock
during the 1995 period, principally from exercises of employee stock options.
The Company's balance sheet remains strong, with stockholders' equity of
$52,202,000 compared to long-term debt of only $68,000. The Company has
available a $2,000,000 bank line of credit. 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.
The deficit reduction plan presently being considered by Congress includes a
provision which would eliminate, over a period of years, the possessions tax
credit (Section 936) for companies operating in Puerto Rico. The Company has
operated in Puerto Rico since 1978 and a major part of its investment in its
telephone station apparatus manufacturing operation is located there. The
Company has also benefited greatly from the possessions tax credit, which
reduced the Company's income tax expense for the 1995 nine months by $1,575,000.
The Company believes elimination of the credit will have a negative impact on
both the Puerto Rico economy and the Company's Puerto Rico operation. The
Company cannot predict the form of the tax plan Congress will ultimately
institute or the effect the plan will have on the Company.
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: November 10, 1995
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000022701
<NAME> COMMUNICATIONS SYSTEMS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 11,804,923
<SECURITIES> 889,599
<RECEIVABLES> 13,262,534
<ALLOWANCES> 402,245
<INVENTORY> 17,344,296
<CURRENT-ASSETS> 44,487,428
<PP&E> 25,344,486
<DEPRECIATION> 14,435,336
<TOTAL-ASSETS> 62,268,098
<CURRENT-LIABILITIES> 9,998,108
<BONDS> 68,004
<COMMON> 458,561
0
0
<OTHER-SE> 51,743,425
<TOTAL-LIABILITY-AND-EQUITY> 62,268,098
<SALES> 66,877,595
<TOTAL-REVENUES> 66,877,595
<CGS> 50,810,156
<TOTAL-COSTS> 50,810,156
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 90,000
<INTEREST-EXPENSE> 39,025
<INCOME-PRETAX> 8,988,062
<INCOME-TAX> 2,015,000
<INCOME-CONTINUING> 6,973,062
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,973,062
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.76
</TABLE>
