================================================================================
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, 1997
--------------------
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, address, and 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, 1997
Common Stock, par value 9,201,213
$.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 9
Part II. Other Information 10
2
<PAGE>
PART I. FINANCIAL INFORMATION
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31 December 31
Assets: 1997 1996
------------ ------------
Current assets:
Cash $18,016,563 $17,799,398
Marketable securities 909,873 889,782
Receivables, net 11,566,707 10,375,080
Inventories - Note 3 15,260,324 13,861,914
Prepaid expenses 603,974 460,692
Deferred income taxes 1,062,283 792,000
------------ ------------
Total current assets 47,419,724 44,178,866
Property, plant and equipment 24,776,642 24,299,704
less accumulated depreciation (15,792,979) (15,335,114)
------------ ------------
Net property, plant and equipment 8,983,663 8,964,590
Net assets of discontinued operations 536,679
Other assets:
Investments in mortgage backed and
other securities 4,305,344 4,487,934
Excess of cost over net assets acquired 3,155,163 3,166,422
Deferred income taxes 835,047 835,047
Notes receivable from sale of assets of
discontinued operations 4,866,597 4,866,597
Other assets 786,641 559,979
------------ ------------
Total other assets 13,948,792 13,915,979
------------ ------------
Total Assets $70,352,179 $67,596,114
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $3,730,982 3,164,406
Accrued expenses 2,599,176 2,622,853
Dividends payable 735,297 728,585
Income taxes payable 2,236,922 2,064,792
------------ ------------
Total current liabilities 9,302,377 8,580,636
Stockholders' Equity 61,049,802 59,015,478
------------ ------------
Total Liabilities and Stockholders' Equity $70,352,179 $67,596,114
============ ============
See notes to consolidated financial statements.
3
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended March 31
---------------------------------
1997 1996
------------ -------------
Revenues from continuing operations:
Sales $16,816,019 $15,793,821
Costs and expenses:
Cost of sales 11,825,031 11,162,664
Selling, general and
administrative expenses 2,623,506 2,318,496
------------ -------------
Total costs and expenses 14,448,537 13,481,160
------------ -------------
Operating income from
continuing operations 2,367,482 2,312,661
Other income and (expenses):
Investment income 376,992 142,054
Interest expense (935) (6,398)
------------ ------------
Other income, net 376,057 135,656
Income from continuing operations
before income taxes 2,743,539 2,448,317
Income taxes (Note 4) 575,000 445,000
------------ -------------
Income from continuing operations 2,168,539 2,003,317
Income from discontinued operations,
net of income taxes 41,358
------------ -------------
Net income $2,168,539 $2,044,675
============ =============
Net income per share:
Continuing operations $.24 $.21
Discontinued operations .01
------------ -------------
$.24 $.22
============ =============
Average common and common
equivalent shares outstanding 9,208,000 9,414,000
============ =============
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 Translation
-----------------------------
Shares Amount Capital Earnings Adjustment Total
--------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE at December 31, 1995 9,183,401 $459,170 $19,706,125 $34,140,435 ($230,154) $54,075,576
Net Income 8,232,531 8,232,531
Shareholder dividends (2,868,154) (2,868,154)
Issuance of common stock under
Employee Stock Purchase Plan 14,346 717 157,806 158,523
Issuance of common stock under
Employee Stock Option Plan 52,381 2,619 466,427 469,046
Tax benefit from nonqualified
employee stock options 12,701 12,701
Purchase of Communications Systems
Inc. common stock (255,495) (12,775) (601,381) (2,648,527) (3,262,683)
Issuance of common stock to acquire
Automatic Tool and Connector Co. 112,676 5,634 1,712,675 1,718,309
Cumulative translation adjustment 479,629 479,629
--------- --------- ----------- ----------- --------- -----------
BALANCE at December 31, 1996 9,107,309 455,365 21,454,353 36,856,285 249,475 59,015,478
Net Income 2,168,539 2,168,539
Shareholder dividends (735,297) (735,297)
Issuance of common stock to
Employee Stock Ownership Plan 20,870 1,044 298,956 300,000
Issuance of common stock under
Employee Stock Option Plan 63,034 3,152 538,157 541,309
Cumulative translation adjustment (240,227) (240,227)
--------- --------- ----------- ----------- --------- -----------
BALANCE at March 31, 1997 9,191,213 $459,561 $22,291,466 $38,289,527 $9,248 $61,049,802
========= ========= =========== =========== ========= ===========
See notes to consolidated financial
statements.
</TABLE>
5
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
Three Months Ended March 31
-------------------------------
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,168,539 $ 2,044,675
Less: Income from discontinued operations (41,358)
------------ ------------
Income from continuing operations 2,168,539 2,003,317
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 627,392 619,632
Adjustment to marketable securities reserve (20,091) 34,503
Changes in assets and liabilities:
Increase in accounts receivable (1,186,292) (474,688)
Increase in inventory (1,468,915) (778,470)
Increase in prepaid expenses (145,650) (80,925)
Increase in deferred income taxes (269,310)
Increase (decrease) in accounts payable 644,700 (655,923)
Increase in accrued expenses 618 75,676
Increase in income taxes payable 173,617 247,117
------------ ------------
Net cash provided by operating activities 524,608 990,239
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (650,202) (815,110)
Decrease in mortgage backed and other investment securities 182,590 294,124
Decrease (increase) in other assets (327,166) 83,565
Changes in assets and liabilities of discontinued operations 536,679 (283,257)
Payment for purchase of Austin Taylor Communications, Ltd. (79,947) (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 (338,046) (2,029,386)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (33,430)
Dividends paid (728,585) (642,838)
Proceeds from issuance of common stock 841,309 150,700
------------ ------------
Net cash provided by (used in) financing activities 112,724 (525,568)
------------ ------------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (82,121) (13,566)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 217,165 (1,578,281)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 17,799,398 11,703,536
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $18,016,563 $10,125,255
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $391,201 $227,883
Interest paid 935 6,398
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, 1997 and
the statements of income and statements of cash flows for the three month
periods ended March 31, 1997 and 1996 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, 1997 and 1996 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, 1996 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 - DISCONTINUED OPERATIONS
On November 4, 1996, the Company completed the sale of its contract
manufacturing subsidiary, Zercom Corporation, to Nortech Systems, Inc. (Nasdaq
National Market: NSYS). Nortech Systems acquired all the assets of Zercom,
except cash and accounts receivable, in exchange for $1.5 million cash and a
$4.9 million term note secured by Zercom's assets.
The Company's financial statements have been restated to separate the net assets
and operating results of Zercom Corporation from the Company's continuing
operations. Zercom's operating results were as follows:
Three Months Ended
March 31, 1996
Sales $ 4,665,292
Costs and expenses 4,599,201
Interest income, net 5,267
--------------
Income before income taxes 71,358
Income tax expense 30,000
--------------
Net income $ 41,358
==============
Net assets of discontinued Zercom operations at December 31, 1996 consisted of:
Accounts receivable $ 567,679
Deferred income taxes 269,000
Accrued expenses (300,000)
--------------
Net assets of discontinued operations $ 536,679
==============
7
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTE 3 - INVENTORIES
Inventories summarized below are priced at the lower of first-in, first-out cost
or market:
March 31 December 31
1997 1996
Finished Goods $ 4,364,980 $ 3,957,655
Raw Materials 10,895,344 9,904,259
---------------- -----------------
Total $ 15,260,324 $ 13,861,914
================ =================
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, 1997
and 1996 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 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.
The Financial Accounting Standards Board (FASB) has issued SFAS 128, "Earnings
per Share" which requires public companies to present basic earnings per share
and, if applicable, diluted earnings per share instead of primary and fully
diluted earnings per share. SFAS 128 is effective for interim and annual periods
ending after December 15, 1997. The new standard would have no effect on the
Company's net income per share for the three month periods ended March 31, 1997
and 1996.
NOTE 6 - ACQUISITION OF AUTOMATIC TOOL AND CONNECTOR CO., INC.
Effective January 4, 1996, the Company purchased all the capital stock of
Automatic Tool and Connector Co., Inc. for $3,191,000, consisting of $1,473,000
of cash and 112,676 shares of the Company's common stock. The fair value of
assets acquired in the transaction was $4,063,000 (which includes excess of cost
over net assets acquired was $2,864,000, which is being amortized over ten years
on a straight line basis) and liabilities of $872,000 were assumed. Results of
Automatic Tool, which are not material to the Company's financial results, are
included in Company operations beginning January 4, 1996.
8
<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, 1997 Compared to
Three Months Ended March 31, 1996
Revenues from continuing operations increased $1,022,000 or 6% from the 1996
period. Sales to domestic (U.S. and Puerto Rico) customers increased $1,058,000
or 9%. Sales to the Big 8 telephone companies (the seven Regional Bell Operating
Companies and GTE) increased $1,109,000 or 15%. The sales increase was due to
sales of the Company's CorroShield line of corrosion resistant products to an
additional RBOC. The Company's sales of CorroShield products would have been
even higher in the 1997 quarter except for problems the Company experienced
obtaining sufficient supplies of the gel-filled figs used in CorroShield
products. Sales to retailers increased $361,000 or 34% due to strong sales to
Radio Shack stores. Sales to electrical distributors and original equipment
manufacturers decreased $504,000 or 14%, due to lower sales to Lucent
Technologies and lower sales of fiber optic connectors.
Sales to international customers decreased $36,000 or 1%. Sales by Austin
Taylor, the Company's United Kingdom based subsidiary, increased $217,000 or 7%.
U.S. export sales, including sales to Canada, decreased $253,000 or 33%. Gross
margin as a percentage of sales was 30% compared to 29% in the 1996 period.
Margin percentages improved in U.S. plants due to reduction in manufacturing
overheads, which offset higher raw material costs. Margins earned on Austin
Taylor products declined to 19% from 21% in the 1996 period due to increased raw
material costs.
Selling, general and administrative expenses increased $305,000 or 13% from the
1996 period. The increase was due to increased international sales expenses
associated with efforts to develop export markets for telephone station
apparatus products and increase sales of the Company's data products.
Operating income from continuing operations increased $55,000 or 2%. Investment
income, net of interest expense, increased $240,000 from the 1996 period due to
higher interest rates earned on investments and increases in investable cash
balances. The Company's effective income tax rate was 21% compared to 18% in the
1996 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. Income
from continuing operations increased $165,000, or 8%. Income from discontinued
operations was $41,000 in the 1996 period. Net income increased $124,000, or 6%.
Liquidity and Capital Commitments
At March 31, 1997, the Company held approximately $18,016,000 of cash compared
to $17,799,000 at December 31, 1996. Working capital was $38,117,000 compared to
$35,598,000 at December 31, 1996. The Company's current ratio was 5.1 to 1,
unchanged from year end 1996.
Net cash provided by operating activities was $525,000 compared to $990,000 in
the first three months of 1996. Cash was utilized during the period to finance
increases in accounts receivable and inventory, purchase new plant and equipment
and pay dividends.
9
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Liquidity and Capital Commitments (continued)
Under provisions of the Small Business Job Protection Act of 1996, the
possessions tax credit, which shelters the Company's Puerto Rico income from
U.S. income tax, was repealed for years after 1995. However, companies like CSI
which currently qualify for the credit, may continue to claim the credit until
2005, subject to certain limitations. As of July 1, 1996, the credit no longer
applied to investment income earned in Puerto Rico. The credit will continue to
apply to business income earned in Puerto Rico through 2001. For the years 2002
to 2005, the amount of Puerto Rico business income eligible for the credit will
be limited to an inflation adjusted amount based on Puerto Rico business income
earned from 1990 to 1994. The possessions tax credit has a materially favorable
effect on the Company's income tax expense. Had the Company incurred income tax
expense on Puerto Rico operations in 1997 at the full U.S. rate, income tax
expense would have increased by $510,000.
The Company's balance sheet remains strong, with stockholders' equity of
$61,050,000 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.
The acquisition of Automatic Tool and Connector Co. and the disposition of
Zercom Corporation as well as other acquisitions and dispositions the Company
has made over the past several years have served to expand and focus the
Company's telecommunications 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 with
products that will enable the Company to better serve its target markets.
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 /s/Paul N. Hanson
Paul N. Hanson
Vice President and
Chief Financial Officer
Date: May 14, 1997
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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 18,016,563
<SECURITIES> 909,873
<RECEIVABLES> 11,872,707
<ALLOWANCES> 306,000
<INVENTORY> 15,260,324
<CURRENT-ASSETS> 47,419,724
<PP&E> 24,776,642
<DEPRECIATION> 15,792,979
<TOTAL-ASSETS> 70,352,179
<CURRENT-LIABILITIES> 9,302,377
<BONDS> 0
0
0
<COMMON> 459,561
<OTHER-SE> 60,590,241
<TOTAL-LIABILITY-AND-EQUITY> 70,352,179
<SALES> 16,816,019
<TOTAL-REVENUES> 16,816,019
<CGS> 11,825,031
<TOTAL-COSTS> 11,825,031
<OTHER-EXPENSES> 2,623,506
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 935
<INCOME-PRETAX> 2,743,539
<INCOME-TAX> 575,000
<INCOME-CONTINUING> 2,168,539
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,168,539
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
