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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 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
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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 October 31, 2001
- -------------------------------------- -------------------------------
Common Stock, par value $.05 per share 8,263,475
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
PART I. FINANCIAL INFORMATION
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30 December 31
2001 2000
------------ ------------
Assets:
Current assets:
Cash and cash equivalents $ 20,724,829 $ 11,321,374
Receivables, net 18,288,458 23,189,409
Inventories (Note 4) 25,753,648 27,479,839
Note Receivable 2,765,390 2,965,390
Deferred income taxes 1,834,745 1,834,745
Other current assets 649,678 626,139
------------ ------------
Total current assets 70,016,748 67,416,896
Property, plant and equipment 34,533,875 33,466,268
less accumulated depreciation (25,759,845) (23,360,224)
------------ ------------
Net property, plant and equipment 8,774,030 10,106,044
Other assets:
Excess of cost over net assets acquired 5,160,800 6,728,995
Investments in mortgage backed and other securities 33,260 5,916,507
Deferred income taxes 2,734,356 2,735,811
Other assets 303,720 293,801
------------ ------------
Total other assets 8,232,136 15,675,114
------------ ------------
Total Assets $ 87,022,914 $ 93,198,054
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable $ 9,000,000 $ 9,101,438
Accounts payable 5,076,902 5,866,627
Accrued expenses 4,926,190 4,579,202
Dividends payable 880,391
Income taxes payable 991,596 1,503,468
------------ ------------
Total current liabilities 19,994,688 21,931,126
Stockholders' Equity 67,028,226 71,266,928
------------ ------------
Total Liabilities and Stockholders' Equity $ 87,022,914 $ 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 Sept. 30 Nine Months Ended Sept. 30
---------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales $ 23,073,751 $ 29,654,108 $ 71,849,561 $ 92,592,144
Costs and expenses:
Cost of sales 17,464,144 20,615,336 52,649,728 63,627,720
Selling, general and
administrative expenses 6,100,458 7,187,898 19,109,437 22,499,747
------------ ------------ ------------ ------------
Total costs and expenses 23,564,602 27,803,234 71,759,165 86,127,467
------------ ------------ ------------ ------------
Operating income (loss) (490,851) 1,850,874 90,396 6,464,677
Other income and (expenses):
Investment income 153,268 217,689 622,771 731,388
Interest expense (128,742) (211,089) (469,530) (487,460)
------------ ------------ ------------ ------------
Other income, net 24,526 6,600 153,241 243,928
Income before income taxes (466,325) 1,857,474 243,637 6,708,605
Income tax expense (benefit) (Note 5) (270,000) 350,000 (60,000) 1,300,000
------------ ------------ ------------ ------------
Net income (loss) $ (196,325) $ 1,507,474 $ 303,637 $ 5,408,605
------------ ------------ ------------ ------------
Other comprehensive income (loss):
Unrealized holding gain
on debt securities 38,644 31,613
Foreign currency
translation adjustment 170,311 (130,092) (11,636) (396,231)
------------ ------------ ------------ ------------
Other comprehensive loss before
income taxes 170,311 (91,448) (11,636) (364,618)
Income tax expense related to
unrealized gain on debt securities 13,394 10,957
------------ ------------ ------------ ------------
170,311 (104,842) (11,636) (375,575)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ (26,014) $ 1,402,632 $ 292,001 $ 5,033,030
============ ============ ============ ============
Basic net income (loss) per share $ (.02) $ .17 $ .04 $ .62
Diluted net income (loss) per share $ (.02) $ .17 $ .04 $ .61
Average Basic Shares Outstanding 8,365,133 8,771,679 8,396,236 8,738,155
Average Dilutive Shares Outstanding 8,365,133 8,910,290 8,399,272 8,901,609
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 303,637 303,637
Issuance of common stock to
Employee Stock Ownership Plan 25,000 1,250 219,075 220,325
Issuance of common stock under
Employee Stock Purchase Plan 15,657 783 82,363 83,146
Purchase of stock (383,912) (19,196) (1,281,535) (1,859,776) (3,160,507)
Shareholder dividends (1,673,667) (1,673,667)
Other comprehensive loss (11,636) (11,636)
--------- --------- ------------ ------------ ----------- ----------- ------------
BALANCE AT SEPTEMBER 30, 2001 8,273,654 $ 413,683 $ 27,897,038 $ 39,080,112 $ - $ (362,607) $ 67,028,226
========= ========= ============ ============ =========== =========== ============
See notes to consolidated financial statements.
5
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30
--------------------------------------
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 303,637 $ 5,408,605
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,808,018 3,972,128
Changes in assets and liabilities :
Accounts receivable 4,881,125 (6,220,735)
Inventories 1,698,856 (8,662,925)
Other current assets (22,639) (46,285)
Accounts payable (220,822) (1,707,642)
Accrued expenses 16,841 676,494
Income taxes payable (508,268) (1,548,697)
------------- -------------
Net cash provided by (used in) operating activities 9,956,748 (8,129,057)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (926,420) (1,922,215)
Maturities of mortgage-backed and other investment securities 5,883,247 167,041
Other assets (16,033) 365,116
Collection of notes receivable 200,000 200,000
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Net cash provided by (used in) investing activities 5,140,794 (1,190,058)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (101,438) (3,931,573)
Proceeds from issuance of notes payable 5,000,000
Dividends paid (2,554,058) (2,610,667)
Proceeds from issuance of stock 83,146 3,639,774
Purchase of stock (3,160,507) (1,175,132)
Collection of stock option notes receivable 288,225
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Net cash (used in) provided by financing activities (5,732,857) 1,210,627
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EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 38,770 (46,011)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 9,403,455 (8,154,499)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,321,374 14,837,655
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,724,829 $ 6,683,156
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 451,872 $ 2,858,776
Interest paid 454,746 474,954
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
September 30, 2001, the statements of income and comprehensive income for the
three and nine month periods ended September 30, 2001 and 2000 and the
statements of cash flows for the nine-month periods ended September 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 September 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 September 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, if
any. 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
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
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 nine-month periods ended
September 30, 2001 and 2000 is as follows:
Austin Transition JDL
Suttle Taylor Networks Technologies Corporate Consolidated
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Nine Months Ended Sept. 30, 2001:
Revenues $ 30,953,843 $ 7,644,306 $ 26,360,158 $ 6,891,254 $ 71,849,561
Cost of sales 24,998,427 6,968,203 16,532,938 4,150,160 52,649,728
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Gross profit 5,955,416 676,103 9,827,220 2,741,094 19,199,833
Selling, general and
administrative expenses 5,241,545 1,150,222 7,443,915 2,357,796 $ 2,915,959 19,109,437
Goodwill amortization 229,869 43,749 977,914 333,414 (1,584,946) 0
-------------------------------------------------------------------------------------------------
Operating income (loss) $ 484,002 $ (517,868) $ 1,405,391 $ 49,884 $(1,331,013) $ 90,396
=================================================================================================
Depreciation and amortization $ 1,637,694 $ 429,235 $ 1,228,638 $ 423,414 $ 89,037 $ 3,808,018
=================================================================================================
Capital expenditures $ 556,055 $ - $ 72,190 $ 88,548 $ 209,627 $ 926,420
=================================================================================================
Assets $ 47,814,338 $ 5,906,433 $ 19,164,532 $ 5,921,272 $ 8,216,339 $ 87,022,914
=================================================================================================
Nine Months Ended Sept. 30, 2000:
Revenues $ 44,090,192 $ 7,488,679 $ 29,484,368 $11,528,905 $ 92,592,144
Cost of sales 30,326,723 6,301,091 18,240,652 8,759,254 63,627,720
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Gross profit 13,763,469 1,187,588 11,243,716 2,769,651 28,964,424
Selling, general and
administrative expenses 5,413,451 1,157,350 10,257,613 2,842,096 $ 2,829,237 22,499,747
Goodwill amortization 229,869 43,749 977,914 333,414 (1,584,946) 0
-------------------------------------------------------------------------------------------------
Operating income (loss) $ 8,120,149 $ (13,511) $ 8,189 $ (405,859) $(1,244,291) $ 6,464,677
=================================================================================================
Depreciation and amortization $ 1,673,499 $ 572,186 $ 1,213,029 $ 378,414 $ 135,000 $ 3,972,128
=================================================================================================
Capital expenditures $ 1,215,500 $ 196,111 $ 209,458 $ 266,808 $ 34,338 $ 1,922,215
=================================================================================================
Assets $ 48,155,680 $ 6,692,516 $ 22,445,091 $ 8,696,278 $ 8,955,089 $ 94,944,654
=================================================================================================
Information concerning the Company's continuing operations in the various
segments for the three-month periods ended September 30, 2001 and 2000 is as
follows:
8
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Austin Transition JDL
Suttle Taylor Networks Technologies Corporate Consolidated
-------------------------------------------------------------------------------------------------
Three Months Ended Sept. 30, 2001:
Revenues $ 10,116,147 $ 1,847,280 $ 8,985,956 $ 2,124,368 $ 23,073,751
Cost of sales 8,116,802 2,022,488 5,832,648 1,492,206 17,464,144
-------------------------------------------------------------------------------------------------
Gross profit 1,999,345 (175,208) 3,153,308 632,162 5,609,607
Selling, general and
administrative expenses 1,669,858 368,900 2,409,604 732,285 $ 919,811 6,100,458
Goodwill amortization 86,345 14,580 337,140 111,137 (549,202) 0
-------------------------------------------------------------------------------------------------
Operating income (loss) $ 243,142 $ (558,688) $ 406,564 $ (211,260) $ (370,609) $ (490,851)
=================================================================================================
Depreciation and amortization $ 489,421 $ 121,053 $ 409,214 $ 141,137 $ 29,678 $ 1,190,503
=================================================================================================
Capital expenditures $ 162,289 $ - $ 25,403 $ 19,958 $ 25,253 $ 232,903
=================================================================================================
Three Months Ended September 30, 2000:
Revenues $ 13,571,136 $ 2,127,350 $ 10,977,439 $ 2,978,183 $ 29,654,108
Cost of sales 9,690,115 1,873,865 6,922,403 2,128,953 20,615,336
-------------------------------------------------------------------------------------------------
Gross profit 3,881,021 253,485 4,055,036 849,230 9,038,772
Selling, general and
administrative expenses 1,762,679 360,192 3,240,085 930,093 $ 894,849 7,187,898
Goodwill amortization 86,345 14,580 337,140 111,137 (549,202) 0
-------------------------------------------------------------------------------------------------
Operating income (loss) $ 2,031,997 $ (121,287) $ 477,811 $ (192,000) $ (345,647) $ 1,850,874
=================================================================================================
Depreciation and amortization $ 557,833 $ 195,492 $ 404,343 $ 126,138 $ 45,000 $ 1,328,806
=================================================================================================
Capital expenditures $ 341,530 $ 92,848 $ 22,087 $ 101,497 $ 3,705 $ 561,667
=================================================================================================
NOTE 4 - INVENTORIES
Inventories summarized below are priced at the lower of first-in, first-out cost
or market:
September 30 December 31
2001 2000
------------ ------------
Finished Goods $ 8,435,114 $ 10,876,529
Raw Materials 17,318,534 16,603,310
------------ ------------
Total $ 25,753,648 $ 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 September 30,
2001 and 2000 income tax rates do not bear a normal relationship to 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.
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9
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Nine Months Ended September 30, 2001 Compared to
Nine Months Ended September 30, 2000
- --------------------------------------------------------------------------------
Consolidated sales decreased 22% to $71,850,000. Consolidated operating income
decreased 99% to $90,400.
Suttle sales decreased 30% to $30,954,000. Sales to the major telephone
companies (Bell South, SBC, Verizon and Qwest) decreased $9,736,000 or 40%.
Sales to these customers accounted for 48% of Suttle's sales. Sales to
distributors, original equipment manufacturers (OEMs), and electrical
contractors decreased $2,054,000 or 13%. Sales to retail customers decreased
$383,000 or 22% due to decreased sales to Radio Shack, which is Suttle's
principal retail customer. Suttle's export sales, including sales to Canada,
decreased $1,008,000 to $701,000.
Suttle's sales declines are attributable to lower capital spending by
telecommunications industry companies and in particular Suttle's Regional Bell
Operating Company (RBOC) customers. Sales of DSL (Digital subscriber line)
products, however, have posted strong growth throughout the nine month period of
2001. DSL revenues increased to $4,148,000 from $1,443,000 in the year earlier
period. Revenues from CorroShield products, which are sold mainly to the major
telephone companies, decreased 39%. Sales of conventional voice products
declined 15%. Sales of voice products are being hurt by price competition from
foreign manufacturers. Sales of fiber-optic connector products increased 16%.
Suttle's gross margins decreased 57% to $5,955,000. Gross margin percentage
declined to 19.2% in 2001 from 31.2% in 2000. The decline in gross margin was
due to price-cutting to meet competition as well as unfavorable overhead
comparisons caused by lower than anticipated production volume. Suttle's
operating income decreased $7,636,000 or 94%. Suttle has implemented cost
reduction and other business restructuring measures at its plants in Minnesota,
Puerto Rico and Costa Rica. Suttle's nine month operating income was $484,000 in
comparison to $8,120,000 in the same 2000 period.
Austin Taylor's sales increased 2% to $7,644,000. Austin Taylor's gross margin
declined 43% to $676,000. Gross margin as a percentage of sales was 9% compared
to 16% in 2000. The decline in gross margin was principally due to competitive
pricing pressures, loss of higher margin business and third quarter expenses
associated with restructuring the operations to match current volume levels.
Selling, general and administrative expenses decreased $7,100 from the prior
year. Austin Taylor had an operating loss of $518,000 in the 2001 nine month
period compared to an operating loss of $13,500 in the same 2000 period.
Sales by Transition Networks, Inc. decreased to $26,360,000 or 11%. The sales
decline was due to decreased demand for media conversion products and general
slowdown in capital spending in the telecommunications marketplace . Sales to
distributors in the nine month period represented 57% of total year to date
sales. Gross margin on Transition Networks' sales decreased 13% to $9,827,000.
Gross margin as a percentage of sales decreased slightly to 37% from 38% in
2000, principally due to lower volume. Selling, general and administrative
expenses decreased $2,814,000 or 27% due to aggressive cost control
implementation. Transition Networks had operating income of $1,405,000 in the
2001 period compared to operating income of $8,200 in 2000.
10
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Sales by JDL Technologies, Inc. decreased $4,638,000 or 40%. 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 remained
consistent with the previous year at approximately $2,741,000 reflecting
increased revenues and higher margins on training, consulting and design
services. Gross margin as a percentage of sales increased to 40% from 24% in the
2000 period. Selling, general and administrative expenses decreased $484,000, or
17%, due to effective cost control efforts. JDL's operating income was $50,000
compared to an operating loss of $406,000 in the 2000 period.
Consolidated investment income, net of interest expense, decreased $91,000 due
to lower returns on invested funds. Income before income taxes decreased
$6,465,000 or 96%. The Company's effective income tax rate (recovery) was
(24.6)% compared to 19.4% in 2000. The decrease in the tax rate was attributable
to a lower percentage of the Company's earnings allocated to U.S. tax in the
2001 period. Net income decreased $5,105,000 or 94%.
Three Months Ended September 30, 2001 Compared to
Three Months Ended September 30, 2000
- --------------------------------------------------------------------------------
Consolidated sales decreased 22% to $23,074,000. The Company reported an
operating loss of $491,000 in the third quarter of 2001 compared to operating
income of $1,851,000 in the same period of 2000.
Suttle sales decreased 25% to $10,116,000. Sales to the major telephone
companies decreased $4,016,000 to $2,695,000. Sales to these customers accounted
for 27% of Suttle's sales. Sales to distributors, original equipment
manufacturers (OEMs), and electrical contractors increased $936,000, or 17%.
Sales to retail customers decreased $160,000 or 28% due to decreased sales to
Radio Shack, which is Suttle's principal retail customer. Suttle's export sales
decreased $454,000 to $269,000.
Sales of Suttle's voice products (CorroShield and conventional products)
declined $1,620,000 or 27%. Sales of data products decreased 30% from the 2000
period. Sales of fiber-optic connector products increased 36% to $808,000. Sales
of DSL (digital subscriber line) filters were $791,000 in the third quarter of
2001 compared to $912,000 in the same period in 2000.
Suttle's gross margins decreased 48% to $1,999,000. Gross margin percentage
declined to 19.8% in 2001 from 28.6% in 2000. The decline in gross margin was
due to price-cutting to meet competition as well as unfavorable overhead
comparisons caused by lower than anticipated production volume. Suttle's
operating income decreased $1,789,000 or 88%.
Austin Taylor's sales decreased 13% to $1,847,000. Austin Taylor's gross margin
declined by $429,000. The decline in gross margin was principally due to lower
business volume and costs associated with restructuring the business to match
current volume levels. Selling, general and administrative expenses increased
$8,700. Austin Taylor had an operating loss of $559,000 in the 2001 period
compared to an operating loss of $121,000 in 2000.
Sales by Transition Networks, Inc. decreased $1,991,000 or 18%. Gross margin on
Transition Networks' sales decreased 22% to $3,153,000. Gross margin as a
percentage of sales decreased to 35% from 37% in 2000. Selling, general and
administrative expenses decreased $830,000 or 26% due to effective cost control
implementation. During the third quarter of 2000, the Company implemented a cost
reduction program aimed at lowering this unit's overhead structure by 20%.
Transition Networks had operating income of $407,000 in the 2001 period compared
to operating income of $478,000 in 2000.
11
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Sales by JDL Technologies, Inc. decreased 29% to $2,124,000. 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 decreased
$217,000 to $632,000. Gross margin as a percentage of sales increased to 30% in
2001 from 29% in the 2000 period. Selling, general and administrative expenses
decreased $198,000, or 21%, due to cost control efforts. JDL's operating loss
was $211,000 compared to a loss of $192,000 in the 2000 period.
Consolidated investment income, net of interest expense, increased $18,000 due
to decreased interest expense on bank borrowings and higher cash balances
available for investment. Income before income taxes decreased $2,324,000. The
Company's effective income tax rate (recovery) was (57.8)% compared to 18.8% in
2000. Net income decreased $1,704,000.
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
At September 30, 2001, the Company had approximately $20,725,000 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 $50,022,000
and a current ratio of 3.5 to 1 compared to working capital of $45,486,000 and a
current ratio of 3.0 to 1 at the end of 2000.
The Company had positive operating cash flow of $9,957,000 in the first nine
months of 2001 compared to negative operating cash flow of $8,129,000 in the
same period in 2000. This was due to reductions in accounts receivable and
inventory levels as result of lower sales volumes and adjustments made to
business plans to conserve cash. The Company used substantial amounts of cash in
the 2000 period to support higher inventory and accounts receivable balances at
JDL Technologies and Transition Networks.
Investing activities provided $5,137,000 of cash in the 2001 period which was
due to redemption of mortgage backed securities and collection of notes
receivable. Cash investments in new plant and equipment totaled $926,000 in the
nine month period in 2001 compared with $1,922,000 for the same period in 2000.
Investments in both years were financed by internal cash flows. The Company
expects to spend a total of $1,500,000 on capital additions in 2001.
Net cash flows used in financing activities were $5,729,000 for the first nine
months of 2001. The Company retired $101,000 of notes payable in the first nine
months of 2001. Notes payable were $9,000,000 at September 30, 2001 compared to
$9,101,000 at December 31, 2000. The Company purchased and retired 383,912
shares of its stock in open market transactions during the 2001 period. At
September 30, 2001 Board authorizations are outstanding to purchase an
additional 228,000 shares. Dividends paid on common stock were $2,550,000.
Effective for the quarter beginning October 1, 2001, the CSI Board of Directors
has suspended the payment of a regular quarterly dividend due to the substantial
reduction in earnings during the past several quarters. Reinstatement of a
quarterly dividend will be reviewed on a regular basis. The Company received
$83,000 of cash in the 2001 period from employee stock purchases.
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
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
New Accounting Principles:
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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 September 30, 2001 and 2000 the Company had net goodwill of $5,160,000 and
$7,252,000, respectively. Amortization expense recorded during the nine months
ended September 30, 2001 and 2000 was $1,554,000.
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: November 14, 2001