- --------------------------------------------------------------------------------
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, 1998
-------------------------------------------------
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 issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding at October 31, 1998
- ----------------------- -------------------------------
Common Stock, par value 8,793,301
$.05 per share
Total Pages (12) 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 8
Part II. Other Information 12
2
<PAGE>
PART I. FINANCIAL INFORMATION
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30 December 31
Assets: 1998 1997
------------ ------------
Current assets:
<S> <C> <C>
Cash $ 16,592,858 $ 17,942,315
Investments in U.S. Treasury securities 5,249,314
Marketable securities 21,150 802,045
Receivables, net 13,252,145 12,571,511
Inventories - Note 2 19,923,846 18,438,531
Prepaid expenses 410,046 684,221
Deferred income taxes 1,080,000 1,080,000
------------ ------------
Total current assets 51,280,045 56,767,937
Property, plant and equipment 29,360,359 26,682,575
less accumulated depreciation (18,695,423) (17,007,714)
------------ ------------
Net property, plant and equipment 10,664,936 9,674,861
Other assets:
Excess of cost over net assets acquired 4,756,539 2,881,544
Investments in mortgage backed and other securities 2,312,355 3,356,568
Deferred income taxes 112,005 114,047
Notes receivable from sale of assets of
discontinued operations 4,357,767 4,557,767
Other assets 703,622 165,204
------------ ------------
Total other assets 12,242,288 11,075,130
------------ ------------
Total Assets $ 74,187,269 $ 77,517,928
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 2,992,732 $ 2,770,628
Accrued expenses 4,003,182 3,030,736
Dividends payable 890,260 839,399
Income taxes payable 2,103,339 1,613,469
------------ ------------
Total current liabilities 9,989,513 8,254,232
Stockholders' Equity 64,197,756 69,263,696
------------ ------------
Total Liabilities and Stockholders' Equity $ 74,187,269 $ 77,517,928
============ ============
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 18,029,530 $ 19,790,212 $ 52,485,367 $ 56,787,475
Costs and expenses:
Cost of sales 12,826,725 13,015,205 36,688,322 38,674,614
Selling, general and
administrative expenses 2,840,180 2,742,209 8,433,891 8,353,346
------------ ------------ ------------ ------------
Total costs and expenses 15,666,905 15,757,414 45,122,213 47,027,960
------------ ------------ ------------ ------------
Operating income 2,362,625 4,032,798 7,363,154 9,759,515
Other income and (expenses):
Investment income 330,402 456,567 1,118,636 1,231,813
Interest expense (1,278) (3,803)
------------ ------------ ------------ ------------
Other income, net 329,124 456,567 1,114,833 1,231,813
Income before income taxes 2,691,749 4,489,365 8,477,987 10,991,328
Income taxes (Note 3) 740,000 1,335,000 1,890,000 2,785,000
------------ ------------ ------------ ------------
Net income $ 1,951,749 $ 3,154,365 $ 6,587,987 $ 8,206,328
============ ============ ============ ============
Basic net income per share $ .22 $ .34 $ .72 $ .89
============ ============ ============ ============
Diluted net income per share $ .22 $ .33 $ .72 $ .88
============ ============ ============ ============
Average shares outstanding:
Weighted average number of common
shares outstanding 8,942,618 9,200,989 9,123,609 9,200,989
Dilutive effect of stock options
outstanding after application of
treasury stock method 18,375 97,796 67,537 97,796
------------ ------------ ------------ ------------
8,960,993 9,298,785 9,191,146 9,298,785
============ ============ ============ ============
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
Common Stock Additional Cumulative Stock Option
-------------------- Paid in Retained Translation Notes
Shares Amount Capital Earnings Adjustment Receivable Total
--------- --------- ------------ ------------ ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE at December 31, 1996 9,107,309 $ 455,365 $ 21,454,353 $ 36,856,285 $ 249,475 $ - $ 59,015,478
Net income 10,936,873 10,936,873
Shareholder dividends (3,240,303) (3,240,303)
Issuance of common stock under
Employee Stock Purchase Plan 16,622 831 182,843 183,674
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 181,851 9,093 2,045,715 2,054,808
Tax benefit from non qualified
employee stock options 150,904 150,904
Cumulative translation adjustment (137,738) (137,738)
--------- --------- ------------ ------------ ----------- ------------- --------------
BALANCE at December 31, 1997 9,326,652 466,333 24,132,771 44,552,855 111,737 - 69,263,696
Net income 6,587,987 6,587,987
Shareholder dividends (2,627,113) (2,627,113)
Issuance of common stock to
acquire JDL Technologies, Inc. 158,005 7,900 2,204,170 2,212,070
Issuance of common stock under
Employee Stock Purchase Plan 12,210 610 112,259 112,869
Issuance of common stock under
Employee Stock Option Plan 84,834 4,242 938,102 942,344
Issuance of notes receivable
for stock options (288,225) (288,225)
Purchase of Communications
Systems, Inc. common stock (788,400) (39,420) (2,167,669) (9,992,581) (12,199,670)
Cumulative translation adjustment 193,798 193,798
--------- --------- ------------ ------------ ----------- ------------- --------------
BALANCE at September 30, 1998 8,793,301 $ 439,665 $ 25,219,633 $ 38,521,148 $ 305,535 $ (288,225) $ 64,197,756
========= ========= ============ ============ =========== ============= ==============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30
------------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 6,587,987 $ 8,206,328
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,113,980 1,872,513
Adjustment to marketable securities reserve (39,171) (34,459)
Loss on liquidation of foreign subsidiary 73,696
Changes in assets and liabilities:
Decrease in marketable securities 820,066 128,141
Decrease (increase) in accounts receivable 803,466 (1,859,360)
Increase in inventory (1,159,803) (4,337,843)
Decrease in prepaid expenses 275,948 32,717
Increase in deferred income taxes (269,310)
Increase (decrease) in accounts payable (769,412) 1,364,665
Increase in accrued expenses 143,855 1,177,422
Increase in income taxes payable 480,000 992,716
------------ ------------
Net cash provided by operating activities 9,256,916 7,347,226
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,619,135) (1,981,448)
Decrease in mortgage backed and other investment securities 1,044,213 818,551
Increase in other assets (536,913) (600,910)
Changes in assets and liabilities of discontinued operations 536,679
Collection of notes receivable 200,000 201,207
Proceeds from maturities of U.S. Treasury securities 5,249,314
Payment for purchase of Austin Taylor Communications, Ltd. (79,947)
Payment for purchase of JDL Technologies, Inc. (32,260)
------------ ------------
Net cash provided by (used in) investing activities 3,305,219 (1,105,868)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,576,252) (2,291,991)
Proceeds from issuance of common stock 766,988 2,009,682
Purchases of Communications Systems, Inc. common stock (12,199,670)
------------ ------------
Net cash used in financing activities (14,008,934) (282,309)
------------ ------------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 97,342 (113,538)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (1,349,457) 5,845,511
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 17,942,315 17,799,398
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,592,858 $ 23,644,909
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 1,400,130 $ 1,786,294
Interest paid 3,803 -
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 September 30,
1998, the statements of income for the three and nine month periods ended
September 30, 1998 and 1997, and the statements of cash flows for the nine month
periods ended September 30, 1998 and 1997, 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 September 30, 1998 and 1997
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, 1997 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.
Effective January 1, 1998, the Company has adopted the provisions of Financial
Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income"
(SFAS No. 130). This statement establishes standards for reporting and
presenting comprehensive income and its components in the financial statements.
The Company's total comprehensive income for the three-month periods ended
September 30, 1998 and 1997 was $2,074,472 and $3,076,770, respectively. The
Company's total comprehensive income for the nine-month periods ended September
30, 1998 and 1997 was $6,781,785 and $7,968,815, respectively.
Effective August 7, 1998, in a noncash transaction, the Company acquired JDL
Technologies, Inc. in exchange for 158,005 shares of its common stock. The
acquisition was accounted for as a purchase. The excess of cost over net assets
acquired in the transaction was $2,396,000 which is being amortized on a
straight-line basis over 5 years. The results of operations of JDL Technologies,
Inc., which are not material to the Company's financial statements, have been
included in the Company's operations effective August 7, 1998.
In February, 1997 the Company issued 20,870 shares of the Company's common stock
to the Employee Stock Ownership Plan in payment of its 1996 obligation. In a
noncash transaction, the Company recorded additional stockholders' equity of
$300,000 (reflecting the market value of the stock at the time of the
contribution) and reduced accrued expenses by the same amount.
NOTE 2 - INVENTORIES
Inventories summarized below are priced at the lower of first-in, first-out cost
or market:
September 30 December 31
1998 1997
Finished Goods $ 7,394,632 $ 5,237,907
Raw Materials 12,574,214 13,200,624
------------------- --------------------
Total $ 19,923,846 $ 18,438,531
=================== ====================
7
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
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,
1998 and 1997 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.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Nine Months Ended September 30, 1998 Compared to
Nine Months Ended September 30, 1997
Sales totaled $52,485,000, a decrease of $4,302,000 or 8% from the 1997 period.
Operating income was $7,363,000, a decrease of $2,396,000 or 25% from 1997.
Sales to domestic (U.S. and Puerto Rico) customers decreased $2,855,000 or 6%.
Sales to the Big 6 telephone companies (the five Regional Bell Operating
Companies [RBOCs] and GTE) decreased $3,467,000 or 12%. The decline in sales to
this market was due to purchase pattern adjustments caused by the merger of two
RBOCs and inventory overstocks at a third RBOC. Sales to this market accounted
for 57% of domestic sales in the 1998 period. Sales to electrical distributors
and original equipment manufacturers increased $332,000 or 3%. Sales in Puerto
Rico increased $325,000 or 24%. The acquisition of JDL Technologies added
$1,347,000 to sales for the 1998 period. Sales to retailers decreased $1,389,000
or 31%.
The sales decreases were spread over all of the Company's product groups. Sales
of the Company's CorroShield line of corrosion resistant connectors, which has
lead the Company's sales growth, were 5% lower for 1998 than in the 1997 period.
CorroShield product sales totaled $16,488,000 in the 1998 period compared to
$17,348,000 in 1997. Sales of conventional voice products declined $2,226,000 or
11%. The Company believes most of the sales decline of these products is due to
customers converting to the CorroShield product. Sales of data products
decreased $949,000 or 18%. Sales of fiber optic connector products decreased
$627,000 or 19%.
Sales to international customers decreased $1,447,000 or 12%. Sales by Austin
Taylor, the Company's United Kingdom based subsidiary, decreased $988,000 or 10%
due to lower sales of metal street cabinets and cable television ("CATV")
customer premise equipment to U.K. based customers. U.S. export sales, including
sales to Canada, decreased $459,000 or 20% due to lower sales of fiber products.
Consolidated gross margin as a percentage of sales was 30%, compared to 32% in
the 1997 period. Margin percentages earned in U.S. plants were 33% compared to
35% in 1997. Margins earned on Austin Taylor products declined to 18% from 19%
in the 1997 period. The decline in gross margin percentages was principally due
to overhead inefficiencies resulting from lower than anticipated sales volume.
Selling, general and administrative expenses increased $80,000 or 1% from the
1997 period. The increase was due to the addition of JDL Technologies operations
which offset lower sales and delivery expenses in the Company's telephone
station apparatus operations.
8
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Investment income, net of interest expense, decreased $117,000 from the 1997
period due to reduced cash balances available for investment. The Company's
effective income tax rate was 22% compared to 25% in the 1997 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 1998
tax rate is lower than the 1997 tax rate due to lower profits in Puerto Rico,
which reduced the percentage of the Company's income subject to the full U.S.
tax rate. Net income decreased $1,618,000, or 20%.
Three Months Ended September 30, 1998 Compared to
Three Months Ended September 30, 1997
Sales totaled $18,030,000, a decrease of $1,761,000 or 9% from the 1997 period.
Operating income was $2,363,000, a decrease of $1,670,000 or 41% from 1997.
Sales to domestic (U.S. and Puerto Rico) customers decreased $980,000 or 6%.
Sales to the Big 6 telephone companies decreased $745,000 or 8%. The decline in
sales to this market was due to purchase pattern adjustments caused by the
merger of two RBOCs and inventory overstocks at a third RBOC. Sales to this
market accounted for 57% of domestic sales in the 1998 period. Sales to
retailers decreased $1,040,000 or 56% due to lower sales to Tandy Corporation.
Sales to electrical distributors and original equipment manufacturers decreased
$445,000 or 11%. Sales in Puerto Rico increased $16,000 or 3%. The acquisition
of JDL Technologies added $1,347,000 to sales for the 1998 period.
The sales decreases were spread over all of the Company's product groups. Sales
of the Company's CorroShield line of corrosion resistant connectors, which has
lead the Company's sales growth, were 5% lower for 1998 than in the 1997 period.
The Big 6 telephone companies have been the Company's principal markets for
CorroShield products. Sales of conventional voice products decreased $2,018,000
or 27%. Sales of fiber optic connector products decreased $241,000 or 21%.
Sales to international customers decreased $781,000 or 20%. Sales by Austin
Taylor, the Company's United Kingdom based subsidiary, decreased $608,000 or 19%
due to lower sales of metal street cabinets and cable television ("CATV")
customer premise equipment to U.K. based customers. U.S. export sales, including
sales to Canada, decreased $173,000 or 26% due to lower sales of fiber products
and lower sales to Far East customers. The Company believes its sales in this
region are being hurt by the currency devaluations that have followed the
economic crisis in this area.
Gross margin as a percentage of sales was 29% compared to 34% in the 1997
period. Gross margin percentage in U.S. plants declined to 32% from 37% in 1997.
Margins earned on Austin Taylor products were 13% compared to 19% in the 1997
period. The decline in gross margin percentages was principally due to overhead
inefficiencies resulting from lower than anticipated sales volume.
Selling, general and administrative expenses increased $397,000, or 14%, from
the 1997 period. The increase was due to the addition of JDL Technologies
operations which offset lower sales and delivery expenses in the Company's
telephone station apparatus operations.
9
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Investment income, net of interest expense, decreased $127,000 from the 1997
period due to reduced cash balances available for investment. The Company's
effective income tax rate was 27% compared to 30% in the 1997 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 1998
tax rate is lower than the 1997 tax rate due to lower profits in Puerto Rico,
which reduced the percentage of the Company's income subject to the full U.S.
tax rate. The Company's tax rate was higher in this 1998 quarterly period than
in earlier quarters during the year due to higher than anticipated toll gate tax
expenses on dividends from the Company's Puerto Rico subsidiary. Net income
decreased $1,203,000, or 38%.
Liquidity and Capital Commitments
At September 30, 1998, the Company held approximately $16,593,000 of cash
compared to $17,942,000 at December 31, 1997. Working capital was $41,291,000
compared to $48,514,000 at December 31, 1997. The Company's current ratio was
5.1 to 1 compared to 6.9 to 1 at December 31, 1997. In addition to its cash and
working capital balances, the Company also holds investments in long-term
securities and notes receivable totaling $6,670,000.
Net cash provided by operating activities was $9,257,000 compared to $7,347,000
in the first nine months of 1997. Cash was utilized during the period to finance
increased inventory levels, purchase new plant and equipment, pay dividends and
repurchase the Company's common stock.
The Company's Board of Directors has issued authorizations to purchase and
retire up to 1,000,000 shares of the Company's common stock on the open market
or in privately negotiated transactions consistent with overall market and
financial conditions. At September 30, 1998, the Company had purchased and
retired 788,400 shares of stock at a cost of $12,200,000. The Company received
$767,000 and $2,010,000 from stock issuances due to exercise of employee stock
options in 1998 and 1997, respectively.
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 1998 at the full U.S. rate, income tax
expense would have increased by approximately $1,800,000.
The Company's balance sheet remains strong, with stockholders' equity of
$64,198,000 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.
10
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Year 2000 Issues
The software used by the Company's data processing and management control
systems was originally designed to use references to calendar dates on an
abbreviated basis. Under this system, references to the calendar year are
abbreviated to the last two digits of the year, i.e. 1998 is abbreviated as
"98". Most software using this system does not recognize that the year 2000,
abbreviated as "00", follows 1999. This causes computing errors in date
sensitive processes. The Company has surveyed its operations to locate computer
systems which may be subject to this error.
The Company's accounting and management control systems for its plants in the
U.S., Puerto Rico and Costa Rica utilize a company-wide computer network
centered in the Company's Hector, MN corporate office. The hardware and software
used in operating the network are all purchased from third party suppliers. The
Company has contracted with these suppliers to obtain the necessary hardware and
software to bring its central computer system into Year 2000 compliance on a
current basis. However, certain elements of the data network itself are not
compliant and will be upgraded on an as needed basis in 1999 and 2000.
The Company's U.K. facilities are not currently Year 2000 compliant. The Company
has decided to bring this facility up to compliance by integrating it into the
existing U.S. network. The Company is currently installing and testing this
network expansion as well as training U.K. employees in use of this system. The
Company expects the system to be operational in the U.K. by December 31, 1998.
Total cost to upgrade to Year 2000 compliance companywide is estimated at
$150,000.
At the current time, none of the Company's products contain embedded controllers
or microprocessors. None of the products are date sensitive or subject to the
Year 2000 problem.
The Company has also been in contact with its major customers and suppliers to
estimate the extent to which it may be vulnerable to their respective year 2000
problems. The Company is reliant on third parties for many critical functions,
including transportation, supplies, utilities and communications services. It
cannot quantify the effect Year 2000 problems might have on these customers and
suppliers. As a result, although the Company does not believe Year 2000 problems
will cause a material disruption of its operations, it will continue to monitor
the issue and modify its business plans and procedures as the situation
warrants.
- --------------------------------------------------------------------------------
Statements regarding the Company's anticipated performance in future periods are
forward looking and involve risks and uncertainties, including but not limited
to: buying patterns of the Regional Bell Operating Companies and other
customers, competitive products, and other factors.
- --------------------------------------------------------------------------------
11
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
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: November 13, 1998
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000022701
<NAME> COMMUNICATIONS SYSTEMS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 16,592,858
<SECURITIES> 21,150
<RECEIVABLES> 14,116,145
<ALLOWANCES> 864,000
<INVENTORY> 19,923,846
<CURRENT-ASSETS> 51,280,045
<PP&E> 29,360,359
<DEPRECIATION> 18,695,423
<TOTAL-ASSETS> 74,187,269
<CURRENT-LIABILITIES> 9,989,513
<BONDS> 0
0
0
<COMMON> 439,665
<OTHER-SE> 63,758,091
<TOTAL-LIABILITY-AND-EQUITY> 74,187,269
<SALES> 52,485,367
<TOTAL-REVENUES> 52,485,367
<CGS> 36,688,322
<TOTAL-COSTS> 36,688,322
<OTHER-EXPENSES> 8,433,891
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,803
<INCOME-PRETAX> 8,477,987
<INCOME-TAX> 1,890,000
<INCOME-CONTINUING> 6,587,987
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,587,987
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.72
</TABLE>
