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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, 2001
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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, 2001
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Common Stock, par value 8,391,343
$.05 per share
Total Pages (11) 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 9
Part II. Other Information 11
2
PART I. FINANCIAL INFORMATION
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31 December 31
Assets: 2001 2000
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Current assets:
Cash $ 15,222,061 $ 11,321,374
Trade receivables, net 17,375,607 23,189,409
Inventories (Note 2) 27,618,278 27,479,839
Note receivable 2,965,390 2,965,390
Deferred income taxes 1,834,745 1,834,745
Other current assets 587,106 626,139
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Total current assets 65,603,187 67,416,896
Property, plant and equipment 33,671,583 33,466,268
less accumulated depreciation (24,175,070) (23,360,224)
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Net property, plant and equipment 9,496,513 10,106,044
Other assets:
Excess of cost over net assets acquired 6,206,264 6,728,995
Investments in debt securities 5,837,904 5,916,507
Deferred income taxes 2,726,097 2,735,811
Other assets 457,190 293,801
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Total other assets 15,227,455 15,675,114
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Total Assets $ 90,327,155 $ 93,198,054
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable $ 10,091,138 $ 9,101,438
Accounts payable 5,650,934 5,866,627
Accrued expenses 3,992,998 4,579,202
Dividends payable 839,753 880,391
Income taxes payable 1,345,066 1,503,468
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Total current liabilities 21,919,889 21,931,126
Stockholders' Equity 68,407,266 71,266,928
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Total Liabilities and Stockholders' Equity $ 90,327,155 $ 93,198,054
============ ============
See notes to consolidated financial statements.
3
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
Three Months Ended March 31
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2001 2000
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Sales $ 23,094,277 $ 30,864,192
Costs and expenses:
Cost of sales 16,452,246 20,390,889
Selling, general and
administrative expenses 5,917,094 7,068,362
Goodwill amortization 522,729 522,729
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Total costs and expenses 22,892,069 27,981,980
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Operating income 202,208 2,882,212
Other income and (expenses):
Investment income 243,138 258,146
Interest expense (180,618) (142,546)
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Other income, net 62,520 115,600
Income before income taxes 264,728 2,997,812
Income taxes (Note 3) 80,000 685,000
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Net income 184,728 2,312,812
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Other comprehensive income (loss):
Unrealized holding gain (loss) on
debt securities 28,126 (24,638)
Foreign currency translation adjustment (180,051) (31,218)
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Other comprehensive income (loss)
before income taxes (151,925) (55,856)
Income tax expense (benefit) related to
unrealized loss on debt securities 9,714 (8,540)
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Other comprehensive loss (161,639) (47,316)
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Comprehensive income $ 23,089 $ 2,265,496
============ ============
Basic net income per share $ .02 $ .27
Diluted net income per share $ .02 $ .26
Average Basic Shares Outstanding 8,459,321 8,646,469
Average Dilutive Shares Outstanding 8,492,066 8,897,392
See notes to consolidated financial statements.
4
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
--------- --------- ------------ ------------ ----------- ----------- ------------
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 6,672,172 6,672,172
Issuance of common stock under
Employee Stock Purchase Plan 30,515 1,526 316,211 317,737
Issuance of common stock to
Employee Stock Ownership Plan 23,692 1,184 306,812 307,996
Issuance of stock under
Employee Stock Option Plan 290,159 14,508 3,323,673 3,338,181
Stock issued as compensation 8,000 400 119,600 120,000
Tax benefit from non qualified
employee stock options 397,420 397,420
Purchase of stock (286,729) (14,336) (888,887) (1,843,058) (2,746,281)
Shareholder dividends (3,516,065) (3,516,065)
Collection of Stock Option
Note Receivable 288,225 288,225
Other comprehensive loss (334,249) (334,249)
--------- --------- ------------ ------------ ----------- ----------- ------------
BALANCE AT DECEMBER 31, 2000 8,616,909 $ 430,846 $ 28,877,135 $ 42,309,918 $ - $ (350,971) $ 71,266,928
Net income 184,728 184,728
Issuance of common stock to
Employee Stock Ownership Plan 25,000 1,250 219,075 220,325
Purchase of stock (244,765) (12,238) (812,837) (1,438,248) (2,263,323)
Shareholder dividends (839,753) (839,753)
Other comprehensive loss (161,639) (161,639)
--------- --------- ------------ ------------ ----------- ----------- ------------
BALANCE AT MARCH 31, 2001 8,397,144 $ 419,858 $ 28,283,373 $ 40,216,645 $ - $ (512,610) $ 68,407,266
========= ========= ============ ============ =========== =========== ============
See notes to consolidated financial statements.
5
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31
--------------------------------
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 184,728 $ 2,312,812
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,306,962 1,319,653
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 5,704,801 (620,229)
Increase in inventory (230,373) (2,732,810)
Decrease (increase) in other current assets (6,330) 98,960
Decrease in accounts payable (136,810) (222,575)
(Decrease) increase in accrued expenses (324,940) 430,464
Decrease in income taxes payable (157,602) (69,957)
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Net cash provided by operating activities 6,340,436 516,318
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (250,359) (659,692)
Change in mortgage-backed and other investment securities 74,287 53,490
Increase in other assets (121,722) (61,714)
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Net cash used in investing activities (297,794) (667,916)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) notes payable 989,700 (3,908,006)
Dividends paid (880,391) (855,087)
Proceeds from issuance of common stock 3,038,007
Collection of stock option notes receivable 288,225
Purchase of stock (2,263,323)
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Net cash used in financing activities (2,154,014) (1,436,861)
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EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 12,059 16,055
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,900,687 (1,572,404)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,321,374 14,837,655
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,222,061 $ 13,265,251
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 245,034 $ 756,184
Interest paid 189,294 60,417
See notes to consolidated financial statements.
6
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, 2001,
the statements of income and comprehensive income and the statements of cash
flows for the three-month periods ended March 31, 2001 and 2000 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, 2001 and 2000 and for the three months then ended 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, 2000 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.
In February 2001 the Company issued 25,000 shares of the Company's common stock
to the Employee Stock Ownership Plan in payment of its 2000 obligation. In a
noncash transaction, the Company recorded additional stockholders' equity of
$220,325 (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
2001 2000
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Finished goods $ 12,027,410 $ 10,876,529
Raw and processed materials 15,590,868 16,603,310
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Total $ 27,618,278 $ 27,479,839
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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, 2001
and 2000 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.
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 32,745 shares and 250,923 shares for the
periods ended March 31, 2001 and 2000, respectively. The Company calculates the
dilutive effect of outstanding options using the treasury stock method.
7
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. Information
concerning the Company's continuing operations in the various segments is as
follows:
SEGMENT INFORMATION
Austin Transition
Suttle Taylor Networks JDL Technolgies Corporate Consolidated
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Three Months Ended March 31, 2001
Revenues $ 10,010,080 $ 2,933,849 $ 8,015,723 $ 2,134,625 $ - $ 23,094,277
Cost of sales 7,766,469 2,556,428 5,025,725 1,103,624 - 16,452,246
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Gross profit 2,243,611 377,421 2,989,998 1,031,001 - 6,642,031
Selling, general and
administrative expenses 1,857,303 363,024 2,492,121 831,670 372,976 5,917,094
Goodwill amortization 76,619 14,585 320,387 111,138 522,729
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Operating income (loss) $ 309,689 $ (188) $ 177,490 $ 88,193 $ (372,976) $ 202,208
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Depreciation and amortization $ 575,147 $ 151,460 $ 409,538 $ 141,138 $ 29,679 $ 1,306,962
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Assets $ 47,359,007 $ 6,300,571 $19,432,092 $ 6,142,439 $11,093,046 $ 90,327,155
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Capital expenditures $ 172,732 $ (1,569) $ 15,606 $ 55,344 $ 8,246 $ 250,359
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Three Months Ended March 31, 2000
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 - 20,390,889
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Gross profit 5,481,279 420,268 3,511,418 1,060,338 - 10,473,303
Selling, general and
administrative expenses 2,113,342 348,120 3,329,247 875,033 402,620 7,068,362
Goodwill amortization 76,619 14,585 320,387 111,138 522,729
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Operating income (loss) $ 3,291,317 $ 57,565 $ (138,214) $ 74,167 $ (402,623) $ 2,882,212
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Depreciation and amortization $ 557,833 $ 186,339 $ 404,343 $ 126,138 $ 45,000 $ 1,319,653
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Assets $ 50,471,923 $ 7,481,927 $18,703,420 $ 5,316,701 $10,441,807 $ 92,415,778
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Capital expenditures $ 341,058 $ 99,551 $ 110,376 $ 106,875 $ 1,832 $ 659,692
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8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Three Months Ended March 31, 2001 Compared to
Three Months Ended March 31, 2000
Consolidated sales decreased 25% to $23,094,000. Consolidated operating income
decreased 93% to $202,000. These decreases were due to a significant reduction
in capital spending by the Company's major telecommunications service provider
customers in the first quarter of 2001.
Suttle sales decreased 33% to $10,010,000. Sales to customers in the United
States (U.S.) decreased 32% to $9,792,000. Sales to the major telephone
companies (the Regional Bell Operating Companies ("RBOCs" which are Verizon
Logistics, Bell South, SBC Communications and Qwest) decreased 45% to
$4,992,000. Sales to these customers accounted for 50% of Suttle's U.S. customer
sales. Sales to distributors, original equipment manufacturers (OEMs), and
electrical contractors decreased 6% to $4,063,000. Sales to retail customers
decreased $92,000 or 17% due to decreased sales to Radio Shack, which is
Suttle's principal retail customer. Suttle's export sales decreased to $217,000
from $618,000.
Suttle's gross margins decreased 59% to $2,244,000. Gross margin percentage
decreased to 22.4% in 2001 from 36.3% in 2000. The gross margin percentage
decline was due to the negative effect of manufacturing overhead variances and
product mix. Selling, general and administrative expenses excluding goodwill
decreased $256,000 or 12%. Suttle's operating income decreased $2,982,000 or
91%.
Austin Taylor's sales increased 7% to $2,934,000. Austin Taylor's gross margin
declined 10% to $377,000. Gross margin as a percentage of sales was 12.8%
compared to 15.3% in 2000. The decline in gross margin was principally due to
lower margin product mix and competitive pricing pressures. Selling, general and
administrative expenses increased $15,000. Operating income decreased $58,000.
JDL Technologies, Inc. reported 2000 first quarter sales of $2,135,000 compared
to $3,934,000 in 2000. The lower sales volume was due to decreases in sales of
lower margin integration hardware and software products. Sales of consulting and
training services, on which JDL earns higher margins, increased in 2001 by 95%
to $1,077,000 from $526,000 in 2000. Operating income was $88,000 compared to
$74,000 reported in the first quarter of 2000.
Transition Networks, Inc. sales decreased by 11% to $8,016,000 in the first
quarter of 2001 due to a decline in the telecommunications market for media
conversion products. Gross margin decreased to $2,990,000 from $3,511,000. Gross
margin as a percentage of sales was 37.3% compared to 38.6% in 2000. Selling,
general and administrative expenses decreased by 24% or $837,000 due to recently
implemented tighter cost control measures. As a result, operating income
increased by $316,000.
Consolidated investment income, net of interest expense, decreased $53,000 due
to interest expense on increased notes payable balances. Income before income
taxes decreased 91% to $264,728. The Company's effective income tax rate was
30.2% compared to 22.9% in the first quarter of 2000. The increase in the tax
rate was due to a lower percentage of company earnings coming from Puerto Rico,
where it is sheltered from U.S. tax. Net income decreased $2,128,000 or 92%.
9
Liquidity and Capital Resources
At March 31, 2001, the Company had approximately $15,222,000 of cash and cash
equivalents compared to $11,321,000 of cash and cash equivalents at December 31,
2000. The Company had working capital of approximately $40,718,000 and a current
ratio of 2.9 to 1 compared to working capital of $45,486,000 and a current ratio
of 3.0 to 1 at the end of 2000.
Cash flow provided by operations was approximately $6,340,000 in the first three
months of 2001 compared to $516,000 in the same period in 2000. The increase was
due primarily to collections of accounts receivable balances.
Investing activities utilized $298,000 of cash in the 2001 period. Cash
investments in new plant and equipment totaled $250,000, which was financed by
internal cash flows. The Company expects to spend $2,000,000 on capital
additions in 2001.
Net cash used in financing activities was $2,154,000. The Company purchased and
retired 244,765 shares of its stock in open market transactions during the 2001
period. The Company purchased and retired an additional 5,800 shares in April
2001. At March 31, 2001 Board authorizations are outstanding to purchase an
additional 63,735 shares. Dividends paid on common stock were $880,391. Proceeds
from issuances of notes payable in the first quarter of 2001 totaled $989,700.
Lower telecom capital expenditures and the wave of consolidations among the
Regional Bell Operating Companies (RBOCs) have resulted in many customers
depleting safety stocks and reducing inventories of Suttle products. To help
strengthen future operating results amid these difficult market conditions, the
workforce of Suttle's operation has been reduced by nearly 17% since the
beginning of 2001. Annualized savings from this action will approximate
$500,000. Suttle's sales force is also being reorganized to work more closely
with RBOC customers and capitalize on new opportunities as market conditions
strengthen.
Reflecting the impact of the cost reduction measures taken, the Company's
earnings for the second quarter ending June 30, 2001 are expected to improve
over the first quarter level. However, due to the continuation of weak
conditions in the telecommunications market, this year's second quarter earnings
are expected to be down from the level posted in the second quarter of 2000.
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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Cautionary Statement: This document contains forward-looking statements
concerning possible or anticipated future financial performance, business
activities or plans. For such forward-looking statements, the Company claims the
protections of the safe harbor for forward-looking statements contained in
federal securities laws. Such forward-looking statements are subject to risks
and uncertainties that could cause actual performance, activities or plans to
differ significantly from those indicated in the forward-looking statements.
These risk factors are discussed in the Company's Form 10-K for the year ended
December 31, 2000, filed with the Securities and Exchange Commission.
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10
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
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Paul N. Hanson
Vice President and
Chief Financial Officer
Date: May 14, 2001