- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 0-10355
COMMUNICATIONS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0957999
--------------- -------------
(State or other jurisdiction (Federal Employer
of incorporation or organization) Identification No.)
213 South Main Street
Hector, MN 55342
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (320) 848-6231
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $.05 par value
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
---- ----
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
---
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $134,852,000 based upon the closing sale price of
the Company's common stock on the NASDAQ National Market System on March 17,
2000.
As of March 17, 2000 there were outstanding 8,768,047 shares of the Registrant's
common stock.
Documents Incorporated by Reference: The Company's Proxy Statement for its
Annual Meeting of Shareholders to be held on May 18, 2000 is incorporated by
reference into Part III of this Form 10-K.
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Communications Systems, Inc. (herein collectively called "CSI" or the "Company")
is a Minnesota corporation organized in 1969 which operates directly and through
its subsidiaries located in the United States (including Puerto Rico), Costa
Rica and the United Kingdom. CSI is principally engaged in the manufacture and
sale of modular connecting and wiring devices for voice and data communications.
Effective August 7, 1998, the Company acquired JDL Technologies, Inc. ("JDL").
JDL, located in Edina, Minnesota, provides telecommunications network design,
specification, and training services to educational institutions. JDL also sells
internet access software for use in elementary and secondary schools. The
acquisition was accounted for as a purchase and operations of JDL have been
included in consolidated operations from August 7, 1998.
Effective December 1, 1998, the Company acquired Transition Networks, Inc.
("TNI"). TNI, located in Eden Prairie, Minnesota is a manufacturer of media and
rate conversion products, which permit telecommunications networks to move
information between copper-wired equipment and fiber-optic cable. The
acquisition was accounted for as a purchase and operations of TNI have been
included in consolidated operations from December 1, 1998.
Effective April 7, 1999, the Company acquired LANart Corporation, a designer and
manufacturer of application specific integrated circuits located in Needham,
Massachusetts. The operations and reporting activities have been merged into the
Company's Transition Networks, Inc. subsidiary. The acquisition was accounted
for as a purchase and operations of LANart Corporation have been included in
consolidated results from April 7, 1999.
Additional information on these acquisitions can be found in subparagraphs
(c)(1)(iii) and (c)(1)(iv) under Item 1 herein, in "Acquisitions and
Dispositions" under Item 7, Management's Discussion and Analysis and in Note 8
of Notes to Consolidated Financial Statements under Item 8, herein.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
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 distribution and central office frames; Transition Networks, which
designs and markets data transmission and computer network products; and JDL
Technologies, which provides telecommunications network design, specification
and training services to educational institutions. The Company conducts
manufacturing in the United States (including Puerto Rico), the United Kingdom
and Costa Rica. Information regarding operations in the various segments is set
forth in Note 9 of the Notes to Consolidated Financial Statements under Item 8,
herein.
2
<PAGE>
(c) NARRATIVE DESCRIPTION OF BUSINESS
(1) Suttle
The Company manufactures and markets connectors and wiring devices for voice,
data and video communications under the "Suttle" brand name in the United States
(U.S.) and internationally. The Company also manufactures a line of high
performance fiber-optic connectors, interconnect devices and fiber cable
assemblies for the telecommunications, computer and electronics markets.
Products are manufactured at the Company's plants in Hector, Minnesota (Suttle
Apparatus Minnesota Division), Humacao, Puerto Rico (Suttle Caribe, Inc.) and
San Jose, Costa Rica (Suttle Costa Rica, S.A.). Segment sales were $58,398,000
in 1999, or 50% of consolidated revenues.
(A) Products
Suttle's products are used in on-premise connection of telephones, data
terminals and related equipment. The product line consists primarily of modular
connecting devices and includes numerous types of jacks, connecting blocks and
assemblies, adapters, cords and related equipment, which are offered in a
variety of colors, styles and wiring configurations. Most of the products are
used in voice applications, but the Company continues to develop an expanding
line of products for network systems applications. A significant portion of the
Company's revenues are derived from sales of a line of corrosion resistant
connectors which utilize a water resistant gel to offer superior performance in
harsh environments. Station apparatus products generally range in price from
$.70 to $25.00 per unit. A majority of the sales volume, both in units and
revenues, is derived from products selling for under $5.00.
The Company also produces high performance fiber-optic connectors, interconnect
devices and fiber cable assemblies that are used in high speed fiber-optic
networks and local area network connections. The Company's patented Quick Term
TM fiber optic connector significantly reduces installation time and costs
associated with making fiber connections. By eliminating the need for a curing
oven, the product reduces field installation time for this process from 20
minutes to 2 minutes. The Company's fiber-optic connector products range in
price from $2.50 to $1,500.00.
(B) Markets and Marketing
Suttle competes in all major areas of the telecommunications connector market
characterized by modular four, six and eight conductor jacks. Customers include
the "Big 6" telephone companies (the five Regional Bell Operating Companies, or
"RBOCs" and GTE), other telephone companies, electrical contractors,
interconnect companies, original equipment manufacturers and retailers. These
customers are served directly through the Company's sales staff and through
distributors such as Sprint North Supply, Graybar Electric Company, Alltel
Supply, KGP and Anixter Communications.
As a group, sales to the Big 6 telephone companies, both directly and through
distribution, were approximately $35,526,000 in 1999 and $33,245,000 in 1998,
which represented about 60% of Suttle's sales in each year. Sales to GTE Supply,
Alltel Supply and KGP, the principal distributors serving this market, amounted
to 18%, 12% and 16%, respectively, of Suttle's sales in 1999. Sales to GTE
Supply and KGP were 17% and 13%, respectively, of Suttle's sales in 1998.
The Company believes business and network systems products will become an
increasingly important part of its product line. Independent contractors (which
include businesses often referred to as "interconnect companies") are engaged in
the business of engineering, selling, installing and maintaining telephone
equipment for the business community. The Company markets its products to
independent contractors through a network of manufacturer's representatives,
through distribution, and through the Company's sales staff. Sales of products
for business and network systems accounted for 10% and 11% of Suttle's revenues
in 1999 and 1998, respectively.
Approximately 5% of Suttle's 1999 revenues and 8% of 1998 revenues were derived
from sales in the retail market. The Company is a supplier of station apparatus
to Radio Shack, other retailers, office supply distributors and specialized
telephone stores. Sales to the retail market are made through a limited number
of manufacturers' representatives.
Fiber-optic products are marketed to original equipment manufacturers (OEMs) in
the U.S. and internationally through the Company's sales staff, manufacturers'
representatives and a network of distributors, including Graybar Electric
Company, Arcade Electronics and Primestock. Sales of fiber-optic products
accounted for 4% and 6% of Suttle's revenues in 1999 and 1998, respectively.
3
<PAGE>
The balance of Suttle's sales in 1999 and 1998 were to original equipment
manufacturers, non-Big 6 telephone companies and international customers. In the
communications industry market, sales to telephone companies are made directly
or through distribution. Sales to OEM customers are made through a nationwide
network of distributors, some of which are affiliates of major telephone
companies, and through the Company's sales staff.
(C) Competition
Suttle encounters strong competition in all its product lines. The Company
competes primarily on the basis of the broad lines of products offered, product
performance, quality, price and delivery.
Suttle's principal competitors for sales to telephone companies and independent
contractors include: Lucent Technologies, Ortronics, Leviton, Hubbell, Northern
Telecom and AMP, Inc. Most of these companies have greater financial resources
than the Company. In addition, distributors of the Company's apparatus products
also market products for one or more of these competitors. Lucent Technologies
markets to telephone companies and independent contractors directly and through
telephone industry distributors that also market the Company's products.
In retail markets, the Company experiences significant competition from
importers of low-priced modular products that market their products directly and
through a number of distributors to various retail outlets.
The Company's principal competitor for sales to the Regional Bell Operating
Companies is Lucent Technologies. To date, foreign manufacturers of apparatus
products have not presented significant competition for sales to this market.
(D) Order Book
Suttle manufactures its products on the basis of estimated customer
requirements. Outstanding customer orders at March 1, 2000, were approximately
$3,992,000 compared to approximately $3,551,000 at March 1, 1999. Because new
orders are filled on a relatively short timetable, the Company does not believe
its order book is a significant indicator of future results.
(E) Manufacturing and Sources of Supply
The Company's station apparatus products are manufactured using plastic parts,
wire sub-assemblies, fasteners, brackets, electronic circuit boards and other
components, most of which are fabricated by the Company. There are multiple
sources of supply for the materials and parts required and the Company is not
dependent upon any single supplier, except that Suttle's corrosion resistant
products utilize a moisture-resistant gel-filled fig available only from Raychem
Corporation. The unavailability of the gel-filled figs from Raychem Corporation
could have a material adverse effect on the Company. The Company has not
generally experienced significant problems in obtaining its required supplies,
although from time to time spot shortages are experienced.
(F) Research and Development; Patents
The Company continually monitors industry requirements and creates new products
to improve its existing station apparatus product line. The Company's
CorroShield line of corrosion resistant products was introduced in 1993, as was
the Flex-Plate line of data products. The Company added additional products to
these product lines in 1994 and 1995. The Company's SpeedStar line of high-speed
data connectors was introduced in early 1996. In 1997, a proprietary Category 5
connector was developed which meets the highest current industry standard.
Historically, the Company has not relied on patents to protect its competitive
position in the station apparatus market. However, duplication of Company
designs by foreign apparatus manufacturers has caused the Company to apply for
design patents on a number of station apparatus products.
The Company's "Suttle Apparatus" brand name is important to its business. The
Company regularly supports this name by trade advertising and believes it is
well known in the marketplace.
(2) Austin Taylor
Austin Taylor Communications, Ltd. manufactures voice and data connectors and
related products at its plant in Bethesda, Wales, U.K. Its product line consists
of British standard line jacks, patch panels, wiring harness assemblies, metal
boxes, distribution cabinets and distribution and central office frames. Sales
by Austin Taylor were $12,031,000, or 10% of consolidated revenues, in 1999 and
$11,730,000 or 16% in 1998.
4
<PAGE>
Austin Taylor is a vertically integrated manufacturer with metal stamping, metal
bending, forming and painting, plastic injection molding and printed circuit
board assembly capabilities. Austin Taylor's major customers include Cable and
Wireless Communications, Northern Telecom Europe, Lucent Technologies and
British Telecom. Austin Taylor's products are sold directly by its sales staff
and through distributors, including Anixter Communications, NS Supply Group, RS
Components and Telcom Products. Approximately 52% and 61% of Austin Taylor sales
were to United Kingdom customers in 1999 and 1998, respectively.
The Company believes the European telecommunications market will offer
increasing opportunities as the European Economic Community eliminates trade
barriers and standardizes use of modular connector products. In addition to
continued manufacturing and marketing of its existing products, Austin Taylor
will be a base to manufacture and/or distribute existing Suttle products or new
jointly developed products in the United Kingdom, Europe and internationally.
The Company also markets Austin Taylor products in the U.S., Canada, and other
markets.
Outstanding customer orders for Austin Taylor products were approximately
$1,587,000 at March 1, 2000 compared to $539,000 at March 1, 1999. Because
Austin Taylor fills new orders on a relatively short timetable, the Company does
not believe its order book is a significant indicator of future results.
(3) Transition Networks
Effective December 1, 1998, by its acquisition of Transition Networks, Inc., the
Company entered the rapidly growing market for media converter products. Located
in Eden Prairie, Minnesota, TNI manufactures a line of media and rate conversion
products that permit telecommunications networks to move information between
copper-wired equipment and fiber-optic cable. The products make it possible for
customers to take advantage of the newer technologies and higher data
transmission speeds supported by fiber without sacrificing their investments in
older, copper based equipment. In April 1999, the company acquired LANart
Corporation which has been merged into the operations of Transition Networks.
LANart designs and produces the application-specific integrated circuits (ASIC
chips) for its conversion products. This acquisition makes TNI the industry's
largest supplier of conversion devices.
TNI markets its products in the U.S. and internationally through its sales staff
and a limited number of distributors. TNI has international sales offices in
London and Prague and distribution partners in South America and the Pacific
Rim. TNI is generally regarded as the market leader in conversion technology.
Its principal competitors include Allied Telsyn International and Digi
International. Sales by TNI for 1999 were $35,363,000 and represented 30% of
consolidated revenues. Sales by TNI for all of 1998 totaled $24,558,000 of which
$2,208,000 were included in the Company's consolidated operating results for
1998.
Outstanding customer orders for TNI products were approximately $644,000 at
March 1, 2000. TNI also fills new orders on a relatively short term basis and
therefore does not believe its order book is a significant indicator of future
results.
(4) JDL Technologies, Inc.
JDL Technologies, Inc. provides telecommunications network design,
specification, and training services to educational institutions. JDL also sells
internet access software for use in elementary and secondary schools. The
company was acquired effective August 7, 1998. Sales by JDL for 1999 totaled
$11,141,000 and represented 10% of consolidated revenues. Total sales for 1998
totaled $5,613,000 of which $1,681,000 were included in the Company's operating
results.
Outstanding customer orders for JDL products and services were approximately
$4,100,000 At March 1, 2000. JDL does not believe its order book is a
significant indicator of future results.
(5) Employment Levels
As of March 1, 2000 the Company employed 1,000 people. Of this number,
670 were employed by Suttle (including 205 in Puerto Rico, 193 in Hector,
Minnesota and 272 in Costa Rica), 179 by Austin Taylor Communications, Ltd., 101
by Transition Networks, Inc., 34 by JDL Technologies, Inc. and 16 held general
and administrative positions. The Company considers its employee relations to be
good.
5
<PAGE>
(6) Factors Affecting Future Performance
From time to time, in reports filed with the Securities and Exchange Commission,
in press releases, and in other communications to shareholders or the investing
public, the Company may comment on anticipated future financial performance.
Such forward looking statements are subject to risks and uncertainties,
including but not limited to buying patterns of Bell Operating Companies, the
impact of new products introduced by competitors, higher than expected expenses
related to sales and new marketing initiatives, changes in tax laws,
particularly in regard to taxation of income of its subsidiary in Puerto Rico
and other risks involving the telecommunications industry generally.
(7) Executive Officers of Registrant
The executive officers of the Company and their ages at March 1, 2000
were as follows:
Name Age Position (1)
---- --- --------------------------
Curtis A. Sampson 66 Chairman of the Board and Chief Executive
Officer [1970]
C.S. (Sal) Mondelli 49 President and Chief Operating Officer 1999](2)
President, Transition Networks, Inc. [1998](2)
Jeffrey K. Berg 57 President and General Manager, Suttle
Apparatus Corporation [1990]
Paul N. Hanson 53 Vice President - Finance, Treasurer and Chief
Financial Officer [1982]
Lee Ludlam 39 Managing Director, Austin Taylor
Communications, Ltd. [1998] (3)
Thomas Lapping 41 President, JDL Technologies, Inc. [1998] (4)
- -----------------------------------
1 Dates in brackets indicate period during which officers began
serving in such capacity. Executive officers serve at the pleasure
of the Board of Directors and are elected annually for one-year
terms.
2 Mr. Mondelli was appointed President of Transition Networks, Inc.
in May, 1996. From November 1995 to May 1996 he served as
Transition Networks' Vice President of Sales and Marketing. Prior
to November 1995, he was an executive vice president of Prodea
Software in Minneapolis. Transition Networks, Inc. was acquired
by the Company in December 1998. In May 1999, Mr. Mondelli was
appointed President and Chief Operating Officer of Communications
Systems, Inc.
3 Mr. Ludlam was appointed Managing Director of Austin Taylor in
November 1998. From December 1995 to November 1998 he served as
Austin Taylor's Director of Manufacturing. Prior to December 1995
he served as Austin Taylor's plant manager.
4 The Company acquired JDL Technologies, Inc. in 1998.
Messrs. Sampson and Hanson each devote approximately 60% of their
working time to the Company's business with the balance devoted to management
responsibilities at Hector Communications Corporation ("HCC"), a diversified
telecommunications holding company also headquartered in Hector, Minnesota, for
which they are separately compensated by HCC.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
Financial information about domestic and foreign operations and export
sales may be obtained by reference to Note 9 of the "Notes to Consolidated
Financial Statements" under Item 8 herein.
6
<PAGE>
ITEM 2. PROPERTIES
The administrative and manufacturing functions of CSI are conducted at
the following facilities:
- In Hector, Minnesota the Company owns a 15,000 square foot
building where its executive and administrative offices are
located.
- Suttle's manufacturing is conducted at four locations. At Hector,
Minnesota, the Company owns three plants totaling 68,000 feet of
manufacturing space. The Company has a long-term lease from the
Puerto Rico Industrial Development Company on three facilities in
Humacao, Puerto Rico aggregating 65,000 square feet. The Company
leases 40,000 square feet of manufacturing space in San Jose,
Costa Rica.
- Austin Taylor Communications, Ltd. owns a 40,000 square foot
facility and leases a 6,000 square foot facility in Bethesda,
Wales. Austin Taylor also leases a distribution center in Hong
Kong.
- Transition Networks, Inc. leases a 27,000 square foot facility in
Eden Prairie, Minnesota where its manufacturing and administrative
facilities are located.
- JDL Technologies, Inc. leases a 4,000 square foot facility in
Edina, Minnesota which houses its business operations.
- The Company owns a 35,000 square foot plant in Lawrenceville,
Illinois. This facility is for sale, but is currently leased to
other tenants.
CSI believes these facilities will be adequate to accommodate its
administrative and manufacturing needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
No material litigation or other claims are presently pending against
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
7
<PAGE>
PART II
ITEM 5. MARKET MATTERS FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's common stock is currently traded in the National Market
System of the National Association of Securities Dealers Automated Quotation
System ("NASDAQ").
The table below presents the price range of high and low trades of the
Company's common stock for each quarterly period indicated as reported by
NASDAQ:
1999 1998
-------------------- -------------------
High Low High Low
First $12.88 $ 9.50 $19.25 $15.25
Second 13.75 8.50 19.00 16.00
Third 14.75 10.50 16.00 10.88
Fourth 14.75 10.25 13.88 10.50
(b) HOLDERS
At March 1, 2000 there were approximately 860 holders of record of
Communications Systems, Inc. common stock.
(c) DIVIDENDS
The Company has paid regular quarterly dividends since October 1, 1985.
The per share quarterly dividends payable in fiscal 1998 and 1999 were as
follows:
Jan 1, 1998 - April, 1998 $ .09
July 1, 1998 - Present $ .10
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
(in thousands except per share amounts)
Year Ended December 31
-----------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Selected Income Statement Data
<S> <C> <C> <C> <C> <C>
Revenues From Continuing Operations $116,933 $ 71,159 $ 75,732 $ 68,705 $ 66,004
Costs and Expenses:
Cost of Sales 76,688 50,188 52,302 47,719 47,297
Selling, General and Administrative Expenses 28,907 12,413 10,947 10,581 8,519
------- ------- ------- ------- -------
Total Costs and Expenses 105,595 62,601 63,249 58,300 55,816
Operating Income From Continuing Operations 11,338 8,558 12,483 10,405 10,189
Other Income, Net 296 1,259 1,654 799 899
Income From Continuing Operations Before Income Taxes 11,634 9,817 14,137 11,204 11,088
Income Tax Expense 2,620 1,950 3,200 2,250 2,164
------- ------- ------- ------- -------
Income From Continuing Operations 9,014 7,867 10,937 8,954 8,924
Income (Loss) From Discontinued Operations, Net of Taxes (721) 160
------- ------- ------- ------- -------
Net Income $ 9,014 $ 7,867 $ 10,937 $ 8,233 $ 9,084
======= ======= ======= ======= =======
Basic Net Income (Loss) Per Common Share:
Continuing Operations $ 1.04 $ .87 $ 1.18 $ .97 $ .98
Discontinued Operations (.08) .02
------- ------- ------- ------- -------
Basic Net Income Per Share $ 1.04 $ .87 $ 1.18 $ .89 $ 1.00
======= ======= ======= ======= =======
Diluted Net Income (Loss) Per Common Share
Continuing Operations $ 1.03 $ .87 $ 1.17 $ .96 $ .97
Discontinued Operations (.08) .02
------- ------- ------- ------- -------
Diluted Net Income Per Share $ 1.03 $ .87 $ 1.17 $ .88 $ .99
======= ======= ======= ======= =======
Cash Dividends Per Share $ .40 $ .38 $ .34 $ .30 $ .26
======= ======= ======= ======= =======
Average Common and Potential Common
Shares Outstanding 8,727 9,084 9,325 9,352 9,217
======= ======= ======= ======= =======
Selected Balance Sheet Data
Total Assets $ 91,476 $ 83,900 $ 77,518 $ 67,596 $ 61,945
Property, Plant and Equipment, Net 10,960 11,379 9,675 8,965 8,658
Working Capital 34,387 37,245 48,514 35,906 29,039
Net Assets of Discontinued Operations 537 9,255
Stockholders' Equity 66,422 63,454 69,264 59,015 54,076
</TABLE>
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1999 Compared to 1998
Consolidated sales increased 64% to $116,933,000. Consolidated operating income
increased 32% to $11,338,000. The majority of the Company's 1999 sales growth
was generated by three strategic acquisitions that have positioned the Company
in the broadband and high-speed networking markets. The Company acquired JDL
Technologies, Inc. in August 1998; Transition Networks, Inc. in December 1998;
and LANart Corporation in April 1999. LANart Corporation was subsequently merged
into Transition Networks. These acquisitions generated 40% of the Company's
consolidated sales in 1999. The balance of the revenue was comprised of sales of
the Company's traditional voice communications products through the Suttle
operations and Austin Taylor Communications, Ltd.
Suttle sales increased 5% to $58,398,000. Sales to customers in the United
States (U.S.) increased 5% to $56,073,000. Sales to the Big 6 telephone
companies (the five Regional Bell Operating Companies (RBOC's) and GTE)
increased 7% to $35,526,000. Sales to these customers account for 63% of
Suttle's U.S. customer sales. Sales to distributors, original equipment
manufacturers (OEMs) and electrical contractors increased $2,010,000 or 14%.
Sales to retail customers decreased by $1,246,000 or 29%, due primarily by
decreased sales to Radio Shack, which is Suttle's principal retail customer.
Suttle's export sales, including sales to Canada increased by $305,000 or 15%.
The Suttle sales increases were due to a 21% increase in CorroShield product
sales to $26,967,000 in 1999. CorroShield products continue to displace
conventional voice connecting products, sales of which declined approximately 3%
in 1999. Data sales decreased 5% to $5,683,000 and fiber-optic connector
products decreased to approximately $2,317,000 in revenue.
Suttle's gross margins increased by 14% to $20,859,000 in 1999. The gross margin
percentage increased to 35.7% from 32.7% in 1998. The increase in gross margin
was due to lower raw material costs and increased sales of CorroShield products,
which carry higher margins than conventional products. Selling, general and
administrative expenses increased by $181,000 or 2% due to higher sales
expenses. Suttle's operating income increased by $2,502,000 or 24%.
Austin Taylor's sales increased 3% to $12,031,000. The sales increase was due to
increased export sales. Austin Taylor began shipping a new family of
corrosion-resistant products to customers in the Far East in the third quarter
of 1999. Gross margin increased by 186,000, or 10%, to $2,021,000. Gross margin
as a percentage of sales increased to 16.8% from 15.7% in 1998. Selling, general
and administrative expenses increased $23,000. Operating income increased by
$163,000 or 26%.
The Company acquired JDL Technologies, Inc. ("JDL") in August 1998 and
Transition Networks, Inc. ("TNI") in December 1998. JDL had sales of $1,681,000
in the last five months of 1998, and an operating loss of $675,000. JDL reported
$11,141,000 in 1999 revenue with an operating loss of $283,000. TNI and LANart
had combined revenues of $35,363,000 and an operating loss of $173,000. TNI had
1998 sales of $2,208,000 and an operating loss of $334,000 after its acquisition
by the Company.
Consolidated investment income, net of interest expense, decreased by $963,000
due to decreased levels of funds available for investment and also increased
interest expense on notes payable relative to recent acquisitions. Income from
continuing operations before income taxes increased $1,817,000 or 18.5%. The
Company's effective income tax rate was 22.5% in 1999 as compared to 19.9% in
1998. The increase in the tax rate was driven by higher U.S. and U.K. earnings
which are subject to higher tax rates than Puerto Rico earnings. Consolidated
net income increased 15% to $9,014,000 or $1.03 per diluted share. Per share
earnings in 1999 were favorably affected by a reduction in average shares
outstanding in comparison to 1998 due to the repurchase of common shares.
10
<PAGE>
1998 Compared to 1997
Consolidated sales decreased 6% to $71,759,000. Consolidated operating income
decreased 31% to $8,558,000.
Suttle sales decreased 11% to $55,540,000. Sales to customers in the United
States (U.S.) decreased 10% to $53,426,000. Sales to the Big 6 telephone
companies (the five Regional Bell Operating Companies (RBOCs) and GTE) decreased
13% to $33,245,000. Sales to these customers account for 62% of Suttle's U.S.
customer sales. Sales to distributors, original equipment manufacturers (OEMs),
and electrical contractors decreased $155,000, or 1%. Sales to retail customers
decreased $1,476,000 or 26% due to decreased sales to Radio Shack, which is
Suttle's principal retail customer. Suttle's export sales, including sales to
Canada decreased 23% to $2,114,000 due to reduced exports of fiber-optic
connector products and lower sales to Pacific Rim countries.
The sales decreases were across all of Suttle's product lines. CorroShield
product sales fell 6% to $22,247,000 in 1998, the first year it failed to
produce double-digit sales growth since its introduction. The decrease in
CorroShield sales is due to changes in ordering patterns and inventory reduction
programs at the RBOCs, which are CorroShield's major customers. CorroShield
products are continuing to displace conventional voice connecting products,
sales of which declined 12% in 1998. Sales of data products decreased 18% to
$5,972,000. Sales of fiber-optic connector products decreased 18% to $3,336,000.
Suttle's gross margins declined 14% to $18,176,000. Gross margin percentage
declined to 32.7% in 1998 from 33.8% in 1997. The decline in gross margin was
due to costs associated with excess production capacity and provisions for
inventory obsolescence due to slow-moving inventory. Selling, general and
administrative expenses declined $886,000 or 10% due to lower selling and
delivery expenses associated with lower sales volume. Suttle's operating income
decreased $2,037,000 or 16%.
Austin Taylor's sales decreased 12% to $11,730,000. The decrease was due to
reduced sales of cable television products caused by major reductions of cable
television construction activity in the U.K. and below plan sales to Pacific Rim
telephone companies. Austin Taylor's gross margin declined 21% to $1,835,000.
Gross margin as a percentage of sales was 15.7% compared to 17.5% in 1997. The
decline in gross margin was principally due to lower than expected business
volume. Selling, general and administrative expenses increased $21,000.
Operating income decreased $517,000 or 45%.
The Company acquired JDL Technologies, Inc. in August 1998 and Transition
Networks, Inc. in December, 1998. While the Company expects both acquisitions to
make positive contributions in future periods, neither had a positive impact in
1998. JDL had sales of $1,681,000 in the last five months of 1998, and an
operating loss of $675,000. Government funding delays for new telecommunications
infrastructure in the public schools negatively affected JDL's performance. TNI
had sales of $2,208,000 and an operating loss of $334,000. TNI's performance was
hurt by the lack of manufacturing margins on purchased inventory sold in
December.
Consolidated investment income, net of interest expense, decreased $395,000 due
to decreased levels of funds available for investment and interest on notes
payable associated with acquisitions. Income from continuing operations before
income taxes decreased $4,319,000 or 31%. The Company's effective income tax
rate was 19.9% compared to 22.6% in 1997. The decrease in the tax rate was due
to decreased earnings in the U.S. and U.K., where the Company pays a higher rate
of tax than it does on earnings in Puerto Rico. Net income decreased $3,069,000
or 28%.
Acquisitions and Dispositions
Effective December 1, 1998, the Company acquired Transition Networks, Inc.
("TNI") in exchange for $8,507,000 of cash (net of cash acquired). TNI is a
manufacturer of media and rate conversion products, which permit
telecommunications networks to move information between copper-wired equipment
and fiber-optic cable.
Effective August 7, 1998, the Company acquired JDL Technologies, Inc. ("JDL") in
exchange for 158,005 shares of CSI common stock. JDL provides telecommunications
network design, specification, and training services to educational
institutions. JDL also sells Internet access software for use in elementary and
secondary schools.
11
<PAGE>
Effective April 7, 1999, the Company acquired LANart Corporation, a manufacturer
of applications specific integrated circuits (ASIC chips) located in Needham,
Massachusetts, for approximately $4,700,000. The operations were subsequently
merged with Transition Networks, Inc.
The acquisitions the Company has made over the past several years have served to
expand the Company's product offerings and customer base in both U.S. and
international markets. The Company is a growth-oriented manufacturer of
telecommunications connecting and networking devices. The Company is continuing
to search for acquisition candidates with products that will enable the Company
to better serve its target markets.
Effects of Inflation
Inflation has not had a significant effect on operations. The Company does not
have long-term production or procurement contracts and has historically been
able to adjust pricing and purchasing decisions to respond to inflationary
pressures.
European Currency
In January 1999, the European Monetary Union (EMU) entered into a three-year
transition phase during which a common currency called the Euro was introduced
in participating countries. Initially, this new currency is being used for
financial transactions. It will eventually replace the national currencies of
participating nations, which will be withdrawn by July 2002.
The Company does not believe introduction of the Euro will have any material
effect on its business at this time. The United Kingdom, where Austin Taylor is
located, is not among the countries converting to the Euro. The Company does not
do significant amounts of business in other participating European nations, nor
does it hold assets valued in other European currencies. The Company will
continue to monitor the European currency situation and take action as required.
Liquidity and Capital Resources
At December 31, 1999, the Company had approximately $14,838,000 of cash and cash
equivalents compared to $20,405,000 of cash and cash equivalents at December 31,
1998. The Company had working capital of approximately $34,387,000 and a current
ratio of 2.4 to 1 compared to working capital of $37,245,000 and a current ratio
of 2.8 to 1 at the end of 1998. The reduction in working capital was primarily
due to use of short-term debt by the Company in making acquisitions and the
investment of cash in long-term debt securities.
Cash flow provided by operations was approximately $11,222,000 in 1999 compared
to $14,013,000 in 1998. The decrease was due to increased inventory and accounts
receivable levels caused by the Company's increased levels of business.
Investing activities utilized $10,380,000 of cash in 1999. The company invested
approximately $5,825,000 in the purchase of debt securities in 1999. Cash
investments in new subsidiaries in 1999 and 1998 were $3,956,000 and $8,398,000
respectively. Cash investments in new plant and equipment totaled $2,226,000 in
1999. The Company expects to spend $3,000,000 on capital additions in 2000.
Net cash used in financing activities was $6,351,000. Dividends paid on common
stock were $3,480,000. Proceeds from common stock issuances, principally
exercises of key employee stock options, totaled $543,000 in 1999 and $804,000
in 1998. The Company purchased and retired 320,136 and 790,400 shares of its
stock in open market transactions during 1999 and 1998 respectively. Board
authorizations are outstanding to purchase 139,500 additional shares. The
Company may purchase and retire additional shares in 2000 if warranted by market
conditions and the Company's financial position.
The bulk of Suttle's operations are located in Puerto Rico. Until 1994,
substantially all the earnings of these operations were sheltered from U.S.
income tax due to the possessions tax credit (Internal Revenue Code Section
936). Under provisions of the Omnibus Budget Act of 1993, which went into effect
beginning in the 1994 tax year, the amount of the possessions credit is limited
to a percentage of the Company's Puerto Rico payroll and depreciation. U.S.
income tax expense on the Company's earnings in Puerto Rico, after full
utilization of the available tax credits, was $827,000, $556,000 and $791,000 in
1999, 1998 and 1997, respectively.
12
<PAGE>
Under provisions of the Small Business Job Protection Act of 1996, the
possessions tax credit 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 applies 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 at the full U.S. rate,
income tax expense would have increased by $2,023,000, $1,947,000 and $1,987,000
in 1999, 1998 and 1997, respectively.
At December 31, 1999 approximately $34,143,000, $7,626,000 and $1,607,000 of
assets were invested in the Company's subsidiaries in Puerto Rico, the United
Kingdom and Costa Rica, respectively. The Company expects to maintain these
investments to support the continued operation of the subsidiaries. The Company
uses the U.S. dollar as its functional currency in Costa Rica. The United
Kingdom is a politically and economically stable country. Accordingly, the
Company believes its risk of material loss due to adjustments in foreign
currency markets to be small.
At December 31, 1999, the Company's outstanding obligations for notes payable
totaled $9,043,000, consisting principally of borrowings against its line of
credit used to purchase Transition Networks, Inc. The Company expects to repay
or refinance this credit line in 2000. The unused portion of the Company's
credit line ($1,097,000 at December 31, 1999) is available for use. 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.
New Accounting Standards
In September 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 137, an amendment of SFAS No. 133, was
issued in June of 1999 and defers the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000. The Company has not yet determined the
impact of this pronouncement on its financial statements.
13
<PAGE>
REPORT OF MANAGEMENT
The management of Communications Systems, Inc. and its subsidiary companies is
responsible for the integrity and objectivity of the financial statements and
other financial information contained in the annual report. The financial
statements and related information were prepared in accordance with generally
accepted accounting principles and include amounts that are based on
management's informed judgments and estimates.
In fulfilling its responsibilities for the integrity of financial information,
management maintains accounting systems and related controls. These controls
provide reasonable assurance, at appropriate costs, that assets are safeguarded
against losses and that financial records are reliable for use in preparing
financial statements. Management recognizes its responsibility for conducting
the Company's affairs according to the highest standards of personal and
corporate conduct.
The Audit Committee of the Board of Directors, comprised solely of outside
directors, meets with the independent auditors and management periodically to
review accounting, auditing, financial reporting and internal control matters.
The independent auditors have free access to this committee, without management
present, to discuss the results of their audit work and their opinion on the
adequacy of internal financial controls and the quality of financial reporting.
/s/ Curtis A. Sampson
- -------------------------------------
Curtis A. Sampson
President and Chief Executive Officer
/s/ Paul N. Hanson
- -------------------------------------
Paul N. Hanson
Chief Financial Officer
March 28, 2000
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Communications Systems, Inc.
We have audited the accompanying consolidated balance sheets of Communications
Systems, Inc. and subsidiaries (the Company) as of December 31, 1999 and 1998
and the related consolidated statements of income and comprehensive income,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. Our audits also include the financial
statement schedule listed in the Index at Item 14. These consolidated financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1999
and 1998 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles. Also, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
- ----------------------------
Deloitte & Touche LLP
March 2, 2000
Minneapolis, Minnesota
15
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
-------------------------------
1999 1998
------------ ------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 14,837,655 $ 20,405,363
Trade accounts receivable, less allowance for doubtful
accounts of $908,000 and $884,000, respectively 21,125,610 14,624,123
Inventories (Note 2) 21,168,942 20,837,508
Other current assets 574,530 476,149
Deferred income taxes (Note 7) 1,735,000 1,348,000
------------ ------------
TOTAL CURRENT ASSETS 59,441,737 57,691,143
PROPERTY, PLANT AND EQUIPMENT, net (Notes 1 and 3) 10,959,668 11,378,760
OTHER ASSETS:
Excess of cost over net assets acquired (Note 1) 8,819,923 8,392,261
Investments in debt securities (Note 1) 6,078,365 1,340,312
Note receivable (Note 1) 3,365,390 3,765,390
Deferred income taxes (Note 7) 2,168,571 548,047
Other assets 642,399 783,799
------------ ------------
TOTAL OTHER ASSETS 21,074,648 14,829,809
------------ ------------
TOTAL ASSETS $ 91,476,053 $ 83,899,712
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 1) $ 9,043,035 $ 9,077,598
Accounts payable 8,075,596 4,589,078
Accrued expenses 4,291,797 3,823,596
Dividends payable 855,087 879,130
Income taxes payable 2,788,746 2,076,658
------------ ------------
TOTAL CURRENT LIABILITIES 25,054,261 20,446,060
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00 per share;
3,000,000 shares authorized; none issued
Common stock, par value $.05 per share; 30,000,000 shares authorized;
8,551,272 and 8,791,301 shares issued and
outstanding, respectively (Notes 1 and 6) 427,564 439,565
Additional paid-in capital 25,302,306 25,250,914
Retained earnings 40,996,869 37,862,463
Stock option notes receivable (Note 6) (288,225) (288,225)
Cumulative other comprehensive income (loss) (Note 1) (16,722) 188,935
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 66,421,792 63,453,652
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 91,476,053 $ 83,899,712
============ ============
See notes to consolidated financial statements.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended December 31
--------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES (Note 9): $116,932,877 $ 71,158,743 $ 75,731,651
COSTS AND EXPENSES:
Cost of sales 76,688,001 50,188,186 52,301,671
Selling, general and administrative expenses 28,907,288 12,412,361 10,947,163
------------ ------------ ------------
TOTAL COSTS AND EXPENSES 105,595,289 62,600,547 63,248,834
------------ ------------ ------------
OPERATING INCOME 11,337,588 8,558,196 12,482,817
OTHER INCOME (EXPENSE):
Investment income 986,263 1,306,466 1,690,223
Interest expense (690,129) (47,237) (36,167)
------------ ------------ ------------
OTHER INCOME, net 296,134 1,259,229 1,654,056
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 11,633,722 9,817,425 14,136,873
INCOME TAX EXPENSE (Note 7) 2,620,000 1,950,000 3,200,000
------------ ------------ ------------
NET INCOME 9,013,722 7,867,425 10,936,873
------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment (153,981) 77,198 (137,738)
Unrealized holding loss on debt securities (79,087)
------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS)
BEFORE INCOME TAXES (233,068) 77,198 (137,738)
Income tax benefit related to unrealized loss on
debt securities 27,411
------------ ------------ ------------
(205,657) 77,198 (137,738)
------------ ------------ ------------
COMPREHENSIVE INCOME $ 8,808,065 $ 7,944,623 $ 10,799,135
============ ============ ============
BASIC NET INCOME $ 1.04 $ .87 $ 1.18
PER COMMON SHARE (Note 1)
============ ============ ============
DILUTED NET INCOME $ 1.03 $ .87 $ 1.17
PER COMMON SHARE (Note 1)
============ ============ ============
AVERAGE BASIC SHARES OUTSTANDING 8,644,000 9,040,000 9,232,000
AVERAGE DILUTED SHARES OUTSTANDING 8,727,000 9,084,000 9,325,000
See notes to consolidated financial
statements.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Cumulative
Additional Stock Option Other
Common Stock 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, 1996 9,107,309 $ 455,365 $21,454,353 $36,856,285 $ - $ 249,475 $59,015,478
Net income 10,936,873 0,936,873
Issuance of stock to
Employee Stock Ownership Plan 20,870 1,044 298,956 300,000
Issuance of stock under
Employee Stock Purchase Plan 16,622 831 182,843 183,674
Issuance of 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
Shareholder dividends (3,240,303) (3,240,303)
Other comprehensive loss (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 7,867,425 7,867,425
Issuance of 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 stock under
Employee Stock Option Plan 84,834 4,242 938,102 942,344
Tax benefit from non qualified
employee stock options 37,017 37,017
Issuance of notes receivable
for stock options, net (288,225) (288,225)
Purchase of stock (790,400) (39,520) (2,173,405) (11,052,325) (13,265,250)
Shareholder dividends (3,505,492) (3,505,492)
Other comprehensive income 77,198 77,198
--------- --------- ----------- ----------- ----------- ------------ -----------
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 common stock under
Employee Stock Purchase Plan 27,431 1,372 266,766 268,138
Issuance of common 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
========= ========= =========== =========== =========== ============ ===========
See notes to consolidated
financial statements.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
--------------------------------------------------
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 9,013,722 $ 7,867,425 $10,936,873
Adjustments to reconcile income to
net cash provided by operating activities:
Depreciation and amortization 4,801,290 3,085,533 2,471,510
Deferred taxes (816,225) (702,323) 702,713
Loss on liquidation of foreign subsidiary 73,696
Changes in assets and liabilities net of effects
from acquisitions:
Decrease (increase) in accounts receivable (4,744,476) 2,651,591 (1,966,519)
Decrease (increase) in inventory 693,624 1,073,699 (4,634,744)
Decrease (increase) in other current assets (99,920) 1,045,802 (137,547)
Increase (decrease) in accounts payable 2,241,620 (1,114,838) (328,639)
Increase (decrease) in accrued expenses (581,638) (353,930) 727,787
Increase (decrease) in income taxes payable 713,595 459,438 (300,273)
------------ ------------ ------------
Net cash provided by operating activities 11,221,592 14,012,397 7,544,857
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,226,103) (3,351,927) (2,878,073)
Maturities of debt securities 1,008,607 2,039,656 1,131,366
Purchases of debt securities (5,825,747)
Sales (purchase) of U.S. Treasury bill investments 5,249,314 (5,249,314)
Increase (decrease) in other assets 219,507 (617,433) 64,293
Cash receipts from collection of note receivable 400,000 492,377 308,830
Changes in assets and liabilities of discontinued operations 267,679
Payment for purchase of subsidiaries, net of cash acquired (3,955,898) (8,397,852) (79,947)
------------ ------------ ------------
Net cash used in investing activities (10,379,634) (4,585,865) (6,435,166)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt (1,131,484)
Increase in notes payable 1,096,921 8,900,364
Dividends paid (3,479,613) (3,465,761) (3,129,489)
Proceeds from issuance of stock 542,668 804,005 2,238,482
Purchase of stock (3,379,821) (13,265,250)
------------ ------------ ------------
Net cash used in financing activities (6,351,329) (7,026,642) (891,007)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (58,337) 63,158 (75,767)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,567,708) 2,463,048 142,917
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,405,363 17,942,315 17,799,398
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $14,837,655 $20,405,363 $17,942,315
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 1,850,564 $ 2,152,133 $ 2,797,237
Interest paid 714,871 10,727 13,723
See notes to consolidated financial
statements.
</TABLE>
19
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business: The Company is principally engaged in the manufacture
and sale of modular connecting and wiring devices for voice and data
communications. The Company sells these products to telephone companies,
electrical contractors, interconnect companies, original equipment manufacturers
and retailers. The Company also owns subsidiaries which manufacture media and
rate conversion products (products that permit telecommunications networks to
move information between copper wired equipment and fiber-optic cable) and offer
internet network design, specification and training services to educational
institutions. The Company's operations are located in the United States, United
Kingdom, Puerto Rico, and Costa Rica.
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries. All material intercompany
transactions and accounts have been eliminated.
Use of estimates: The presentation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
Company's estimates consist principally of reserves for doubtful accounts and
lower of cost or market inventory adjustments.
Financial instruments: The fair value of the Company's accounts receivable,
accounts payable and notes payable approximate their carrying value due to their
short-term nature. The fair value of the Company's investment in debt securities
is based on quoted market prices.
Cash equivalents: For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid investments with a maturity of three months
or less at the time of purchase to be cash equivalents.
Accounts receivable from Hector Communications Corporation: The Company provides
services for Hector Communications Corporation ("HCC"), a former subsidiary of
the Company. Several of the Company's officers and directors work in similar
capacities for HCC. Outstanding receivable balances from HCC were $428,000 and
$645,000 at December 31, 1999 and 1998, respectively. Accounts with HCC are
handled on an open account basis.
Property, plant and equipment: Property, plant and equipment are recorded at
cost. Depreciation is computed using principally the straight-line method.
Depreciation included in costs and expenses was $2,827,709, $2,444,192 and
$2,086,366 for 1999, 1998 and 1997, respectively. Maintenance and repairs are
charged to operations and additions or improvements are capitalized. Items of
property sold, retired or otherwise disposed of are removed from the asset and
accumulated depreciation accounts and any gains or losses on disposal are
reflected in operations.
Excess of cost over net assets acquired: The excess of cost over net assets of
subsidiaries acquired in purchase transactions is being amortized on the
straight-line method over periods of from 5 to 15 years. Amortization included
in costs and expenses was $1,973,581, $641,341 and $385,144 in 1999, 1998 and
1997, respectively.
Note Receivable: The note receivable represents the balance due from the sale of
the Company's contract manufacturing operations sold in 1996. The note bears
interest at the prime rate and is secured by the assets sold. The original
amount was $4,866,000 and the maturity date is November 1, 2001.
20
<PAGE>
Recoverability of long-lived assets: The company reviews its long-lived assets
periodically to determine potential impairment by comparing the carrying value
of the assets with expected net cash flows expected to be provided by operating
activities of the business or related products. Should the sum of the expected
future net cash flows be less than the carrying value, the Company would
determine whether an impairment loss should be recognized. An impairment loss
would be measured by comparing the amount by which the carrying value exceeds
the fair value of the asset based on market value that is based on the
discounted cash flows expected to be generated by the asset. At December 31,
1999 and 1998, no impairment loss provision is required or recorded in the
consolidated financial statements.
Investment in debt securities: The Company's Puerto Rico subsidiary owns a
portfolio of AAA rated mortgage-backed securities it is holding to maturity. At
December 31, 1999, the amortized cost basis of the securities was $308,000,
which approximates market value. The subsidiary also holds an investment in
Federal Home Loan Bank bonds, which are available for sale. Market value of the
securities was $5,770,000 including a gross unrealized holding loss of $79,000
($52,000 net of taxes), which is reflected in the consolidated financial
statements as a reduction of stockholder's equity.
Notes payable: The Company has a $10,000,000 line of credit from U.S. Bank.
Outstanding borrowings against the line of credit at December 31, 1999 and 1998
were $8,903,000. The Company utilized those funds in the acquisition of
Transition Networks, Inc. Interest on borrowings on the credit line is at the
bank's average CD rate plus 1.5% (6.41% at December 31, 1999). The credit line
matures June 30, 2000.
Foreign currency translation: Assets and liabilities denominated in foreign
currencies were translated into U.S. dollars at year-end exchange rates. Revenue
and expense transactions were translated using average exchange rates.
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, which resulted in a dilutive effect of 82,923 shares, 44,261
shares, and 92,583 shares in 1999, 1998 and 1997, respectively. The Company
calculates the dilutive effect of outstanding options using the treasury stock
method.
New accounting principles: In September 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No.133
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS No. 137, an
amendment of SFAS No. 133, was issued in June 1999 and defers the effective date
of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company has
not yet determined the impact of this pronouncement on its financial statements.
Basis of presentation: Certain amounts in the 1998 and 1997 financial statements
have been reclassified to conform to the 1999 financial statement presentation.
These reclassifications had no effect on net income or stockholders' equity as
previously reported.
21
<PAGE>
NOTE 2 - INVENTORIES
Inventories are carried at the lower of cost (first-in, first out method) or
market and consist of:
December 31
----------------------------
1999 1998
------------ ------------
Finished goods $ 7,418,810 $ 8,450,447
Raw and processed materials 13,750,132 12,387,061
------------ ------------
$ 21,168,942 $ 20,837,508
============ ============
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and the estimated useful lives are as follows:
Estimated December 31
useful life 1999 1998
----------- ------------ ------------
Land $ 305,519 $ 309,939
Buildings 7-30 years 3,105,474 3,091,289
Machinery and equipment 3-15 years 25,690,309 24,550,064
Furniture and fixtures 5-10 years 3,045,826 2,702,890
------------ ------------
32,147,128 30,654,182
Less accumulated depreciation 21,187,460 19,275,422
------------ ------------
$ 10,959,668 $ 11,378,760
============ ============
NOTE 4 - EMPLOYEE BENEFIT PLANS
The Company has an Employee Savings Plan (401(k)) and matches a percentage of
employee contributions up to six percent of compensation. Contributions to the
plan in 1999, 1998 and 1997 were $275,000, $93,000, and $89,000 respectively.
The Company does not provide post retirement benefits to its employees.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company leases land, buildings and equipment under operating leases with
original terms from one to ten years. Certain of these leases contain renewal
and purchase options. Rent expense charged to operations was $885,000, $590,000
and $640,000 in 1999, 1998 and 1997 respectively. At December 31, 1999, the
Company was obligated under noncancellable operating leases to make minimum
annual future lease payments as follows:
Year Ending December 31:
2000 $ 600,618
2001 543,315
2002 466,158
2003 360,960
2004 164,140
------------
$ 2,135,191
============
In the ordinary course of business, the Company is exposed to legal actions and
incurs costs to pursue and defend legal claims. Company management is not aware
of any outstanding or pending legal actions that would materially affect the
Company's financial position or results of operations.
22
<PAGE>
NOTE 6 - COMMON STOCK AND STOCK OPTIONS
Common shares are reserved in connection with the Company's 1992 stock plan
under which 1,900,000 shares of common stock may be issued pursuant to stock
options, stock appreciation rights, restricted stock or deferred stock granted
to officers and key employees. Exercise prices of stock options under the plan
cannot be less than fair market value of the stock on the date of grant. Rules
and conditions governing awards of stock options, stock appreciation rights and
restricted or deferred stock are determined by the Compensation Committee of the
Board of Directors, subject to certain limitations incorporated into the plan.
At December 31, 1999, 446,146 shares remained available to be issued under the
plan. Options expire five years from date of grant with one third of the options
vesting immediately, the remaining two thirds vesting equally over the next two
years.
Common shares are also reserved for issuance in connection with a nonqualified
stock option plan under which up to 200,000 shares may be issued to nonemployee
directors. The plan provides for the automatic grant of nonqualified options for
3,000 shares of common stock annually to each nonemployee director concurrent
with the annual stockholders' meeting. Exercise price will be the fair market
value of the stock at the date of grant. Options granted under this plan vest
when issued and expire ten years from date of grant. At December 31, 1999,
44,000 shares are available to be issued under the plan.
The Company issued 8,000 common shares of stock to JDL Technologies employees as
compensation for services during 1999. Compensation expense recorded was
$92,000. Under provisions of the Company's agreement to purchase JDL
Technologies, an additional 8,000 shares will be issued to JDL Technologies
employees for services performed in 2000, valued at market price on the date of
the issuance.
The Company awarded 240,000 incentive stock options to employees of Transition
Networks, Inc in March 1999. These options are vested based on the attainment of
TNI's annual revenue and operating income targets from 1999 to 2004. On the
measurement date of December 31, 1999, 44,736 incentive stock options were
vested in the accounts of eligible employees. The Company recorded compensation
expense of $125,798 in 1999 in connection with these options. Compensation
expense is based on the difference between the exercise price of $10.18 and the
market price at the measurement date which was $13.00.
Changes in outstanding employee and director stock options during the three
years ended December 31, 1999 were as follows:
<PAGE>
Weighted
average
Number of exercise price
shares per share
---------------- -----------
Outstanding at December 31, 1996 541,689 $ 12.38
Granted 197,700 13.82
Exercised (181,851) 11.30
Canceled (32,266) 14.04
-----------------
Outstanding at December 31, 1997 525,272 13.19
Granted 224,550 17.46
Exercised (84,834) 11.11
Canceled (5,800) 15.07
-----------------
Outstanding at December 31, 1998 659,188 14.89
Granted 622,204 10.27
Exercised (24,783) 10.52
Canceled (99,617) 12.98
-----------------
Outstanding at December 31, 1999 1,156,992 12.66
=================
At December 31, 1999, 660,942 stock options are currently exercisable. The
following table summarizes the status of Communications Systems, Inc. stock
options outstanding at December 31, 1999:
Weighted Average Weighted
Remaining Average
Range of Exercise Prices Shares Option Life Exercise Price
- ------------------------ --------- ----------- ----------------
$ 5.31 to $ 9.99 44,000 3.2 years $ 8.09
$10.00 to $12.00 554,804 5.1 years 10.22
$12.01 to $14.99 295,238 2.4 years 13.98
$15.00 to $18.91 262,950 3.6 years 17.12
23
<PAGE>
In 1998, the Company provided financing to employees and directors who exercised
stock options during the year. The notes bear interest at 6% and matured
February 28, 2000. The notes have been reflected as a reduction of stockholders'
equity in the financial statements.
On October 29, 1999 the Board of Directors adopted a shareholders' rights plan.
Under this plan, the Board of Directors declared a distribution of one right per
share of common stock. Each right entitles the holder to purchase 1/100th of a
share of a new series of Junior Participating Preferred Stock of the Company at
an initial exercise price of $65. The rights expire on October 26, 2009. The
rights will become exercisable only following the acquisition by a person or
group, without the prior consent of the Board of Directors, of 15% or more of
the Company's voting stock, or following the announcement of a tender offer or
exchange offer to acquire an interest of 15% or more. If the rights become
exercisable, each rightholder will be entitled to purchase, at the exercise
price, common stock with a market value equal to twice the exercise price.
Should the Company be acquired, each right would entitle the holder to purchase,
at the exercise price, common stock of the acquiring company with a market value
equal to twice the exercise price. Any rights owned by the acquiring person or
group would become void.
PRO FORMA FINANCIAL INFORMATION
The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," but applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees" for measurement and recognition of stock-based
transactions with its employees. If the Company had elected to recognize
compensation cost for its stock based transactions using the method prescribed
by SFAS No. 123, pro forma net income and net income per share would have been
as follows:
Year Ended December 31
------------------------------------------
1999 1998 1997
----------- ----------- -----------
Net Income $ 8,035,603 $ 7,061,627 $10,254,975
Basic Net Income Per Share $ .93 $ .78 $ 1.11
Diluted Net Income Per Share $ .92 $ .78 $ 1.10
The fair value of the Company's stock options and Employee Stock Purchase Plan
transactions used to compute pro forma net income and net income per share
disclosures is the estimated present value at grant date using the Black-Scholes
option-pricing model. The following table displays the assumptions used in the
model.
Year Ended December 31
--------------------------------
1999 1998 1997
---------- --------- ---------
Expected volatility 27% 26% 25%
Risk free interest rate 5.2% 5.7% 6.2%
Expected holding period - employees 4 years 4 years 4 years
Expected holding period - directors 7 years 7 years 7 years
Dividend yield 3.9% 2.4% 2.6%
Pro forma stock-based compensation cost was $978,000, $806,000 and $682,000 in
1999, 1998 and 1997, respectively. The fair value of all options issued in 1999,
1998 and 1997 was $1,402,000, $971,000 and $690,000, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company maintains an Employee Stock Purchase Plan for which 300,000 common
shares have been reserved. Under the terms of the plan, employees may acquire
shares of common stock, subject to limitations, through payroll deductions at
85% of the lower of fair market value for such shares on one of two specified
dates in each plan year. Shares issued to employees under the plan were 27,431,
12,210 and 16,622 for the plan years ended August 31, 1999, 1998 and 1997,
respectively. At December 31, 1999 employees had subscribed to purchase an
additional 38,546 shares in the current plan year ending August 31, 2000.
24
<PAGE>
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
All eligible employees of the Company participate in the ESOP after completing
one year of service. Contributions are allocated to each participant based on
compensation and vest 30% after three years of service and incrementally
thereafter, with full vesting after seven years. At December 31, 1999, the ESOP
held 309,172 shares of the Company's common stock, all of which has been
allocated to the accounts of eligible employees. Contributions to the plan are
determined by the Board of Directors and can be made in cash or shares of the
Company's stock. The Company's 1997 ESOP contribution was $350,000 of cash. The
Company's 1998 ESOP contribution was $235,000 for which the Company issued
19,893 shares of common stock to the ESOP in February 1999. The 1999 ESOP
contribution was $308,000 for which the Company issued 23,692 shares in February
2000.
PURCHASES OF COMMUNICATIONS SYSTEMS, INC. COMMON STOCK
The Company's Board of Directors has authorized the purchase and retirement,
from time to time, of shares of the Company's stock on the open market, or in
private transactions consistent with overall market and financial conditions. In
1999, the Company purchased and retired 320,136 shares at a cost of $3,380,000.
In 1998, the Company purchased and retired 790,400 shares at a cost of
$13,265,000. At December 31, 1999, 139,500 shares could be repurchased under
outstanding Board authorizations.
NOTE 7 - INCOME TAXES
Income tax expense from continuing operations consists of the following:
Year Ended December 31
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Currently payable income taxes:
Federal $ 2,070,000 $ 1,644,000 $ 1,049,000
State 217,000 110,000 168,000
Puerto Rico 844,000 767,000 826,000
Foreign 305,000 131,000 454,000
------------ ------------ ------------
3,436,000 2,652,000 2,497,000
Deferred income taxes (benefit) (816,000) (702,000) 703,000
------------ ------------ ------------
$ 2,620,000 $ 1,950,000 $ 3,200,000
============ ============ ============
A subsidiary, Suttle Caribe, Inc., operates in Puerto Rico, and is qualified
under Internal Revenue Service Code section 936 for credit against U.S. income
taxes. Under provisions of the Omnibus Budget Reconciliation Act of 1993,
Congress set limits on the section 936 credit that went into effect for the
1994-tax year. As a result of the tax credit limitation, the Company incurred
$827,000, $556,000 and $791,000 of U.S. federal income tax expense on earnings
in Puerto Rico for 1999, 1998 and 1997, respectively.
Earnings of Suttle Caribe, Inc. are 90% exempt from Puerto Rico income taxes
through 2003, subject to satisfaction of the employment and investment
requirements of the tax exemption grant received by the Company. Distributions
by Suttle Caribe, Inc. to the parent company are subject to a tollgate tax at
rates which, depending on various factors, range from 3.5% to 10%. The Company
has provided for and prepaid tollgate taxes at a 1.75% rate on its Puerto Rico
earnings for each year since 1993. The Company has recognized tollgate tax
expense at the 3.5% rate on earnings from years prior to 1993 only to the extent
distributions were received from Suttle Caribe, Inc. The cumulative amount of
undistributed prior earnings on which no tollgate tax has been recognized was
approximately $10,004,000 at December 31, 1999.
Austin Taylor Communications, Ltd. operates in the U.K. and is subject to U.K.
rather than U.S. income taxes. U.K. pretax income was $878,000, $915,000, and
$1,343,000 in 1999, 1998 and 1997, respectively. Suttle Costa Rica, S.A.
operates in Costa Rica and is currently exempt from Costa Rica income taxes.
Accumulated earnings in Costa Rica on which no U.S. income tax has been accrued
was $1,817,000 at December 31, 1999. It is the Company's intention to reinvest
the remaining undistributed earnings of its Puerto Rico, U.K. and Costa Rica
subsidiaries to support the continued operation of those subsidiaries.
25
<PAGE>
The provision for income taxes varied from the federal statutory tax rate as
follows:
Year Ended December 31
-----------------------------
1999 1998 1997
------- ------- -------
Tax at U.S. statutory rate 35.0% 35.0% 35.0%
Surtax exemption (.9) (1.0) (.7)
U.S. taxes not provided on Puerto Rico operations (17.4) (19.8) (14.1)
State income taxes, net of federal benefit 1.8 .7 .8
Other 4.0 5.0 1.6
------- ------- -------
Effective tax rate 22.5% 19.9% 22.6%
======= ======= =======
Deferred tax assets and liabilities as of December 31 related to the following:
1999 1998
------------ ------------
Current assets:
Bad debts $ 258,000 $ 264,000
Inventory 938,000 617,000
Accrued expenses 539,000 470,000
Other (3,000)
------------ ------------
$ 1,735,000 $ 1,348,000
============ ============
Long term assets and (liabilities):
Depreciation $ (393,429) $ (382,953)
Net operating loss carryforward 1,110,000
Loss reserves on notes receivable 151,000 132,000
Excess of cost over net assets 203,000 16,000
Other 26,000
Alternative minimum tax credits 1,072,000 783,000
------------ ------------
$ 2,168,571 $ 548,047
============ ============
As part of the LANart acquisition, the Company purchased net operating loss
carryforwards in the amount of $1,161,000. At December 31, 1999, the Company has
$1,110,000 available net operating loss carryforwards for income tax purposes,
which expire in 2014. The Company also has alternative minimum tax carryforwards
of approximately $1,072,000 at December 31, 1999, which are available to reduce
future regular income taxes over an indefinite period.
NOTE 8 - ACQUISITIONS
Effective December 1, 1998, the Company acquired all the capital stock of
Transition Networks, Inc. for $8,507,000 (cash payments net of cash acquired).
The transaction is being accounted for as a purchase, and the operations of
Transition Networks, Inc. are included in consolidated operations as of the
effective date. Excess of cost over net assets acquired in the transaction was
$4,047,000, which is being amortized on a straight-line basis over 5 years. In
the acquisition, the following assets were acquired and liabilities assumed:
Property, plant and equipment $ 708,804
Excess of cost over net assets acquired 4,046,565
Accounts receivable 3,262,689
Inventory 3,198,942
Cash 550,049
Accounts payable (1,973,236)
Accrued expenses (643,263)
Other assets and liabilities (93,786)
-------------
Total purchase price 9,056,764
Less cash acquired (550,049)
-------------
Payment for purchase of Transition Networks, Inc.,
net of cash acquired $ 8,506,715
=============
Effective August 7, 1998, the Company purchased all the capital stock of JDL
Technologies, Inc. for $2,244,000, consisting of 158,005 shares of the Company's
common stock and $32,000 of acquisition costs. The acquisition was accounted for
as a purchase. Excess of cost over net assets acquired in the transaction was
$2,223,000, which is being amortized on a straight-line basis over five years.
The results of operations of JDL are included in consolidated operations as of
the acquisition date. In the acquisition, the following assets were acquired and
liabilities assumed:
26
<PAGE>
Property, plant and equipment $ 77,799
Excess of cost over net assets acquired 2,222,772
Accounts receivable 1,430,953
Inventory 264,608
Accounts payable (949,999)
Accrued expenses (800,803)
Other assets and liabilities (1,000)
-------------
Payment for purchase of JDL Technologies, Inc. $ 32,260
=============
Effective April 7, 1999, the Company purchased all the capital stock of LANart
Corporation, a designer and manufacturer of application specific integrated
circuits (ASIC chips) located in Needham, Massachusetts, for $3,956,000, net of
cash acquired. The operations of LANart Corporation, which were not material to
the Company's financial statements, have been included in consolidated
operations as of the purchase date. The fair value of assets acquired in the
transaction was $4,764,000 (including excess of cost over net assets acquired of
$2,361,000) and liabilities of $2,805,000 were assumed as follows:
Property, plant and equipment $ 242,192
Excess of cost over net assets acquired 2,361,179
Accounts receivable 1,801,359
Inventory 1,075,871
Deferred tax benefits 1,161,408
Cash 808,265
Accounts payable (1,285,761)
Accrued expenses (1,519,296)
Other assets and liabilities 118,946
-------------
Total purchase price 4,464,163
Less cash acquired (808,265)
-------------
Payment for purchase of LANart, Inc.,
net of cash acquired $ 3,955,898
=============
NOTE 9 - INFORMATION CONCERNING INDUSTRY SEGMENTS AND MAJOR CUSTOMERS
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 distribution and central office frames; Transition Networks, which
designs and markets data transmission and computer network products; and JDL
Technologies. (JDL), that 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.
Suttle products are sold principally to United States (U.S.) customers. Suttle
operates manufacturing facilities in the U.S. (including Puerto Rico) and Costa
Rica. Austin Taylor operates in the United Kingdom (U.K.). Transition Networks
manufactures its products in the United States and makes sales in both the U.S.
and U.K. markets. JDL Technologies operates in the U.S. and makes sales in the
U.S. and Latin America.
In 1999, no customer accounted for more than 10% of consolidated sales. In 1998,
sales to three U.S. customers amounted to 13.6%, 10.4% and 10.3% of consolidated
revenues, respectively. In 1997, sales to two U.S. customers amounted to 17.6%
and 10.0% of consolidated revenues, respectively.Export sales were less than 10%
of consolidated revenues in each of the last three years. At December 31, 1999,
foreign earnings in excess of amounts received in the United States were
approximately $5,739,000.
The Company's products are manufactured using plastic parts, wire
sub-assemblies, fasteners, brackets, electronic circuit boards and other
components, many of which are fabricated by the Company. There are multiple
sources of supply for the materials and parts required and the Company is not
dependent upon any single supplier, except that Suttle's corrosion resistant
products utilize a moisture-resistant gel-filled fig available only from Raychem
Corporation. The unavailability of the gel-filled figs from Raychem Corporation
could have a material adverse effect on the Company. The Company has not
generally experienced significant problems in obtaining its required supplies,
although from time to time spot shortages are experienced.
Information concerning the Company's operations in the various segments is as
follows:
27
<PAGE>
<TABLE>
<CAPTION>
Austin Transition JDL
Suttle Taylor Networks Technologies Corporate Consolidated
---------------------------------------------------------------------------------
Year Ended December 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Revenues $58,398,319 $12,031,318 $35,362,659 $11,140,581 $ - $116,932,877
Cost of sales 37,539,492 10,010,373 21,144,442 7,993,694 76,688,001
---------------------------------------------------------------------------------
Gross profit 20,858,827 2,020,945 14,218,217 3,146,887 40,244,876
Selling, general and
administrative expenses 8,042,164 1,237,122 14,391,632 3,430,327 1,806,043 28,907,288
---------------------------------------------------------------------------------
Operating income (loss$ 12,816,663 $ 783,823 $ (173,415) $ (283,440) $(1,806,043) $ 11,337,588
=================================================================================
Depreciation and amort$zation$ $ 2,068,839 $ 709,992 $ 1,367,536 $ 494,023 $ 160,900 $ 4,801,290
=================================================================================
Assets $51,004,622 $ 7,751,465 $17,511,819 $ 6,639,227 $ 8,568,920 $ 91,476,053
=================================================================================
Capital expenditures $ 1,345,535 $ 675,074 $ 8,293 $ 95,890 $ 61,311 $ 2,226,103
=================================================================================
Year Ended December 31, 1998:
Revenues $55,539,979 $11,729,725 $ 2,208,295 $ 1,680,744 $ - $ 71,158,743
Cost of sales 37,363,994 9,894,546 1,701,222 1,228,424 50,188,186
---------------------------------------------------------------------------------
Gross profit 18,175,985 1,835,179 507,073 452,320 20,970,557
Selling, general and
administrative expenses 7,861,420 1,213,987 841,360 1,127,669 1,367,925 12,412,361
---------------------------------------------------------------------------------
Operating income (loss) $10,314,565 $ 621,192 $ (334,287) $ 675,349) $(1,367,925) $ 8,558,196
=================================================================================
Depreciation and amortization $ 1,957,261 $ 692,453 $ 96,756 $ 12,134 $ 326,929 $ 3,085,533
=================================================================================
Assets $53,130,454 $ 7,091,218 $ 11,731,323 $ 3,634,012 $ 8,312,705 $ 83,899,712
=================================================================================
Capital expenditures $ 2,269,177 $ 935,603 $ 15,294 $ 22,427 $ 109,426 $ 3,351,927
=================================================================================
Year Ended December 31, 1997:
Revenues $62,415,513 $13,316,138 $ - $ 75,731,651
Cost of sales 41,316,252 10,985,419 52,301,671
---------------------------------------------------------------------------------
Gross profit 21,099,261 2,330,719 23,429,980
Selling, general and
administrative expenses 8,747,540 1,192,648 $ 1,006,975 10,947,163
---------------------------------------------------------------------------------
Operating income (loss) $12,351,721 $ 1,138,071 $(1,006,975) $ 12,482,817
=================================================================================
Depreciation and amortization $ 1,744,554 $ 599,982 $ 126,974 $ 2,471,510
=================================================================================
Assets $54,740,837 $ 9,150,276 $13,626,815 $ 77,517,928
=================================================================================
Capital expenditures $ 2,553,360 $ 265,340 $ 59,373 $ 2,878,073
=================================================================================
</TABLE>
28
<PAGE>
(b) SUPPLEMENTAL FINANCIAL INFORMATION
Unaudited Quarterly Operating Results
(in thousands except per share amounts)
Quarter Ended
March 31 June 30 Sept 30 Dec 31
- -----------------------------------------------------------------------------
1999
Revenues $26,598 $29,807 $29,278 $31,250
Gross Margins 9,036 9,901 10,135 11,173
Operating income 3,262 2,078 2,592 3,406
Net Income 2,473 1,748 2,101 2,692
Basic Net Income per Share $ .29 $ .20 $ .24 $ .31
Diluted Net Income per Share $ .28 $ .20 $ .24 $ .31
1998
Revenues $17,486 $16,970 $18,030 $18,673
Gross Margins 5,244 5,350 5,203 5,174
Operating income 2,286 2,715 2,363 1,195
Net Income 2,194 2,442 1,952 1,279
Basic Net Income per Share $ .24 $ .27 $ .22 $ .15
Diluted Net Income per Share $ .23 $ .27 $ .22 $ .15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by paragraphs [a], [c], [d], [e], and [f] of Item 401
under Regulation S-K, to the extent applicable, will be set forth under the
caption "Election of Directors" in the Company's definitive proxy material for
its May 18, 2000 Annual Meeting of Shareholders to be filed within 120 days from
the end of the Registrant's fiscal year, which information is expressly
incorporated by reference herein. The information called for by paragraph [b] of
Item 401 is set forth under Item 1[c] herein. The information called for by Item
405 under Regulation S-K, to the extent applicable, will be set forth under the
caption "Certain Transactions" in the Company's above referenced definitive
proxy material.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 402 under Regulation S-K to the extent
applicable, will be set forth under the caption "Executive Compensation" in the
Company's definitive proxy materials for its May 18, 2000 Annual Meeting to be
filed within 120 days from the end of the Registrant's fiscal year, which
information is expressly incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 403 under Regulation S-K will be set forth
under the captions "Security Ownership of Certain Beneficial Owners and
Management" and "Election of Directors" in the Company's definitive proxy
materials for its May 18, 2000 Annual Meeting to be filed within 120 days from
the end of the Registrant's fiscal year, which information is expressly
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 404 under Regulation S-K will be set forth
under the caption "Certain Transactions" in the Company's definitive proxy
materials for its May 18, 2000 Annual Meeting to be filed within 120 days from
the end of the Registrant's fiscal year, which information is expressly
incorporated herein by reference.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Consolidated Financial Statements
The following Consolidated Financial Statements of Communications Systems,
Inc. and subsidiaries appear at pages 15 to 29 herein:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income and Comprehensive Income for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a) (2) Consolidated Financial Statement Schedule Page Herein
----------------------------------------- -----------
The following financial statement schedule is being filed as part of
thisForm 10-K Report:
Independent Auditors' Report 15
Schedule II - Valuation and Qualifying Accounts and Reserves 34
All other schedules are omitted as the required information is
inapplicable or the information is presented in the consolidated financial
statements or related notes.
(a) (3) Exhibits
The exhibits which accompany or are incorporated by reference in this
report, including all exhibits required to be filed with this report, are
described on the Exhibit Index, which begins on page 37 of the sequential
numbering system used in this report.
(b) REPORTS ON FORM 8-K FILED DURING THE THREE MONTHS ENDED DECEMBER 31, 1999
Not Applicable.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMUNICATIONS SYSTEMS, INC.
Dated: March 28, 2000 /s/ Curtis A.Sampson
---------------------------------------
Curtis A. Sampson, Chairman of the
Board of Directors, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
Each person whose signature appears below constitutes and appoints
CURTIS A. SAMPSON and PAUL N. HANSON as his true and lawful attorneys-in-fact
and agents, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10-K and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all said attorneys-in-fact
and agents, each acting alone, or his substitute or substitutes, may lawfully do
or cause to be done by virtue thereof.
Signature Title Date
/s/Curtis A.Sampson Chairman of the Board of Directors, March 28, 2000
- ------------------------ President, and Director (Principal
Curtis A. Sampson Executive Officer)
/s/Paul N. Hanson Vice President, Treasurer and March 28, 2000
- ------------------------ Chief Financial Officer (Principal
Paul N. Hanson Financial Officer and Principal
Accounting Officer)
/s/Paul J. Anderson Director March 28, 2000
- ------------------------
Paul J. Anderson
/s/Edwin C. Freeman Director March 28, 2000
- ------------------------
Edwin C. Freeman
/s/Luella Gross Goldberg Director March 28, 2000
- ------------------------
Luella Gross Goldberg
/s/Frederick M. Green Director March 28, 2000
- ------------------------
Frederick M. Green
/s/Randall D. Sampson Director March 28, 2000
- ------------------------
Randall D. Sampson
/s/Joseph W. Parris Director March 28, 2000
- ------------------------
Joseph W. Parris
/s/Gerald D. Pint Director March 28, 2000
- ------------------------
Gerald D. Pint
/s/Wayne E. Sampson Director March 28, 2000
- ------------------------
Wayne E. Sampson
/s/Edward E. Strickland Director March 28, 2000
- ------------------------
Edward E. Strickland
32
<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF
COMMUNICATIONS SYSTEMS, INC.
FOR
YEAR ENDED DECEMBER 31, 1999
---------------------------
FINANCIAL STATEMENT SCHEDULE
- --------------------------------------------------------------------------------
33
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
---------------------------------------------
Schedule II - Valuation and Qualifying Accounts and Reserves
Balance at Additions Additions Deductions Balance
Beginning of Charged to Cost Charged to from at End
Description Period and Expenses Other Accounts Reserves of Period
- ----------- --------- --------- ---------- --------- ---------
Allowance for doubtful accounts:
Year ended:
<S> <C> <C> <C> <C> <C>
December 31, 1999 $ 884,000 $ 126,000 $ 102,000(B) $ 908,000
December 31, 1998 $ 796,000 $ 94,000 $ 6,000(B) $ 884,000
December 31, 1997 $ 306,000 $ 50,000 $ 441,000(A) $ 1,000(B) $ 796,000
Reserve for assets transferred under contractual arrangements and notes
receivable:
Year Ended:
December 31, 1999 $ 371,000 $ 63,000 $ 434,000
December 31, 1998 $ 371,000 $ 371,000
December 31, 1997 $ 358,000 $ 13,000(C) $ 371,000
- -----------------------------------------
(A) Reclassification of allowance for doubtful accounts related to net assets of
discontinued operations. (B) Accounts determined to be uncollectible and charged
off against reserve. (C) Interest on notes receivable credited to valuation
reserve.
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF
COMMUNICATIONS SYSTEMS, INC.
FOR
YEAR ENDED DECEMBER 31, 1999
--------------------
EXHIBITS
- --------------------------------------------------------------------------------
35
<PAGE>
COMMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Exhibit Index To
Form 10-K for the Year Ended December 31, 1999
Regulation S-K Location in Consecutive Numbering
Exhibit Table System as Filed With the
Reference Title of Document Securities and Exchange Commission
3.1 Articles of Incorporation, as Filed as Exhibit 3.1 to the Form
amended 10-K of the Company for its year
ended December 31, 1989 (the "1989
Form 10-K") and incorporated
herein by reference.
3.2 Bylaws, as amended Filed as Exhibit 3.2 to the 1989
Form 10-K and incorporated herein
by reference.
10.1 1987 Stock Plan Filed as Exhibit 10.1 to the Form
10-K Report of the Company for its
year ended December 31, 1993 (the
"1993 Form 10-K") and incorporated
herein by reference.
10.2 Employee Savings Plan Filed as Exhibit 10.2 to the 1993
Form 10-K and incorporated herein
by reference.
10.3 Employee Stock Ownership Filed as Exhibit 10.3 to the 1993
Plan Form 10-K and incorporated herein
by reference.
10.4 Employee Stock Purchase Plan Filed
as Exhibit 10.4 to the 1993 Form
10-K and incorporated herein by
reference.
10.5 Stock Option Plan for Filed as Exhibit 10.5 to the 1993
Nonemployee Directors Form 10-K and incorporated herein
by reference.
10.6 1992 Stock Plan Filed as Exhibit 10.6 to the 1993
Form 10-K and incorporated herein
by reference.
10.7 Flexible Benefit Plan Filed as Exhibit 10.7 to the 1993
Form 10-K and incorporated herein
by reference.
10.8 Supplemental Executive Filed as Exhibit 10.8 to the 1993
Retirement Plan Form 10-K and incorporated herein
by reference.
10.9 Form of Rights Agreement, Filed as Exhibit 1 to the
dated as of October 26, 1999 Company's Form 8-A on November 8,
between the Company and 1999 and incorporated herein by
Norwest Bank Minnesota, reference.
National Association
21 Subsidiaries of the Registrant Filed herewith at page 37.
23 Independent Auditors' Consent Filed herewith at page 38.
24 Power of Attorney Included in signatures at page 32.
The exhibits referred to in this Exhibit Index will be supplied to a shareholder
at a charge of $.25 per page upon written request directed to CSI's Assistant
Secretary at the executive offices of the Company.
36
<PAGE>
SUBSIDIARIES OF COMMUNICATIONS SYSTEMS, INC.
EXHIBIT 21
Subsidiaries Jurisdiction of Incorporation
Suttle Apparatus Corporation Illinois
Suttle Costa Rica, S.A. Costa Rica
Tel Products, Inc. Minnesota
Suttle Caribe, Inc. Minnesota
Austin Taylor Communications, Ltd. United Kingdom
Automatic Tool & Connector Company, Inc. New Jersey
JDL Technologies, Inc. Minnesota
Transition Networks, Inc. Minnesota
LANart Corporation Massachusetts
All such subsidiaries are 100%-owned directly by Communications Systems, Inc.
The financial statements of all such subsidiaries are included in the
consolidated financial statements of Communications Systems, Inc.
37
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-28486, 33-39862, 33-39864, 33-60930, 33-83662, 33-99564, 33-99566 and
333-92063 of Communications Systems, Inc. of our report dated March 2, 2000 on
the consolidated financial statements and schedule of Communications Systems,
Inc. and subsidiaries appearing in this Annual Report on Form 10-K of
Communications Systems, Inc. for the year ended December 31, 1999.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
March 28, 2000
Minneapolis, Minnesota
38
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000022701
<NAME> COMMUNICATIONS SYSTEMS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 14,837,655
<SECURITIES> 0
<RECEIVABLES> 22,033,610
<ALLOWANCES> 908,000
<INVENTORY> 21,168,942
<CURRENT-ASSETS> 59,441,737
<PP&E> 32,147,128
<DEPRECIATION> 21,187,460
<TOTAL-ASSETS> 91,476,053
<CURRENT-LIABILITIES> 25,054,261
<BONDS> 0
0
0
<COMMON> 427,564
<OTHER-SE> 65,994,228
<TOTAL-LIABILITY-AND-EQUITY> 91,476,053
<SALES> 116,932,877
<TOTAL-REVENUES> 116,932,877
<CGS> 76,688,001
<TOTAL-COSTS> 76,688,001
<OTHER-EXPENSES> 28,907,288
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 690,129
<INCOME-PRETAX> 11,633,722
<INCOME-TAX> 2,620,000
<INCOME-CONTINUING> 9,013,722
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,013,722
<EPS-BASIC> 1.04
<EPS-DILUTED> 1.03
</TABLE>
