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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, 1996
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)
(320) 848-6231
................................................................................
Registrant's telephone number, including area code
................................................................................
(Former name, former address, 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, 1996
Common Stock, par value 9,316,243
$.05 per share
Total Pages (10) Exhibit Index at (NO EXHIBITS)
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<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>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31 December 31
Assets: 1996 1995
____________ ____________
Current assets:
<S> <C> <C>
Cash $10,156,199 $12,198,455
Marketable securities 864,966 899,469
Receivables, net 12,734,117 10,931,382
Inventories - Note 3 21,013,120 19,522,963
Prepaid expenses 465,354 400,778
Deferred income taxes 1,188,000 1,188,000
____________ ____________
Total current assets 46,421,756 45,141,047
Property, plant and equipment 26,756,915 25,762,350
less accumulated depreciation (15,394,211) (14,847,042)
____________ ____________
Net property, plant and equipment 11,362,704 10,915,308
Other assets:
Investments in mortgage backed and other securities 5,104,437 5,398,316
Excess of cost over net assets acquired 3,504,979 839,229
Deferred income taxes 461,047 461,047
Other assets 452,494 532,285
____________ ____________
Total other assets 9,522,957 7,230,877
____________ ____________
Total Assets $67,307,417 $63,287,232
____________ ____________
____________ ____________
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable $109,356 $146,923
Accounts payable 4,526,455 4,104,349
Accrued expenses 2,491,864 2,296,996
Dividends payable 651,575 642,838
Income taxes payable 2,260,819 2,020,550
____________ ____________
Total current liabilities 10,040,069 9,211,656
Stockholders' Equity 57,267,348 54,075,576
____________ ____________
Total Liabilities and Stockholders' Equity $67,307,417 $63,287,232
____________ ____________
____________ ____________
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended March 31
___________________________________
1996 1995
____________ ____________
Revenues:
<S> <C> <C>
Sales $20,459,113 $24,805,947
Costs and expenses:
Cost of sales 15,216,811 18,757,202
Selling, general and
administrative expenses 2,863,550 3,018,774
____________ ____________
Total costs and expenses 18,080,361 21,775,976
Operating income 2,378,752 3,029,971
Other income and (expenses):
Investment income 147,376 304,710
Interest expense (6,453) (13,679)
____________ ____________
Other income, net 140,923 291,031
Income before income taxes 2,519,675 3,321,002
Income taxes (Note 4) 475,000 800,000
____________ ____________
Net income $2,044,675 $2,521,002
____________ ____________
____________ ____________
Net income per share $ .22 $ .28
____________ ____________
____________ ____________
Average common and common
equivalent shares outstanding 9,414,000 9,149,000
____________ ____________
____________ ____________
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT 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> <C> <C>
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 9,084,153 9,084,153
Shareholder dividends (2,463,672) (2,463,672)
Issuance of common stock under
Employee Stock Option Plan 173,311 8,666 1,267,846 1,276,512
Tax benefit from nonqualified
employee stock options 243,000 243,000
Issuance of common stock under
Employee Stock Purchase Plan 23,567 1,178 193,957 195,135
Issuance of common stock to
Welsh Development Agency 20,142 1,007 219,325 220,332
Purchase of Communications Systems
Inc. common stock (20,142) (1,007) (219,325) (220,332)
Cumulative translation adjustment 102,007 102,007
Repayment of advances to ESOP 72,000 72,000
_________ ________ ___________ __________ _________ ____________ ___________
BALANCE at December 31, 1995 9,183,401 459,170 19,706,125 34,140,435 - (230,154) 54,075,576
Net Income 2,044,675 2,044,675
Shareholder dividends (651,575) (651,575)
Issuance of common stock under
Employee Stock Option Plan 15,133 757 149,943 150,700
Issuance of common stock to acquire
Automatic Tool and Connector Co. 112,676 5,634 1,712,675 1,718,309
Cumulative translation adjustment (70,337) (70,337)
__________ ________ ___________ __________ _________ ____________ ___________
BALANCE at March 31, 1996 9,311,210 $465,561 $21,568,743 $35,533,535 - ($300,491) $57,267,348
__________ ________ ___________ __________ _________ ____________ ___________
__________ ________ ___________ __________ _________ ____________ ___________
See notes to consolidated financial statements.
</TABLE>
5
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<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31
_________________________________
1996 1995
____________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $2,044,675 $2,521,002
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 663,299 682,701
Adjustment to marketable securities reserve 34,503 (96,458)
Changes in assets and liabilities:
Decrease in marketable securities 40,000
Increase in accounts receivable (1,331,874) (1,643,776)
Decrease (increase) in inventory (1,069,736) 196,841
Decrease (increase) in prepaid expenses (54,495) 62,960
Decrease in accounts payable (298,021) (955,414)
Increase (decrease) in accrued expenses 208,376 (116,249)
Increase (decrease) in income taxes payable 247,117 (392,678)
____________ ____________
Net cash provided by (used in) operating activities 443,844 298,929
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,012,822) (1,141,682)
Decrease in mortgage backed and other investment securities 294,124 6,236
Decrease in other assets 83,565 12,035
Payment for purchase of Austin Taylor Communications, Ltd. (135,131)
Payment for purchase of Automatic Tool and Connector
Company, Inc., net of cash acquired (1,173,577)
____________ ____________
Net cash used in investing activities (1,943,841) (1,123,411)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (36,555) (47,635)
Dividends paid (642,838) (539,191)
Proceeds from issuance of common stock 150,700 412,462
Purchases of Communications Systems, Inc. common stock (220,331)
____________ ____________
Net cash used in financing activities (528,693) (394,695)
____________ ____________
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (13,566) (59,692)
____________ ____________
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,042,256) (1,278,869)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,198,455 8,829,776
____________ ____________
CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,156,199 $7,550,907
____________ ____________
____________ ____________
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $227,883 $1,193,076
Interest paid 6,453 13,679
See notes to consolidated financial statements.
</TABLE>
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,
1996, and the statements of income and statements of cash flows for the three
month periods ended March 31, 1996 and 1995 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, 1996 and 1995 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, 1995 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 - CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). SFAS 123 required expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to its
stock-based compensation awards to employees and will disclose the required pro
forma effect on net income and earnings per share.
NOTE 3 - INVENTORIES
Inventories summarized below are priced at the lower of first-in, first-out
cost or market:
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
<S> <C> <C>
Finished Goods $5,479,160 $5,475,458
Raw Materials 15,533,960 14,047,505
Total $21,013,120 $19,522,963
</TABLE>
NOTE 4 - 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, 1996 and 1995 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.
7
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - 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.
NOTE 6 - ACQUISITION OF AUTOMATIC TOOL AND CONNECTOR CO., INC.
Effective January 4, 1996, the Company acquired Automatic Tool and
Connector Co., Inc., a Union, New Jersey based manufacturer of fiber optic
connectors, in exchange for $1,373,000 in cash and 112,676 shares of
Communications Systems, Inc. common stock. The acquisition was accounted for as
a purchase and the purchase price was allocated to the assets acquired. Excess
of cost over net assets acquired was $2,760,000, which is being amortized over
ten years on a straight line basis. Results of Automatic Tool, which were not
material to the Company's financial results, were included in Company operations
beginning January 4, 1996.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Three Months Ended March 31, 1996 Compared to
Three Months Ended March 31, 1995
Consolidated revenues decreased $4,347,000 or 18% from the 1995 period.
Telephone station apparatus revenue decreased $2,228,000 or 12%. Apparatus sales
to domestic (U.S. and Puerto Rico) customers decreased $1,483,000 or 11%. The
domestic sales decrease was due to lower sales to the Big 8 telephone companies
(the seven Regional Bell Operating Companies and GTE) which fell $1,805,000 or
21%. Reduced shipments to this market segment were attributed to customer
inventory overstocks and reduced construction activity caused by the cold
winter. Sales to electrical distributors and original equipment manufacturers
decreased $342,000 or 21%. Sales to retailers decreased $377,000 or 26%. Lower
sales to these segments were offset by increased sales to other distributors and
by sales of fiber optic connectors by Automatic Tool and Connector Co., which
the Company acquired in January, 1996.
Sales of telephone station apparatus to international customers decreased
$745,000 or 17%. Sales by Austin Taylor, the Company's United Kingdom based
subsidiary, decreased $848,000 or 22% due to the phase-out of certain products
previously sold to British Telecom. Shipments of new products intended to
replace this business were delayed until summer. U.S. export sales increased
$108,000 or 40%. Sales in Canada decreased $6,000 or 2%.
Contract manufacturing sales decreased $2,119,000 or 31%. Sales to
Thermo-King, which was the segment's principal customer, declined $2,069,000 or
62%, 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 27% of
Zercom's sales in the 1996 period compared to 49% of sales in the 1995 period.
Sales of multi-function display units used by a major watercraft manufacturer
increased $233,000 or 20%. Sales of electronic fishing products decreased
$162,000 or 35%.
8
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion (continued)
Gross margin as a percentage of apparatus sales was 29%, unchanged from the
1995 period. Margin percentages improved in U.S. plants due to reduction in
manufacturing overheads, freight charges and payroll overtime premiums. Margins
earned on Austin Taylor products declined to 21% from 29% in the 1995 period due
to increased raw material costs. Gross margin on contract manufacturing sales
increased to 13% compared to 12% in 1995 due to inventory reserves established
on certain slow-moving inventory items in the 1995 period.
Selling, general and administrative expenses decreased $155,000 or 5% from
the 1995 period due to decreased customer delivery charges and lower selling
expenses.
Consolidated operating income decreased $651,000 or 21%. Net other income
decreased $150,000 from the 1995 period due to fluctuations in the value of the
Company's marketable securities portfolio. The Company's effective income tax
rate was 19% compared to 24% 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 was higher 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 decreased
$476,000, or 19%.
Liquidity and Capital Commitments
At March 31, 1996 the Company had approximately $10,156,000 in cash
compared to $12,198,000 at December 31, 1995. Working capital was $36,382,000
compared to $35,929,000 at December 31, 1995. The Company's current ratio was
4.6 to 1, compared to 4.9 to 1 at year end 1995.
Net cash provided by operating activities was $444,000 compared to $299,000
in the first quarter of 1995. The Company used cash in the first quarter to
finance increased inventory and accounts receivable levels, which negatively
affected cash provided by operations. The Company expects its operating cash
flows for the full year to approximate the results of 1995, which produced cash
from operations of $6,983,000. Cash was also utilized during the period to
purchase new plant and equipment, pay dividends and acquire Automatic Tool and
Connector Co., Inc.
The Company's balance sheet remains strong, with stockholders' equity of
$57,267,000 and no long-term debt. 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.
On January 4, 1996, the Company acquired Automatic Tool and Connector Co.,
Inc. of Union, New Jersey, in exchange for $3,091,000 in cash and common stock.
Automatic Tool and Connector Co. (ATC) is a manufacturer of high performance
fiber optic connectors, interconnect devices and coaxial cable assemblies for
the telecommunications, medical electronics, computer and other markets. The
acquisition represents the Company's entrance into the market for fiber optic
connectors, which is the fastest growing segment in the telecommunications
connector market. ATC's sales for its 1995 fiscal year were approximately
$3,200,000.
9
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Liquidity (continued)
This acquisition, as well as other acquisitions and dispositions the
Company has made over the past several years (including the 1992 acquisition of
Austin Taylor Communications, Ltd.), have served to expand the Company's product
offerings and customer base in both U.S. and international markets. The Company
is seeking to position itself in the marketplace as a growth oriented
manufacturer of telecommunications connecting devices. The Company is continuing
to search for acquisition candidates which fit the Company's target markets.
PART II. OTHER INFORMATION
Items 1 - 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
On January 5, 1996, the Company filed a Form 8-K dated January 4, 1996
reporting the acquisition of Automatic Tool and Connector Co., Inc. under Item
5, "Other Events".
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 13, 1996
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 10,156,199
<SECURITIES> 864,966
<RECEIVABLES> 13,090,117
<ALLOWANCES> 356,000
<INVENTORY> 21,013,120
<CURRENT-ASSETS> 46,421,756
<PP&E> 26,756,915
<DEPRECIATION> 15,394,211
<TOTAL-ASSETS> 67,307,417
<CURRENT-LIABILITIES> 10,040,069
<BONDS> 0
0
0
<COMMON> 465,561
<OTHER-SE> 56,801,787
<TOTAL-LIABILITY-AND-EQUITY> 67,307,417
<SALES> 20,459,113
<TOTAL-REVENUES> 20,459,113
<CGS> 15,216,811
<TOTAL-COSTS> 15,216,811
<OTHER-EXPENSES> 2,716,174
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,453
<INCOME-PRETAX> 2,519,675
<INCOME-TAX> 475,000
<INCOME-CONTINUING> 2,044,675
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,044,675
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
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