--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-----------------------------------
Commission File Number: 0-10355
-------
COMMUNICATIONS SYSTEMS, INC.
................................................................................
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0957999
................................................................................
(State or other jurisdiction of (Federal Employer
incorporation or organization) Identification No.)
213 South Main Street, Hector, MN 55342
................................................................................
(Address of principal executive offices) (Zip Code)
(320) 848-6231
................................................................................
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding at July 31, 2000
----------------------- -----------------------------
Common Stock, par value 8,754,647
$.05 per share
Total Pages (13) Exhibit Index at (NO EXHIBITS)
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COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income and Comprehensive Income 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information 13
2
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30 December 31
2000 1999
------------ ------------
Assets:
Current assets:
<S> <C> <C>
Cash $ 7,447,613 $ 14,837,655
Receivables, net 24,409,803 21,125,610
Inventories (Note 4) 29,565,945 21,168,942
Deferred income taxes 1,735,000 1,735,000
Other current assets 382,238 574,530
------------ ------------
Total current assets 63,540,599 59,441,737
Property, plant and equipment 33,150,967 32,147,128
less accumulated depreciation (22,538,958) (21,187,460)
------------ ------------
Net property, plant and equipment 10,612,009 10,959,668
Other assets:
Excess of cost over net assets acquired 7,774,459 8,819,923
Investments in mortgage backed and other securities 5,905,266 6,078,365
Deferred income taxes 2,175,459 2,168,571
Note receivable 3,165,390 3,365,390
Other assets 408,391 642,399
------------ ------------
Total other assets 19,428,965 21,074,648
------------ ------------
Total Assets $ 93,581,573 $ 91,476,053
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable $ 7,421,218 $ 9,043,035
Accounts payable 9,222,518 8,075,596
Accrued expenses 3,979,029 4,291,797
Dividends payable 874,302 855,087
Income taxes payable 1,244,610 2,788,746
------------ ------------
Total current liabilities 22,741,677 25,054,261
Stockholders' Equity 70,839,896 66,421,792
------------ ------------
Total Liabilities and Stockholders' Equity $ 93,581,573 $ 91,476,053
============ ============
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
Three Months Ended June 30 Six Months Ended June 30
---------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 32,073,844 $ 29,807,344 $ 62,938,036 $ 56,404,236
Costs and expenses:
Cost of sales 22,621,495 19,906,281 43,012,384 37,467,395
Selling, general and
administrative expenses 7,720,758 7,822,663 15,311,849 13,597,274
------------ ------------ ------------ ------------
Total costs and expenses 30,342,253 27,728,944 58,324,233 51,064,669
------------ ------------ ------------ ------------
Operating income 1,731,591 2,078,400 4,613,803 5,339,567
Other income and (expenses):
Investment income 255,553 218,125 513,699 421,760
Interest expense (133,825) (168,835) (276,371) (321,178)
------------ ------------ ------------ ------------
Other income, net 121,728 49,290 237,328 100,582
Income before income taxes 1,853,319 2,127,690 4,851,131 5,440,149
Income taxes (Note 5) 265,000 380,000 950,000 1,220,000
------------ ------------ ------------ ------------
Net income 1,588,319 1,747,690 3,901,131 4,220,149
------------ ------------ ------------ ------------
Other comprehensive income (loss):
Unrealized holding gain (loss)
on debt securities 17,607 (7,031)
Foreign currency
translation adjustment (234,921) (94,154) (266,139) (325,657)
------------ ------------ ------------ ------------
Other comprehensive loss before
income taxes (217,314) (94,154) (273,170) (325,657)
Income tax expense (benefit) related
to unrealized loss on debt securities 6,103 (2,437)
------------ ------------ ------------ ------------
(223,417) (94,154) (270,733) (325,657)
------------ ------------ ------------ ------------
Comprehensive income $ 1,364,902 $ 1,653,536 $ 3,630,398 $ 3,894,492
============ ============ ============ ============
Basic net income per share $ .18 $ .20 $ .45 $ .48
Diluted net income per share $ .18 $ .20 $ .44 $ .48
Average Basic Shares Outstanding 8,795,838 8,623,804 8,721,219 8,712,894
Average Dilutive Shares Outstanding 8,984,864 8,716,487 8,938,873 8,775,711
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Cumulative
Common Stock Additional Stock Option Other
-------------------- Paid-in Retained Notes Comprehensive
Shares Amount Capital Earnings Receivable Income (Loss) Total
--------- --------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 8,791,301 $439,565 $25,250,914 $37,862,463 $ (288,225) $ 188,935 $63,453,652
Net income 9,013,722 9,013,722
Issuance of stock under Employee
Stock Purchase Plan 27,431 1,372 266,766 268,138
Issuance of stock to Employee
Stock Ownership Plan 19,893 995 234,005 235,000
Issuance of stock under Employee
Stock Option Plan 24,783 1,239 259,537 260,776
Stock issued as compensation 8,000 400 91,600 92,000
Stock option compensation 125,798 125,798
Tax benefit from non qualified
employee stock options 13,754 13,754
Purchase of stock (320,136) (16,007) (940,068) (2,423,746) (3,379,821)
Shareholder dividends (3,455,570) (3,455,570)
Other comprehensive loss (205,657) (205,657)
--------- --------- ----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1999 8,551,272 427,564 25,302,306 40,996,869 (288,225) (16,722) 66,421,792
Net income 3,901,131 3,901,131
Issuance of stock to Employee
Stock Ownership Plan 23,692 1,185 306,811 307,996
Issuance of stock under Employee
Stock Option Plan 247,058 12,352 3,080,643 3,092,995
Purchase of stock (79,000) (3,950) (255,786) (886,195) (1,145,931)
Shareholder dividends (1,755,579) (1,755,579)
Collection of notes receivable 288,225 288,225
Other comprehensive loss (270,733) (270,733)
--------- --------- ----------- ----------- ----------- ----------- -----------
BALANCE AT JUNE 30, 2000 8,743,022 $437,151 $28,433,974 $42,256,226 $ - $ (287,455) $70,839,896
========= ========= =========== =========== =========== =========== ===========
See notes to consolidated
financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30
---------------------------------
2000 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 3,901,131 $ 4,220,149
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,643,322 2,448,596
Changes in assets and liabilities net of effects from
acquisition of LANart Corporation:
Increase in accounts receivable (3,397,437) (3,864,667)
Decrease (increase) in inventory (8,519,957) 4,056,044
Decrease (increase) in other current assets 186,926 (358,705)
Increase in accounts payable 1,239,773 557,046
Increase (decrease) in accrued expenses 15,848 (533,887)
Decrease in income taxes payable (1,537,079) (78,664)
------------ ------------
Net cash provided by (used in) operating activities (5,467,473) 6,445,912
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,360,548) (926,280)
Maturities of mortgage-backed and other investment securities 126,880 166,025
Purchases of mortgaged-backed and other securities (5,625,000)
Decrease (increase) in other assets 258,700 (196,766)
Collection of notes receivable 200,000 200,000
Payment for purchase of LANart Corporation, net of cash acquired (3,983,703)
------------ ------------
Net cash used in investing activities (774,968) (10,365,724)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (3,921,817) (266,813)
Proceeds from issuance of notes payable 2,300,000 1,096,921
Dividends paid (1,736,364) (1,760,245)
Proceeds from issuance of stock 3,092,995 53,334
Purchase of stock (1,145,931) (1,966,903)
Collection of notes receivable 288,225
------------ ------------
Net cash used in financing activities (1,122,892) (2,843,706)
------------ ------------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (24,709) (42,925)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,390,042) (6,806,443)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,837,655 20,405,363
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,447,613 $ 13,598,920
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 2,493,807 $ 1,303,136
Interest paid 296,023 325,983
See notes to consolidated financial
statements.
</TABLE>
6
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The balance sheet and statement of changes in stockholders' equity as of June
30, 2000, the statements of income and comprehensive income for the three and
six month periods ended June 30, 2000 and 1999 and the statements of cash flows
for the six-month periods ended June 30, 2000 and 1999 have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations, and cash flows at June 30, 2000 and
1999 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's December 31, 1999 Annual Report to
Shareholders. The results of operations for the periods ended June 30 are not
necessarily indicative of the operating results for the entire year.
In February 2000, the Company issued 23,692 shares of the Company's common stock
to the Employee Stock Ownership Plan in payment of its 1999 obligation. In a
noncash transaction, the Company recorded additional stockholders' equity of
$308,000 (reflecting the market value of the stock at the time of the
contribution) and reduced accrued expenses by the same amount.
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 excess of cost over net assets
acquired in the transaction was $2,361,000, which is being amortized on a
straight-line basis over 5 years.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
SAB No. 101 is to be implemented by the Company no later than the fourth quarter
of 2000. Based on an initial review, the Company does not expect it to have a
significant effect on the financial position or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The FASB subsequently issued SFAS No. 137
delaying the effective date for one year, to fiscal years beginning after June
15, 2000. The Company will adopt this standard no later than January 1, 2001.
Although the Company expects that this standard will not materially affect its
financial position and results of operations, it has not yet determined the
impact of this standard on its financial statements.
NOTE 2 - NET INCOME PER SHARE
Basic net income per common share is based on the weighted average number of
common shares outstanding during each year. Diluted net income per common share
takes into effect the dilutive effect of potential common shares outstanding.
The Company's only potential common shares outstanding are stock options. The
Company calculates the dilutive effect of outstanding options using the treasury
stock method.
7
<PAGE>
NOTE 3 - SEGMENT INFORMATION
The Company classifies its businesses into four segments: Suttle, which
manufactures U.S. standard modular connecting and wiring devices for voice and
data communications; Austin Taylor, which manufactures British standard line
jacks, patch panels, wiring harness assemblies, metal boxes, distribution
cabinets and central office frames; Transition Networks, which designs and
markets data transmission and computer network products; and JDL Technologies
(JDL) which provides telecommunications network design, specification and
training services to educational institutions. During 1999, JDL became a more
significant portion of the Company and is now identified as a separate segment.
Segment results as previously reported have been restated to reflect JDL as a
separate segment. Information concerning the Company's continuing operations in
the various segments for the six-month periods ended June 30, 2000 and 1999 is
as follows:
<PAGE>
<TABLE>
<CAPTION>
Austin Transition JDL
Suttle Taylor Networks Technologies Corporate Consolidated
------------ ----------- ------------ ----------- ----------- ------------
Six Months Ended June 30, 2000:
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 30,519,056 $ 5,361,329 $ 18,506,929 $ 8,550,722 $ 62,938,036
Cost of sales 20,636,608 4,427,226 11,318,249 6,630,301 43,012,384
------------ ----------- ------------ ----------- ------------
Gross profit 9,882,448 934,103 7,188,680 1,920,421 19,925,652
Selling, general and
administrative expenses 3,794,296 826,327 7,658,302 2,134,280 $ 898,644 15,311,849
------------ ----------- ------------ ----------- ----------- ------------
Operating income (loss) $ 6,088,152 $ 107,776 $ (469,622) $ (213,859) $ (898,644) $ 4,613,803
============ =========== ============ =========== =========== ============
Depreciation and amortization $ 1,115,666 $ 376,694 $ 808,686 $ 252,276 $ 90,000 $ 2,643,322
============ =========== ============ =========== =========== ============
Capital expenditures $ 873,970 $ 103,263 $ 187,371 $ 165,311 $ 30,633 $ 1,360,548
============ =========== ============ =========== =========== ============
Assets $ 48,823,622 $ 6,620,358 $ 23,325,663 $ 6,479,343 $ 8,332,587 $ 93,581,573
============ =========== ============ =========== =========== ============
Six Months Ended June 30, 1999:
Revenues $ 29,977,460 $ 5,708,793 $ 16,729,834 $ 3,988,149 $ 56,404,236
Cost of sales 19,369,544 4,615,993 10,683,321 2,798,537 37,467,395
------------ ----------- ------------ ----------- ------------
Gross profit 10,607,916 1,092,800 6,046,513 1,189,612 18,936,841
Selling, general and
administrative expenses 4,085,366 680,594 6,653,141 1,340,345 $ 837,828 13,597,274
------------ ----------- ------------ ----------- ----------- ------------
Operating income (loss) $ 6,522,550 $ 412,206 $ (606,628) $ (150,733) $ (837,828) $ 5,339,567
============ =========== ============ =========== =========== ============
Depreciation and amortization $ 1,059,262 $ 319,923 $ 751,134 $ 237,277 $ 81,000 $ 2,448,596
============ =========== ============ =========== =========== ============
Capital expenditures $ 516,764 $ 258,750 $ 96,638 $ 25,240 $ 28,888 $ 926,280
============ =========== ============ =========== =========== ============
Assets $ 49,090,211 $ 6,849,903 $ 19,610,095 $ 4,725,645 $ 7,407,937 $ 87,683,791
============ =========== ============ =========== =========== ============
</TABLE>
Information concerning the Company's continuing operations in the various
segments for the three-month periods ended June 30, 2000 and 1999 is as follows:
8
<PAGE>
<TABLE>
<CAPTION>
Austin Transition JDL
Suttle Taylor Networks Technologies Corporate Consolidated
------------ ----------- ------------ ----------- ----------- ------------
Three Months Ended June 30, 2000:
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 15,415,390 $ 2,621,494 $ 9,420,473 $ 4,616,487 $ 32,073,844
Cost of sales 11,014,221 2,107,659 5,743,211 3,756,404 22,621,495
------------ ----------- ------------ ----------- ------------
Gross profit 4,401,169 513,835 3,677,262 860,083 9,452,349
Selling, general and
administrative expenses 1,604,334 463,624 4,008,670 1,148,109 $ 496,021 7,720,758
------------ ----------- ------------ ----------- ----------- ------------
Operating income (loss) $ 2,796,835 $ 50,211 $ (331,408) $ (288,026) $ (496,021) $ 1,731,591
============ =========== ============ =========== =========== ============
Depreciation and amortization $ 557,833 $ 190,355 $ 404,343 $ 126,138 $ 45,000 $ 1,278,669
============ =========== ============ =========== =========== ============
Capital expenditures $ 532,912 $ 3,712 $ 76,995 $ 58,436 $ 28,801 $ 672,055
============ =========== ============ =========== =========== ============
Three Months Ended June 30, 1999:
Revenues $ 14,007,252 $ 2,901,298 $ 9,964,452 $ 2,934,342 $ 29,807,344
Cost of sales 9,123,663 2,364,131 6,340,492 $ 2,077,995 19,906,281
------------ ----------- ------------ ----------- ------------
Gross profit 4,883,589 537,167 3,623,960 856,347 9,901,063
Selling, general and
administrative expenses 2,137,522 340,786 4,138,177 764,676 $ 441,502 7,822,663
------------ ----------- ------------ ----------- ----------- ------------
Operating income (loss) $ 2,746,067 $ 196,381 $ (514,217) $ 91,671 $ (441,502) $ 2,078,400
============ =========== ============ =========== =========== ============
Depreciation and amortization $ 529,629 $ 158,649 $ 488,891 $ 118,639 $ 40,500 $ 1,336,308
============ =========== ============ =========== =========== ============
Capital expenditures $ 236,671 $ 141,045 $ 36,493 $ 4,961 $ 28,888 $ 448,058
============ =========== ============ =========== =========== ============
</TABLE>
NOTE 4 - INVENTORIES
Inventories summarized below are priced at the lower of first-in, first-out cost
or market:
June 30 December 31
2000 1999
------------------- --------------------
Finished Goods $ 9,532,665 $ 7,418,810
Raw Materials 20,033,280 13,750,132
------------------- --------------------
Total $ 29,565,945 $ 21,168,942
=================== ====================
NOTE 5 - INCOME TAXES
Income taxes are computed based upon the estimated effective rate applicable to
operating results for the full fiscal year. For the periods ended June 30, 2000
and 1999 income taxes do not bear a normal relationship to income before income
taxes, primarily because income from Puerto Rico operations is taxed at rates
lower than the U.S. rate.
--------------------------------------------------------------------------------
Statements regarding the Company's anticipated performance in future periods are
forward looking and involve risks and uncertainties, including but not limited
to: buying patterns of its Regional Bell Operating Customers, competitor's
products, the success of its recent acquisitions, changes in tax laws,
particularly in regard to taxation of its subsidiary in Puerto Rico.
--------------------------------------------------------------------------------
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Six Months Ended June 30, 2000 Compared to
Six Months Ended June 30, 1999
------------------------------
Consolidated sales increased 12% to $62,938,000. Consolidated operating income
decreased 14% to $4,614,000.
Suttle sales increased 2% to $30,519,000. Sales to the major telephone companies
(Bell South, SBC, Verizon and Qwest) decreased $921,000 or 5%. Sales to these
customers accounted for 59% of Suttle's sales. Sales to distributors, original
equipment manufacturers (OEMs), and electrical contractors increased $2,235,000,
or 30%. Sales to retail customers decreased $481,000 or 30% due to decreased
sales to Radio Shack, which is Suttle's principal retail customer. Suttle's
export sales, including sales to Canada, decreased 20% to $986,000.
Suttle's sales gains were mainly from sales of data products, which increased
64% from the 1999 period. New data product offerings, especially products
suitable for high-speed data transmission, are getting exceptional acceptance
from customers. However, Suttle is experiencing supply problems with certain raw
materials for these products, resulting in delays in shipments to customers of
some products.
Data product sales gains were offset by lower sales of Suttle's voice products.
Revenues from CorroShield products, which are sold mainly to the major telephone
companies, decreased 8%. Sales of conventional voice products declined 3%. Sales
of voice products are being hurt by price competition from foreign
manufacturers. Sales of fiber-optic connector products decreased 17%.
Suttle's gross margins decreased 7% to $9,882,000. Gross margin percentage
declined to 32.4% in 2000 from 35.4% in 1999. The decline in gross margin was
due primarily to price cutting to meet competition. Suttle's operating income
decreased $434,000 or 7%.
Austin Taylor's sales decreased 6% to $5,361,000. The decrease was due to
reduced sales of CATV products, below plan sales to Pacific Rim telephone
companies and the effects of changes in foreign exchange rates. Austin Taylor's
gross margin declined 15% to $934,000. Gross margin as a percentage of sales was
17% compared to 19% in 1998. The decline in gross margin was principally due to
lower business volume. Selling, general and administrative expenses increased
$146,000 due to increased sales efforts in the Pacific Rim. Operating income
decreased $304,000 or 74%.
Sales by Transition Networks, Inc. increased $1,777,000 or 11%. The sales gain
was due to increased demand for media conversion products and the full year
effect of the acquisition of LANart Corporation in April, 1999. Gross margin on
Transition Networks' sales increased 19% to $7,189,000. Gross margin as a
percentage of sales increased to 39% from 36% in 1999, principally due to higher
volume. Selling, general and administrative expenses increased $1,005,000 or
15%. Transition Networks had an operating loss of $470,000 in the 2000 period
compared to an operating loss of $607,000 in 1999. The 1999 period included some
costs associated with merging LANart Corporation into Transition Networks.
Sales by JDL Technologies, Inc. increased $4,563,000 or 114%. However, most of
the sales increase was made up of low-margin or no-margin reselling of
networking equipment to the education market. JDL's gross margin increased 61%
to $1,920,000. Gross margin as a percentage of sales decreased to 22% from 30%
in the 1999 period. Selling, general and administrative expenses increased
$794,000, or 59%, due to expanded sales efforts. JDL's operating loss was
$214,000 compared to $151,000 in the 1999 period.
10
<PAGE>
Consolidated investment income, net of interest expense, increased $137,000 due
to higher returns on invested funds and reduced borrowing from banks. Income
before income taxes decreased $589,000 or 11%. The Company's effective income
tax rate was 19.6% compared to 22.4% in 1998. The decrease in the tax rate was
because a higher than normal percentage of the Company's earnings was sheltered
from U.S. tax in the 2000 period. Net income decreased $319,000 or 8%.
Three Months Ended June 30, 2000 Compared to
Three Months Ended June 30, 1999
--------------------------------
Consolidated sales increased 8% to $32,074,000. Consolidated operating income
decreased 17% to $1,732,000.
Suttle sales increased 10% to $15,415,000. Sales to the major telephone
companies increased $43,000 to $8,819,000. Sales to these customers accounted
for 57% of Suttle's sales. Sales to distributors, original equipment
manufacturers (OEMs), and electrical contractors increased $1,765,000, or 48%.
Sales to retail customers decreased $167,000 or 21% due to decreased sales to
Radio Shack, which is Suttle's principal retail customer. Suttle's export sales
decreased 43% to $368,000.
Suttle's sales gains were mainly from sales of data products, which increased
87% from the 1999 period. New data product offerings, especially products
suitable for high-speed data transmission, are getting exceptional acceptance
from customers. However, Suttle is experiencing supply problems with certain raw
materials for these products, resulting in delays in shipments to customers of
some products.
Sales of Suttle's voice products (CorroShield and conventional products)
declined $52,000 or 1%. Sales of voice products are being hurt by price
competition from foreign manufacturers. Sales of fiber-optic connector products
decreased 12%.
Suttle's gross margins decreased 10% to $4,401,000. Gross margin percentage
declined to 28.6% in 2000 from 34.9% in 1999. The decline in gross margin was
due primarily to price cutting to meet competition. Suttle's operating income
increased $51,000 due to lower selling and administrative expenses.
Austin Taylor's sales decreased 10% to $2,621,000. The decrease was due to
reduced sales of CATV products and below plan sales to international customers.
Austin Taylor's gross margin declined 4% to $514,000. Gross margin as a
percentage of sales was 19.6% compared to 18.5% in 1999. Selling, general and
administrative expenses increased $123,000 due to increased sales efforts in the
Pacific Rim. Operating income decreased $146,000 or 74%.
Sales by Transition Networks, Inc. decreased $544,000 or 5%. The sales decline
was due to slower than expected demand for media conversion products in the
period and the pairing back of certain unprofitable products acquired with
LANart Corporation in April, 1999. Gross margin on Transition Networks' sales
increased 1% to $3,677,000. Gross margin as a percentage of sales increased to
39% from 36% in 1999. Selling, general and administrative expenses decreased
$130,000 or 3%. Transition Networks had an operating loss of $331,000 in the
2000 period compared to an operating loss of $514,000 in 1999. The 1999 period
included some costs associated with merging LANart Corporation into Transition
Networks.
Sales by JDL Technologies, Inc. increased $1,682,000 or 57%. However, most of
the sales increase was made up of low-margin or no-margin reselling of
networking equipment to the education market. JDL's gross margin increased
$4,000 to $860,000. Gross margin as a percentage of sales decreased to 19% from
29% in the 1999 period. Selling, general and administrative expenses increased
$383,000, or 50%, due to JDL's expanded sales efforts. JDL's operating loss was
$288,000 compared to operating income of $92,000 in the 1999 period.
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Consolidated investment income, net of interest expense, increased $72,000 due
to increased returns on invested cash and payments made on notes payable
associated with acquisitions. Income before income taxes decreased $274,000 or
13%. The Company's effective income tax rate was 14.3% compared to 17.9% in
1999. Net income decreased $159,000 or 9%.
Liquidity and Capital Resources
At June 30, 2000, the Company had approximately $7,448,000 of cash and cash
equivalents compared to $14,838,000 of cash and cash equivalents at December 31,
1999. The Company had working capital of approximately $40,799,000 and a current
ratio of 2.8 to 1 compared to working capital of $34,387,000 and a current ratio
of 2.4 to 1 at the end of 1999.
The Company had an operating cash flow deficit of $5,467,000 in the first six
months of 2000 compared to positive cash flow of $6,446,000 in the same period
in 1999. The Company used substantial amounts of cash to support higher accounts
receivable and inventory balances at JDL Technologies and Transition Networks in
the April to June, 2000 period. Some of these expenditures were made in
anticipation of higher business volumes that have failed to materialize. The
Company is adjusting the business plans of these operations in order to conserve
cash and reduce excess inventory and accounts receivable levels.
Investing activities utilized $775,000 of cash in the 2000 period. Cash
investments in new plant and equipment totaled $1,361,000, which was financed by
internal cash flows. The Company expects to spend $3,000,000 on capital
additions in 2000.
Net cash used in financing activities was $1,123,000 for the first six months of
2000. The Company retired $3,922,000 of notes payable in the first half of 2000.
However, cash requirements at JDL Technologies and Transition Networks
necessitated $2,300,000 of new borrowing in June 2000. Notes payable were
$7,421,000 at June 30, 2000 compared to $9,043,000 at December 31, 1999. The
Company purchased and retired 79,000 shares of its stock in open market
transactions during the 2000 period. At June 30, 2000 Board authorizations are
outstanding to purchase an additional 60,500 shares. Dividends paid on common
stock were $1,736,000. The Company received $3,093,000 of cash in the 2000
period from exercises of employee stock options.
The Company has been and continues to be engaged in discussions with a
substantially larger public corporation regarding the merger of the Company into
the other firm. The Company has retained US Bankcorp Piper Jaffray as its
investment banker to assist in these discussions. No assurance can be given that
these discussions will result in a definitive merger agreement.
In the opinion of management, based on the Company's current financial and
operating position and projected future expenditures, sufficient funds are
available to meet the Company's anticipated operating and capital expenditure
needs.
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PART II. OTHER INFORMATION
Items 1 - 3. Not Applicable
----------------------------
Item 4. Submission of Matters to a Vote of Securities Holders
--------------------------------------------------------------
The Annual Meeting of the Shareholders of the Registrant was held on May 18,
2000 in Minneapolis, MN. The total number of shares outstanding and entitled to
vote at the meeting was 8,793,297 of which 8,235,862 were present either in
person or by proxy. Shareholders re-elected board members Paul J. Anderson,
Wayne E. Sampson and Frederick M. Green to three-year terms expiring at the 2003
Annual Meeting of Shareholders. The vote for these board members was as follows:
In Favor Abstaining
Paul J. Anderson 8,179,195 56,667
Wayne E. Sampson 8,174,895 60,967
Frederick M. Green 8,189,601 46,261
Board members continuing in office are Curtis A. Sampson, Joseph W. Parris and
Gerald D. Pint (whose terms expire at the 2001 Annual Meeting of Shareholders),
and Edwin C. Freeman, Luella Gross Goldberg and Edward E. Strickland (whose
terms expire at the 2002 Annual Meeting of Shareholders).
Items 5 - 6. Not Applicable
----------------------------
Signatures
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Communications Systems, Inc.
By /s/ Paul N. Hanson
------------------------
Paul N. Hanson
Vice President and
Chief Financial Officer
Date: August 14, 2000
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