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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2002
-------------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-10355
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COMMUNICATIONS SYSTEMS, INC.
..................................................................................
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0957999
..................................................................................
(State or other jurisdiction of (Federal Employer
incorporation or organization) Identification No.)
213 South Main Street, Hector, MN 55342
..................................................................................
(Address of principal executive offices) (Zip Code)
(320) 848-6231
..................................................................................
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding at April 30, 2002
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Common Stock, par value $.05 per share 8,288,133
Total Pages (13) Exhibit Index at (NO EXHIBITS)
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COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of
Income and Comprehensive Income 4
Consolidated Statements of
Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information 13
2
PART I. FINANCIAL INFORMATION
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31 December 31
Assets: 2002 2001
------------ ------------
Current assets:
Cash $ 19,088,312 $ 22,239,883
Trade receivables, net 21,899,845 19,182,828
Inventories 29,161,001 24,931,739
Note receivable 2,765,390
Deferred income taxes 2,176,405 2,176,405
Other current assets 329,699 556,906
------------ ------------
Total current assets 72,655,262 71,853,151
Property, plant and equipment 33,220,596 32,955,036
less accumulated depreciation (25,255,959) (24,818,363)
------------ ------------
Net property, plant and equipment 7,964,637 8,136,673
Other assets:
Excess of cost over net assets acquired 5,543,378 4,638,068
Deferred income taxes 3,070,027 3,070,027
Other assets 355,931 313,884
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Total other assets 8,969,336 8,021,979
------------ ------------
Total Assets $ 89,589,235 $ 88,011,803
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable $ 9,000,000 $ 9,000,000
Accounts payable 5,783,856 5,567,390
Accrued expenses 4,855,986 3,890,113
Income taxes payable 2,046,631 2,246,299
------------ ------------
Total current liabilities 21,686,473 20,703,802
Stockholders' Equity 67,902,762 67,308,001
------------ ------------
Total Liabilities and Stockholders' Equity $ 89,589,235 $ 88,011,803
============ ============
See notes to consolidated financial statements.
3
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
Three Months Ended March 31
----------------------------------
2002 2001
------------ ------------
Sales $ 23,920,340 $ 23,094,277
Costs and expenses:
Cost of sales 17,543,729 16,452,246
Selling, general and
administrative expenses 5,716,902 5,917,094
Amortization of goodwill and intangibles 8,360 522,729
------------ ------------
Total costs and expenses 23,268,991 22,892,069
------------ ------------
Operating income 651,349 202,208
Other income and (expense):
Investment income 75,904 243,138
Interest expense (92,397) (180,618)
------------ ------------
Other (expense) income, net (16,493) 62,520
Income before income taxes 634,856 264,728
Income taxes 165,000 80,000
------------ ------------
Net income 469,856 184,728
------------ ------------
Other comprehensive income (loss):
Unrealized holding gain on debt securities 28,126
Foreign currency translation adjustment (67,650) (180,051)
------------ ------------
Other comprehensive (loss)
before income taxes (67,650) (151,925)
Income tax expense related to unrealized
gain on debt securities 9,714
------------ ------------
(67,650) (161,639)
------------ ------------
Comprehensive income $ 402,206 $ 23,089
============ ============
Basic net income per share $ .06 $ .02
Diluted net income per share $ .06 $ .02
Average Basic Shares Outstanding 8,285,662 8,459,321
Average Dilutive Shares Outstanding 8,296,917 8,492,066
See notes to consolidated financial statements.
4
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Cumulative
Common Stock Additional Other
--------------------- Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Total
--------- --------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2000 8,616,909 $ 430,846 $ 28,877,135 $ 42,309,918 $ (350,971) $ 71,266,928
Net income 712,249 712,249
Issuance of common stock under
Employee Stock Purchase Plan 15,657 783 82,363 83,146
Issuance of common stock to
Employee Stock Ownership Plan 25,000 1,250 219,075 220,325
Purchase of stock (395,252) (19,763) (1,323,044) (1,885,563) (3,228,370)
Shareholder dividends (1,673,467) (1,673,467)
Other comprehensive loss (72,810) (72,810)
--------- --------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2001 8,262,314 413,116 27,855,529 39,463,137 (423,781) 67,308,001
Net income 469,856 469,856
Issuance of common stock to
Employee Stock Ownership Plan 25,000 1,250 187,250 188,500
Issuance of common stock under
Employee Stock Option Plan 1,700 85 11,645 11,730
Purchase of stock (881) (44) (2,970) (4,661) (7,675)
Other comprehensive loss (67,650) (67,650)
--------- --------- ----------- ----------- ----------- -----------
BALANCE AT MARCH 31, 2002 8,288,133 $ 414,407 $ 28,051,454 $ 39,928,332 $ (491,431) $ 67,902,762
========= ========= =========== =========== =========== ===========
See notes to consolidated financial statements.
5
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31
--------------------------------
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 469,856 $ 184,728
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 665,674 1,306,962
Changes in assets and liabilities net of effects of the
purchase of MiLAN Technology Corporation:
Trade receivables (324,030) 5,704,801
Inventories 872,127 (230,373)
Other current assets 226,689 (6,330)
Accounts payable 667,719 (136,810)
Accrued expenses 126,246 (324,940)
Income taxes payable (199,561) (157,602)
------------ ------------
Net cash provided by operating activities 2,504,720 6,340,436
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (269,664) (250,359)
Collection of note receivable 2,765,390
Other assets (79,893) (47,435)
Payment for purchase of MiLAN Technology Corporation (8,058,932)
------------ ------------
Net cash used in investing activities (5,643,099) (297,794)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 989,700
Dividends paid (880,391)
Proceeds from issuance of common stock 11,730
Purchase of stock (7,675) (2,263,323)
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Net cash provided by (used in) financing activities 4,055 (2,154,014)
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EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (17,247) 12,059
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,151,571) 3,900,687
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,239,883 11,321,374
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,088,312 $ 15,222,061
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 274,008 $ 245,034
Interest paid 153,921 189,294
See notes to consolidated financial statements.
6
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet and statements of changes in stockholders' equity
as of March 31, 2002, the consolidated statements of income and comprehensive
income and the consolidated statements of cash flows for the three-month periods
ended March 31, 2002 and 2001 have been prepared by the Company without audit.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows at March 31, 2002 and 2001 and for the
three months then ended have been made.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles in the United States of America have been condensed or omitted. It is
suggested these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's December 31, 2001 Annual Report to Shareholders. The results of
operations for the periods ended March 31 are not necessarily indicative of the
operating results for the entire year.
In February 2002 the Company issued 25,000 shares of the Company's common stock
to the Employee Stock Ownership Plan in payment of its 2001 obligation. In a
noncash transaction, the Company recorded additional stockholders' equity of
$188,500 (reflecting the market value of the stock at the time of the
contribution) and reduced accrued expenses by the same amount.
NOTE 2 - ACQUISITIONS
Effective March 25, 2002 the Company acquired substantially all of the assets
and assumed certain liabilities of Digi International Inc.'s MiLAN legacy
business. The business has been reincorporated as MiLAN Technology Corporation.
Located in Sunnyvale, California, MiLAN is a growing provider of leading edge
wireless telecommunications products for businesses and residences, managed and
unmanaged LAN switches, media conversion products and print servers. The Company
expects the MiLAN acquisition will be both complementary and supplementary to
its Transition Networks business by increasing the product offerings and
expanding the customer bases of both business units.
The operations of MiLAN, which were not material to the Company's financial
statements, are included in the Company's financial results from the purchase
date. In the acquisition, the following assets were acquired and liabilities
assumed:
Accounts receivable $ 2,426,713
Inventory 5,121,936
Plant and equipment 234,971
Excess of cost over net assets acquired 910,170
Accrued expenses (566,039)
-----------
Total purchase price $ 8,127,751
===========
The Company believes the excess of cost over net assets acquired in this
transaction has an indefinite useful life and is not subject to amortization.
7
NOTE 3 - INVENTORIES
Inventories summarized below are priced at the lower of first-in, first-out cost
or market:
March 31 December 31
2002 2001
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Finished goods $ 14,204,253 $ 15,821,487
Raw and processed materials 14,956,748 9,110,252
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Total $ 29,161,001 $ 24,931,739
============ ============
NOTE 4 - OTHER ASSETS
In the first quarter of fiscal 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets", which eliminated the amortization of purchased
goodwill and other intangibles with indefinite useful lives. Upon adoption of
SFAS No. 142, the Company is required to perform an initial impairment test of
its goodwill within the first six months of 2002. The Company expects to
complete the analysis in the second quarter of 2002. Under SFAS No. 142,
goodwill will be tested for impairment at least annually and more frequently if
an event occurs which indicates the goodwill may be impaired. Amortization of
intangible assets that the Company determines to have finite useful lives will
continue. Amortization expense for those assets will be approximately $33,400
annually.
The following table summarizes operating and net income for the three months
ended March 31, 2002 and 2001, and proforma amounts for 2001 excluding
amortization expense recognized in that period related to goodwill.
Three Months Ended March 31
----------------------------------
2002 2001 2001 Pro forma
------------ ------------ --------------
Sales $ 23,920,340 $ 23,094,277 $ 23,094,277
Gross Margin 6,376,611 6,642,031 6,642,031
Operating Income 651,349 202,208 724,937
Income Before Income Taxes 634,856 264,728 787,457
Income Taxes 165,000 80,000 237,812
Net Income 469,856 184,728 549,645
Basic Net Income Per Share $ .06 $ .02 $ .06
Diluted Net Income Per Share $ .06 $ .02 $ .06
Average Shares Outstanding:
Average Common Shares Outstanding 8,285,662 8,459,321 8,459,321
Dilutive Effect of Stock Options Outstanding 11,255 32,745 32,745
------------ ------------ ------------
8,296,917 8,492,066 8,492,066
============ ============ ============
8
NOTE 5 - SEGMENT INFORMATION
The Company classifies its businesses into four segments: Suttle, which
manufactures U.S. standard modular connecting and wiring devices for voice and
data communications; Austin Taylor, which manufactures British standard line
jacks, patch panels, wiring harness assemblies, metal boxes, distribution
cabinets and distribution and central office frames; Transition Networks and
MiLAN Technology (substantially all assets purchased March 25, 2002) which
designs and markets data transmission ,computer network and media conversion
products and print servers; and JDL Technologies (JDL), which provides
telecommunications network design, specification and training services to
educational institutions. Information concerning the Company's continuing
operations in the various segments is as follows:
SEGMENT INFORMATION
Transition
Austin Networks/ JDL
Suttle Taylor MiLAN Technolgies Corporate Consolidated
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Three Months Ended March 31, 2002
Sales $ 8,283,022 $ 1,896,395 $ 9,553,083 $ 4,187,840 $ 0 $ 23,920,340
Cost of sales 7,047,397 1,653,067 6,088,843 2,754,422 0 17,543,729
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Gross profit 1,235,625 243,328 3,464,240 1,433,418 0 6,376,611
Selling, general and
administrative expenses 1,547,727 217,647 2,624,618 930,505 404,765 5,725,262
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Operating (loss) income $ (312,102) $ 25,681 839,622 502,913 (404,765) 651,349
===============================================================================================
Depreciation and amortization $ 468,405 $ 76,911 $ 66,358 $ 30,000 $ 24,000 $ 665,674
===============================================================================================
Assets $42,335,073 $ 5,274,676 $26,779,326 $ 7,283,834 $ 7,916,326 $ 89,589,235
===============================================================================================
Capital expenditures $ 176,265 $ 7,985 $ 80,649 $ 0 $ 4,765 $ 269,664
===============================================================================================
Three Months Ended March 31, 2001
Sales $10,010,080 $ 2,933,849 $ 8,015,723 $ 2,134,625 $ 0 $ 23,094,277
Cost of sales 7,766,469 2,556,428 5,025,725 1,103,624 0 16,452,246
-----------------------------------------------------------------------------------------------
Gross profit 2,243,611 377,421 2,989,998 1,031,001 0 6,642,031
Selling, general and
administrative expenses 1,862,160 363,024 2,492,121 831,670 890,848 6,439,823
Goodwill amortization 71,762 14,585 320,387 111,138 (517,872) 0
-----------------------------------------------------------------------------------------------
Operating income (loss) 309,689 (188) 177,490 88,193 (372,976) 202,208
===============================================================================================
Depreciation and amortization $ 575,147 $ 151,460 $ 409,538 $ 141,138 $ 29,679 $ 1,306,962
===============================================================================================
Assets $47,359,007 $ 6,300,571 $19,432,092 $ 6,142,439 $11,093,046 $ 90,327,155
===============================================================================================
Capital expenditures $ 172,732 $ (1,569) $ 15,606 $ 55,344 $ 8,246 $ 250,359
===============================================================================================
NOTE 6 - INCOME TAXES
Income taxes are computed based upon the estimated effective rate applicable to
operating results for the full fiscal year. For the periods ended March 31, 2002
and 2001 income taxes do not bear a normal relationship to income before income
taxes, primarily because income from Puerto Rico operations is taxed at rates
lower than the U.S. rate.
9
NOTE 7 - 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 11,255 shares and 32,745 shares for the periods
ended March 31, 2002 and 2001, respectively. The Company calculates the dilutive
effect of outstanding options using the treasury stock method.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- --------------------------------------------
Three Months Ended March 31, 2002 Compared to
Three Months Ended March 31, 2001
---------------------------------
Consolidated sales increased 4% to $23,920,000. Consolidated operating income
increased to $651,000 from $202,000. The sales increase was attributable to the
Company's media conversion products business unit Transition Networks and from
JDL Technologies (network design and training services for educational
institutions) compared to the previous year. The Company continues to be
adversely affected by the general economic downturn particularly in the
communications equipment industry as reflected in sales declines by the
Company's voice and data connectivity products manufacturing units, Suttle and
United Kingdom subsidiary Austin Taylor Communications Ltd.
Suttle sales decreased 17% to $8,283,000. Sales to the major telephone companies
(the Regional Bell Operating Companies ("RBOCs" which are Verizon Logistics,
Bell South, SBC Communications and Qwest) decreased 19% to $4,028,000. Sales to
these customers accounted for 46% of Suttle's U.S. customer sales. Sales to
distributors, original equipment manufacturers (OEMs), and electrical
contractors decreased 46% to $2,181,000. Sales to retail customers decreased
$248,000 or 57% due to decreased sales to Radio Shack, which is Suttle's
principal retail customer. Suttle's export sales increased to $1,010,000 from
$217,000.
Suttle's gross margins decreased 45% to $1,236,000. Gross margin percentage
decreased to 15.0% in 2002 from 22.4% in 2001. The gross margin percentage
decline was due to the negative effect of manufacturing overhead variances,
product mix and competitive pricing pressures. Selling, general and
administrative expenses decreased $314,000 or 17%. The Company has downsized
operations by closing two of three manufacturing facilities in Puerto Rico to
align production capacities and overhead with current business volumes. Suttle's
operating loss was $312,000 compared to operating income of $381,000 before
goodwill amortization in 2001. Suttle has implemented a telesales strategy to
sell voice, data and fiber optic products to the nation's thousands of telecom
and electrical installation companies. These firms are supplanting the RBOCs in
the area of commercial and residential installations. In addition, offshore
manufacturing suppliers will provide a growing proportion of data products to
improve gross margins.
10
Austin Taylor's sales decreased 35% to $1,896,000 in 2002 compared to $2,934,000
for the three months ended March 31, 2001. Austin Taylor's gross margin declined
35% to $243,000 compared to $377,000 in 2001. Gross margin as a percentage of
sales remained at 12.8% in 2002 and 2001. Selling, general and administrative
expenses decreased $145,000 from the 2001 amount. Austin Taylor has also
implemented a cost reduction plan to better match overhead and production with
existing volumes. Operating income before goodwill amortization increased by
$11,300 compared to 2001.
JDL Technologies, Inc. reported 2002 first quarter sales of $4,188,000 compared
to $2,135,000 in 2001. JDL successfully secured several large educational
institutional projects in the first quarter of 2002 consisting of hardware and
software sales as well as design and network management services. JDL gross
margins increased by $402,000 compared to 2001. Gross margin as a percentage of
sales decreased to 34.2% from 48.3% in 2001. The JDL sales mix in 2002 contained
a higher amount of hardware and software sales, which contain a lower margin
than sales of consulting, and training services. Hardware and software sales
were $3,535,000 in 2002 compared to $918,000 in 2001. Sales of consulting and
training services decreased in 2002 by 44% to $652,000 from $1,161,000 in 2001.
Selling, general and administrative expenses increased by 12% in 2002 to
$930,500. Operating income was $503,000 compared to $199,000 before goodwill
amortization reported in the first quarter of 2001.
Transition Networks / MiLAN Technology segment sales increased by 19% to
$9,553,000 in the first quarter of 2002 compared to $8,015,000 in the same
period in 2001. Sales and results for this segment include a contribution from
MiLAN Technology, which CSI purchased substantially all the assets from Digi
International on March 25, 2002. Transition Networks sales increased by 8% from
the 2001 three month period. The demand for media conversion and related
products has remained strong in the first quarter of 2002 and is expected to
remain a growth market for some time. Gross margin increased to $3,464,000 in
2002 from $2,990,000 in 2001. Gross margin as a percentage of sales was 36.3% in
2002 compared to 37.3% in 2001. Selling, general and administrative expenses
increased $132,000 to $2,625,000 in 2002 compared to $2,492,000 in 2001.
Operating income before goodwill amortization increased to $840,000 compared to
$498,000 in 2001.
On March 25, 2002 the Company acquired substantially all the assets of MiLAN
Technology from Digi International (NASDAQ: DGII) in an all cash transaction
valued at approximately $8,100,000. MiLAN is a growing provider of wireless
telecommunications products, LAN switches, media conversion products and print
servers. The Company plans to streamline MiLAN's cost structure and consolidate
certain functions with other operating business units of CSI during 2002.
Consolidated investment income decreased $167,000 due to lower earnings on
invested funds and collection of the balance of a note receivable and accrued
interest in the first quarter related to the sale of assets of discontinued
operations. Interest expense decreased by $88,000 in 2002 compared to 2001 due
to lower interest expense on the line of credit. Income before income taxes
increased 140% to $635,000. The Company's effective income tax rate was 26.0%
compared to 30.2% in the first quarter of 2001. The decrease in the tax rate was
due to a higher percentage of company earnings coming from Puerto Rico, where it
is sheltered from U.S. tax and also from the lower amount of non deductible
goodwill amortization previously experienced. Net income increased $285,000 or
154%.
11
Liquidity and Capital Resources
-------------------------------
At March 31, 2002, the Company had approximately $19,088,000 of cash and cash
equivalents compared to $22,240,000 of cash and cash equivalents at December 31,
2001. The Company had working capital of approximately $51,292,000 and a current
ratio of 3.4 to 1 compared to working capital of $51,149,000 and a current ratio
of 3.5 to 1 at the end of 2001.
Net cash provided by operating activities was approximately $2,505,000 in the
first three months of 2002 compared to $6,340,000 in the same period in 2001.
The decrease was due primarily to supporting higher levels of accounts
receivable and the effect of lower goodwill amortization during the first
quarter of 2002.
Net cash used in investing activities was $5,643,000 in 2002. The Company
acquired substantially all of the assets of MiLAN Technology on March 25, 2002
for approximately $8,058,000 in cash. Also in the first quarter of 2002, the
Company received the balance of $2,765,000 of the note receivable related to the
sale of assets of a previously discontinued business unit. Cash investments in
new plant and equipment totaled $270,000, which was financed by internal cash
flows. The Company expects to spend $1,000,000 on capital additions in 2002.
Net cash provided by financing activities was $4,100 in 2002. The Company
purchased and retired 881 shares of its stock in open market transactions during
the 2002 period. At March 31, 2002 Board authorizations are outstanding to
purchase an additional 227,552 shares. There were no additional borrowings on
the line of credit during the first quarter of 2002.
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.
Critical Accounting Policies
----------------------------
Our critical accounting policies, including the assumptions and judgements
underlying them, are discussed in our 2001 Form 10-K in Note 1 Summary of
Significant Accounting Policies included in our Consolidated Financial
Statements. These policies have been consistently applied in all material
respects and disclose such matters as revenue recognition, investment valuation,
asset impairment recognition and foreign currency translation. On an ongoing
basis, we evaluate our estimates, including those related to reserves for
inventory valuation, uncollectable receivables and sales returns. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the result of which form the
basis for making judgements about the carrying value of assets and liabilities
that are not readily apparent from other sources. Results may differ from these
estimates due to actual outcomes being different from those on which we based
our assumptions. Management on an ongoing basis reviews these estimates and
judgements.
12
Market Risk Disclosures
-----------------------
The Company has no freestanding 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 freestanding derivatives and to not enter into
contracts with terms that cannot be designated as normal purchases or sales.
The vast majority of our transactions are denominated in U.S. dollars; as such,
fluctuations in foreign currency exchange rates have historically not been
material to the Company. At March 31, 2002 our bank line of credit carried a
variable interest rate based on the London Interbank Offered Rate (Libor) plus
2%. The Company's investments are money market type of investments that earn
interest at prevailing market rates and as such do not have material risk
exposure.
Based on the Company's operations, in the opinion of management, no material
future losses or exposure exist relative to market risk.
- --------------------------------------------------------------------------------
Cautionary Statement: This document contains forward-looking statements
concerning possible or anticipated future financial performance, business
activities or plans. For such forward-looking statements, the Company claims the
protections of the safe harbor for forward-looking statements contained in
federal securities laws. Such forward-looking statements are subject to risks
and uncertainties that could cause actual performance, activities or plans to
differ significantly from those indicated in the forward-looking statements.
These risk factors are discussed in the Company's Form 10-K for the year ended
December 31, 2001, filed with the Securities and Exchange Commission.
- --------------------------------------------------------------------------------
Part II. OTHER INFORMATION
Items 1 - 6. Not Applicable
- -----------------------------
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Communications Systems, Inc.
By /s/ Paul N. Hanson
-----------------------------
Paul N. Hanson
Vice President and
Chief Financial Officer
Date: May 14, 2002
13