This excerpt taken from the JCS 10-Q filed May 13, 2009.
Net investment income remained stable at $160,000 in 2009 as compared to $158,000 in 2008. Income before income taxes increased to $1,937,000 in 2009 compared to $356,000 in 2008. The Companys effective income tax rate was 37% in 2009 compared to 48% in 2008. This effective rate was higher than the standard rate of 35% due to state income taxes, foreign losses not deductible for U.S. income tax purposes, provisions for interest charges and settlement of uncertain income tax positions as explained in Note 7 above.
Liquidity and Capital Resources
At March 31, 2009, the Company had approximately $31,144,000 of cash equivalents and investments compared to $29,952,000 of cash equivalents and investments at December 31, 2008. The Company had current assets of approximately $76,806,000 and current liabilities of $8,523,000 at March 31, 2009 compared to current assets of $80,819,000 and current liabilities of $10,091,000 at December 31, 2008.
Net cash provided by operating activities was $2,606,000 in the first three months of 2009 compared to $1,966,000 used in the same period in 2008. Significant working capital changes from December 31, 2008 to March 31, 2009 included decreased inventory of $1,488,000 due to sale of increased inventory purchases at the end of 2008 and a decrease in accounts receivable of $389,000 due to the timing of collections.
Net cash used in investing activities was $14,998,000 in the first three months in 2009 compared to cash used of $1,237,000 in the same period in 2008, due to the purchase of certificates of deposit with maturities of greater than 90 days during the quarter, offset by the sale of such investments. Additionally, there was a decrease in capital expenditures at the Companys new building in Minnetonka, Minnesota. In the first quarter of 2008, the Company spent approximately $700,000 in equipping the new building, which did not occur in the first quarter of 2009.
Net cash used in financing activities was $1,039,000 and $801,000 in the first three months of 2009 and 2008, respectively. Cash dividends paid in the first three months of 2009 were $994,000 ($.12 per common share) compared to $1,029,000 ($.12 per common share) in the same period in 2008. Proceeds from common stock issuances, principally exercises of employee stock options, totaled approximately $67,000 in the first three months of 2009 and $298,000 in the same period in 2008. The Companys Board of Directors has authorized the purchase and retirement, from time to time, of shares of the Companys stock on the open market, or in private transactions consistent with overall market and financial conditions. In the first three months of 2009, the Company purchased and retired 2,869 of its common shares at a cost of $26,000. At March 31, 2009, 484,194 additional shares could be repurchased under outstanding Board authorizations. The Company has a $10,000,000 line of credit from U.S. Bank. Interest on borrowings on the credit line is at the LIBOR rate plus 1.5% (2.7% at March 31, 2009). There were no borrowings on the line of credit during the first three months of 2009 or 2008. The credit agreement expires September 30, 2009 and is secured by assets of the Company. As part of the acquisition of the new Minnetonka headquarters building in July 2007, the Company assumed an outstanding mortgage of $4,380,000. The mortgage is payable in monthly installments and carries an interest rate of 6.83%. The mortgage matures on March 1, 2016. Mortgage payments on principal totaled $85,000 during the first quarter of 2009. The outstanding balance on the mortgage was $3,038,000 at March 31, 2009.
In the opinion of management, based on the Companys current financial and operating position and projected future expenditures, sufficient funds are available to meet the Companys anticipated operating and capital expenditure needs.
Critical Accounting Policies
Our critical accounting policies, including the assumptions and judgments underlying them, are discussed in our 2008 Form 10-K in Note 1 Summary of Significant Accounting Policies included in our Consolidated Financial Statements. There were no significant changes to our critical accounting policies during the three months ended March 31, 2009.
The Companys accounting policies have been consistently applied in all material respects and disclose such matters as allowance for doubtful accounts, sales returns, inventory valuation, warranty expense, income taxes, revenue recognition, asset and goodwill impairment recognition and foreign currency translation. On an ongoing basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. Management on an ongoing basis reviews these estimates and judgments.
Recently Issued Accounting Pronouncements
We do not believe there are any recently issued accounting standards that have not yet been adopted that will have a material impact on the Companys financial statements.
The Company has no freestanding or embedded derivatives. The Companys policy is to not use freestanding derivatives and to not enter into contracts with terms that cannot be designated as normal purchases or sales.
The vast majority of our transactions are denominated in U.S. dollars; as such, fluctuations in foreign currency exchange rates have historically not been material to the Company. At March 31, 2009 our bank line of credit carried a variable interest rate based on the London Interbank Offered Rate (Libor) plus 1.5%. The Companys investments are either money market type of investments that earn interest at prevailing market rates or certificates of deposits insured through the federal deposit insurance company and as such do not have material risk exposure.
Based on the Companys operations, in the opinion of management, no material future losses or exposure exist relative to market risk.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Operating Effectiveness of Accounting and Control Procedures. We concluded that, in the aggregate, no material weakness existed as of March 31, 2009 related to documentation and review of significant accounting judgments and estimates, balance sheet account reconciliations, financial closing processes and financial reporting processes at period ends.
Changes in Internal Control over Financial Reporting
The following changes to our internal controls over financial reporting were substantially completed during the fourth quarter of fiscal 2008 and have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:
During the period covered by this Report there was no additional change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
These excerpts taken from the JCS 10-K filed Mar 24, 2009.
Net investment and other income decreased to $597,000 in 2008 compared to $1,760,000 in 2007 due to an increase in interest expense on the Companys mortgage and a decrease in earnings on cash investments. The Company paid a full year in interest expense on the mortgage in 2008 while only a few months in 2007. The Company generally invested its excess cash in money market funds and certificates of deposit in 2008, which had lower rates than in the prior year. The combination of the state and foreign income taxes increased the Companys 2008 tax rate to 41% compared to a normal U.S. rate of 35%.
Net investment and other income increased to $1,760,000 in 2007 compared to $698,000 in 2006 due to increased earnings on cash investments. The Company generally invested its excess cash in money market funds in 2007. The combination of the state and foreign income taxes increased the Companys 2007 tax rate to 38% compared to a normal U.S. rate of 34%.