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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 0-10355
COMMUNICATIONS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0957999
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(State or other jurisdiction (Federal Employer
of incorporation or organization) Identification No.)
213 South Main Street
Hector, MN 55342
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (320) 848-6231
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
----------------------------
Common Stock, $.05 par value
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
----- -----
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $54,101,000 based upon the closing sale price of
the Company's common stock on the NASDAQ National Market System on March 22,
2001.
As of March 22, 2001 there were outstanding 8,307,209 shares of the Registrant's
common stock.
Documents Incorporated by Reference: The Company's Proxy Statement for its
Annual Meeting of Shareholders to be held on May 17, 2001 is incorporated by
reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Communications Systems, Inc. (herein collectively called "CSI" or the "Company")
is a Minnesota corporation organized in 1969 which operates directly and through
its subsidiaries located in the United States (including Puerto Rico), Costa
Rica and the United Kingdom. CSI is principally engaged in the manufacture and
sale of modular connecting and wiring devices for voice and data communications.
Effective August 7, 1998, the Company acquired JDL Technologies, Inc. ("JDL").
JDL, located in Edina, Minnesota, provides telecommunications network design,
specification, and training services to educational institutions. JDL also sells
internet access software for use in elementary and secondary schools. The
acquisition was accounted for as a purchase and operations of JDL have been
included in consolidated operations from August 7, 1998.
Effective December 1, 1998, the Company acquired Transition Networks, Inc.
("TNI"). TNI, located in Eden Prairie, Minnesota is a manufacturer of media and
rate conversion products, which permit telecommunications networks to move
information between copper-wired equipment and fiber-optic cable. The
acquisition was accounted for as a purchase and operations of TNI have been
included in consolidated operations from December 1, 1998.
Effective April 7, 1999, the Company acquired LANart Corporation, a designer and
manufacturer of application specific integrated circuits located in Needham,
Massachusetts, for approximately $4,800,000. The operations and reporting
activities have been merged into the Company's Transition Networks, Inc.
subsidiary. The acquisition was accounted for as a purchase and operations of
LANart Corporation have been included in consolidated results from April 7,
1999.
Additional information on these acquisitions can be found in subparagraphs
(c)(1)(iii) and (c)(1)(iv) under Item 1 herein, in "Acquisitions and
Dispositions" under Item 7, Management's Discussion and Analysis and in Note 8
of Notes to Consolidated Financial Statements under Item 8, herein.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
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 other
operations; JDL Technologies, Inc. provides telecommunications network design,
specification and training services to educational institutions. The Company
conducts manufacturing in the United States (including Puerto Rico), the United
Kingdom and Costa Rica. Information regarding operations in the various segments
is set forth in Note 9 of the Notes to Consolidated Financial Statements under
Item 8, herein.
(c) NARRATIVE DESCRIPTION OF BUSINESS
(i) Suttle
------
The Company manufactures and markets connectors and wiring devices for voice,
data and video communications under the "Suttle" brand name in the United States
(U.S.) and internationally. The Company also manufactures a line of high
performance fiber-optic connectors, interconnect devices and fiber cable
assemblies for the telecommunications, computer and electronics markets.
Products are manufactured at the Company's plants in Hector, Minnesota (Suttle
Apparatus Minnesota Division), Humacao, Puerto Rico (Suttle Caribe, Inc.) and
San Jose, Costa Rica (Suttle Costa Rica, S.A.). Segment sales were $55,111,000
in 2000, or 46% of consolidated revenues and $58,670,000 or 50% in 1999.
2
(A) Products
Suttle's products are used in on-premise connection of telephones, data
terminals and related equipment. The product line consists primarily of modular
connecting devices and includes numerous types of jacks, connecting blocks and
assemblies, adapters, cords and related equipment, which are offered in a
variety of colors, styles and wiring configurations. Most of the products are
used in voice applications, but the Company continues to develop an expanding
line of products for network systems applications. A significant portion of the
Company's revenues are derived from sales of a line of corrosion resistant
connectors which utilize a water resistant gel to offer superior performance in
harsh environments. Station apparatus products generally range in price from
$.70 to $25.00 per unit. A majority of the sales volume, both in units and
revenues, is derived from products selling for under $5.00.
The Company also produces high performance fiber-optic connectors, interconnect
devices and fiber cable assemblies that are used in high-speed fiber-optic
networks and local area network connections. The Company's patented Quick Term
TM fiber optic connector significantly reduces installation time and costs
associated with making fiber connections. By eliminating the need for a curing
oven, the product reduces field installation time for this process from 20
minutes to 2 minutes. The Company's fiber-optic connector products range in
price from $2.50 to $1,500.00.
The Company also manufactures DSL (Digital Subscriber Lines) filters for home
and business applications. These filters permit the user to receive both analog
and digital signals simultaneously and allow a single telephone line to support
uninterrupted voice, fax and internet capabilities.
(B) Markets and Marketing
Suttle competes in all major areas of the telecommunications connector market
characterized by modular four, six and eight conductor jacks. Customers include
the major telephone companies ("RBOCs" which are Verizon Logistics, Bell South,
SBC Communications, and Qwest), other telephone companies, electrical
contractors, interconnect companies, original equipment manufacturers and
retailers. These customers are served directly through the Company's sales staff
and through distributors such as Sprint North Supply, Graybar Electric Company,
Alltel Supply, KGP and Anixter Communications.
As a group, sales to the major telephone companies, both directly and through
distribution, were approximately $29,713,000 in 2000 and $35,526,000 in 1999,
which represented 54% of Suttle's sales in 2000 and 60% in 1999. Sales to
Verizon Logistics, Alltel Supply and KGP, the principal distributors serving
this market, amounted to 20%, 17% and 14%, respectively, of Suttle's sales in
2000. Sales to Verizon Logistics, Alltell Supply and KGP were 18%, 12% and 16%,
respectively, of Suttle's sales in 1999.
The Company believes business and network systems products will become an
increasingly important part of its product line. Independent contractors (which
include businesses often referred to as "interconnect companies") are engaged in
the business of engineering, selling, installing and maintaining telephone
equipment for the business community. The Company markets its products to
independent contractors through a network of manufacturer's representatives,
through distribution, and through the Company's sales staff. Sales of products
for business and network systems accounted for 16% and 10% of Suttle's revenues
in 2000 and 1999, respectively.
Approximately 4% of Suttle's 2000 revenues and 5% of 1999 revenues were derived
from sales in the retail market. The Company is a supplier of station apparatus
to Radio Shack, other retailers, office supply distributors and specialized
telephone stores. Sales to the retail market are made through a limited number
of manufacturers' representatives.
Fiber-optic products are marketed to original equipment manufacturers (OEMs) in
the U.S. and internationally through the Company's sales staff, manufacturers'
representatives and a network of distributors, including Graybar Electric
Company, Arcade Electronics and Branch Datacom. Sales of fiber-optic products
accounted for 4% of Suttle's revenues in 2000 and 1999. Sales of DSL products
introduced in 2000 represented an additional 4% of sales.
The balance of Suttle's sales in 2000 and 1999 were to original equipment
manufacturers, non-major telephone companies and international customers. In the
communications industry market, sales to telephone companies are made directly
or through distribution. Sales to OEM customers are made through a nationwide
network of distributors, some of which are affiliates of major telephone
companies, and through the Company's sales staff.
(C) Competition
Suttle encounters strong competition in all its product lines. The Company
competes primarily on the basis of the broad lines of products offered, product
performance, quality, price and delivery.
3
Suttle's principal competitors for sales to telephone companies and independent
contractors include Lucent Technologies, Ortronics, Leviton, Hubbell, Northern
Telecom and AMP, Inc. Most of these companies have greater financial resources
than the Company. In addition, distributors of the Company's apparatus products
also market products for one or more of these competitors. Lucent Technologies
markets to telephone companies and independent contractors directly and through
telephone industry distributors that also market the Company's products.
In retail markets, the Company experiences significant competition from
importers of low-priced modular products that market their products directly and
through a number of distributors to various retail outlets.
The Company's principal competitor for sales to the Regional Bell Operating
Companies is Lucent Technologies. To date, foreign manufacturers of apparatus
products have not presented significant competition for sales to this market.
(D) Order Book
Suttle manufactures its products on the basis of estimated customer
requirements. Outstanding customer orders at March 1, 2001, were approximately
$1,839,000 compared to approximately $3,992,000 at March 1, 2000. Because new
orders are filled on a relatively short timetable, the Company does not believe
its order book is a significant indicator of future results.
(E) Manufacturing and Sources of Supply
The Company's station apparatus products are manufactured using plastic parts,
wire sub-assemblies, fasteners, brackets, electronic circuit boards and other
components, most of which are fabricated by the Company. There are multiple
sources of supply for the materials and parts required and the Company is not
dependent upon any single supplier, except that Suttle's corrosion resistant
products utilize a moisture-resistant gel-filled fig available only from Raychem
Corporation. The unavailability of the gel-filled figs from Raychem Corporation
could have a material adverse effect on the Company. The Company has not
generally experienced significant problems in obtaining its required supplies,
although from time to time spot shortages are experienced.
(F) Research and Development; Patents
The Company continually monitors industry requirements and creates new products
to improve its existing station apparatus product line. The Company's
CorroShield line of corrosion resistant products was introduced in 1993, as was
the Flex-Plate line of data products. The Company added additional products to
these product lines in 1994 and 1995. The Company's SpeedStar line of high-speed
data connectors was introduced in early 1996. In 1997, a proprietary Category 5
connector was developed which meets the highest current industry standard. In
2000, DSL (Digital Subscriber Lines) filters for home and business applications
were introduced.
Historically, the Company has not relied on patents to protect its competitive
position in the station apparatus market. However, duplication of Company
designs by foreign apparatus manufacturers has caused the Company to apply for
design patents on a number of station apparatus products.
The Company's "Suttle Apparatus" brand name is important to its business. The
Company regularly supports this name by trade advertising and believes it is
well known in the marketplace.
(ii) Austin Taylor
-------------
Austin Taylor Communications, Ltd. manufactures voice and data connectors and
related products at its plant in Bethesda, Wales, U.K. Its product line consists
of British standard line jacks, patch panels, wiring harness assemblies, metal
boxes, distribution cabinets and distribution and central office frames. Sales
by Austin Taylor were $10,148,000, or 8% of consolidated revenues, in 2000 and
$12,031,000 or 10% in 1999.
Austin Taylor is a vertically integrated manufacturer with metal stamping, metal
bending, forming and painting, plastic injection molding and printed circuit
board assembly capabilities. Austin Taylor's major customers include Cable and
Wireless Communications, Northern Telecom Europe, Lucent Technologies and
British Telecom. Austin Taylor's products are sold directly by its sales staff
and through distributors, including Anixter Communications, NS Supply Group, RS
Components and Telcom Products. Approximately 32% and 52% of Austin Taylor sales
were to United Kingdom customers in 2000 and 1999, respectively.
4
The Company believes the European telecommunications market will offer
increasing opportunities as the European Economic Community eliminates trade
barriers and standardizes use of modular connector products. Austin Taylor also
serves as a base to manufacture and/or distribute Suttle products and jointly
developed products in the United Kingdom, Europe and internationally. The
Company markets Austin Taylor products in the U.S., Canada, and other markets.
Outstanding customer orders for Austin Taylor products were approximately
$595,000 at March 1, 2001 compared to $1,587,000 at March 1, 2000. Because
Austin Taylor fills new orders on a relatively short timetable, the Company does
not believe its order book is a significant indicator of future results.
(iii) Transition Networks
-------------------
Effective December 1, 1998, by its acquisition of Transition Networks, Inc., the
Company entered the rapidly growing market for media conversion products.
Located in Eden Prairie, Minnesota, TNI manufactures a line of media and rate
conversion products that permit telecommunications networks to move information
between copper-wired equipment and fiber-optic cable. The products make it
possible for customers to take advantage of the newer technologies and higher
data transmission speeds supported by fiber without sacrificing their
investments in older, copper based equipment. In April 1999, the company
acquired LANart Corporation which has been merged into the operations of
Transition Networks. LANart designs and produces the application-specific
integrated circuits (ASIC chips) for its conversion products. This acquisition
makes TNI the industry's largest supplier of conversion devices.
TNI markets its products in the U.S. and internationally through its sales staff
and a limited number of distributors. Sales to two major distributors
represented 56% of total TNI sales in 2000. TNI has international sales offices
in London and Prague and distribution partners in South America and the Pacific
Rim. TNI is generally regarded as the market leader in conversion technology.
Its principal competitors include Allied Telsyn International and Digi
International. Sales by TNI for 2000 were $39,574,000 and represented 33% of
consolidated revenues compared to 1999 sales of $35,682,000 or 30% of
consolidated CSI revenues.
Outstanding customer orders for TNI products were approximately $1,225,000 at
March 1, 2001 and $644,000 at March 1, 2000. TNI also fills new orders on a
relatively short-term basis and therefore does not believe its order book is a
significant indicator of future results.
(iv) JDL Technologies, Inc.
----------------------
JDL Technologies, Inc. provides telecommunications network design,
specification, and training services to educational institutions. JDL also sells
internet access software for use in elementary and secondary schools. JDL was
acquired effective August 7, 1998. Sales by JDL for 2000 totaled $14,887,000 and
represented 12% of consolidated revenues. Total sales for 1999 totaled
$11,141,000 or 10% of consolidated revenues. Sales of hardware, software and
related equipment totaled $12,285,000 in 2000 or 83% of total sales compared to
1999 hardware, software and related equipment of $8,613,000 or 77% of total
sales. Training, support and consulting sales totaled $2,595,000 and $2,501,000
in 2000 and 1999, respectively. Sales of hardware products, consulting and
training services to two large school districts totaled $11,725,000 in 2000.
Outstanding customer orders for JDL products and services were approximately
$2,350,000 as of March 1, 2001 and $4,100,000 at March 1, 2000. JDL does not
believe its order book is a significant indicator of future results.
(2) Employment Levels
-----------------
As of March 1, 2001 the Company employed 924 people. Of this number, 637 were
employed by Suttle (including 186 in Puerto Rico, 171 in Hector, Minnesota and
280 in Costa Rica), 160 by Austin Taylor Communications, Ltd., 79 by Transition
Networks, Inc., 33 by JDL Technologies, Inc. and 15 general and administrative
positions. The Company considers its employee relations to be good.
5
(3) Factors Affecting Future Performance
------------------------------------
From time to time, in reports filed with the Securities and Exchange Commission,
in press releases, and in other communications to shareholders or the investing
public, the Company may make forward-looking statements concerning possible or
anticipated future financial performance, business activities or plans which are
typically preceded by the words "believes", "expects", "anticipates", "intends"
or similar expressions. For such forward-looking statements, the Company claims
the protection of the safe harbor for forward-looking statements are subject to
risks and uncertainties which could cause actual performance, activities or
plans to differ significantly from those indicated in the forward-looking
statements. Such risks and uncertainties include, but are not limited to: lower
sales to RBOCs and other major customers; competitive products and technologies;
our ability to successfully reduce operating expenses at certain business units;
the general health of the telecom sector, profitability of recent acquisitions;
delays in new product introductions; higher than expected expense related to new
sales and marketing initiatives; availability of adequate supplies of raw
materials and components; fuel prices; and other factors discussed from time to
time in the Company's filings with the Securities and Exchange Commission.
(4) Executive Officers of Registrant
--------------------------------
The executive officers of the Company and their ages at March 1, 2001 were as
follows:
Name Age Position 1
---- --- ----------
Curtis A. Sampson 67 Chairman of the Board and
Chief Executive Officer [1970]
Jeffrey K. Berg 58 Executive Vice President
and Chief Operating Officer [2000]2
Paul N. Hanson 54 Vice President - Finance, Treasurer
and Chief Financial Officer [1982]
Daniel G. Easter 44 President, Transition Networks, Inc. [2000] 3
Lee Ludlam 40 Managing Director
Austin Taylor Communications, Ltd. [1998]4
Thomas J. Lapping 42 President, JDL Technologies, Inc. [1998]5
- -----------------------------------
1 Dates in brackets indicate period during which officers began serving in
such capacity. Executive officers serve at the pleasure of the Board of
Directors and are elected annually for one-year terms.
2 Mr. Berg was appointed Chief Operating Officer of Communications Systems,
Inc. in November 2000. Prior to November 2000, Mr. Berg served as President
and General Manager of the Company's Suttle Apparatus Corporation.
3 Mr. Easter was appointed President of Transition Networks, Inc. in
September 2000. From July 1997 to September 2000 he served as Transition
Networks' Vice President of Sales and Marketing. Prior to July 1997, he was
an executive of Allied Telesyn International Corporation in Seattle, WA.
4 Mr. Ludlam was appointed Managing Director of Austin Taylor in November
1998. From December 1995 to November 1998, he served as Austin Taylor's
Director of Manufacturing. Prior to December 1995 he served as Austin
Taylor's plant manager.
5 JDL Technologies, Inc. was acquired by the Company in 1998. Mr. Lapping
founded JDL Technologies, Inc. in 1989. Prior to 1989 Mr. Lapping served as
National Education Sales Manager for Control Data Corporation.
Messrs. Sampson and Hanson each devote approximately 60% of their working time
to the Company's business with the balance devoted to management
responsibilities at Hector Communications Corporation ("HCC"), a diversified
telecommunications holding company also headquartered in Hector, Minnesota, for
which they are separately compensated by HCC.
6
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
Financial information about domestic and foreign operations and export sales may
be obtained by reference to Note 9 of the "Notes to Consolidated Financial
Statements" under Item 8 herein.
ITEM 2. PROPERTIES
The administrative and manufacturing functions of CSI are conducted at the
following facilities:
- In Hector, Minnesota the Company owns a 15,000 square foot building
where its executive and administrative offices are located.
- Suttle's manufacturing is conducted at three locations. At Hector,
Minnesota, the Company owns three plants totaling 68,000 feet of
manufacturing space. The Company has a long-term lease from the Puerto
Rico Industrial Development Company on three facilities in Humacao,
Puerto Rico aggregating 65,000 square feet. The Company leases 40,000
square feet of manufacturing space in San Jose, Costa Rica.
- Austin Taylor Communications, Ltd. owns a 40,000 square foot facility
and leases a 6,000 square foot facility in Bethesda, Wales. Austin
Taylor also leases a distribution center in Hong Kong.
- Transition Networks, Inc. leases a 27,000 square foot facility in Eden
Prairie, Minnesota where its manufacturing and administrative
facilities are located.
- JDL Technologies, Inc. leases an 11,000 square foot facility in Edina,
Minnesota, which houses its business operations.
- The Company owns a 35,000 square foot plant in Lawrenceville,
Illinois. This facility is for sale, but is currently leased to other
tenants, pending a sale.
CSI believes these facilities will be adequate to accommodate its administrative
and manufacturing needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
No material litigation or other claims are presently pending against the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
7
PART II
ITEM 5. MARKET MATTERS FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's common stock is currently traded in the National Market System of
the National Association of Securities Dealers Automated Quotation System
("NASDAQ").
The table below presents the price range of high and low trades of the Company's
common stock for each quarterly period indicated as reported by NASDAQ:
2000 1999
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High Low High Low
First $24.00 $12.56 $12.88 $9.50
Second 18.63 13.13 13.75 8.50
Third 17.88 12.00 14.75 10.50
Fourth 14.13 7.25 14.75 10.25
(b) HOLDERS
At March 1, 2001 there were approximately 860 holders of record of
Communications Systems, Inc. common stock.
(c) DIVIDENDS
The Company has paid regular quarterly dividends since October 1, 1985. The per
share quarterly dividends payable were $.10 in 1999 and 2000.
8
ITEM 6. SELECTED FINANCIAL DATA
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
(in thousands except per share amounts)
Year Ended December 31
-------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Selected Income Statement Data
Revenues From Continuing Operations $119,720 $117,525 $ 71,570 $ 76,114 $ 69,042
Costs and Expenses:
Cost of Sales 82,355 77,280 50,599 52,684 48,056
Selling, General and Administrative Expenses 29,432 28,907 12,413 10,947 10,581
-------- -------- -------- -------- --------
Total Costs and Expenses 111,787 106,187 63,012 63,631 58,637
Operating Income From Continuing Operations 7,933 11,338 8,558 12,483 10,405
Other Income, Net 339 296 1,259 1,654 799
Income From Continuing Operations Before Income Taxes 8,272 11,634 9,817 14,137 11,204
Income Tax Expense 1,600 2,620 1,950 3,200 2,250
-------- -------- -------- -------- --------
Income From Continuing Operations 6,672 9,014 7,867 10,937 8,954
Income (Loss) From Discontinued Operations, Net of Taxes (721)
-------- -------- -------- -------- --------
Net Income $ 6,672 $ 9,014 $ 7,867 $ 10,937 $ 8,233
======== ======== ======== ======== ========
Basic Net Income (Loss) Per Common Share:
Continuing Operations $ .76 $ 1.04 $ .87 $ 1.18 $ .97
Discontinued Operations (.08)
-------- -------- -------- -------- --------
Basic Net Income Per Share $ .76 $ 1.04 $ .87 $ 1.18 $ .89
======== ======== ======== ======== ========
Diluted Net Income (Loss) Per Common Share
Continuing Operations $ .75 $ 1.03 $ .87 $ 1.17 $ .96
Discontinued Operations (.08)
-------- -------- -------- -------- --------
Diluted Net Income Per Share $ .75 $ 1.03 $ .87 $ 1.17 $ .88
======== ======== ======== ======== ========
Cash Dividends Per Share $ .40 $ .40 $ .38 $ .34 $ .30
======== ======== ======== ======== ========
Average Common and Potential Common
Shares Outstanding 8,865 8,727 9,084 9,325 9,352
======== ======== ======== ======== ========
Selected Balance Sheet Data
Total Assets $ 93,198 $ 91,476 $ 83,900 $ 77,518 $ 67,596
Property, Plant and Equipment, Net 10,106 10,960 11,379 9,675 8,965
Working Capital 45,486 34,787 37,245 48,514 35,906
Net Assets of Discontinued Operations 537
Stockholders' Equity 71,267 66,422 63,454 69,264 59,015
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2000 Compared to 1999
---------------------
Consolidated sales increased 2% to $119,720,000 in 2000. Consolidated operating
income decreased 30% to $7,933,000. Overall, CSI was adversely affected by the
slowdown in purchasing by telecommunications service providers due to general
weakening economic conditions and continuing consolidation within the telecom
industry.
Suttle's sales decreased 6% to $55,111,000 in 2000. Sales to customers in the
United States (U.S.) decreased 6% to $53,000,000. Sales to the RBOC's (Regional
Bell Operating Companies) decreased 16% to $29,713,000. Sales to these customers
represent 56% of Suttle's U.S. customer sales. Sales to distributors, original
equipment manufacturers (OEMs), and electrical contractors increased to
$19,626,000 or 20% from prior year. Sales to retail customers decreased 18% to
$2,413,000. Suttle's international sales decreased by 9% to $2,121,000 in 2000.
The sales decreases were reflected in most product lines with the exception of
data connector products and DSL (Digital Subscriber Lines) filters. CorroShield
(standard voice jack for most telephone applications) product sales fell 13% to
$23,412,000 in 2000. Sales of fiber-optic connector products decreased 13% to
$2,027,000. Sales of data products increased 56% in 2000 to $8,883,000. DSL
filters (introduced in 2000) sales were $2,226,000 or 4% of Suttle's sales.
Suttle's gross margins declined 16% to $17,419,000 with the gross margin
percentage declining to 31.6% in 2000 from 35.7% in 1999. The gross margin
decline is due primarily to lower business volumes and pricing reductions due to
competitive pressures. Selling, general and administrative expenses decreased
$216,000 or 3%. Operating income declined by $3,224,000 or 25%.
Austin Taylor's sales decreased by 16% to $10,148,000 in 2000. The sales
decrease was due to below plan sales to several key United Kingdom (U.K.)
accounts. Gross margin decreased by $743,000 or 37% from prior year and as a
percentage of sales decreased 4.2% in 2000. The gross margin decline is due to
lower business volumes and pricing reductions. Selling, general and
administrative expenses increased $205,000. Operating income declined $948,000.
Transition Network's sales increased $4,211,000 or 11% to $39,574,000. The sales
increase was due to increased volumes and related market share of the Company's
media conversion technology products. Operating income increased by $878,000 to
$705,000. Sales to distributors were $21,760,000 or 55% of total sales in 2000.
Sales to system integrators and resellers represented 22% and 16% of total
Transition sales respectively. The balance of sales by Transition Networks was
made to OEMs and through catalog sales and represented 7% of total sales. Sales
to international customers were $14,237,000 and were 36% of total sales in 2000
compared to $10,297,000 or 30% in 1999. New product sales accounted for 1% of
sales in 2000. Gross margin increased by $894,000 but as a percentage of sales
decreased by 2%. Selling, general and administrative expenses decreased by
$141,000 and 5% as a percentage of sales.
JDL Technologies sales increased by $3,746,000 or 34% in 2000. The sales
increase was due to higher sales of computer and network hardware in 2000
compared to 1999. Operating income decreased by $438,500 compared to 1999.
Computer and network hardware represented $12,285,000 or 83% of total JDL
revenues in 2000 compared to 77% in 1999. Consulting, training and support was
$2,595,000 or 17% of total sales compared to 23% of total sales in 1999. Gross
margin in 2000 was $3,556,000 or 24% in 2000 compared to $3,147,000 or 28% in
1999. Selling, general and administrative expenses increased to $3,834,000 in
2000 from $2,986,000 in 1999 but as a percentage of sales decreased 1% to 26%.
Consolidated investment income, net of interest expense, increased by $43,000
due to increased earnings on invested funds. Income from continuing operations
before income taxes decreased 30% to $3,404,000. The Company's effective income
tax rate was 19.3% in 2000 as compared to 22.5% in 1999. The decrease in the tax
rate was attributable to lower U.S. and U.K. earnings, which are subject to
higher tax rates than Puerto Rico earnings. Consolidated net income decreased
26% to $6,672,000 or $.75 per diluted share compared to $1.03 in 1999. The
consolidated net income decrease was due primarily to a consolidated 3% decline
in gross margin. Consolidated selling, general and administrative expenses
remained at approximately 25% of gross revenues.
10
1999 Compared to 1998
---------------------
Consolidated sales increased 64% to $117,525,000. Consolidated operating income
increased 32% to $11,338,000. The majority of the Company's 1999 sales growth
was generated by three strategic acquisitions that positioned the Company in the
broadband and high-speed networking markets. The Company acquired JDL
Technologies, Inc. in August 1998; Transition Networks, Inc. in December 1998;
and LANart Corporation in April 1999. LANart Corporation was subsequently merged
into Transition Networks. These acquisitions generated 40% of the Company's
consolidated sales in 1999. The balance of the revenue was comprised of sales of
the Company's traditional voice communications products through the Suttle
operations and Austin Taylor Communications, Ltd.
Suttle sales increased 5% to $58,670,000. Sales to customers in the United
States (U.S.) increased 5% to $56,073,000. Sales to the major telephone
companies increased 7% to $35,526,000. Sales to these customers account for 63%
of Suttle's U.S. customer sales. Sales to distributors, original equipment
manufacturers (OEMs) and electrical contractors increased $2,010,000 or 14%.
Sales to retail customers decreased by $1,246,000 or 29%, due primarily by
decreased sales to Radio Shack, which is Suttle's principal retail customer.
Suttle's export sales, including sales to Canada increased by $305,000 or 15%.
The Suttle sales increases were due to a 21% increase in CorroShield product
sales to $26,967,000 in 1999. CorroShield products continue to displace
conventional voice connecting products, sales of which declined approximately 3%
in 1999. Data sales decreased 5% to $5,683,000 and fiber-optic connector
products decreased to approximately $2,317,000 in revenue.
Suttle's gross margins increased by 14% to $20,859,000 in 1999. The gross margin
percentage increased to 35.7% from 32.7% in 1998. The increase in gross margin
was due to lower raw material costs and increased sales of CorroShield products,
which carry higher margins than conventional products. Selling, general and
administrative expenses increased by $181,000 or 2%. Suttle's operating income
increased by $2,502,000 or 24%.
Austin Taylor's sales increased 3% to $12,031,000. The sales increase was due to
increased export sales. Austin Taylor began shipping a new family of
corrosion-resistant products to customers in the Far East in the third quarter
of 1999. Gross margin increased by $186,000, or 10%, to $2,021,000. Gross margin
as a percentage of sales increased to 16.8% from 15.7% in 1998. Selling, general
and administrative expenses increased $23,000. Operating income increased by
$163,000 or 26%.
The Company acquired JDL Technologies, Inc. ("JDL") in August 1998 and
Transition Networks, Inc. ("TNI") in December 1998. JDL had sales of $1,681,000
in the last five months of 1998, and an operating loss of $675,000. JDL reported
$11,140,000 in 1999 revenue with operating income of $116,000. TNI and LANart
had combined revenues of $35,682,000 and an operating loss of $173,000. TNI had
1998 sales of $2,232,000 and an operating loss of $334,000 after its acquisition
by the Company.
Consolidated investment income, net of interest expense, decreased by $963,000
due to decreased levels of funds available for investment and also increased
interest expense on notes payable relative to recent acquisitions. Income from
continuing operations before income taxes increased $1,817,000 or 18.5%. The
Company's effective income tax rate was 22.5% in 1999 as compared to 19.9% in
1998. The increase in the tax rate was driven by higher U.S. and U.K. earnings,
which are subject to higher tax rates than Puerto Rico earnings. Consolidated
net income increased 15% to $9,014,000 or $1.03 per diluted share. Per share
earnings in 1999 were favorably affected by a reduction in average shares
outstanding in comparison to 1998 due to the repurchase of common shares.
Acquisitions and Dispositions
-----------------------------
Effective December 1, 1998, the Company acquired Transition Networks, Inc.
("TNI") in exchange for $8,507,000 of cash (net of cash acquired). TNI is a
manufacturer of media and rate conversion products, which permit
telecommunications networks to move information between copper-wired equipment
and fiber-optic cable.
11
Effective August 7, 1998, the Company acquired JDL Technologies, Inc. ("JDL") in
exchange for 158,005 shares of CSI common stock. JDL provides telecommunications
network design, specification, and training services to educational
institutions. JDL also sells Internet access software for use in elementary and
secondary schools.
Effective April 7, 1999, the Company acquired LANart Corporation, a manufacturer
of applications specific integrated circuits (ASIC chips) located in Needham,
Massachusetts, for approximately $4,800,000. The operations were subsequently
merged with the Company's Transition Networks, Inc. subsidiary.
The acquisitions the Company has made over the past several years have served to
expand the Company's product offerings and customer base in both U.S. and
international markets. The Company is a growth-oriented manufacturer of
telecommunications connecting and networking devices. The Company is continuing
to search for acquisition candidates with products that will enable the Company
to better serve its target markets.
Effects of Inflation
--------------------
Inflation has not had a significant effect on operations. The Company does not
have long-term production or procurement contracts and has historically been
able to adjust pricing and purchasing decisions to respond to inflationary
pressures.
European Currency
-----------------
In January 1999, the European Monetary Union (EMU) entered into a three-year
transition phase during which a common currency called the Euro was introduced
in participating countries. Initially, this new currency is being used for
financial transactions. It will eventually replace the national currencies of
participating nations, which will be withdrawn by July 2002.
The Company does not believe introduction of the Euro will have any material
effect on its business at this time. The United Kingdom, where Austin Taylor is
located, is not among the countries converting to the Euro. The Company does not
do significant amounts of business in other participating European nations, nor
does it hold assets valued in other European currencies. The Company will
continue to monitor the European currency situation and take action as required.
Liquidity and Capital Resources
-------------------------------
At December 31, 2000, the Company had approximately $11,321,000 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 $45,486,000 and a current
ratio of 3.0 to 1 compared to working capital of $34,787,000 and a current ratio
of 2.4 to 1 at the end of 1999. The increase in working capital was primarily
due to an increase in inventories, receivables and reduction of trade payables.
Cash flow provided by operations was approximately $162,000 in 2000 compared to
$11,222,000 provided by operations in 1999. The decrease was due to the
Company's increased inventory and accounts receivable levels. The Company does
not anticipate this trend to continue in 2001.
Investing activities utilized $1,352,000 of cash in 2000. Cash investments in
new plant and equipment totaled $2,277,000 in 2000. The Company expects to
invest $2,500,000 on capital additions in 2001. The Company invested
approximately $5,825,000 in the purchase of debt securities in 1999. Cash
investments in new subsidiaries in 1999 and 1998 were $3,956,000 and $8,398,000
respectively.
Net cash used in financing activities was $2,234,000. Dividends paid on common
stock were $3,491,000. Proceeds from common stock issuances, principally
exercises of key employee stock options, totaled $3,656,000 in 2000 and $543,000
in 1999. The Company purchased and retired 267,628 and 320,136 shares of its
stock in open market transactions during 2000 and 1999 respectively. Board
authorizations are outstanding to purchase 123,377 additional shares. The
Company may purchase and retire additional shares in 2001 if warranted by market
conditions and the Company's financial position.
12
The bulk of Suttle's operations are located in Puerto Rico. Until 1994,
substantially all the earnings of these operations were sheltered from U.S.
income tax due to the possessions tax credit (Internal Revenue Code Section
936). Under provisions of the Omnibus Budget Act of 1993, which went into effect
beginning in the 1994 tax year, the amount of the possessions credit is limited
to a percentage of the Company's Puerto Rico payroll and depreciation. U.S.
income tax expense on the Company's earnings in Puerto Rico, after full
utilization of the available tax credits, was $82,000, $827,000 and $556,000 in
2000, 1999 and 1998, respectively.
Under provisions of the Small Business Job Protection Act of 1996, the
possessions tax credit was repealed for years after 1995. However, companies
like CSI which currently qualify for the credit, may continue to claim the
credit until 2005, subject to certain limitations. As of July 1, 1996, the
credit no longer applies to investment income earned in Puerto Rico. The credit
will continue to apply to business income earned in Puerto Rico through 2001.
For the years 2002 to 2005, the amount of Puerto Rico business income eligible
for the credit will be limited to an inflation-adjusted amount based on Puerto
Rico business income earned from 1990 to 1994. The possessions tax credit has a
materially favorable effect on the Company's income tax expense. Had the Company
incurred income tax expense on Puerto Rico operations at the full U.S. rate,
income tax expense would have increased by $1,908,000, $2,023,000 and $1,947,000
in 2000, 1999 and 1998, respectively.
At December 31, 2000 approximately $31,284,000, $6,436,000 and $1,732,000 of
assets were invested in the Company's subsidiaries in Puerto Rico, the United
Kingdom and Costa Rica, respectively. The Company expects to maintain these
investments to support the continued operation of the subsidiaries. The Company
uses the U.S. dollar as its functional currency in Costa Rica. The United
Kingdom is a politically and economically stable country. Accordingly, the
Company believes its risk of material loss due to adjustments in foreign
currency markets to be small.
At December 31, 2000, the Company's outstanding obligations for notes payable
totaled $9,101,000. The Company expects to repay or refinance this credit line
in 2001. The unused portion of the Company's credit line ($1,000,000 at December
31, 2000) is available for use. 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.
New Accounting Standards
------------------------
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that all derivatives, including those embedded in other contracts,
be recognized as either assets or liabilities and that those financial
instruments be measured at fair value. The accounting for changes in the fair
value of derivatives depends on their intended use and designation. Management
has reviewed the requirements of SFAS No. 133 and has determined that they have
no free-standing or embedded derivatives. All contracts that contain provisions
meeting the definition of a derivative also meet the requirements of, and have
been designated as, normal purchases or sales. The Company's policy is to not
use free-standing derivatives and to not enter into contracts with terms that
cannot be designated as normal purchases or sales.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which
among other guidance, clarified the Staff's views on various revenue recognition
and reporting matters. The Company adopted the provisions of SAB 101 in the
fourth quarter of fiscal 2000. The adoption of SAB 101 did not have a material
impact to the results of operations for the year ended December 31, 2000.
During the year ended December 31, 2000, the Company adopted the provisions of
Emerging Issues Task Force (EITF) 00-10, Accounting for Shipping and Handling
Fees and Costs. EITF 00-10 specifies classification guidelines for shipping and
handling fees and costs incurred by sellers. Upon application of EITF 00-10,
prior period amounts related to shipping and handling fees and costs were
reclassified, which had no effect on previously reported net income.
13
REPORT OF MANAGEMENT
The management of Communications Systems, Inc. and its subsidiary companies is
responsible for the integrity and objectivity of the financial statements and
other financial information contained in the annual report. The financial
statements and related information were prepared in accordance with generally
accepted accounting principles and include amounts that are based on
management's informed judgments and estimates.
In fulfilling its responsibilities for the integrity of financial information,
management maintains accounting systems and related controls. These controls
provide reasonable assurance, at appropriate costs, that assets are safeguarded
against losses and that financial records are reliable for use in preparing
financial statements. Management recognizes its responsibility for conducting
the Company's affairs according to the highest standards of personal and
corporate conduct.
The Audit Committee of the Board of Directors, comprised solely of outside
directors, meets with the independent auditors and management periodically to
review accounting, auditing, financial reporting and internal control matters.
The independent auditors have free access to this committee, without management
present, to discuss the results of their audit work and their opinion on the
adequacy of internal financial controls and the quality of financial reporting.
/s/ Curtis A. Sampson
- -------------------------------------
Curtis A. Sampson
President and Chief Executive Officer
/s/ Paul N. Hanson
- -------------------------------------
Paul N. Hanson
Chief Financial Officer
March 29, 2001
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Communications Systems, Inc.
We have audited the accompanying consolidated balance sheets of Communications
Systems, Inc. and subsidiaries (the Company) as of December 31, 2000 and 1999
and the related consolidated statements of income and comprehensive income,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. Our audits also include the financial
statement schedule listed in the Index at Item 14. These consolidated financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2000
and 1999 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
March 2, 2001
Minneapolis, Minnesota
15
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
-------------------------------
2000 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 11,321,374 $ 14,837,655
Trade accounts receivable, less allowance for
doubtful accounts of $913,000 and $908,000, respectively 23,189,409 21,125,610
Inventories (Note 2) 27,479,839 21,168,942
Note receivable (Note 1) 2,965,390 400,000
Other current assets 626,139 574,530
Deferred income taxes (Note 7) 1,834,745 1,735,000
------------ ------------
TOTAL CURRENT ASSETS 67,416,896 59,841,737
PROPERTY, PLANT AND EQUIPMENT,net (Notes 1 and 3) 10,106,044 10,959,668
OTHER ASSETS:
Excess of cost over net assets acquired (Note 1) 6,728,995 8,819,923
Investments in debt securities (Note 1) 5,916,507 6,078,365
Note receivable (Note 1) 2,965,390
Deferred income taxes (Note 7) 2,735,811 2,168,571
Other assets 293,801 642,399
------------ ------------
TOTAL OTHER ASSETS 15,675,114 20,674,648
------------ ------------
TOTAL ASSETS $ 93,198,054 $ 91,476,053
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 1) $ 9,101,438 $ 9,043,035
Accounts payable 5,866,627 8,075,596
Accrued expenses 4,579,202 4,291,797
Dividends payable 880,391 855,087
Income taxes payable 1,503,468 2,788,746
------------ ------------
TOTAL CURRENT LIABILITIES 21,931,126 25,054,261
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00 per share;
3,000,000 shares authorized; none issued
Common stock, par value $.05 per share; 30,000,000 shares authorized;
8,616,909 and 8,551,272 shares issued and
outstanding, respectively (Notes 1 and 6) 430,846 427,564
Additional paid-in capital 28,877,135 25,302,306
Retained earnings 42,309,918 40,996,869
Stock option notes receivable (Note 6) (288,225)
Cumulative other comprehensive income (loss) (350,971) (16,722)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 71,266,928 66,421,792
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 93,198,054 $ 91,476,053
============ ============
See notes to consolidated financial statements.
16
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended December 31
---------------------------------------------------
2000 1999 1998
------------- ------------- ------------
REVENUES (Note 9): $ 119,720,115 $ 117,524,617 $ 71,570,030
COSTS AND EXPENSES:
Cost of sales 82,354,384 77,279,741 50,599,473
Selling, general and administrative expenses 29,432,373 28,907,288 12,412,361
------------- ------------- ------------
TOTAL COSTS AND EXPENSES 111,786,757 106,187,029 63,011,834
------------- ------------- ------------
OPERATING INCOME 7,933,358 11,337,588 8,558,196
OTHER INCOME (EXPENSE):
Investment income 1,028,681 986,263 1,306,466
Interest expense (689,867) (690,129) (47,237)
------------- ------------- ------------
OTHER INCOME, net 338,814 296,134 1,259,229
------------- ------------- ------------
INCOME BEFORE INCOME TAXES 8,272,172 11,633,722 9,817,425
INCOME TAX EXPENSE (Note 7) 1,600,000 2,620,000 1,950,000
------------- ------------- ------------
NET INCOME 6,672,172 9,013,722 7,867,425
------------- ------------- ------------
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment (382,435) (153,981) 77,198
Unrealized holding gain (loss) on debt securities 73,800 (79,087)
------------- ------------- ------------
OTHER COMPREHENSIVE INCOME (LOSS)
BEFORE INCOME TAXES (308,635) (233,068) 77,198
Income tax expense (benefit) related to unrealized
gains and losses on debt securities 25,614 (27,411)
------------- ------------- ------------
(334,249) (205,657) 77,198
------------- ------------- ------------
COMPREHENSIVE INCOME $ 6,337,923 $ 8,808,065 $ 7,944,623
============= ============= ============
BASIC NET INCOME
PER COMMON SHARE (Note 1) $ .76 $ 1.04 $ .87
============= ============= ============
DILUTED NET INCOME
PER COMMON SHARE (Note 1) $ .75 $ 1.03 $ .87
============= ============= ============
AVERAGE BASIC SHARES OUTSTANDING 8,750,279 8,644,217 9,040,000
AVERAGE DILUTED SHARES OUTSTANDING 8,865,466 8,727,140 9,084,000
See notes to consolidated financial statements.
17
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Cumulative
Additional Stock Option Other
Common Stock Paid-in Retained Notes Comprehensive
Shares Amount Capital Earnings Receivable Income (Loss) Total
--------- --------- ----------- ----------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 1997 9,326,652 $ 466,333 $24,132,771 $44,552,855 $ - $ 111,737 $69,263,696
Net income 7,867,425 7,867,425
Issuance of stock to acquire
JDL Technologies, Inc. 158,005 7,900 2,204,170 2,212,070
Issuance of common stock under
Employee Stock Purchase Plan 12,210 610 112,259 112,869
Issuance of stock under
Employee Stock Option Plan 84,834 4,242 938,102 942,344
Tax benefit from non qualified
employee stock options 37,017 37,017
Issuance of notes receivable
for stock options, net (288,225) (288,225)
Purchase of stock (790,400) (39,520) (2,173,405) (11,052,325) (13,265,250)
Shareholder dividends (3,505,492) (3,505,492)
Other comprehensive income 77,198 77,198
--------- --------- ----------- ----------- ----------- ------------ -----------
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 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 6,672,172 6,672,172
Issuance of stock under
Employee Stock Purchase Plan 30,515 1,526 316,211 317,737
Issuance of 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
notes receivable 288,225 288,225
Other comprehensive loss (334,249) (334,248)
--------- --------- ----------- ----------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 2000 8,616,909 $ 430,846 $28,877,135 $42,309,918 $ - $ (350,971) $71,266,928
========= ========= =========== =========== =========== ============ ===========
See notes to consolidated financial statements.
18
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
--------------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,672,172 $ 9,013,722 $ 7,867,425
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,098,123 4,801,290 3,085,533
Deferred taxes (666,985) (816,225) (702,323)
Tax benefit from non-qualified stock options 397,420
Changes in assets and liabilities net of effects
from acquisitions:
Decrease (increase) in accounts receivable (2,222,176) (4,744,476) 2,651,591
Decrease (increase) in inventory (6,455,692) 693,624 1,073,699
Decrease (increase) in other current assets (55,759) (99,920) 1,045,802
Increase (decrease) in accounts payable (2,071,389) 2,241,620 (1,114,838)
Increase (decrease) in accrued expenses 739,557 (581,638) (353,930)
Increase (decrease) in income taxes payable (1,272,969) 713,595 459,438
------------ ------------ ------------
Net cash provided by operating activities 162,302 11,221,592 14,012,397
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,276,790) (2,226,103) (3,351,927)
Maturities of debt securities 214,973 1,008,607 2,039,656
Purchases of debt securities (5,825,747)
Sales of U.S. Treasury bill investments 5,249,314
Increase (decrease) in other assets 309,833 219,507 (617,433)
Cash receipts from sale of assets of discontinued operations 400,000 400,000 492,377
Payment for purchase of subsidiaries, net of cash acquired (3,955,898) (8,397,852)
------------ ------------ ------------
Net cash used in investing activities (1,351,984) (10,379,634) (4,585,865)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt (38,518) (1,131,484)
Proceeds from notes payable 96,921 1,096,921 8,900,364
Collection of stock option note receivable 288,225
Dividends paid (3,490,761) (3,479,613) (3,465,761)
Proceeds from issuance of stock 3,655,918 542,668 804,005
Purchase of stock (2,746,281) (3,379,821) (13,265,250)
------------ ------------ ------------
Net cash used in financing activities (2,234,496) (6,351,329) (7,026,642)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (92,103) (58,337) 63,158
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,516,281) (5,567,708) 2,463,048
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 14,837,655 20,405,363 17,942,315
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,321,374 $ 14,837,655 $ 20,405,363
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 2,885,278 $ 1,850,564 $ 2,152,133
Interest paid 682,679 714,871 10,727
See notes to consolidated financial statements.
19
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Description of business: The Company is principally engaged in the manufacture
and sale of modular connecting and wiring devices for voice and data
communications. The Company sells these products to telephone companies,
electrical contractors, interconnect companies, original equipment manufacturers
and retailers. The Company also owns subsidiaries which manufacture media and
rate conversion products (products that permit telecommunications networks to
move information between copper wired equipment and fiber-optic cable) and offer
internet network design, specification and training services to educational
institutions. The Company's operations are located in the United States, United
Kingdom, Puerto Rico, and Costa Rica.
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries. All material intercompany
transactions and accounts have been eliminated.
Use of estimates: The presentation of financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The Company's estimates consist principally of reserves
for doubtful accounts and lower of cost or market inventory adjustments.
Financial instruments: The fair value of the Company's financial instruments,
which consist of marketable securities, accounts receivable, notes receivable,
mortgage-backed securities, accounts payable and notes payable, approximate
their carrying value due to their short-term nature and the variable interest
rate on outstanding indebtedness.
Cash equivalents: For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid investments with a maturity of three months
or less at the time of purchase to be cash equivalents.
Accounts receivable from Hector Communications Corporation: The Company provides
services for Hector Communications Corporation ("HCC"), a former subsidiary of
the Company. Several of the Company's officers and directors work in similar
capacities for HCC. Outstanding receivable balances from HCC were $172,000 and
$428,000 at December 31, 2000 and 1999, respectively. Accounts with HCC are
handled on an open account basis.
Property, plant and equipment: Property, plant and equipment are recorded at
cost. Depreciation is computed using principally the straight-line method.
Depreciation included in costs and expenses was $2,969,253, $2,827,709 and
$2,444,192 for 2000, 1999 and 1998, respectively. Maintenance and repairs are
charged to operations and additions or improvements are capitalized. Items of
property sold, retired or otherwise disposed of are removed from the asset and
accumulated depreciation accounts and any gains or losses on disposal are
reflected in operations.
Excess of cost over net assets acquired: The excess of cost over net assets of
subsidiaries acquired in purchase transactions is being amortized on the
straight-line method over periods of 5 to 15 years. Amortization included in
costs and expenses was $2,128,870, $1,973,581 and $641,341 in 2000, 1999 and
1998, respectively.
Note receivable: The note receivable represents the balance due from the sale of
the Company's contract manufacturing operations sold in 1996. The note bears
interest at the prime rate and is secured by the assets sold. The original
amount was $4,866,000 and the maturity date is November 1, 2001.
20
Recoverability of long-lived assets: The Company reviews its long-lived assets
periodically to determine potential impairment by comparing the carrying value
of the assets with expected net cash flows expected to be provided by operating
activities of the business or related products. Should the sum of the expected
future net cash flows be less than the carrying value, the Company would
determine whether an impairment loss should be recognized. An impairment loss
would be measured by comparing the amount by which the carrying value exceeds
the fair value of the asset based on market value that is based on the
discounted cash flows expected to be generated by the asset. At December 31,
2000 and 1999, no impairment loss provision is required or recorded in the
consolidated financial statements.
Investment in debt securities: The Company's Puerto Rico subsidiary owns a
portfolio of AAA rated mortgage-backed securities it is holding to maturity. At
December 31, 2000, the amortized cost basis of the securities was $248,000,
which approximates market value. The subsidiary also holds an investment in
Federal Home Loan Bank bonds, which are available for sale. Market value of the
securities was $5,620,000 including a gross unrealized holding loss of $5,200
($3,400 net of taxes), which is reflected in the consolidated financial
statements in other comprehensive income (loss).
Notes payable: The Company has a $10,000,000 line of credit from U.S. Bank.
Outstanding borrowings against the line of credit at December 31, 2000 and 1999
were $9,000,000 and $8,903,000 respectively. Interest on borrowings on the
credit line is at the bank's average CD rate plus 1.5% (8.20% at December 31,
2000). The credit line matures June 30, 2001.
Foreign currency translation: Assets and liabilities denominated in foreign
currencies were translated into U.S. dollars at year-end exchange rates. Revenue
and expense transactions were translated using average exchange rates. The
cumulative foreign currency translation balance is $347,000 and $35,000 at
December 31, 2000 and 1999, respectively.
Revenue recognition: The Company recognizes revenue for all domestic and
international sales at the shipping point. Shipping terms are FOB shipping
point. The Company sells products directly to its customers, as well as through
distributors. In all cases, risk of loss transfers at the point of shipment and
the Company has no further obligation for performance after such time. Payment
terms for distributors are consistent with the terms of the Company's direct
customers.
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 115,187 shares, 82,923
shares, and 44,261 shares in 2000, 1999 and 1998, respectively. The Company
calculates the dilutive effect of outstanding options using the treasury stock
method.
New accounting principles: On January 1, 2001, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that all derivatives, including those
embedded in other contracts, be recognized as either assets or liabilities and
that those financial instruments be measured at fair value. The accounting for
changes in the fair value of derivatives depends on their intended use and
designation. Management has reviewed the requirements of SFAS No. 133 and has
determined that they have no free-standing or embedded derivatives. All
contracts that contain provisions meeting the definition of a derivative also
meet the requirements of, and have been designated as, normal purchases or
sales. The Company's policy is to not use free-standing derivatives and to not
enter into contracts with terms that cannot be designated as normal purchases or
sales.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which
among other guidance, clarified the Staff's views on various revenue recognition
and reporting matters. The Company adopted the provisions of SAB 101 in the
fourth quarter of fiscal 2000. The adoption of SAB 101 did not have a material
impact to the results of operations for the year ended December 31, 2000.
During the year ended December 31, 2000, the Company adopted the provisions of
Emerging Issues Task Force (EITF) 00-10, Accounting for Shipping and Handling
Fees and Costs. EITF 00-10 specifies classification guidelines for shipping and
handling fees and costs incurred by sellers. Upon application of EITF 00-10,
prior period amounts related to shipping and handling fees and costs were
reclassified, which had no effect on previously reported net income.
21
Basis of presentation: Certain amounts in the 1999 and 1998 financial statements
have been reclassified to conform to the 2000 financial statement presentation.
These reclassifications had no effect on net income or stockholders' equity as
previously reported.
NOTE 2 - INVENTORIES
- --------------------
Inventories are carried at the lower of cost (first-in, first out method) or
market and consist of:
December 31
----------------------------
2000 1999
------------ ------------
Finished goods $ 10,876,529 $ 7,418,810
Raw and processed materials 16,603,310 13,750,132
------------ ------------
$ 27,479,839 $ 21,168,942
============ ============
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment and the estimated useful lives are as follows:
December 31
Estimated --------------------------
useful life 2000 1999
------------ ------------
Land $ 293,299 $ 305,519
Buildings 7-30 years 3,077,470 3,105,474
Machinery and equipment 3-15 years 26,746,398 25,690,309
Furniture and fixtures 5-10 years 3,349,101 3,045,826
------------ ------------
33,466,268 32,147,128
Less accumulated depreciation 23,360,224 21,187,460
------------ ------------
$ 10,106,044 $ 10,959,668
============ ============
NOTE 4 - EMPLOYEE BENEFIT PLANS
- --------------------------------
The Company has an Employee Savings Plan (401(k)) and matches a percentage of
employee contributions up to six percent of compensation. Contributions to the
plan in 2000, 1999 and 1998 were $347,000, $275,000, and $93,000 respectively.
The Company does not provide post retirement benefits to its employees.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
The Company leases land, buildings and equipment under operating leases with
original terms from one to ten years. Certain of these leases contain renewal
and purchase options. Rent expense charged to operations was $901,000, $885,000
and $590,000 in 2000, 1999 and 1998 respectively. At December 31, 2000, the
Company was obligated under noncancellable operating leases to make minimum
annual future lease payments as follows:
Year Ending December 31:
2001 $ 589,077
2002 513,330
2003 408,136
2004 236,482
2005 255,125
------------
$ 2,002,150
============
In the ordinary course of business, the Company is exposed to legal actions and
incurs costs to pursue and defend legal claims. Company management is not aware
of any outstanding or pending legal actions that would materially affect the
Company's financial position or results of operations.
22
NOTE 6 - COMMON STOCK AND STOCK OPTIONS
- ---------------------------------------
Common shares are reserved in connection with the Company's 1992 stock plan
under which 1,900,000 shares of common stock may be issued pursuant to stock
options, stock appreciation rights, restricted stock or deferred stock granted
to officers and key employees. Exercise prices of stock options under the plan
cannot be less than fair market value of the stock on the date of grant. Rules
and conditions governing awards of stock options, stock appreciation rights and
restricted or deferred stock are determined by the Compensation Committee of the
Board of Directors, subject to certain limitations incorporated into the plan.
At December 31, 2000, 253,983 shares remained available to be issued under the
plan. Options expire five years from date of grant with one third of the options
vesting after six months, the remaining two thirds vesting equally over the next
two years.
Common shares are also reserved for issuance in connection with a nonqualified
stock option plan under which up to 200,000 shares may be issued to nonemployee
directors. The plan provides for the automatic grant of nonqualified options for
3,000 shares of common stock annually to each nonemployee director concurrent
with the annual stockholders' meeting. Exercise price will be the fair market
value of the stock at the date of grant. Options granted under this plan vest
when issued and expire ten years from date of grant. At December 31, 2000,
17,000 shares are available to be issued under the plan.
The Company issued 8,000 common shares of stock to JDL Technologies employees as
compensation for services during 2000 and 1999. Compensation expense recorded
was $120,000 in 2000 and $92,000 in 1999.
The Company awarded 240,000 incentive stock options to employees of Transition
Networks, Inc. in March 1999. For 1999 these options were based on the
attainment of TNI's annual revenue and operating income targets. On the
measurement date of December 31, 1999, 44,736 incentive stock options were
vested in the accounts of eligible employees. The Company recorded compensation
expense of $125,798 in 1999 in connection with these options. Compensation
expense was based on the difference between the exercise price and the price at
the measurement date. During the years 2000 to 2004, the balance of the options
vest at the rate of 20% per year.
Changes in outstanding employee and director stock options during the three
years ended December 31, 2000 were as follows:
Weighted
average
Number of exercise price
shares per share
--------- -------------
Outstanding at December 31, 1997 525,272 $ 13.19
Granted 224,550 17.46
Exercised (84,834) 11.11
Canceled (5,800) 15.07
---------
Outstanding at December 31, 1998 659,188 14.89
Granted 622,204 10.27
Exercised (24,783) 10.52
Canceled (99,617) 12.98
---------
Outstanding at December 31, 1999 1,156,992 12.66
Granted 363,100 16.79
Exercised (290,159) 12.98
Canceled (146,537) 11.81
---------
Outstanding at December 31, 2000 1,083,396 14.17
=========
At December 31, 2000, 957,248 stock options are currently exercisable. The
following table summarizes the status of Communications Systems, Inc. stock
options outstanding at December 31, 2000:
Weighted Average Weighted
Remaining Average
Range of Exercise Prices Shares Option Life Exercise Price
- ------------------------ ------- ---------------- --------------
$ 5.31 to $ 9.99 28,167 2.0 years $ 7.86
$10.00 to $12.00 356,379 4.0 years 10.21
$12.01 to $14.99 187,500 3.2 years 13.97
$15.00 to $18.91 511,350 3.7 years 17.08
23
In 1998, the Company provided financing to employees and directors who exercised
stock options during the year. The notes bear interest at 6% and were paid
February 28, 2000. The notes were reflected as a reduction of stockholders'
equity in the financial statements.
On October 29, 1999 the Board of Directors adopted a shareholders' rights plan.
Under this plan, the Board of Directors declared a distribution of one right per
share of common stock. Each right entitles the holder to purchase 1/100th of a
share of a new series of Junior Participating Preferred Stock of the Company at
an initial exercise price of $65. The rights expire on October 26, 2009. The
rights will become exercisable only following the acquisition by a person or
group, without the prior consent of the Board of Directors, of 15% or more of
the Company's voting stock, or following the announcement of a tender offer or
exchange offer to acquire an interest of 15% or more. If the rights become
exercisable, each rightholder will be entitled to purchase, at the exercise
price, common stock with a market value equal to twice the exercise price.
Should the Company be acquired, each right would entitle the holder to purchase,
at the exercise price, common stock of the acquiring company with a market value
equal to twice the exercise price. Any rights owned by the acquiring person or
group would become void.
PRO FORMA FINANCIAL INFORMATION
The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," but applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees" for measurement and recognition of stock-based
transactions with its employees. If the Company had elected to recognize
compensation cost for its stock based transactions using the method prescribed
by SFAS No. 123, pro forma net income and net income per share would have been
as follows:
Year Ended December 31
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Net Income $ 5,323,456 $ 8,035,603 $ 7,061,627
Basic Net Income Per Share $ .61 $ .93 $ .78
Diluted Net Income Per Share $ .60 $ .92 $ .78
The fair value of the Company's stock options and Employee Stock Purchase Plan
transactions used to compute pro forma net income and net income per share
disclosures is the estimated present value at grant date using the Black-Scholes
option-pricing model. The following table displays the assumptions used in the
model.
Year Ended December 31
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Expected volatility 34% 27% 26%
Risk free interest rate 6.1% 5.2% 5.7%
Expected holding period - employees 4 years 4 years 4 years
Expected holding period - directors 7 years 7 years 7 years
Dividend yield 2.4% 3.9% 2.4%
Pro forma stock-based compensation cost was $1,349,000, $978,000 and $806,000 in
2000, 1999 and 1998, respectively. The fair value of all options issued in 2000,
1999 and 1998 was $1,860,000, $1,402,000 and $971,000, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company maintains an Employee Stock Purchase Plan for which 300,000 common
shares have been reserved. Under the terms of the plan, employees may acquire
shares of common stock, subject to limitations, through payroll deductions at
85% of the lower of fair market value for such shares on one of two specified
dates in each plan year. Shares issued to employees under the plan were 30,515,
27,431 and 12,210 for the plan years ended August 31, 2000, 1999 and 1998,
respectively. At December 31, 2000 employees had subscribed to purchase an
additional 25,500 shares in the current plan year ending August 31, 2001.
24
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
All eligible employees of the Company participate in the ESOP after completing
one year of service. Contributions are allocated to each participant based on
compensation and vest 30% after three years of service and incrementally
thereafter, with full vesting after seven years. At December 31, 2000, the ESOP
held 332,864 shares of the Company's common stock, all of which has been
allocated to the accounts of eligible employees. Contributions to the plan are
determined by the Board of Directors and can be made in cash or shares of the
Company's stock. The Company's 1998 ESOP contribution was $235,000 for which the
Company issued 19,893 shares of common stock to the ESOP in February 1999. The
1999 ESOP contribution was $308,000 for which the Company issued 23,692 shares
in February 2000. The 2000 ESOP contribution was $220,325 for which the Company
issued 25,000 shares in February 2001.
PURCHASES OF COMMUNICATIONS SYSTEMS, INC. COMMON STOCK
The Company's Board of Directors has authorized the purchase and retirement,
from time to time, of shares of the Company's stock on the open market, or in
private transactions consistent with overall market and financial conditions. In
2000, the Company purchased and retired 286,729 shares at a cost of $2,746,000.
In 1999, the Company purchased and retired 320,136 shares at a cost of
$3,380,000. At December 31, 2000, 123,377 shares could be repurchased under
outstanding Board authorizations.
NOTE 7 - INCOME TAXES
- ---------------------
Income tax expense from continuing operations consists of the following:
Year Ended December 31
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Currently payable income taxes:
Federal $ 1,109,000 $ 2,058,000 $ 1,607,000
State 131,000 217,000 110,000
Puerto Rico 573,000 844,000 767,000
Foreign 57,000 305,000 131,000
----------- ----------- -----------
1,870,000 3,424,000 2,615,000
Tax effect of disqualified employee
incentive stock options 397,000 14,000 37,000
Deferred income taxes (benefit) (667,000) (818,000) (702,000)
----------- ----------- -----------
$ 1,600,000 $ 2,620,000 $ 1,950,000
=========== =========== ===========
A subsidiary, Suttle Caribe, Inc., operates in Puerto Rico, and is qualified
under Internal Revenue Service Code section 936 for credit against U.S. income
taxes. Under provisions of the Omnibus Budget Reconciliation Act of 1993,
Congress set limits on the section 936 credit that went into effect for the
1994-tax year. As a result of the tax credit limitation, the Company incurred
$82,000, $827,000 and $556,000 of U.S. federal income tax expense on earnings in
Puerto Rico for 2000, 1999 and 1998, respectively.
Earnings of Suttle Caribe, Inc. are 90% exempt from Puerto Rico income taxes
through 2003, subject to satisfaction of the employment and investment
requirements of the tax exemption grant received by the Company. Distributions
by Suttle Caribe, Inc. to the parent company are subject to a tollgate tax at
rates which, depending on various factors, range from 3.5% to 10%. The Company
has provided for and prepaid tollgate taxes at a 1.75% rate on its Puerto Rico
earnings for each year since 1993. The Company has recognized tollgate tax
expense at the 3.5% rate on earnings from years prior to 1993 only to the extent
distributions were received from Suttle Caribe, Inc. The cumulative amount of
undistributed prior earnings on which no tollgate tax has been recognized was
approximately $10,004,000 at December 31, 2000.
Austin Taylor Communications, Ltd. operates in the U.K. and is subject to U.K.
rather than U.S. income taxes. U.K. pretax income (loss) was ($74,000),
$878,000, and $915,000 in 2000, 1999 and 1998, respectively. Suttle Costa Rica,
S.A. operates in Costa Rica and is currently exempt from Costa Rica income
taxes. Accumulated earnings in Costa Rica on which no U.S. income tax has been
accrued was $2,268,000 at December 31, 2000. It is the Company's intention to
reinvest the remaining undistributed earnings of its Puerto Rico, U.K. and Costa
Rica subsidiaries to support the continued operation of those subsidiaries.
25
The provision for income taxes varied from the federal statutory tax rate as
follows:
Year Ended December 31
----------------------------
2000 1999 1998
------ ------ ------
Tax at U.S. statutory rate 35.0% 35.0% 35.0%
Surtax exemption (1.0) (.9) (1.0)
U.S. taxes not provided on Puerto Rico operations (23.1) (17.4) (19.8)
State income taxes, net of federal benefit 1.8 1.8 .7
Other 6.6 4.0 5.0
------ ------ ------
Effective tax rate 19.3% 22.5% 19.9%
====== ====== ======
Deferred tax assets and liabilities as of December 31 related to the following:
2000 1999
----------- ------------
Current assets:
Bad debts $ 253,000 $ 258,000
Inventory 934,000 938,000
Accrued expenses 647,745 539,000
----------- -----------
$ 1,834,745 $ 1,735,000
=========== ===========
Long term assets and (liabilities):
Depreciation $ (333,189) $ (393,429)
Net operating loss carryforward 1,032,000 1,110,000
Loss reserves on notes receivable 148,000 151,000
Excess of cost over net assets 382,000 203,000
Other (3,000) 26,000
Alternative minimum tax credits 1,510,000 1,072,000
----------- -----------
$ 2,735,811 $ 2,168,571
=========== ===========
As part of the LANart acquisition, the Company purchased net operating loss
carryforwards in the amount of $3,416,000. At December 31, 2000, the Company has
$3,036,000 available net operating loss carryforwards for income tax purposes,
which expire 2014. The Company also has alternative minimum tax carryforwards of
approximately $1,510,000 at December 31, 2000, which are available to reduce
future regular income taxes over an indefinite period.
NOTE 8 - ACQUISITIONS
- ---------------------
Effective December 1, 1998, the Company acquired all the capital stock of
Transition Networks, Inc. for $8,507,000 (cash payments net of cash acquired).
The transaction is being accounted for as a purchase, and the operations of
Transition Networks, Inc. are included in consolidated operations as of the
effective date. Excess of cost over net assets acquired in the transaction was
$4,047,000, which is being amortized on a straight-line basis over 5 years. In
the acquisition, the following assets were acquired and liabilities assumed:
Property, plant and equipment $ 708,804
Excess of cost over net assets acquired 4,046,565
Accounts receivable 3,262,689
Inventory 3,198,942
Cash 550,049
Accounts payable (1,973,236)
Accrued expenses (643,263)
Other assets and liabilities (93,786)
-----------
Total purchase price 9,056,764
Less cash acquired (550,049)
-----------
Payment for purchase of Transition Networks, Inc.,
net of cash acquired $ 8,506,715
===========
Effective August 7, 1998, the Company purchased all the capital stock of JDL
Technologies, Inc. for $2,244,000, consisting of 158,005 shares of the Company's
common stock and $32,000 of acquisition costs. The acquisition was accounted for
as purchase. Excess of cost over net assets acquired in the transaction was
$2,223,000, which is being amortized on a straight-line basis over five years.
The results of operations of JDL are included in consolidated operations as of
the acquisition date. In the acquisition, the following assets were acquired and
liabilities assumed:
26
Property, plant and equipment $ 77,799
Excess of cost over net assets acquired 2,222,772
Accounts receivable 1,430,953
Inventory 264,608
Accounts payable (949,999)
Accrued expenses (800,803)
Other assets and liabilities (1,000)
-----------
Payment for purchase of JDL Technologies, Inc. $ 32,260
===========
Unaudited consolidated results of operations on a pro forma basis as though the
acquisitions of JDL Technologies and Transition Networks, Inc. were effective
January 1, 1998 are as follows:
Year Ended December 31, 1998
----------------------------
Revenues from continuing operations $97,440,835
Net income $ 6,473,170
Basic net income per share $ .71
Diluted net income per share $ .71
Effective April 7, 1999, the Company purchased all the capital stock of LANart
Corporation a designer and manufacturer of application specific integrated
circuits (ASIC chips) located in Needham, Massachusetts, for $3,956,000, net of
cash acquired. The operations of LANart Corporation, which were not material to
the Company's financial statements, have been included in consolidated
operations as of the purchase date. The fair value of assets acquired in the
transaction was $4,764,000 (including excess of cost over net assets acquired of
$2,361,000) and liabilities of $2,805,000 were assumed as follows:
Property, plant and equipment $ 242,192
Excess of cost over net assets acquired 2,361,179
Accounts receivable 1,801,359
Inventory 1,075,871
Deferred tax benefits 1,161,408
Cash 808,265
Accounts payable (1,285,761)
Accrued expenses (1,519,296)
Other assets and liabilities 118,946
-----------
Total purchase price 4,764,163
Less cash acquired (808,265)
-----------
Payment for purchase of LANart, Inc.,
net of cash acquired $ 3,955,898
===========
NOTE 9 - INFORMATION CONCERNING INDUSTRY SEGMENTS AND MAJOR CUSTOMERS
- ---------------------------------------------------------------------
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 other
operations; JDL Technologies, Inc. (JDL) that provides telecommunications
network design, specification and training services to educational institutions.
Suttle products are sold principally to United States (U.S.) customers. Suttle
operates manufacturing facilities in the U.S. (including Puerto Rico) and Costa
Rica. Austin Taylor operates in the United Kingdom (U.K.). Transition Networks
manufactures its products in the United States and makes sales in both the U.S.
and U.K. markets. JDL Technologies operates in the U.S. and makes sales in the
U.S. and Latin America. Export sales were less than 10% of consolidated revenues
in each of the last three years. At December 31, 2000, foreign earnings in
excess of amounts received in the United States were approximately $6,106,000.
In 2000 and 1999, no customer accounted for more than 10% of consolidated sales.
In 1998, sales to three U.S. customers amounted to 13.6%, 10.4% and 10.3% of
consolidated revenues, respectively.
27
The Company's station apparatus products are manufactured using plastic parts,
wire sub-assemblies, fasteners, brackets, electronic circuit boards and other
components, most of which are fabricated by the Company. There are multiple
sources of supply for the materials and parts required and the Company is not
dependent upon any single supplier, except that the Company's corrosion
resistant products utilize a moisture-resistant gel-filled fig available only
from Raychem Corporation. The unavailability of the gel-filled figs from Raychem
Corporation could have a material adverse effect on the Company. The Company has
not generally experienced significant problems in obtaining its required
supplies, although from time to time spot shortages are experienced.
Austin Transition JDL
Suttle Taylor Networks Technologies Corporate Consolidated
---------------------------------------------------------------------------------------
Year Ended December 31, 2000:
Revenues $ 55,111,481 $ 10,148,260 $ 39,573,541 $ 14,886,833 $ - $119,720,115
Cost of sales 37,692,631 8,870,492 24,460,842 11,330,419 82,354,384
---------------------------------------------------------------------------------------
Gross profit 17,418,850 1,277,768 15,112,699 3,556,414 37,365,731
Selling, general and
administrative expenses 7,539,489 1,383,796 13,126,188 3,833,823 3,549,077 29,432,373
Goodwill amortization 287,047 58,338 1,281,549 444,554 (2,071,488) 0
---------------------------------------------------------------------------------------
Operating income (loss) $ 9,592,314 $ (164,366) $ 704,962 $ (721,963) $ (1,477,589 $ 7,933,358
=======================================================================================
Depreciation and amortization $ 2,085,318 $ 676,609 $ 1,631,879 $ 558,607 $ 145,710 $ 5,098,123
=======================================================================================
Assets $ 47,739,407 $ 6,503,926 $ 20,925,554 $ 9,691,659 $ 8,337,508 $ 93,198,054
=======================================================================================
Capital expenditures $ 1,478,871 $ 233,405 $ 223,434 $ 306,107 $ 34,973 $ 2,276,790
=======================================================================================
Year Ended December 31, 1999:
Revenues $ 58,670,315 $ 12,031,318 $ 35,682,403 $ 11,140,581 $ - $117,524,617
Cost of sales 37,811,488 10,010,373 21,464,186 7,993,694 77,279,741
---------------------------------------------------------------------------------------
Gross profit 20,858,827 2,020,945 14,218,217 3,146,887 40,244,876
Selling, general and
administrative expenses 7,755,117 1,178,784 13,267,495 2,985,772 3,720,120 28,907,288
Goodwill amortization 287,047 58,338 1,124,137 444,555 (1,914,077) 0
---------------------------------------------------------------------------------------
Operating income (loss) $ 12,816,663 $ 783,823 $ (173,415) $ (283,440) $ (1,806,043) $ 11,337,588
=======================================================================================
Depreciation and amortization $ i2,068,839 $ 709,992 $ 1,367,536 $ 494,023 $ 160,900 $ 4,801,290
=======================================================================================
Assets $ 51,004,622 $ 7,751,465 $ 17,511,819 $ 6,639,227 $ 8,568,920 $ 91,476,053
=======================================================================================
Capital expenditures $ 1,345,535 $ 675,074 $ 48,293 $ 95,890 $ 61,311 $ 2,226,103
=======================================================================================
Year Ended December 31, 1998:
Revenues $ 55,927,503 $ 11,729,725 $ 2,232,058 $ 1,680,744 $ - $ 71,570,030
Cost of sales 37,751,518 9,894,546 1,724,985 1,228,424 50,599,473
---------------------------------------------------------------------------------------
Gross profit 18,175,985 1,835,179 507,073 452,320 20,970,557
Selling, general and
administrative expenses 7,574,373 1,155,649 773,917 942,438 1,965,984 12,412,361
Goodwill amortization 287,047 58,338 67,443 185,231 (598,059) 0
---------------------------------------------------------------------------------------
Operating income (loss) $ 10,314,565 $ 621,192 $ (334,287) $ (675,349) $ (1,367,925) $ 8,558,196
=======================================================================================
Depreciation and amortization $ 1,957,261 $ 692,453 $ 96,756 $ 12,134 $ 326,929 $ 3,085,533
=======================================================================================
Assets $ 53,130,454 $ 7,091,218 $ 11,731,323 $ 3,634,012 $ 8,312,705 $ 83,899,712
=======================================================================================
Capital expenditures $ 2,269,177 $ 935,603 $ 15,294 $ 22,427 $ 109,426 $ 3,351,927
=======================================================================================
28
(b) SUPPLEMENTAL FINANCIAL INFORMATION
Unaudited Quarterly Operating Results
(in thousands except per share amounts)
Quarter Ended
-----------------------------------------------
March 31 June 30 Sept 30 Dec 31
- --------------------------------------------------------------------------------
2000
Revenues $ 30,864 $ 32,074 $ 29,654 $ 27,128
Gross Margins 10,473 9,452 9,039 8,401
Operating income 2,883 1,730 1,852 1,468
Net Income 2,314 1,587 1,508 1,264
Basic Net Income per Share $ .27 $ .18 $ .17 $ .14
Diluted Net Income per Share $ .26 $ .18 $ .17 $ .14
1999
Revenues $ 26,733 $ 29,957 $ 29,426 $ 31,409
Gross Margins 9,036 9,901 10,135 11,173
Operating income 3,262 2,078 2,592 3,406
Net Income 2,473 1,748 2,101 2,692
Basic Net Income per Share $ .29 $ .20 $ .24 $ .31
Diluted Net Income per Share $ .28 $ .20 $ .24 $ .31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by paragraphs [a], [c], [d], [e], and [f] of Item 401
under Regulation S-K, to the extent applicable, will be set forth under the
caption "Election of Directors" in the Company's definitive proxy material for
its May 17, 2001 Annual Meeting of Shareholders to be filed within 120 days from
the end of the Registrant's fiscal year, which information is expressly
incorporated by reference herein. The information called for by paragraph [b] of
Item 401 is set forth under Item 1[c] herein. The information called for by Item
405 under Regulation S-K, to the extent applicable, will be set forth under the
caption "Certain Transactions" in the Company's above referenced definitive
proxy material.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 402 under Regulation S-K to the extent
applicable, will be set forth under the caption "Executive Compensation" in the
Company's definitive proxy materials for its May 17, 2001 Annual Meeting to be
filed within 120 days from the end of the Registrant's fiscal year, which
information is expressly incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 403 under Regulation S-K will be set forth
under the captions "Security Ownership of Certain Beneficial Owners and
Management" and "Election of Directors" in the Company's definitive proxy
materials for its May 17, 2001 Annual Meeting to be filed within 120 days from
the end of the Registrant's fiscal year, which information is expressly
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 404 under Regulation S-K will be set forth
under the caption "Certain Transactions" in the Company's definitive proxy
materials for its May 17, 2001 Annual Meeting to be filed within 120 days from
the end of the Registrant's fiscal year, which information is expressly
incorporated herein by reference.
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Consolidated Financial Statements
The following Consolidated Financial Statements of Communications Systems, Inc.
and subsidiaries appear at pages 16 to 30 herein:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Income and Comprehensive Income for the
years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(a) (2) Consolidated Financial Statement Schedule Page Herein
----------------------------------------- -----------
The following financial statement schedule is being filed as part of this Form
10-K Report:
Independent Auditors' Report 15
Schedule II - Valuation and Qualifying Accounts and Reserves 34
All other schedules are omitted as the required information is inapplicable or
the information is presented in the consolidated financial statements or related
notes.
(a) (3) Exhibits
The exhibits which accompany or are incorporated by reference in this report,
including all exhibits required to be filed with this report, are described on
the Exhibit Index, which begins on page 37 of the sequential numbering system
used in this report.
(b) REPORTS ON FORM 8-K FILED DURING THE THREE MONTHS ENDED DECEMBER 31, 2000
Not Applicable.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMUNICATIONS SYSTEMS, INC.
Dated: March 29, 2001 /s/ Curtis A.Sampson
---------------------------------------
Curtis A. Sampson, Chairman of the
Board of Directors, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
Each person whose signature appears below constitutes and appoints
CURTIS A. SAMPSON and PAUL N. HANSON as his true and lawful attorneys-in-fact
and agents, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10-K and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all said attorneys-in-fact
and agents, each acting alone, or his substitute or substitutes, may lawfully do
or cause to be done by virtue thereof.
Signature Title Date
--------- ----- ----
/s/Curtis A.Sampson Chairman of the Board of Directors, March 29, 2001
- ----------------------- President, and Director (Principal
Curtis A. Sampson Executive Officer)
/s/Paul N. Hanson Vice President, Treasurer and March 29, 2001
- ----------------------- Chief Financial Officer (Principal
Paul N. Hanson Financial Officer and Principal
Accounting Officer)
/s/Randall D. Sampson Director March 29, 2001
- -----------------------
Randall D. Sampson
/s/Edwin C. Freeman Director March 29, 2001
- -----------------------
Edwin C. Freeman
/s/Luella G. Goldberg Director March 29, 2001
- -----------------------
Luella Gross Goldberg
/s/Frederick M. Green Director March 29, 2001
- -----------------------
Frederick M. Green
/s/Joseph W. Parris Director March 29, 2001
- -----------------------
Joseph W. Parris
/s/Gerald D. Pint Director March 29, 2001
- -----------------------
Gerald D. Pint
/s/Wayne E. Sampson Director March 29, 2001
- -----------------------
Wayne E. Sampson
32
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF
COMMUNICATIONS SYSTEMS, INC.
FOR
YEAR ENDED DECEMBER 31, 2000
------------------------
FINANCIAL STATEMENT SCHEDULE
- --------------------------------------------------------------------------------
33
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts and Reserves
Balance at Additions Deductions Balance
Beginning of Charged t from at End
Description Period and Expenses Reserves of Period
Allowance for doubtful accounts:
Year ended:
December 31, 2000 $ 908,000 $ 36,000 $ 31,000 (A) $ 913,000
December 31, 1999 $ 884,000 $ 126,000 $ 102,000 (A) $ 908,000
December 31, 1998 $ 796,000 $ 94,000 $ 6,000 (A) $ 884,000
Reserve for assets transferred under contractual arrangements and notes
receivable:
Year Ended:
December 31, 2000 $ 434,000 $ - $ - $ 434,000
December 31, 1999 $ 371,000 $ 63,000 $ - $ 434,000
December 31, 1998 $ 371,000 $ - $ - $ 371,000
- -----------------------------------------
(A) Accounts determined to be uncollectible and charged off against reserve.
34
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF
COMMUNICATIONS SYSTEMS, INC.
FOR
YEAR ENDED DECEMBER 31, 2000
--------------------------
EXHIBITS
- --------------------------------------------------------------------------------
35
COMMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Exhibit Index To
Form 10-K for the Year Ended December 31, 2000
Regulation S-K Location in Consecutive Numbering
Exhibit Table System as Filed With the
Reference Title of Document Securities and Exchange Commission
- ------------- ----------------- ----------------------------------
3.1 Articles of Incorporation, as Filed as Exhibit 3.1 to the Form
amended 10-K of the Company for its year
ended December 31, 1989 (the "1989
Form 10-K") and incorporated
herein by reference.
3.2 Bylaws, as amended Filed as Exhibit 3.2 to the 1989
Form 10-K and incorporated herein
by reference.
10.1 1987 Stock Plan Filed as Exhibit 10.1 to the Form
10-K Report of the Company for its
year ended December 31, 1993 (the
"1993 Form 10-K") and incorporated
herein by reference.
10.2 Employee Savings Plan Filed as Exhibit 10.2 to the 1993
Form 10-K and incorporated herein
by reference.
10.3 Employee Stock Ownership Filed as Exhibit 10.3 to the 1993
Plan Form 10-K and incorporated herein
by reference.
10.4 Employee Stock Purchase Plan Filed
as Exhibit 10.4 to the 1993 Form
10-K and incorporated herein by
reference.
10.5 Stock Option Plan for Filed as Exhibit 10.5 to the 1993
Nonemployee Directors Form 10-K and incorporated herein
by reference.
10.6 1992 Stock Plan Filed as Exhibit 10.6 to the 1993
Form 10-K and incorporated herein
by reference.
10.7 Flexible Benefit Plan Filed as Exhibit 10.7 to the 1993
Form 10-K and incorporated herein
by reference.
10.8 Supplemental Executive Filed as Exhibit 10.8 to the 1993
Retirement Plan Form 10-K and incorporated herein
by reference.
10.9 Form of Rights Agreement, Filed as Exhibit 1 to the
dated as of October 26, 1999 Company's Form 8-A on November 8,
between the Company and 1999 and incorporated herein by
Norwest Bank Minnesota, reference.
National Association
21 Subsidiaries of the Registrant Filed herewith at page 37.
23 Independent Auditors' Consent Filed herewith at page 38.
24 Power of Attorney Included in signatures at page 32.
The exhibits referred to in this Exhibit Index will be supplied to a shareholder
at a charge of $.25 per page upon written request directed to CSI's Assistant
Secretary at the executive offices of the Company.
36
SUBSIDIARIES OF COMMUNICATIONS SYSTEMS, INC.
EXHIBIT 21
Subsidiaries Jurisdiction of Incorporation
------------ -----------------------------
Suttle Apparatus Corporation Illinois
Suttle Costa Rica, S.A. Costa Rica
Tel Products, Inc. Minnesota
Suttle Caribe, Inc. Minnesota
Austin Taylor Communications, Ltd. United Kingdom
Automatic Tool & Connector Company, Inc. New Jersey
JDL Technologies, Inc. Minnesota
Transition Networks, Inc. Minnesota
LANart Corporation Massachusetts
All such subsidiaries are 100%-owned directly by Communications Systems, Inc.
The financial statements of all such subsidiaries are included in the
consolidated financial statements of Communications Systems, Inc.
37
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-28486, 33-39862, 33-39864, 33-60930, 33-83662, 33-99564, 33-99566 and
333-92063 of Communications Systems, Inc. of our report dated March 2, 2001 on
the consolidated financial statements and schedule of Communications Systems,
Inc. and subsidiaries appearing in this Annual Report on Form 10-K of
Communications Systems, Inc. for the year ended December 31, 2000.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
March 29, 2001
Minneapolis, Minnesota
38