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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 JUNE 30, 2001
-------------------------------------------------
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 July 31, 2001
-------------------------------------- -----------------------------
Common Stock, par value $.05 per share 8,371,797
Total Pages (14) 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
PART I. FINANCIAL INFORMATION
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30 December 31
2001 2000
------------ ------------
Assets:
Current assets:
Cash $ 19,673,586 $ 11,321,374
Receivables, net 18,463,672 23,189,409
Inventories (Note 4) 27,530,830 27,479,839
Note Receivable 2,765,390 2,965,390
Deferred income taxes 1,834,745 1,834,745
Other current assets 415,922 626,139
------------ ------------
Total current assets 70,684,145 67,416,896
Property, plant and equipment 34,102,839 33,466,268
less accumulated depreciation (24,925,781) (23,360,224)
------------ ------------
Net property, plant and equipment 9,177,058 10,106,044
Other assets:
Excess of cost over net assets acquired 5,683,532 6,728,995
Investments in mortgage backed and other securities 134,807 5,916,507
Deferred income taxes 2,735,504 2,735,811
Other assets 309,974 293,801
------------ ------------
Total other assets 8,863,817 15,675,114
------------ ------------
Total Assets $ 88,725,020 $ 93,198,054
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable $ 9,080,556 $ 9,101,438
Accounts payable 5,583,732 5,866,627
Accrued expenses 4,072,009 4,579,202
Dividends payable 838,900 880,391
Income taxes payable 1,365,009 1,503,468
------------ ------------
Total current liabilities 20,940,206 21,931,126
Stockholders' Equity 67,784,814 71,266,928
------------ ------------
Total Liabilities and Stockholders' Equity $ 88,725,020 $ 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 June 30 Six Months Ended June 30
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales $ 25,681,533 $ 32,073,844 $ 48,775,810 $ 62,938,036
Costs and expenses:
Cost of sales 18,733,338 22,621,495 35,185,584 43,012,384
Selling, general and
administrative expenses 6,569,156 7,720,758 13,008,979 15,311,849
------------ ------------ ------------ ------------
Total costs and expenses 25,302,494 30,342,253 48,194,563 58,324,233
------------ ------------ ------------ ------------
Operating income 379,039 1,731,591 581,247 4,613,803
Other income and (expenses):
Investment income 226,365 255,553 469,503 513,699
Interest expense (160,170) (133,825) (340,788) (276,371)
------------ ------------ ------------ ------------
Other income, net 66,195 121,728 128,715 237,328
Income before income taxes 445,234 1,853,319 709,962 4,851,131
Income taxes (Note 5) 130,000 265,000 210,000 950,000
------------ ------------ ------------ ------------
Net income 315,234 1,588,319 499,962 3,901,131
------------ ------------ ------------ ------------
Other comprehensive income (loss):
Unrealized holding gain (loss)
on debt securities (22,838) 17,607 5,288 (7,031)
Foreign currency
translation adjustment (5,386) (234,921) (185,437) (266,139)
------------ ------------ ------------ ------------
Other comprehensive loss before
income taxes (28,224) (217,314) (180,149) (273,170)
Income tax expense (benefit) related
to unrealized loss on debt securities (7,916) 6,103 1,798 (2,437)
------------ ------------ ------------ ------------
(20,308) (223,417) (181,947) (270,733)
------------ ------------ ------------ ------------
Comprehensive income $ 294,926 $ 1,364,902 $ 318,015 $ 3,630,398
============ ============ ============ ============
Basic net income per share $ .04 $ .18 $ .06 $ .45
Diluted net income per share $ .04 $ .18 $ .06 $ .44
Average Basic Shares Outstanding 8,391,380 8,795,838 8,425,243 8,721,219
Average Dilutive Shares Outstanding 8,400,278 8,984,864 8,445,937 8,938,873
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 499,962 499,962
Issuance of common stock to
Employee Stock Ownership Plan 25,000 1,250 219,075 220,325
Purchase of stock (253,866) (12,646) (840,248) (1,491,408) (2,344,302)
Shareholder dividends (1,676,152) (1,676,152)
Other comprehensive loss (181,947) (181,947)
--------- --------- ------------ ------------ ----------- ----------- ------------
BALANCE AT JUNE 30, 2001 8,388,043 $ 419,450 $ 28,255,962 $ 39,642,320 $ - $ (532,918) $ 67,784,814
========= ========= ============ ============ =========== =========== ============
See notes to consolidated financial statements.
5
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30
---------------------------------
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 499,962 $ 3,901,131
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,617,515 2,643,322
Changes in assets and liabilities :
Accounts receivable 4,600,361 (3,397,437)
Inventories (147,924) (8,519,957)
Other current assets 210,409 186,926
Accounts payable (191,829) 1,239,773
Accrued expenses (285,250) 15,848
Income taxes payable (137,162) (1,537,079)
------------ ------------
Net cash provided by (used in) operating activities 7,166,082 (5,467,473)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (712,192) (1,360,548)
Maturities of mortgage-backed and other investment securities 5,747,354 126,880
Purchases of mortgaged-backed and other securities
Other assets 18,661 258,700
Collection of notes receivable 200,000 200,000
------------ ------------
Net cash provided by (used in) investing activities 5,253,823 (774,968)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (20,882) (3,921,817)
Proceeds from issuance of notes payable 2,300,000
Dividends paid (1,717,643) (1,736,364)
Proceeds from issuance of stock 3,092,995
Purchase of stock (2,344,302) (1,145,931)
Collection of notes receivable 288,225
------------ ------------
Net cash used in financing activities (4,082,827) (1,122,892)
------------ ------------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 15,134 (24,709)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 8,352,212 (7,390,042)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,321,374 14,837,655
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,673,586 $ 7,447,613
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 347,969 $ 2,493,807
Interest paid 377,716 296,023
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 changes in stockholders' equity as of June
30, 2001, the statements of income and comprehensive income for the three and
six month periods ended June 30, 2001 and 2000 and the statements of cash flows
for the six-month periods ended June 30, 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 June 30, 2001 and
2000 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 June 30 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 - 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
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. Information concerning the
Company's operations in the various segments for the six-month periods ended
June 30, 2001 and 2000 is as follows:
Austin Transition JDL
Suttle Taylor Networks Technologies Corporate Consolidated
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Six Months Ended June 30, 2001:
Revenues $ 20,837,696 $ 5,797,026 $17,374,202 $ 4,766,886 $ 0 $ 48,775,810
Cost of sales 16,881,625 4,945,715 10,700,290 2,657,954 0 35,185,584
-------------------------------------------------------------------------------------------------
Gross profit 3,956,071 851,311 6,673,912 2,108,932 0 13,590,226
Selling, general and
administrative expenses 3,557,103 781,326 5,017,559 1,625,513 2,027,478 13,008,979
Goodwill amortization 143,524 29,169 640,774 222,277 (1,035,744) 0
------------------------------------------------------------------------------------------------
Operating income (loss) $ 255,444 $ 40,816 $ 1,015,579 $ 261,142 $ (991,734) $ 581,247
================================================================================================
Depreciation and amortization $ 1,148,273 $ 308,182 $ 819,424 $ 282,277 $ 59,359 $ 2,617,515
================================================================================================
Capital expenditures $ 397,255 $ 15,186 $ 46,787 $ 68,590 $ 184,374 $ 712,192
================================================================================================
Assets $ 47,131,700 $ 6,926,429 $20,175,355 $ 5,444,187 $ 9,047,349 $88,725,020
================================================================================================
Six Months Ended June 30, 2000:
Revenues $ 30,519,056 $ 5,361,329 $18,506,929 $ 8,550,722 $ 0 $62,938,036
Cost of sales 20,636,608 4,427,226 11,318,249 6,630,301 0 43,012,384
------------------------------------------------------------------------------------------------
Gross profit 9,882,448 934,103 7,188,680 1,920,421 0 19,925,652
Selling, general and
administrative expenses 3,650,772 797,158 7,017,528 1,912,003 1,934,388 15,311,849
Goodwill amortization 143,524 29,169 640,774 222,277 (1,035,744) 0
------------------------------------------------------------------------------------------------
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
================================================================================================
Information concerning the Company's operations in the various segments for the
three-month periods ended June 30, 2001 and 2000 is as follows:
8
Austin Transition JDL
Suttle Taylor Networks Technologies Corporate Consolidated
-------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2001:
Revenues $ 10,827,616 $ 2,863,177 $ 9,358,479 $ 2,632,261 $ 0 $25,681,533
Cost of sales 9,115,156 2,389,287 5,674,565 1,554,330 18,733,338
------------------------------------------------------------------------------------------------
Gross profit 1,712,460 473,890 3,683,914 1,077,931 0 6,948,195
Selling, general and
administrative expenses 1,699,800 418,302 2,525,438 793,843 1,131,773 6,569,156
Goodwill amortization 66,905 14,584 320,387 111,139 (513,015) 0
------------------------------------------------------------------------------------------------
Operating income (loss) $ (54,245) $ 41,004 $ 838,089 $ 172,949 $ (618,758) $ 379,039
================================================================================================
Depreciation and amortization $ 573,126 $ 156,722 $ 409,886 $ 141,139 $ 29,680 $ 1,280,873
================================================================================================
Capital expenditures $ 224,523 $ 16,755 $ 31,181 $ 13,246 $ 176,128 $ 285,705
================================================================================================
Three Months Ended June 30, 2000:
Revenues $ 15,415,390 $ 2,621,494 $ 9,420,473 $ 4,616,487 $ 0 $32,073,844
Cost of sales 11,014,221 2,107,659 5,743,211 $ 3,756,404 0 22,621,495
------------------------------------------------------------------------------------------------
Gross profit 4,401,169 513,835 3,677,262 860,083 0 9,452,349
Selling, general and
administrative expenses 1,537,433 449,038 3,688,281 $ 1,036,970 $ 1,009,036 7,720,758
Goodwill amortization 66,901 14,586 320,389 111,139 (513,015) 0
------------------------------------------------------------------------------------------------
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
================================================================================================
NOTE 4 - INVENTORIES
Inventories summarized below are priced at the lower of first-in, first-out cost
or market:
June 30 December 31
2001 2000
------------ ------------
Finished Goods $ 9,653,027 $ 10,876,529
Raw Materials 17,877,803 16,603,310
------------ ------------
Total $ 27,530,830 $ 27,479,839
============ ============
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, 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.
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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.
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9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- ----------------------------------------------------------
Six Months Ended June 30, 2001 Compared to
Six Months Ended June 30, 2000
------------------------------
Consolidated sales decreased 23% to $48,776,000. Consolidated operating income
decreased 87% to $581,000.
Suttle sales decreased 32% to $20,838,000. Sales to the major telephone
companies (Bell South, SBC, Verizon and Qwest) decreased $5,721,000 or 32%.
Sales to these customers accounted for 58% of Suttle's sales. Sales to
distributors, original equipment manufacturers (OEMs), and electrical
contractors decreased $2,990,000, or 31%. Sales to retail customers decreased
$223,000 or 19% due to decreased sales to Radio Shack, which is Suttle's
principal retail customer. Suttle's export sales, including sales to Canada,
decreased 56% to $432,000.
Suttle's sales declines are attributable to slowdown in capital spending by
telecommunications industry companies and in particular the Regional Bell
Operating Company (RBOC) customers. Sales of DSL products, however, have posted
strong growth throughout the first half of 2001 and Suttle plans to introduce
additional broadband products this year. DSL revenues increased to $3,357,000
from $531,000 in the year earlier period. Revenues from CorroShield products,
which are sold mainly to the major telephone companies, decreased 43%. Sales of
conventional voice products declined 8%. Sales of voice products are being hurt
by price competition from foreign manufacturers. Sales of fiber-optic connector
products increased 3%.
Suttle's gross margins decreased 60% to $3,956,000. Gross margin percentage
declined to 19.0% in 2001 from 32.4% in 2000. The decline in gross margin was
due primarily to price cutting to meet competition and from the effect of excess
manufacturing overhead costs relative to lower volumes. Suttle's operating
income decreased $5,833,000 or 96%. Suttle has implemented cost reduction
measures, including 15% workforce reductions at its plants in Minnesota, Puerto
Rico and Costa Rica.
Austin Taylor's sales increased 8% to $5,797,000. Austin Taylor's gross margin
declined 9% to $851,000. Gross margin as a percentage of sales was 14.7%
compared to 17.4% in 2000. The decline in gross margin was principally due to
increased pricing competition. Selling, general and administrative expenses
decreased modestly by $16,000 due to cost reduction measures implemented.
Operating income decreased $67,000 or 62%.
Sales by Transition Networks, Inc. decreased $1,133,000 or 6% from the year
earlier period. Gross margin on Transition Networks' sales decreased 7% to
$6,674,000. Gross margin as a percentage of sales remained at 38% in 2001as
compared to 2000. Selling, general and administrative expenses decreased by
$2,000,000 or 28% as a result of effective cost control measures that have
significantly reduced operating overhead. Transition Networks had operating
income of $1,016,000 in the 2001 period compared to an operating loss of
$470,000 in 2000.
Sales by JDL Technologies, Inc. decreased $3,784,000 or 44%. However, most of
the sales decrease was made up of low-margin or no-margin reselling of
networking equipment to the education market. JDL has been increasing its
higher-margin consulting and training services reflected in a gross margin
10
increase of 10% to $2,109,000. Gross margin as a percentage of sales increased
to 44% from 23% in the 2000 period. Selling, general and administrative expenses
decreased $286,000, or 15%, due to tighter cost control efforts. JDL's operating
income was $261,000 compared to an operating loss of $214,000 in the 2000
period.
Consolidated investment income, net of interest expense, decreased $109,000 due
to lower returns on invested funds and increased borrowing from banks. Income
before income taxes decreased $4,141,000 or 85%. The Company's effective income
tax rate was 29.6% compared to 19.6% in 2000. The increase in the tax rate was
because a lower than normal percentage of the Company's earnings was sheltered
from U.S. tax in the 2001 period. Net income decreased $3,401,000 or 87%.
Three Months Ended June 30, 2001 Compared to
Three Months Ended June 30, 2000
--------------------------------
Consolidated sales decreased 20% to $25,682,000. Consolidated operating income
decreased 78% to $379,000.
Suttle sales decreased 30% to $10,828,000. Sales to the major telephone
companies decreased $1,667,000 to $7,152,000. Sales to these customers accounted
for 66% of Suttle's sales. Sales to distributors, original equipment
manufacturers (OEMs), and electrical contractors decreased $2,718,000, or 50%.
Sales to retail customers decreased $131,000 or 21% due to decreased sales to
Radio Shack, which is Suttle's principal retail customer. Suttle's export sales
decreased 42% to $215,000.
DSL revenues increased to $991,000 from $263,000 in the year earlier period.
Additional broadband products are to be released this year. Sales of Suttle's
voice products (CorroShield and conventional products) declined $2,749,000 or
44%. Sales of voice products are being hurt by price competition from foreign
manufacturers. Sales of fiber-optic connector products increased 28%.
Suttle's gross margins decreased 61% to $1,712,000. Gross margin percentage
declined to 15.8% in 2001 from 28.6% in 2000. The decline in gross margin was
due primarily to price cutting to meet competition and excess factory overhead
costs relative to lower volumes. Suttle reported an operating loss of $54,000 in
the three month period in 2001 compared to operating income of $2,797,000 in the
same period in 2000. Suttle has implemented cost reduction measures in the
second quarter of 2001, including 15% workforce reductions at its plants in
Minnesota, Puerto Rico and Costa Rica.
Austin Taylor's sales increased 9% to $2,863,000. Austin Taylor's gross margin
declined 8% to $474,000. Gross margin as a percentage of sales was 16.6%
compared to 19.6% in 2000. Selling, general and administrative expenses
decreased $31,000 due to increased cost control efforts. Operating income
decreased $9,200 or 18%.
Sales by Transition Networks, Inc. were virtually unchanged from the year
earlier level at $9,358,000. Gross margin on Transition Networks' sales also
remained at the same level at $3,684,000 in 2001. Gross margin as a percentage
of sales remained at 39% in 2001. Selling, general and administrative expenses
decreased $1,163,000 or 32% due to significant improvements in cost control and
overhead reductions. Transition Networks had operating income of $838,000 in the
2001 period compared to an operating loss of $331,000 in 2000.
11
Sales by JDL Technologies, Inc. decreased $1,984,000 or 43%. However, most of
the sales decrease was made up of low-margin or no-margin reselling of
networking equipment to the education market. JDL's gross margin increased
$218,000 to $1,078,000 due to increased levels of higher-margin consulting and
training services. Gross margin as a percentage of sales increased to 41% from
19% in the 2000 period. Selling, general and administrative expenses decreased
$243,000, or 23%, due to JDL's improved cost control efforts. JDL's operating
income was $173,000 compared to an operating loss of $288,000 in the 2000
period.
Consolidated investment income, net of interest expense, decreased $56,000 due
to decreased returns on invested cash and increased interest expense on notes
payable. Income before income taxes decreased $1,408,000 or 76%. The Company's
effective income tax rate was 29.2% compared to 14.3% in 2000. Net income
decreased $1,273,000 or 80%.
Liquidity and Capital Resources
At June 30, 2001, the Company had approximately $19,674,000 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 $49,744,000 and a current
ratio of 3.4 to 1 compared to working capital of $45,486,000 and a current ratio
of 3.1 to 1 at the end of 2000.
The Company had operating cash flows of $7,177,000 in the first six months of
2001 compared to negative cash flows of $5,467,000 in the same period in 2000.
This was due primarily to a reduction of account receivable as well as a decline
in general sales volumes. 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. The Company has
adjusted the business plans of these operations in order to conserve cash and
reduce excess inventory and accounts receivable levels.
Investing activities provided $5,254,000 of cash in the 2001 period which was
due to a redemption of mortgage backed securities and collection of notes
receivable. Cash investments in new plant and equipment totaled $712,000 in the
six month period in 2001 compared with $1,361,000 for the same period in 2000
financed by internal cash flows. The Company expects to spend $1,500,000 on
capital additions in 2001.
Net cash used in financing activities was $4,093,000 for the first six months of
2001. The Company retired $21,000 of notes payable in 2001 and $3,922,000 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 $9,081,000 at June 30, 2001 compared to $7,421,000 at December 31,
2000. The Company purchased and retired 253,866 shares of its stock in open
market transactions during the 2001 period. At June 30, 2001 Board
authorizations are outstanding to purchase an additional 49,000 shares.
Dividends paid on common stock were $1,718,000. The Company received $3,093,000
of cash in the 2000 period from exercises of employee stock options.
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.
12
New Accounting Principles:
In July 2001, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
This statement applies to intangibles and goodwill acquired after June 30, 2001,
as well as goodwill and intangibles previously acquired. Under this statement
goodwill as well as other intangibles determined to have an infinite life will
no longer be amortized; however, these assets will be reviewed for impairment on
a periodic basis. Statement No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. The Statement is effective for the Company on January
1, 2002. The Company is currently assessing but has not yet determined the
impact of the Statement on its financial position and results of operations. As
of June 30, 2001 and 2000 the Company had net goodwill of $5,684,000 and
$6,729,000, respectively. Amortization expense recorded during the six months
ended June 30, 2001 and 2000 was $1,045,000.
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PART II. OTHER INFORMATION
Items 1 - 3. Not Applicable
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Item 4. Submission of Matters to a Vote of Securities Holders
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The Annual Meeting of the Shareholders of the Registrant was held on May 17,
2001 in Eden Praire, MN. The total number of shares outstanding and entitled to
vote at the meeting was 8,307,209 of which 7,619,232 were present either in
person or by proxy. Shareholders re-elected board members Curtis A. Sampson and
Gerald D. Pint to three-year terms expiring at the 2004 Annual Meeting of
Shareholders. The vote for these board members was as follows:
In Favor Abstaining
----------- -----------
Curtis A. Sampson 7,395,025 224,207
Gerald D. Pint 7,550,575 68,656
Board members continuing in office are Edwin C. Freeman, Luella Gross Goldberg
and Randall D. Sampson (whose terms expire at the 2002 Annual Meeting of
Shareholders) and Paul J. Anderson, Wayne E. Sampson and Frederick M. Green
(whose terms expire at the 2003 Annual Meeting of Shareholders).
Shareholders also approved an amendment to increase the number of shares
authorized to be issued under the Company's 1990 Stock Option Plan for
Nonemployee Directors from 200,000 shares to 300,000 shares. The plan provides
for the automatic grant of options to purchase 3,000 shares of common stock
annually to each nonemployee director concurrent with the annual shareholder
meeting of the Company at an option price equal to the fair market value of the
Company's common stock at the date of grant. The vote to approve the amendment
was 7,264,660 in favor, 224,439 against and 130,132 abstaining.
Items 5 - 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: August 14, 2001
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