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 June 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 (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 July 31, 1995
---------------------- ----------------------------
Common Stock, par value 9,143,143
$.05 per share
Total Pages (11) Exhibit Index at (NO Exhibits)
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 11
2
PART I. FINANCIAL INFORMATION
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30 December 31
Assets: 1995 1994
Current assets:
Cash $9,294,658 $8,829,776
Marketable securities 971,346 890,424
Receivables, net 13,500,153 12,535,306
Inventories - Note 2 16,349,485 16,190,879
Prepaid expenses 418,559 492,554
Deferred income taxes 1,108,000 1,108,000
---------- ----------
Total current assets 41,642,201 40,046,939
Property, plant and equipment 25,467,061 22,977,540
less accumulated depreciation (13,955,102) (12,707,397)
---------- ----------
Net property, plant and equipment 11,511,959 10,270,143
Assets of businesses transferred under
contractual arrangements (notes receivable) 420,618 592,838
Other assets:
Investments in mortgage backed and other securities 5,296,759 5,300,841
Excess of cost over net assets acquired 744,679 785,364
Deferred income taxes 376,047 376,047
Other assets 409,972 380,825
--------- ---------
Total other assets 6,827,457 6,843,077
--------- ---------
Total Assets $60,402,235 $57,752,997
========== ==========
Liabilities and Stockholders'Equity:
Current liabilities:
Notes payable and current portion of long-term debt $328,158 $421,273
Accounts payable 4,541,892 5,843,729
Accrued expenses 2,825,222 2,833,987
Dividends payable 637,399 539,191
Income taxes payable 1,707,625 2,481,145
---------- ----------
Total current liabilities 10,040,296 12,119,325
========== ==========
Long-term debt 68,498 67,231
Stockholders' Equity 50,293,441 45,566,441
---------- ----------
Total Liabilities and Stockholders' Equity $60,402,235 $57,752,997
========== ==========
See notes to consolidated financial statements.
3
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended June Six Months Ended June 30
1995 1994 1995 1994
Revenues:
Sales $21,866,017 $18,301,256 $46,671,964 $36,914,676
Costs and expenses:
Cost of sales 17,003,442 13,807,086 35,760,644 27,783,979
Selling, general and
administrative expenses 2,149,999 2,686,934 5,166,773 5,285,004
---------- ---------- ---------- ----------
Total costs & expenses 19,151,44 16,494,020 40,927,417 33,068,983
Operating income 2,714,576 1,807,236 5,744,547 3,845,693
Other income and (expenses)
Investment income 216,353 60,476 521,063 198,901
Interest expense (14,242) (11,196) (27,921) (28,204)
------- ------ ------ ------
Other income, net 202,111 49,280 493,142 170,697
Income before income taxes 2,916,687 1,856,516 6,237,689 4,016,390
Income taxes (Note 3) 620,000 330,000 1,420,000 780,000
Net income $2,296,687 $1,526,516 $4,817,689 $3,236,390
========= ========= ========= =========
Net income per share $ .25 $ .17 $ .53 $ .36
========= ========= ========= =========
Average common and common
equivalent shares outstanding .. 9,232,000 9,087,000 9,171,000 9,095,000
========= ========= ========= =========
See notes to consolidated financial statements.
4
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
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 4,817,689 4,817,689
Shareholder dividends (1,178,849) (1,178,849)
Issuance of common stock under
Employee Stock Option Plan 114,466 5,724 859,406 865,130
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 223,030 223,030
--------- ------- ---------- ---------- ---------- ---------- ----------
BALANCE at June 30, 1995 ....... 9,121,131 $456,057 $19,080,053 $31,158,794 ($292,332) ($109,131) $50,293,441
========= ======= ========== ========== ========== ========== ==========
See notes to consolidated financial statements.
5
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,817,689 $3,236,390
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,275,066 1,053,551
Deferred taxes 257,202
Adjustment to marketable securities reserve (120,922) 47,843
Changes in assets and liabilities:
Decrease in marketable securities 40,000 129,275
Increase in accounts receivable (801,088) (3,507,178)
Decrease (increase) in inventory (131,123) 107,902
Decrease in prepaid expenses 76,067 98,868
Decrease in accounts payable (1,333,139) (164,515)
Increase (decrease) in accrued expenses (23,825) 707,832
Decrease in income taxes payable (773,446) (342,997)
--------- ---------
Net cash provided by (used in) operating activities 3,025,279 1,624,173
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,431,295) (1,872,836)
Decrease in mortgage backed and other investment securities 11,240 14,110
Decrease (increase) in other assets (38,827) 196,912
Collections from businesses transferred under
contractual arrangements 172,220 196,501
Collections from Hector Communications Corporation 348,055
--------- ---------
Net cash used in investing activities (2,286,662) (1,117,258)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt (95,833) (48,156)
Dividends paid (1,080,641) (894,512)
Proceeds from issuance of notes payable and long-term debt 169,554
Proceeds from issuance of common stock 1,085,462 81,000
Advances to Employee Stock Ownership Plan (220,332)
-------- -------
Net cash used in financing activities (311,344) (692,114)
------- -------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 37,609 8,020
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 464,882 (177,179)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,829,776 6,598,139
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $9,294,658 $6,420,960
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $2,193,520 $863,997
Interest paid 27,921 28,204
See notes to consolidated financial statements.
6
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 June 30, 1995, the
statements of income for the three and six month periods ended June 30, 1995 and
1994 and the statements of cash flows for the six month periods ended June 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
cash flows at June 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 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 June 30, 1995 and 1994 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:
June 30 December 31
1995 1994
Finished Goods $4,373,585 $3,525,693
Raw Materials 11,975,900 12,665,186
---------- ----------
Total $16,349,485 $16,190,879
========== ==========
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 June 30, 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
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Six Months Ended June 30, 1995 Compared to
Six Months Ended June 30, 1994
Consolidated revenues increased $9,757,000 or 26% from the 1994 period.
Telephone station apparatus revenues increased $7,059,000, or 26%. Apparatus
sales to domestic (U.S. and Puerto Rico) customers increased $5,523,000, or 27%.
Sales to the Big 8 telephone companies (the Regional Bell Operating Companies
and GTE) increased $4,202,000 or 36% and accounted for 59% 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 decreased
$59,000 or 2%. Sales to retail customers increased $754,000 or 30%.
Sales of telephone station apparatus to international customers increased
$1,536,000 or 21% over 1994. Sales by Austin Taylor, the Company's United
Kingdom based subsidiary, increased $1,076,000 or 17%, due to strong sales
across the Company's product line. U.S. export sales increased $390,000 or 55%.
Sales in Canada increased $70,000 or 16%.
Contract manufacturing revenues increased $2,698,000, or 29%. Sales to
Thermo-King, the segment's principal customer, increased $136,000 over 1994, and
accounted for 43% of the segment's sales. Sales of multifunction display units
used by a major watercraft manufacturer increased $1,201,000 or 114%, accounting
for 19% of the segment's 1995 sales. Sales of printed circuit board assemblies
to a Minnesota original equipment manufacturer added $655,000 of new business in
the period. Sales of the Company's proprietary line of electronic fishing
products increased $392,000, or 75%.
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 19% from 24% in
the 1994 period due to increased raw material costs. Gross margin on contract
manufacturing sales declined to 14% 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 $118,000 or 2% from
the 1994 period. Increased customer delivery charges in the U.S. were offset by
lower selling expenses and lower corporate expenses.
8
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Managements' Discussion (continued)
Consolidated operating income increased $1,899,000 or 49%. Net other income
increased $322,000 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 23% for the 1995 period
compared to 19% 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 49%.
Three Months Ended June 30, 1995 Compared to
Three Months Ended June 30, 1994
Consolidated revenues increased $3,565,000 or 19% from the 1994 period.
Telephone station apparatus revenues increased $2,374,000, or 17%. Apparatus
sales to domestic (U.S. and Puerto Rico) customers increased $2,008,000, or 20%.
Sales to the Big 8 telephone companies (the Regional Bell Operating Companies
and GTE) increased $1,616,000 or 29% and accounted for 55% 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 decreased
$102,000 or 7%. Sales to retail customers increased $389,000 or 27%.
Sales of telephone station apparatus to international customers increased
$366,000, or 9% over 1994. Sales by Austin Taylor, the Company's United Kingdom
based subsidiary, decreased $169,000 or 5%. U.S. export sales increased $517,000
or 166% due to sales of Corroshield products to Latin America and Carribean
island customers. Sales in Canada increased $18,000 or 8%.
Contract manufacturing revenues increased $1,191,000, or 29%. Sales to
Thermo-King, the segment's principal customer, decreased $690,000, or 28% from
1994, and accounted for 34% of the segment's sales. 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 multifunction display units used
by a major watercraft manufacturer increased $865,000 or 399%, accounting for
21% of the segment's 1995 second quarter sales. Sales of printed circuit board
assemblies to a Minnesota original equipment manufacturer added $203,000 of new
business in the period. Sales of the Company's proprietary line of electronic
fishing products increased $466,000.
Gross margin as a percentage of apparatus sales was 24, compared to 27% 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 sharply due to
higher raw material costs and lower production volumes. Gross margin on
contract manufacturing sales was 16%, unchanged from the 1994 period.
9
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Managements' Discussion (continued)
Selling, general and administrative expenses decreased $539,000 from the
1994 period. Lower U.S. apparatus selling costs, lower corporate charges and
expense adjustments at Austin Taylor were responsible for the decrease.
Consolidated operating income increased $907,000 or 50%. Net other income
increased $153,000 from the 1994 period due to increased interest income and
increases in the value of the Company's marketable securities portfolio. The
Company's effective income tax rate was 21% for the 1995 period compared to 18%
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 50%.
Liquidity and Capital Commitments
At June 30, 1995 the Company had approximately $9,295,000 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 $3,674,000 from
year end to $31,602,000. The Company's current ratio was 4.1 to 1, compared to
3.3 to 1 at December 31, 1994.
Order input for U.S. apparatus products was $27,573,000 in the first half
of 1995, up 34% from the 1994 period. Shipments to customers during the first
half of 1995 were an all-time record. Sales order backlog was $5,866,000 at June
30, 1995, up substantially from year end but slightly lower than at March 31.
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
$50,293,000 and long-term debt of only $68,000. 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 totaled $3,025,000 in the first half of 1995.
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.
10
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Items 1-3. Not applicable
Item 4. Submission of matters to Vote of Securityholders
The Annual Meeting of the Shareholders of the Registrant was held on May 15,
1995 in Minneapolis, MN. The total number of shares outstanding and entitled to
vote at the meeting was 9,024,165 of which 8,603,821 were present either in
person or by proxy. Shareholders reelected Board member Curtis A. Sampson (in
favor 8,526,475, abstaining 77,346) and elected new Board member Joseph W.
Parris (in favor 8,523,777, abstaining 80,044) to three year terms expiring at
the 1998 Annual Meeting of Shareholders. Board member James O. Ericson, a
director since 1970, did not stand for reelection at the meeting. Directors
continuing in office are Edward E. Strickland, Edwin C. Freeman and John C.
Ortman (whose terms expire at the 1996 Annual Meeting of Shareholders) and C.A.
Anderson, Paul J. Anderson and Wayne E.Sampson (whose terms expire at the 1997
Annual Meeting of Shareholders).
Additionally, shareholders approved an amendment to the Company's Articles of
Incorporation, increasing the total number of authorized shares of common stock,
par value $.05 per share, by 15,000,000 shares to a total of 30,000,000 shares
(in favor 7,976,232, opposed 530,763, abstaining 96,826). Shareholders also
approved an amendment to the Company's 1992 Stock Plan to increase the total
number of shares of common stock available for issuance under such plan by
500,000 shares to 900,000 shares (in favor 7,160,937, against 332,821,
abstaining 1,110,063). Shareholders also approved an amendment to the Company's
Employee Stock Purchase Plan, increasing the total number of common shares
available for issuance under the plan from 100,000 shares to 200,000 shares (in
favor 7,400,432, against 150,607, abstaining 1,052,782).
Items 5-6. 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: August 11, 1995
11