--------------------------------------------------------------------------------
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, 2000
-------------------------------------------------
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
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 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, 2000
-------------------------------------- -------------------------------
Common Stock, par value $.05 per share 8,804,110
Total Pages (13) 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 and Comprehensive Income 4
Consolidated Statements of Changes in 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 10
Part II. Other Information 13
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
2000 1999
------------ ------------
Assets:
Current assets:
<S> <C> <C>
Cash $ 6,683,156 $ 14,837,655
Receivables, net 27,175,763 21,125,610
Inventories (Note 4) 29,636,714 21,168,942
Deferred income taxes 1,735,000 1,735,000
Other current assets 614,752 574,530
------------ ------------
Total current assets 65,845,385 59,441,737
Property, plant and equipment 33,138,263 32,147,128
less accumulated depreciation (22,818,736) (21,187,460)
------------ ------------
Net property, plant and equipment 10,319,527 10,959,668
Other assets:
Excess of cost over net assets acquired 7,251,727 8,819,923
Investments in mortgage backed and other securities 5,942,937 6,078,365
Deferred income taxes 2,164,116 2,168,571
Note receivable 3,165,390 3,365,390
Other assets 255,572 642,399
------------ ------------
Total other assets 18,779,742 21,074,648
------------ ------------
Total Assets $ 94,944,654 $ 91,476,053
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable $ 10,111,462 $ 9,043,035
Accounts payable 6,212,434 8,075,596
Accrued expenses 4,510,683 4,291,797
Dividends payable 879,895 855,087
Income taxes payable 1,229,970 2,788,746
------------ ------------
Total current liabilities 22,944,444 25,054,261
Stockholders' Equity 72,000,210 66,421,792
------------ ------------
Total Liabilities and Stockholders' Equity $ 94,944,654 $ 91,476,053
============ ============
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
Three Months Ended Sept. 30 Nine Months Ended Sept. 30
---------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 29,654,108 $ 29,278,686 $ 92,592,144 $ 85,682,922
Costs and expenses:
Cost of sales 20,615,336 19,143,527 63,627,720 56,610,922
Selling, general and
administrative expenses 7,187,898 7,543,603 22,499,747 21,140,877
------------ ------------ ------------ ------------
Total costs and expenses 27,803,234 26,687,130 86,127,467 77,751,799
------------ ------------ ------------ ------------
Operating income 1,850,874 2,591,556 6,464,677 7,931,123
Other income and (expenses):
Investment income 217,689 299,309 731,388 721,069
Interest expense (211,089) (189,368) (487,460) (510,546)
------------ ------------ ------------ ------------
Other income, net 6,600 109,941 243,928 210,523
Income before income taxes 1,857,474 2,701,497 6,708,605 8,141,646
Income taxes (Note 5) 350,000 600,000 1,300,000 1,820,000
------------ ------------ ------------ ------------
Net income 1,507,474 2,101,497 5,408,605 6,321,646
------------ ------------ ------------ ------------
Other comprehensive income (loss):
Unrealized holding gain
on debt securities 38,644 31,613
Foreign currency
translation adjustment (130,092) 194,768 (396,231) (130,889)
------------ ------------ ------------ ------------
Other comprehensive loss before
income taxes (91,448) 194,768 (364,618) (130,889)
Income tax expense (benefit) related
to unrealized loss on debt securities 13,394 10,957
------------ ------------ ------------ ------------
(104,842) 194,768 (375,575) (130,889)
------------ ------------ ------------ ------------
Comprehensive income $ 1,402,632 $ 2,296,265 $ 5,033,030 $ 6,190,757
============ ============ ============ ============
Basic net income per share $ .17 $ .24 $ .62 $ .73
Diluted net income per share $ .17 $ .24 $ .61 $ .72
Average Basic Shares Outstanding 8,771,679 8,603,260 8,738,155 8,675,949
Average Dilutive Shares Outstanding 8,910,290 8,723,100 8,901,609 8,760,734
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Cumulative
Common Stock Additional Stock Option Other
-------------------- Paid-in Retained Notes Comprehensive
Shares Amount Capital Earnings Receivable Income (Loss) Total
--------- --------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 8,791,301 $439,565 $25,250,914 $37,862,463 $ (288,225) $ 188,935 $63,453,652
Net income 9,013,722 9,013,722
Issuance of stock under Employee
Stock Purchase Plan 27,431 1,372 266,766 268,138
Issuance of stock to Employee
Stock Ownership Plan 19,893 995 234,005 235,000
Issuance of stock under Employee
Stock Option Plan 24,783 1,239 259,537 260,776
Stock issued as compensation 8,000 400 91,600 92,000
Stock option compensation 125,798 125,798
Tax benefit from non qualified
employee stock options 13,754 13,754
Purchase of stock (320,136) (16,007) (940,068) (2,423,746) (3,379,821)
Shareholder dividends (3,455,570) (3,455,570)
Other comprehensive loss (205,657) (205,657)
--------- --------- ----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1999 8,551,272 427,564 25,302,306 40,996,869 (288,225) (16,722) 66,421,792
Net income 5,408,605 5,408,605
Issuance of stock under Employee
Stock Purchase Plan 30,593 1,530 317,020 318,550
Issuance of stock to Employee
Stock Ownership Plan 23,692 1,185 306,811 307,996
Issuance of stock under Employee
Stock Option Plan 269,225 13,461 3,307,763 3,321,224
Stock issued as compensation 8,000 400 119,600 120,000
Purchase of stock (80,505) (4,025) (271,382) (899,725) (1,175,132)
Shareholder dividends (2,635,475) (2,635,475)
Collection of notes receivable 288,225 288,225
Other comprehensive loss (375,575) (375,575)
--------- --------- ----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 2000 8,802,277 $440,114 $29,082,119 $42,870,274 $ - $ (392,297) $72,000,210
========= ========= =========== =========== =========== =========== ===========
See notes to consolidated financial
statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30
--------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 5,408,605 $ 6,321,646
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,972,128 3,918,252
Changes in assets and liabilities net of effects from
acquisition of LANart Corporation in 1999:
Iincrease in accounts receivable (6,220,735) (3,562,131)
Decrease (increase) in inventory (8,662,925) 2,641,030
Increase in other current assets (46,285) (263,933)
Increase (decrease) in accounts payable (1,707,642) 938,680
Increase (decrease) in accrued expenses 676,494 (172,477)
Increase (decrease) in income taxes payable (1,548,697) 2,311
------------ ------------
Net cash provided by (used in) operating activities (8,129,057) 9,823,378
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,922,215) (1,616,608)
Maturities of mortgage-backed and other investment securities 167,041 744,429
Purchases of mortgaged-backed and other securities (5,625,000)
Decrease in other assets 365,116 72,652
Collection of notes receivable 200,000 200,000
Payment for purchase of LANart Corporation, net of cash acquired (3,955,898)
------------ ------------
Net cash used in investing activities (1,190,058) (10,180,425)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (3,931,573) (275,568)
Proceeds from issuance of notes payable 5,000,000 1,096,921
Dividends paid (2,610,667) (2,621,189)
Proceeds from issuance of stock 3,639,774 504,571
Purchase of stock (1,175,132) (3,253,137)
Collection of notes receivable 288,225
------------ ------------
Net cash provided by (used in) financing activities 1,210,627 (4,548,402)
------------ ------------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (46,011) (20,122)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,154,499) (4,925,571)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,837,655 20,405,363
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,683,156 $ 15,479,792
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 2,858,776 $ 1,814,143
Interest paid 474,954 515,351
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 changes in stockholders' equity as of
September 30, 2000, the statements of income and comprehensive income for the
three and nine month periods ended September 30, 2000 and 1999 and the
statements of cash flows for the nine-month periods ended September 30, 2000 and
1999 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, 2000 and 1999 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, 1999 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.
In February 2000, the Company issued 23,692 shares of the Company's common stock
to the Employee Stock Ownership Plan in payment of its 1999 obligation. In a
noncash transaction, the Company recorded additional stockholders' equity of
$308,000 (reflecting the market value of the stock at the time of the
contribution) and reduced accrued expenses by the same amount. In August 2000,
the Company issued 8,000 shares of common stock to employees of a subsidiary in
exchange for services. In a noncash transaction, the Company recorded additional
stockholders' equity and compensation expense of $120,000.
Effective April 7, 1999 the Company acquired LANart Corporation; a manufacturer
of applications specific integrated circuits (ASIC Chips) located in Needham,
Massachusetts, for approximately $3,956,000, net of cash acquired. The
operations were subsequently merged with Transition Networks, Inc. The excess of
cost over net assets acquired in the transaction was $2,361,000, which is being
amortized on a straight-line basis over 5 years.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
SAB No. 101 is to be implemented by the Company no later than the fourth quarter
of 2000. Based on an initial review, the Company does not expect it to have a
significant effect on financial position or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The FASB subsequently issued SFAS No. 137
delaying the effective date for one year, to fiscal years beginning after June
15, 2000. The Company will adopt this standard no later than January 1, 2001.
The Company does not expect that this standard will materially affect its
financial position or results of operations.
7
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTE 2 - NET INCOME PER SHARE
Basic net income per common share is based on the weighted average number of
common shares outstanding during each year. Diluted net income per common share
takes into effect the dilutive effect of potential common shares outstanding.
The Company's only potential common shares outstanding are stock options. The
Company calculates the dilutive effect of outstanding options using the treasury
stock method.
NOTE 3 - SEGMENT INFORMATION
The Company classifies its businesses into four segments: Suttle, which
manufactures U.S. standard modular connecting and wiring devices for voice and
data communications; Austin Taylor, which manufactures British standard line
jacks, patch panels, wiring harness assemblies, metal boxes, distribution
cabinets and central office frames; Transition Networks, which designs and
markets data transmission and computer network products; and JDL Technologies
(JDL) which provides telecommunications network design, specification and
training services to educational institutions. During 1999, JDL became a more
significant portion of the Company and is now identified as a separate segment.
Segment results as previously reported have been restated to reflect JDL as a
separate segment. Information concerning the Company's operations in the various
segments for the nine-month periods ended September 30, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
Austin Transition JDL
Suttle Taylor Networks Technologies Corporate Consolidated
------------ ----------- ------------ ------------ ------------ ------------
Nine Months Ended September 30, 2000:
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 44,090,192 $ 7,488,679 $ 29,484,368 $ 11,528,905 $ 92,592,144
Cost of sales 30,326,723 6,301,091 18,240,652 8,759,254 63,627,720
------------ ----------- ------------ ------------ ------------
Gross profit 13,763,469 1,187,588 11,243,716 2,769,651 28,964,424
Selling, general and
administrative expenses 5,643,320 1,201,099 11,235,527 3,175,510 $ 1,244,291 22,499,747
------------ ----------- ------------ ------------ ------------ ------------
Operating income (loss) $ 8,120,149 $ (13,511) $ 8,189 $ (405,859) $ (1,244,291) $ 6,464,677
============ =========== ============ ============ ============ ============
Depreciation and amortization $ 1,673,499 $ 572,186 $ 1,213,029 $ 378,414 $ 135,000 $ 3,972,128
============ =========== ============ ============ ============ ============
Capital expenditures $ 1,215,500 $ 196,111 $ 209,458 $ 266,808 $ 34,338 $ 1,922,215
============ =========== ============ ============ ============ ============
Assets $ 48,155,680 $ 6,692,516 $ 22,445,091 $ 8,696,278 $ 8,955,089 $ 94,944,654
============ =========== ============ ============ ============ ============
Nine Months Ended September 30, 1999:
Revenues $ 44,422,016 $ 8,716,082 $ 26,134,463 $ 6,410,361 $ 85,682,922
Cost of sales 28,846,450 7,071,579 16,418,102 4,274,791 56,610,922
------------ ----------- ------------ ------------ ------------
Gross profit 15,575,566 1,644,503 9,716,361 2,135,570 29,072,000
Selling, general and
administrative expenses 6,146,014 1,012,953 10,401,783 2,286,980 $ 1,293,147 21,140,877
------------ ----------- ------------ ------------ ------------ ------------
Operating income (loss) $ 9,429,552 $ 631,550 $ (685,422) $ (151,410) $ (1,293,147) $ 7,931,123
============ =========== ============ ============ ============ ============
Depreciation and amortization $ 1,748,636 $ 480,667 $ 1,211,534 $ 355,915 $ 121,500 $ 3,918,252
============ =========== ============ ============ ============ ============
Capital expenditures $ 1,041,379 $ 360,839 $ 73,424 $ 85,331 $ 55,635 $ 1,616,608
============ =========== ============ ============ ============ ============
Assets $ 49,087,016 $ 7,346,459 $ 20,203,702 $ 4,547,311 $ 8,008,231 $ 89,192,719
============ =========== ============ ============ ============ ============
</TABLE>
8
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Information concerning the Company's continuing operations in the various
segments for the three-month periods ended September 30, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
Austin Transition JDL
Suttle Taylor Networks Technologies Corporate Consolidated
------------ ----------- ------------ ------------ ------------ ------------
Three Months Ended September 30, 2000:
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 13,571,136 $ 2,127,350 $ 10,977,439 $ 2,978,183 $ 29,654,108
Cost of sales 9,690,115 1,873,865 6,922,403 2,128,953 20,615,336
------------ ----------- ------------ ------------ ------------
Gross profit 3,881,021 253,485 4,055,036 849,230 9,038,772
Selling, general and
administrative expenses 1,849,024 374,772 3,577,225 1,041,230 $ 345,647 7,187,898
------------ ----------- ------------ ------------ ------------ ------------
Operating income (loss) $ 2,031,997 $ (121,287) $ 477,811 $ (192,000) $ (345,647) $ 1,850,874
============ =========== ============ ============ ============ ============
Depreciation and amortization $ 557,833 $ 195,492 $ 404,343 $ 126,138 $ 45,000 $ 1,328,806
============ =========== ============ ============ ============ ============
Capital expenditures $ 341,530 $ 92,848 $ 22,087 $ 101,497 $ 3,705 $ 561,667
============ =========== ============ ============ ============ ============
Three Months Ended September 30, 1999:
Revenues $ 14,444,556 $ 3,007,289 $ 9,404,629 $ 2,422,212 $ 29,278,686
Cost of sales 9,476,906 2,455,586 5,734,781 1,476,254 19,143,527
------------ ----------- ------------ ------------ ------------
Gross profit 4,967,650 551,703 3,669,848 945,958 10,135,159
Selling, general and
administrative expenses 2,060,648 332,359 3,748,642 946,635 $ 455,319 7,543,603
------------ ----------- ------------ ------------ ------------ ------------
Operating income (loss) $ 2,907,002 $ 219,344 $ (78,794) $ (677) $ (455,319) $ 2,591,556
============ =========== ============ ============ ============ ============
Depreciation and amortization $ 689,374 $ 160,744 $ 460,400 $ 118,638 $ 40,500 $ 1,469,656
============ =========== ============ ============ ============ ============
Capital expenditures $ 524,615 $ 102,089 $ (23,214) $ 60,091 $ 26,747 $ 690,328
============ =========== ============ ============ ============ ============
</TABLE>
NOTE 4 - INVENTORIES
Inventories summarized below are priced at the lower of first-in, first-out cost
or market:
September 30 December 31
2000 1999
--------------- ----------------
Finished Goods $ 10,131,621 $ 7,418,810
Raw Materials 19,505,093 13,750,132
--------------- ----------------
Total $ 29,636,714 $ 21,168,942
=============== ================
NOTE 5 - 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,
2000 and 1999 income taxes do not bear a normal relationship to income before
income taxes, primarily because income from Puerto Rico operations is taxed at
rates lower than the U.S. rate.
--------------------------------------------------------------------------------
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 its Regional Bell Operating Customers, competitor's
products, the success of its recent acquisitions, changes in tax laws,
particularly in regard to taxation of its subsidiary in Puerto Rico.
--------------------------------------------------------------------------------
9
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Nine Months Ended September 30, 2000 Compared to
Nine Months Ended September 30, 1999
Consolidated sales increased 8% to $92,592,000. Consolidated operating income
decreased 18% to $6,465,000.
Suttle sales decreased 1% to $44,090,000. Sales to the major telephone companies
(Bell South, SBC, Verizon and Qwest) decreased $3,114,000 or 11%. Sales to these
customers accounted for 56% of Suttle's sales. The sales decrease to these
customers was principally due to the merger between GTE and Bell Atlantic (now
Verizon) which disrupted normal procurement activities at both companies.
Additionally, a labor strike against Bell Atlantic reduced its telephone
installation and maintenance activities and adversely affected Suttle's sales.
Sales to distributors, original equipment manufacturers (OEMs), and electrical
contractors increased $3,410,000, or 29%. Sales to retail customers decreased
$570,000 or 25% due to decreased sales to Radio Shack, which is Suttle's
principal retail customer. Suttle's export sales, including sales to Canada,
increased $4,000 to $1,709,000.
Suttle's sales results by product line were mixed in the 2000 period. Gains were
mainly from sales of data products, which increased 58% from the 1999 period.
New data product offerings, especially products suitable for high-speed data
transmission, are getting exceptional acceptance from customers. However, Suttle
is experiencing supply problems with certain raw materials for these products,
resulting in delays in shipments to customers of some products. Data product
sales gains were offset by lower sales of Suttle's voice products. Revenues from
CorroShield products, which are sold mainly to the major telephone companies,
decreased 8%. Sales of conventional voice products declined 10%. Sales of voice
products are being hurt by price competition from foreign manufacturers. Sales
of fiber-optic connector products decreased 13%.
Suttle's gross margins decreased 12% to $13,763,000. Gross margin percentage
declined to 31.2% in 2000 from 35.0% in 1999. The decline in gross margin was
due to price-cutting to meet competition as well as unfavorable overhead
comparisons caused by lower than anticipated production volume. Suttle's
operating income decreased $1,309,000 or 14%.
Austin Taylor's sales decreased 14% to $7,489,000. The decrease was due to
reduced sales of CATV products, below plan sales to Pacific Rim telephone
companies and the effects of changes in foreign exchange rates. Austin Taylor's
gross margin declined 28% to $1,188,000. Gross margin as a percentage of sales
was 16% compared to 19% in 1999. The decline in gross margin was principally due
to lower business volume. Selling, general and administrative expenses increased
$188,000 due to increased sales efforts in the Pacific Rim. Austin Taylor had an
operating loss of $14,000 in the 2000 nine months compared to operating income
of $632,000 in the 1999 period.
Sales by Transition Networks, Inc. increased $3,350,000 or 13%. The sales gain
was due to increased demand for media conversion products and the full year
effect of the acquisition of LANart Corporation in April 1999. Gross margin on
Transition Networks' sales increased 16% to $11,244,000. Gross margin as a
percentage of sales increased to 38% from 37% in 1999, principally due to higher
volume. Selling, general and administrative expenses increased $834,000 or 8%.
Transition Networks had operating income of $8,000 in the 2000 period compared
to an operating loss of $685,000 in 1999. The 1999 period included costs
associated with merging LANart Corporation into Transition Networks.
10
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Sales by JDL Technologies, Inc. increased $5,119,000 or 80%. However, most of
the sales increase was made up of low-margin or no-margin reselling of
networking equipment to the education market. JDL's gross margin increased 30%
to $2,770,000. Gross margin as a percentage of sales decreased to 24% from 33%
in the 1999 period. Selling, general and administrative expenses increased
$889,000, or 39%, due to expanded sales efforts. JDL's operating loss was
$406,000 compared to $151,000 in the 1999 period.
Consolidated investment income, net of interest expense, increased $33,000 due
to higher returns on invested funds and lower average borrowing from banks.
Income before income taxes decreased $1,433,000 or 18%. The Company's effective
income tax rate was 19.4% compared to 22.4% in 1999. The decrease in the tax
rate was because a higher percentage of the Company's earnings was sheltered
from U.S. tax in the 2000 period. Net income decreased $913,000 or 14%.
Three Months Ended September 30, 2000 Compared to
Three Months Ended September 30, 1999
Consolidated sales increased 1% to $29,654,000. Consolidated operating income
decreased 29% to $1,851,000.
Suttle sales decreased 6% to $13,571,000. Sales to the major telephone companies
decreased $2,193,000 to $6,710,000. Sales to these customers accounted for 49%
of Suttle's sales. The sales decrease to these customers was principally due to
the merger between GTE and Bell Atlantic (now Verizon) which disrupted normal
procurement activities at both companies. Additionally, a labor strike against
Bell Atlantic reduced its telephone installation and maintenance activities and
adversely affected Suttle's sales. Sales to distributors, original equipment
manufacturers (OEMs), and electrical contractors increased $1,175,000, or 27%.
Sales to retail customers decreased $89,000 or 13% due to decreased sales to
Radio Shack, which is Suttle's principal retail customer. Suttle's export sales
increased $250,000 to $723,000.
Sales of Suttle's voice products (CorroShield and conventional products)
declined $1,881,000 or 16%. Sales of voice products were down due to business
disruptions at major telephone customers. Sales of conventional voice products
are also being harmed by price competition from foreign manufacturers. Sales of
data products increased 48% from the 1999 period. New data product offerings,
especially products suitable for high-speed data transmission, are getting
exceptional acceptance from customers. However, Suttle is experiencing supply
problems with certain raw materials for these products, resulting in delays in
shipments to customers of some products. Sales of fiber-optic connector products
decreased 7%.
Suttle's gross margins decreased 22% to $3,881,000. Gross margin percentage
declined to 28.6% in 2000 from 34.4% in 1999. The decline in gross margin was
due to price-cutting to meet competition as well as unfavorable overhead
comparisons caused by lower than anticipated production volume. Suttle's
operating income decreased $875,000 or 30%.
Austin Taylor's sales decreased 29% to $2,127,000. The decrease was due to
reduced sales of CATV products and below plan sales to international customers.
Austin Taylor's gross margin declined 54% to $253,000. Gross margin as a
percentage of sales was 12.0% compared to 18.3% in 1999. The decline in gross
margin was principally due to lower business volume. Selling, general and
administrative expenses increased $42,000 due to increased sales efforts in the
Pacific Rim. Austin Taylor had an operating loss of $121,000 in the 2000 period
compared to operating income of $219,000 in 1999.
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COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Sales by Transition Networks, Inc. increased $1,573,000 or 17%. Gross margin on
Transition Networks' sales increased 10% to $4,055,000. Gross margin as a
percentage of sales decreased to 37% from 39% in 1999. Selling, general and
administrative expenses decreased $171,000 or 5%. During the third quarter of
2000, the Company implemented a cost reduction program aimed at lowering this
unit's overhead structure by 20%. The program will be continued into the fourth
quarter. Transition Networks had operating income of $478,000 in the 2000 period
compared to an operating loss of $78,000 in 1999.
Sales by JDL Technologies, Inc. increased 23% to $2,978,000. However, most of
the sales increase was made up of low-margin or no-margin reselling of
networking equipment to the education market. JDL's gross margin decreased
$97,000 to $849,000. Gross margin as a percentage of sales decreased to 29% from
39% in the 1999 period. Selling, general and administrative expenses increased
$95,000, or 10%, due to JDL's expanded sales efforts. JDL's operating loss was
$192,000 compared to a loss of $1,000 in the 1999 period.
Consolidated investment income, net of interest expense, decreased $103,000 due
to increased interest on bank borrowings and smaller cash balances available for
investment. Income before income taxes decreased $844,000 or 31%. The Company's
effective income tax rate was 18.8% compared to 22.2% in 1999. Net income
decreased $594,000 or 28%.
Liquidity and Capital Resources
At September 30, 2000, the Company had approximately $6,683,000 of cash and cash
equivalents compared to $14,838,000 of cash and cash equivalents at December 31,
1999. The Company had working capital of approximately $42,901,000 and a current
ratio of 2.9 to 1 compared to working capital of $34,387,000 and a current ratio
of 2.4 to 1 at the end of 1999.
The Company had an operating cash flow deficit of $8,129,000 in the first nine
months of 2000 compared to positive operating cash flow of $9,823,000 in the
same period in 1999. The Company used substantial amounts of cash to support
higher accounts receivable and inventory balances at JDL Technologies and
Transition Networks in the 2000 period. Some of these expenditures were made in
anticipation of higher business volumes that have failed to materialize. The
Company is adjusting the business plans of these operations in order to conserve
cash and reduce inventory and accounts receivable levels.
Investing activities utilized $1,190,000 of cash in the 2000 period. Cash
investments in new plant and equipment totaled $1,922,000, which was financed by
internal cash flows. The Company expects to spend a total of $3,000,000 on
capital additions in 2000.
Net cash flows from financing activities were $1,211,000 for the first nine
months of 2000. The Company retired $3,932,000 of notes payable in the first
nine months of 2000. However, cash requirements at JDL Technologies and
Transition Networks necessitated $5,000,000 of new borrowing from June through
September 2000. Notes payable were $10,111,000 at September 30, 2000 compared to
$9,043,000 at December 31, 1999. The Company purchased and retired 80,505 shares
of its stock in open market transactions during the 2000 period. At September
30, 2000 Board authorizations are outstanding to purchase an additional 59,000
shares. Dividends paid on common stock were $2,611,000. The Company received
$3,640,000 of cash in the 2000 period from exercises of employee stock options
and employee stock purchases.
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COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
The Company has been and continues to be engaged in discussions and analysis
concerning its future. Among the alternatives being considered is the merger of
the Company with another firm. The Company has retained US Bankcorp Piper
Jaffray as its investment banker to assist in these discussions. The Company has
not received any formal merger offer. No assurance can be given that these
discussions will result in a definitive merger agreement.
In the opinion of management, based on the Company's current financial and
operating position and projected future expenditures, sufficient funds are
available to meet the Company's anticipated operating and capital expenditure
needs.
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 14, 2000
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