- --------------------------------------------------------------------------------
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 MARCH 31, 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
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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 April 30, 2000
- -------------------------------------- -----------------------------
Common Stock, par value $.05 per share 8,820,922
Total Pages (11) Exhibit Index at (NO EXHIBITS)
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<PAGE>
5
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 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 9
Part II. Other Information 11
2
<PAGE>
PART I. FINANCIAL INFORMATION
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31 December 31
Assets: 2000 1999
------------ ------------
Current assets:
Cash $ 13,265,251 $ 14,837,655
Receivables, net 21,721,164 21,125,610
Inventories - Note 2 23,877,135 21,168,942
Deferred income taxes 1,735,000 1,735,000
Other current assets 474,867 574,530
------------ ------------
Total current assets 61,073,417 59,441,737
Property, plant and equipment 32,745,996 32,147,128
less accumulated depreciation (21,941,535) (21,187,460)
------------ ------------
Net property, plant and equipment 10,804,461 10,959,668
Other assets:
Excess of cost over net assets acquired 8,297,191 8,819,923
Investments in debt securities 5,951,850 6,078,365
Deferred income taxes 2,177,960 2,168,571
Note receivable 3,365,390 3,365,390
Other assets 745,509 642,399
------------ ------------
Total other assets 20,537,900 21,074,648
------------ ------------
Total Assets $ 92,415,778 $ 91,476,053
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable $ 5,135,029 $ 9,043,035
Accounts payable 7,832,844 8,075,596
Accrued expenses 4,481,633 4,291,797
Dividends payable 880,807 855,087
Income taxes payable 2,717,562 2,788,746
------------ ------------
Total current liabilities 21,047,875 25,054,261
Stockholders' Equity 71,367,903 66,421,792
------------ ------------
Total Liabilities and Stockholders' Equity $ 92,415,778 $ 91,476,053
============ ============
See notes to consolidated financial statements.
3
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
Three Months Ended March 31
--------------------------------
2000 1999
------------ ------------
Sales $ 30,864,192 $ 26,596,892
Costs and expenses:
Cost of sales 20,390,889 17,561,114
Selling, general and
administrative expenses 7,068,362 5,369,938
Goodwill amortization 522,729 404,673
------------ ------------
Total costs and expenses 27,981,980 23,335,725
------------ ------------
Operating income 2,882,212 3,261,167
Other income and (expenses):
Investment income 258,146 203,635
Interest expense (142,546) (152,343)
------------ ------------
Other income, net 115,600 51,292
Income before income taxes 2,997,812 3,312,459
Income taxes (Note 4) 685,000 840,000
------------ ------------
Net income 2,312,812 2,472,459
------------ ------------
Other comprehensive income (loss):
Unrealized holding loss on debt securities (24,638)
Foreign currency translation adjustment (31,218) (231,503)
------------ ------------
Other comprehensive income (loss)
before income taxes (55,856) (231,503)
Income tax benefit related to unrealized
loss on debt securities 8,540
------------ ------------
(47,316) (231,503)
------------ ------------
Comprehensive income $ 2,265,496 $ 2,240,956
============ ============
Basic net income per share $ .27 $ .28
Diluted net income per share $ .26 $ .28
Average Basic Shares Outstanding 8,646,469 8,802,972
Average Dilutive Shares Outstanding 8,897,392 8,832,458
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
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, 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 common 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 2,312,812 2,312,812
Issuance of common stock to
Employee Stock Ownership Plan 23,692 1,185 234,005 235,190
Issuance of common stock under
Employee Stock Option Plan 245,458 12,273 3,025,734 3,038,007
Shareholder dividends (880,807) (880,807)
Collection of notes receivable 288,225 288,225
Other comprehensive loss (47,316) (47,316)
--------- --------- ----------- ----------- ----------- ----------- -----------
BALANCE AT MARCH 31, 2000 8,820,422 $441,022 $28,562,045 $42,428,874 $ - $ (64,038) $71,367,903
========= ========= =========== =========== =========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31
-------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,312,812 $ 2,472,459
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,319,653 1,112,287
Changes in assets and liabilities
Increase in accounts receivable (620,229) (4,553,860)
Decrease (increase) in inventory (2,732,810) 3,076,917
Decrease in other current assets 98,960 20,315
Increase (decrease) in accounts payable (222,575) 23,607
Increase in accrued expenses 430,464 300,733
Increase (decrease) in income taxes payable (69,957) 584,509
----------- -----------
Net cash provided by operating activities 516,318 3,036,967
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (659,692) (478,221)
Maturities of mortgage-backed and
other investment securities 53,490 76,082
Increase in other assets (61,714) (56,950)
----------- -----------
Net cash used in investing activities (667,916) (459,089)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (3,908,006) (8,293)
Dividends paid (855,087) (879,130)
Proceeds from issuance of common stock 3,038,007
Collection of stock option notes receivable 288,225
Purchase of stock (233,760)
----------- -----------
Net cash used in financing activities (1,436,861) 1,121,183)
----------- -----------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 16,055 (29,248)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,572,404) 1,427,447
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,837,655 20,405,363
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $13,265,251 $21,832,810
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 756,184 $ 259,855
Interest paid 60,417 46,427
See notes to consolidated financial statements.
6
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The balance sheet and statement of stockholders' equity as of March 31, 2000,
the statements of income and comprehensive income and the statements of cash
flows for the three-month periods ended March 31, 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
March 31, 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 March 31 are not
necessarily indicative of the operating results for the entire year.
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 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
$235,000 (reflecting the market value of the stock at the time of the
contribution) and reduced accrued expenses by the same amount.
NOTE 2 - INVENTORIES
Inventories summarized below are priced at the lower of first-in, first-out cost
or market:
March 31 December 31
2000 1999
------------ ------------
Finished Goods $ 8,121,340 $ 7,418,810
Raw Materials 15,755,795 13,750,132
------------ ------------
Total $ 23,877,135 $ 21,168,942
============ ============
NOTE 3 - INCOME TAXES
Income taxes are computed based upon the estimated effective rate applicable to
operating results for the full fiscal year. For the periods ended March 31, 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.
7
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTE 4 - 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 250,923 shares and 29,486 shares in 2000 and
1999, respectively. The Company calculates the dilutive effect of outstanding
options using the treasury stock method.
NOTE 5 - 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 distribution 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 is as follows:
<TABLE>
<CAPTION>
Austin Transition JDL
Suttle Taylor Networks Technologies Corporate Consolidated
------------ ----------- ----------- ----------- ------------- ------------
Three Months Ended March 31, 2000
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 15,103,666 $ 2,739,835 $ 9,086,456 $ 3,934,235 $ - $ 30,864,192
Cost of sales 9,622,387 2,319,567 5,575,038 2,873,897 0 20,390,889
------------ ----------- ----------- ----------- ------------- ------------
Gross profit 5,481,279 420,268 3,511,418 1,060,338 0 10,473,303
Selling, general and
administrative expenses 2,113,339 348,120 3,329,247 875,033 402,623 7,068,362
Goodwill amortization 76,623 14,583 320,385 111,138 522,729
------------ ----------- ----------- ----------- ------------- ------------
Operating income (loss) $ 3,291,317 $ 57,565 $ (138,214) $ 74,167 $ (402,623) $ 2,882,212
============ =========== =========== =========== ============= ============
Depreciation and amortization $ 557,833 $ 186,339 $ 404,343 $ 126,138 $ 45,000 $ 1,319,653
============ =========== =========== =========== ============= ============
Assets $ 50,471,923 $ 7,481,927 $18,703,420 $ 5,316,701 $ 10,441,807 $ 92,415,778
============ =========== =========== =========== ============= ============
Capital expenditures $ 341,058 $ 99,551 $ 110,376 $ 106,875 $ 1,832 $ 659,692
============ =========== =========== =========== ============= ============
Three Months Ended March 31, 1999:
Revenues $ 15,970,208 $ 2,807,495 $ 6,765,382 $ 1,053,807 $ - $ 26,596,892
Cost of sales 10,245,881 2,251,862 4,342,829 720,542 0 17,561,114
------------ ----------- ----------- ----------- ------------- ------------
Gross profit 5,724,327 555,633 2,422,553 333,265 0 9,035,778
Selling, general and
administrative expenses 1,871,221 325,225 2,312,635 464,531 396,326 5,369,938
Goodwill amortization 76,623 14,583 202,329 111,138 404,673
------------ ----------- ----------- ----------- ------------- ------------
Operating income (loss) 4 3,776,483 $ 215,825 $ (92,411) $ (242,404) $ (396,326) $ 3,261,167
============ =========== =========== =========== ============= ============
Depreciation and amortization $ 529,633 $ 161,274 $ 262,243 $ 118,638 $ 40,500 $ 1,112,288
============ =========== =========== =========== ============= ============
Assets $ 55,284,130 $ 6,903,216 $11,786,255 $ 3,664,879 $ 8,316,713 $ 85,955,193
============ =========== =========== =========== ============= ============
Capital expenditures $ 280,093 $ 117,705 $ 60,145 $ 20,279 $ - $ 478,222
============ =========== =========== =========== ============= ============
</TABLE>
8
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Three Months Ended March 31, 2000 Compared to
Three Months Ended March 31, 1999
Consolidated sales increased 16% to $30,864,000. Consolidated operating income
decreased 12% to $2,882,000.
Suttle sales decreased 5% to $15,104,000. Sales to customers in the United
States (U.S.) decreased 6% to $14,486,000. The sales decline was principally due
to lower sales of the Company's conventional (non-CorroShield) voice products,
which offset higher sales of data products. Sales to the Big 6 telephone
companies (the five Regional Bell Operating Companies (RBOCs) and GTE) decreased
10% to $9,045,000. Sales to these customers accounted for 60% of Suttle's U.S.
customer sales. Sales to distributors, original equipment manufacturers (OEMs),
and electrical contractors increased $470,000, or 12%. Sales to retail customers
decreased $314,000 or 37% due to decreased sales to Radio Shack, which is
Suttle's principal retail customer. Suttle's export sales, increased 5% to
$618,000.
Suttle's gross margin decreased 4% to $5,481,000 due to the lower sales volume.
Gross margin as a percentage of sales improved to 36.3% in 2000 from 35.8% in
1999. The improvement in gross margin percentage was due to product mix. The
fastest selling products in 2000 (CorroShield and data products) tended to be
the products with the highest margins. Selling, general and administrative
expenses increased $242,000 or 13% due primarily to increased marketing
expenses. Suttle's operating income decreased $485,000 or 13%.
Austin Taylor's sales decreased 2% to $2,740,000. The decrease was due primarily
to delayed planned first shipments on a significant order. These shipments have
been rescheduled into subsequent quarters. Austin Taylor's gross margin declined
24% to $420,000. Gross margin as a percentage of sales was 15.3% compared to
19.8% in 1999. The decline in gross margin was principally due to lower business
volume. Selling, general and administrative expenses increased $23,000.
Operating income decreased $158,000. First quarter performance was also affected
by higher expenses related to the February 2000 opening of a sales and
distribution office in Hong Kong.
The Company acquired JDL Technologies, Inc. in August 1998. JDL reported 2000
first quarter sales of $3,934,000 compared to $1,054,000 in 1999. Operating
income was $74,000 compared to an operating loss of $242,000 reported in the
first quarter of 1999. JDL's "First Class Connect program, developed for the
K-12 education market represents a significant portion of the growth. This
program is a turnkey package of broadband network design services, proprietary
Internet access software and physical connectivity infrastructure provided by
Suttle and Transition Networks.
Transition Networks, Inc. was acquired in December 1998. Sales increased by 34%
to $9,086,000 in the first quarter of 2000 reflecting a strong global
telecommunications market for media conversion products. Gross margin increased
to $3,511,000 from $2,423,000. Operating income decreased by $46,000 due
primarily to increased broadband component costs purchased in the spot market.
Selling, general and administrative expenses also increased by $1,135,000.
9
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated investment income, net of interest expense, increased $64,000 due
to increased levels of funds available for investment and decreased interest on
notes payable associated with acquisitions. Income from continuing operations
before income taxes decreased $315,000 or 9%. The Company's effective income tax
rate was 22.9% compared to 25.4% in 1999. The decrease in the tax rate was due
to lower company earnings. Net income decreased $160,000 or 6%.
Liquidity and Capital Resources
At March 31, 2000, the Company had approximately $13,265,000 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 $40,026,000 and a current
ratio of 2.9 to 1 compared to working capital of $34,387,000 and a current ratio
of 2.4 to 1 at the end of 1999.
Cash flow provided by operations was approximately $516,000 in the first three
months of 2000 compared to $3,037,000 in the same period in 1999. The decrease
was due to the need to finance increased inventory and accounts receivable
levels caused by the Company's increased sales volume. Cash flow benefited in
the 1999 period from decreased inventory levels, as the Company was able to
satisfy some of the increased customer demand out of existing stocks.
Investing activities utilized $668,000 of cash in the 2000 period. Cash
investments in new plant and equipment totaled $660,000, which was financed by
internal cash flows. The Company expects to spend $3,000,000 on capital
additions in 2000. The Company spent an additional $6,000,000 in April 1999 to
acquire LANart Corporation. The Company financed that acquisition using a
combination of internal funds and short-term borrowing from U.S. Bank. The
Company retired $3,908,000 of this debt in the first quarter of 2000 reducing
notes payable to $5,135,000 compared to the balance of $9,043,000 at December
31, 1999.
Net cash used in financing activities was $1,437,000. The Company purchased and
retired 23,400 shares of its stock in open market transactions during the 1999
period. At March 31, 2000 Board authorizations are outstanding to purchase an
additional 139,500 shares. The Company purchased an additional 180,000 shares
under this authorization in April 1999. No purchases of company stock occurred
in the first quarter of 2000. Dividends paid on common stock were $855,000.
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.
10
<PAGE>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Items 1 - 6. Not Applicable
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Communications Systems, Inc.
By /s/ Paul N. Hanson
----------------------------
Paul N. Hanson
Vice President and
Chief Financial Officer
Date: May 12, 2000
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000022701
<NAME> COMMUNICATIONS SYSTEMS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 13,265,251
<SECURITIES> 0
<RECEIVABLES> 22,785,164
<ALLOWANCES> 1,064,000
<INVENTORY> 23,877,135
<CURRENT-ASSETS> 61,073,417
<PP&E> 32,745,996
<DEPRECIATION> 21,941,535
<TOTAL-ASSETS> 92,415,778
<CURRENT-LIABILITIES> 21,047,875
<BONDS> 0
0
0
<COMMON> 441,022
<OTHER-SE> 70,926,881
<TOTAL-LIABILITY-AND-EQUITY> 92,415,778
<SALES> 30,864,192
<TOTAL-REVENUES> 30,864,192
<CGS> 20,390,889
<TOTAL-COSTS> 20,390,889
<OTHER-EXPENSES> 7,591,091
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142,546
<INCOME-PRETAX> 2,997,812
<INCOME-TAX> 685,000
<INCOME-CONTINUING> 2,312,812
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,312,812
<EPS-BASIC> 0.27
<EPS-DILUTED> 0.26
</TABLE>
