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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, 2001
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 $57,843,000 based upon the closing sale price of
the Company's common stock on the NASDAQ National Market System on March 15,
2002.
As of March 15, 2002 there were outstanding 8,261,493 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 16, 2002 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
and the manufacture of media and rate conversion products for telecommunications
networks.
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. LANart's operations
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 divides 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 $39,992,000
in 2001 or 42% of consolidated revenues and $55,111,000 or 46% in 2000.
2
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 is 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 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 is a manufacturer of DSL (Digital Subscriber Lines) filters for home
and business applications. The Company also resells DSL filter products procured
from offshore sources. 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.
Markets and Marketing
Suttle competes in all major areas of the telecommunications connector market
utilizing modular four, six and eight conductor jacks. Customers include the
major telephone companies (frequently referred to as "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 $19,394,000 in 2001 and $29,713,000 in 2000,
which represented 48% of Suttle's sales in 2001 and 54% in 2000. Sales to
Verizon Logistics, Alltel Supply and KGP, the principal distributors serving
this market, amounted to 21%, 17% and 7%, respectively, of Suttle's sales in
2001. Sales to Verizon Logistics, Alltell Supply and KGP were 20%, 17% and 14%,
respectively, of Suttle's sales in 2000.
The Company markets business and network systems products, which are 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 distributors, and through the Company's sales staff. Sales of products
for business and network systems accounted for 13% and 16% of Suttle's revenues
in 2001 and 2000, respectively.
Approximately 4% of Suttle's 2001 and 2000 revenues were derived from sales in
the retail market. The Company is a supplier of telephone connecting products 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 6% of Suttle's revenues in 2001 and 4% in 2000. Sales of DSL
products introduced in 2000 represented an additional 11% of sales in 2001 and
4% in 2000.
The balance of Suttle's sales in 2001 and 2000 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.
3
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.
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 major telephone companies is
Lucent Technologies. To date, foreign manufacturers of apparatus products have
not presented significant competition for sales to this market.
Order Book
Suttle manufactures its products on the basis of estimated customer
requirements. Outstanding customer orders at March 1, 2002 were approximately
$2,964,000 compared to approximately $1,839,000 at March 1, 2001. 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.
Manufacturing and Sources of Supply
The Company's 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 Tyco
Electronics. The unavailability of the gel-filled figs from Tyco Electronics
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.
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
its 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 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 $9,620,000, or 10% of consolidated revenues, in 2001 and
$10,148,000 or 8% in 2000.
4
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% of Austin Taylor sales were to
United Kingdom customers in 2001 and 2000.
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 and Transition
Networks, Inc. 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
$527,000 at March 1, 2002 compared to $595,000 at March 1, 2001. 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
Transition Networks designs, manufactures and markets media converters, baluns,
transceivers, network interface cards, and fiber hubs. Transition Networks sells
its product solely through distributors, resellers, integrators, and OEMs. Sales
decreased $4,327,000 or 11% to $35, 246,000. However, operating income increased
by $1,413,000 to $2,118,000. The increase in operating income can be attributed
to the reduction of selling, general and administrative expenses. International
sales accounted for 37.2% of sales or $13,111,512 in 2001, up slightly compared
to 2000 when international sales accounted for 36.4% of total sales. Sales to
major distributors in 2001 totaled $18,640,114 a 16% decline compared to 2000.
Products
Transition Networks designs, produces, and sells media converter devices that
make it possible to transmit telecommunications signals between systems using
different types of media (for example between copper and fiber optic networks).
These products are used to support legacy systems as customers' networks grow,
integrate fiber optics into a network, and extend the reach of networks.
Protocols supported include Gigabit Ethernet, Fast Ethernet, Ethernet, Token
Ring, T1/E1, DS3, RS232, RS485, ATM, OC3, OC12, 3270, and 5250. The company uses
ASIC (Application Specific Integrated Circuits) for development of some
products, but is also reliant on industry for the development of new integrated
circuits for the development of new products. Transition Networks is also
vulnerable to the threat of manufacturers discontinuing a product that may be a
sole source. Product hardware and software development is done internally. The
software that Transition Networks utilizes to manage our products is provided
free with the product. The concentration of Transition Networks product
development is on hardware; software is developed to support hardware sales.
Transition Networks outsources most of its manufacturing processes.
Approximately 55% of its products are manufactured offshore, principally in the
Far East. These offshore sources of supply are subject to certain risks,
including foreign currency fluctuations and interference from political sources.
The Company has alternate sources of supply for its products and to date has not
had problems obtaining necessary supplies.
Markets and Marketing
Transition Networks' products are used in a broad array of markets including
enterprise networks, service providers' networks, and industrial environments
such as manufacturing floors. Due to its broad customer base and the nature of
the applications for its products, Transition Networks was not impacted to the
extent that other network equipment manufacturers were affected by the market
downturn.
The media conversion product line consists of the different form factors to
address various applications. The chassis based systems, the Conversion
Center(TM) and the Point System(TM) are used primarily in telecommunication
closets for high-density applications and when multiple protocols need to be
supported. Stand alone media converters are used typically at a workstation or
for lower density applications.
5
Transition Networks continues to develop products that address the enterprise,
service provider, and industrial markets. This includes developing converters
for emerging protocols and existing protocols in new markets. Some of these
products include DS3, remote management devices, and single fiber products. Some
development efforts are paced by the development of critical components such as
integrated circuits and optical transceivers.
Marketing primarily consists of tradeshows, trade magazine advertising, public
relations activities, and direct mail. Total dollars spent in 2001 on marketing
declined 31% compared to 2000. This can be attributed to a temporary reduction
in employees, reduced advertising, and reduced mailing efforts.
Research and Development
Research and development consists mostly of salaries and personnel costs related
to engineering, technical support, outside testing, equipment and supplies
associated with enhancing existing products and developing new products. With
the exception of capital expenditures, research and development costs are
expensed when incurred. Research and development spending was $576,000 in 2001
compared to $640,000 in 2000. The cost reduction was due to closing of a
development center in Needham, MA and consolidating development efforts at the
Eden Prairie, MN facility.
Competition
Transition Networks faces strong competition across its entire product line.
Allied Telelsyn a manufacturer of media converters, network interface cards,
transceivers and switch products is the leading competitor. Other competitors
include IMC Networks and Metrobility Optical Solutions. A large number of
competitors exist for the highest volume products in the Ethernet and Fast
Ethernet family. Low cost competitors from China and Taiwan are strongest in the
developing Asian markets, but have had limited success in the North American
market. A deeper penetration of these competitors poses a potential threat to
sales and profit margins. Competition also exists from substitutes such as lower
cost fiber switches.
Order Book
Outstanding customer orders for Transition Networks products were approximately
$387,000 at March 1, 2002 and $1,225,000 at March 1, 2001. Transition Networks
also fills 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. Sales by
JDL for 2001 totaled $10,247,000 and represented 11% of consolidated revenues.
Total sales for 2000 totaled $14,887,000 or 12% of consolidated revenues. Sales
of hardware, software and related equipment totaled $5,664,000 in 2001 or 55% of
total sales compared to $12,285,000 in 2000 or 83%. of total sales. Training,
support and consulting revenue totaled $4,584,000 and $2,595,000 in 2001 and
2000, 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
$8,736,000 as of March 1, 2002 and $2,350,000 at March 1, 2001. JDL does not
believe its order book is a significant indicator of future results.
(d) Employment Levels
As of March 1, 2002 the Company employed 621 people. Of this number, 384 were
employed by Suttle (including 30 in Puerto Rico, 150 in Hector, Minnesota and
204 in Costa Rica),114 by Austin Taylor Communications, Ltd., 80 by Transition
Networks, Inc., 27 by JDL Technologies, Inc. and 16 general and administrative
positions. The Company considers its employee relations to be good.
6
(e) 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 contained in
federal securities laws. Shareholders and the investing public should understand
that such 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.
(f) Executive Officers of Registrant
The executive officers of the Company and their ages at March 1, 2002 were as
follows:
Name Age Position 1
---- --- --------
Curtis A. Sampson 68 Chairman of the Board and Chief Executive
Officer [1970]
Jeffrey K. Berg 59 President and Chief Operating Officer [2000]2
Paul N. Hanson 55 Vice President - Finance, Treasurer and Chief
Financial Officer [1982]
Daniel G. Easter 45 President, Transition Networks, Inc. [2000]3
Lee Ludlam 41 Managing Director, Austin Taylor
Communications, Ltd. [1998]4
Thomas J. Lapping 43 President, JDL Technologies, Inc. [1998]5
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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 and named President of the Company in March 2002.
Prior to November 2000, Mr. Berg served as President 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.
5 JDL Technologies, Inc. was acquired by the Company in 1998. Mr. Lapping
founded JDL Technologies, Inc. in 1989.
Messrs. Sampson and Hanson each devote approximately 50% 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.
7
(g) 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 leases space from the Puerto Rico
Industrial Development Company in a facility in Humacao, Puerto Rico
aggregating 7,000 square feet. The Company leases 40,000 square feet of
manufacturing space in San Jose, Costa Rica. In 2001, the Company began
leasing a 35,000 square foot facility in Waconia, Minnesota to be utilized
as a distribution center for Suttle and Transition Networks, Inc. products.
- - Austin Taylor Communications, Ltd. owns a 40,000 square foot facility.
- - 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, manufacturing and distribution 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.
8
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:
2001 2000
------------------------- ------------------------
High Low High Low
First $10.69 $7.75 $24.00 $12.56
Second 9.50 7.01 18.63 13.13
Third 8.61 5.40 17.88 12.00
Fourth 8.15 5.85 14.13 7.25
(b) HOLDERS
At March 1, 2002 there were approximately 820 holders of record of
Communications Systems, Inc. common stock.
(c) DIVIDENDS
The Company had paid regular quarterly dividends since October 1, 1985. The per
share quarterly dividends paid were $.10 in 1999 and 2000. Effective for the
quarter beginning October 1, 2001, the CSI Board of Directors suspended the
payment of a regular quarterly dividend due to the substantial reduction in
earnings during the first half of 2001. Reinstatement of a quarterly dividend
will be reviewed on a regular basis.
9
ITEM 6. SELECTED FINANCIAL DATA
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
(in thousands except per share amounts)
Year Ended December 31
---------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Selected Income Statement Data
Revenues $ 95,105 $ 119,720 $ 117,525 $ 71,570 $ 76,114
Costs and Expenses:
Cost of Sales 69,602 82,355 77,280 50,599 52,684
Selling, General and Administrative Expenses 24,691 29,432 28,907 12,413 10,947
--------- --------- --------- --------- ---------
Total Costs and Expenses 94,293 111,787 106,187 63,012 63,631
Income From Operations 812 7,933 11,338 8,558 12,483
Other Income, Net 225 339 296 1,259 1,654
Income Before Income Taxes 1,037 8,272 11,634 9,817 14,137
Income Tax Expense 325 1,600 2,620 1,950 3,200
--------- --------- --------- --------- ---------
Net Income $ 712 $ 6,672 $ 9,014 $ 7,867 $ 10,937
========= ========= ========= ========= =========
Basic Net Income Per Share $ .09 $ .76 $ 1.04 $ .87 $ 1.18
========= ========= ========= ========= =========
Diluted Net Income Per Share $ .09 $ .75 $ 1.03 $ .87 $ 1.17
========= ========= ========= ========= =========
Cash Dividends Per Share $ .30 $ .40 $ .40 $ .38 $ .34
========= ========= ========= ========= =========
Average Common and Potential Common
Shares Outstanding 8,365 8,865 8,727 9,084 9,325
========= ========= ========= ========= =========
Selected Balance Sheet Data
Total Assets $ 88,012 $ 93,198 $ 91,476 $ 83,900 $ 77,518
Property, Plant and Equipment, Net 8,137 10,106 10,960 11,379 9,675
Working Capital 51,149 45,486 34,787 37,245 48,514
Stockholders' Equity 67,308 71,267 66,422 63,454 69,264
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2001 Compared to 2000
---------------------
Consolidated sales in 2001 decreased 21% to $95,105,000 in 2001 as compared to
consolidated sales of $119,720,000 in 2000. Consolidated gross margins decreased
by 4% in 2001 compared to 2000. Consolidated selling, general and administrative
expenses increased 1% to 26% of gross revenue. Consolidated operating income
decreased 90% to $812,000. Consolidated net income decreased 89% to$712,000 in
2001 or $.09 per diluted share compared to $.75 in 2000.
10
Overall, operating results of all business segments were adversely affected by
the overall slowdown in economic conditions resulting in decreased capital
spending and reduced equipment purchases by telecommunications service
providers. Pricing pressures and excess manufacturing capacity also resulted in
the Company experiencing decreases in gross margins. The Company's media
conversion segment Transition Networks was not impacted as severely by the weak
market conditions, which resulted in improved profitability as compared to the
previous year. In 2001, the Company's manufacturing operations were downsized to
match existing and anticipated volumes. Employment levels were reduced 30% in
2001 and in addition, two of three manufacturing facilities in Puerto Rico were
closed to streamline overhead cost structures. The Company is pursuing new
opportunities with significant long-term growth potential in residential and
small business markets. Media conversion and wireless bandwidth solutions are
also expected to significantly contribute to the Company's growth.
Suttle's sales decreased 27% to $39,992,000 in 2001 as compared to $55,111,000
in 2000. Sales to customers in the United States (U.S.) decreased 26% to
$38,980,000 from $53,000,000 in 2000. Sales to the RBOC's (Regional Bell
Operating Companies) decreased 35% to $19,626,000 from $24,713,000 in 2000.
Sales to these customers represent 48% and 56% of Suttle's U.S. customer sales
in 2001 and 2000, respectively. Sales to distributors, original equipment
manufacturers (OEMs), and electrical contractors decreased to $15,632,000 or 20%
from prior year. Sales to retail customers decreased 32% to $1,651,000 from
$2,413,000 in 2000. Suttle's international sales decreased by 52% to $1,010,000
in 2001.
The sales decreases were reflected in most product lines with the exception of
fiber-optic products and DSL (Digital Subscriber Lines) filters. CorroShield
(standard voice jack for most telephone applications) product sales fell 34% to
$15,465,000 in 2001 from $23,412,000 in 2000. Sales of fiber-optic connector
products increased 13% to $2,283,000 from $2,023,000 in 2000. Sales of data
products decreased 43% in 2001 to $5,056,000 from $8,863,000 in 2000. DSL
filters (introduced in 2000) sales were $4,209,000 or 10% of Suttle's sales in
2001 versus $2,271,000 or 4% of sales in 2000.
Suttle's gross margins declined 53% to $8,219,000 with the gross margin
percentage declining to 20.6% in 2001 from 31.6% in 2000. The gross margin
decline is due primarily to lower business volumes, excess overhead costs and
pricing reductions due to competitive pressures. Selling, general and
administrative expenses decreased $700,000 or 9%. Operating income declined by
$8,500,000 or 89%.
Austin Taylor's sales decreased by 5% to $9,620,000 in 2001. The sales decrease
was due to below plan sales to several key United Kingdom (U.K.) accounts. Gross
margin decreased by $565,000 or 44% from prior year and as a percentage of sales
decreased 5.2% in 2001. The gross margin decline is due to excess overhead
costs, pricing reductions and payment of severance costs associated with the
resizing of the operations in the third and fourth quarters of 2001. Selling,
general and administrative expenses increased $67,000. Operating income declined
$632,000.
Transition Network sales decreased $4,327,000 or 11% to $35,246,000. Operating
income increased by $1,413,000 or 146% to $2,118,000. Sales to distributors were
$18,640,000 in 2001 or 53% of total sales compared to $21,760,000 or 55% of
total sales in 2000. The balance of sales in both years was made to system
integrators and resellers, to OEMs and through catalog sales. Sales to
international customers were $13,112,000 and were 37% of total sales in 2001
compared to $14,237,000 or 36% in 2000. Gross margin dollars decreased by
$2,198,000 and as a percentage of sales decreased by 1.5%. Selling, general and
administrative expenses decreased by $3,611,000 and 6% as a percentage of sales.
JDL Technologies sales decreased 31% to $10,247,000 in 2001 compared to
$14,887,000 in 2000. The sales decrease was due to lower sales of computer and
network hardware in 2001 compared to 2000. Operating income increased by
$564,000 or 78% compared to 2000. Computer and network hardware sales
represented $5,664,000 or 55% of total JDL revenues in 2001 compared to 83% of
total revenue in 2000. Consulting, training and support was $4,535,000 or 45% of
total sales compared to 17% of total sales in 2000. Gross margin in 2001 was
$3,657,000 or 36% compared to $3,556,000 or 24% in 2000. The higher gross margin
in 2001 is consistent with increased revenues in consulting, training, and
design services as compared to 2000. Selling, general and administrative
expenses decreased to $3,816,000 in 2001 from $4,278,000 in 2000 but as a
percentage of net sales increased 8% to 37%.
Consolidated investment income, net of interest expense, decreased by $114,000
due to decreased earnings on invested funds. Income from continuing operations
before income taxes decreased 90% to $812,000. The Company's effective income
tax rate was 31.3% in 2001 as compared to 19.3% in 2000. The increase in the tax
rate was attributable to higher U.S. and U.K. earnings as a percentage of total
earnings, which are subject to higher tax rates than Puerto Rico earnings.
11
2000 Compared to 1999
---------------------
Consolidated sales increased 2% to $119,720,000 in 2000. Consolidated selling,
general and administrative expenses remained at approximately 25% of gross
revenues. Consolidated operating income decreased 30% to $7,933,000. .
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. 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 $4,278,000 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
12
Acquisitions and Dispositions
-----------------------------
Effective April 7, 1999, the Company acquired LANart Corporation, a manufacturer
of application 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 has had 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, 2001, the Company had approximately $22,240,000 of cash and cash
equivalents compared to $11,321,000 of cash and cash equivalents at December 31,
2000. The Company had working capital of approximately $51,149,000 and a current
ratio of 3.5 to 1 compared to working capital of $45,486,000 and a current ratio
of 3.0 to 1 at the end of 2000. The increase in working capital was primarily
due to an increase in cash due primarily to redemption of mortgage backed
securities, collection of receivables, reduction of inventories and adjustments
to business plans to conserve cash.
Cash flow provided by operations was approximately $11,634,000 in 2001 compared
to $162,000 provided by operations in 2000. The increase was primarily due to
the Company's decreased inventory and accounts receivable levels and non-cash
charges for depreciation and amortization.
Investing activities provided $5,092,000 of cash in 2001. Cash investments in
new plant and equipment totaled $984,000 in 2001. The Company expects to invest
$2,000,000 on capital additions in 2002. The Company invested approximately
$5,825,000 in the purchase of debt securities in 1999 and redeemed them in the
second quarter of 2001. Cash investments in new subsidiaries in 1999 was
$3,956,000.
Net cash used in financing activities was $5,797,000. Dividends paid on common
stock were $2,554,000. Proceeds from common stock issuances, principally
exercises of key employee stock options, totaled $83,000 in 2001 and $3,656,000
in 2000. The Company purchased and retired 395,252 and 286,729 shares of its
stock in open market transactions during 2001 and 2000 respectively. Board
authorizations are outstanding to purchase 228,433 additional shares. The
Company may purchase and retire additional shares in 2002 if warranted by market
conditions and the Company's financial position.
The bulk of Suttle's operations were located in Puerto Rico until December 2001
The Company's earnings in Puerto Rico are sheltered from U.S. income tax by the
possessions tax credit (Internal Revenue Code Section 936). The amount of the
possessions tax 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 $0,
$82,000 and $827,000 in 2001, 2000 and 1999, respectively.
13
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
continued 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 $564,000, $1,908,000 and $2,023,000
in 2001, 2000 and 1999, respectively.
In December 2001 the Company reduced its operations in Puerto Rico in order to
match anticipated business volume requirements. By reducing its Puerto Rico
operations the Company substantially reduced the amount of possessions tax
credit available to shelter earnings from U.S. income tax. As a result, the
Company expects its corporate income tax rate on future earnings will more
closely match normal U.S. income tax rates.
At December 31, 2001 approximately $28,458,000, $5,350,000 and $1,575,000 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 as needed 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, 2001, the Company's outstanding obligations for notes payable
totaled $9,000,000. The Company expects to repay or refinance this credit line
in 2002. The unused portion of the Company's credit line ($1,000,000 at December
31, 2001) 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.
Subsequent Event
----------------
Effective March 25, 2002, the Company acquired substantially all the assets of
MiLAN Technology Corporation for approximately $8,300,000 of cash. MiLAN is a
manufacturer of media and rate conversion products, which permit
telecommunications networks to move information between copper-wired equipment
and fiber-optic cable.
Critical Accounting Policies
----------------------------
Management's discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. We review the accounting policies we use in reporting
our financial results on a regular basis. The preparation of these financial
statements requires us to make estimates and judgements that affect the reported
amounts of asset, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to reserves for inventory obsolence,
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.
These estimates and judgements are reviewed by management on an ongoing basis
and by the Audit Committee at the end of each quarter prior to the public
release of our financial results.
14
New Accounting Standards
------------------------
In July 2001, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
This statement applies to intangibles and goodwill acquired after June 30, 2001,
as well as goodwill and intangibles previously acquired. Under this statement
goodwill as well as other intangibles determined to have an infinite life will
no longer be amortized; however, these assets will be reviewed for impairment on
a periodic basis. Statement No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. The Statement is effective for the Company on January
1, 2002. The Company is currently assessing but has not yet determined the
impact of the Statement on its financial position and results of operations. As
of December 31, 2001 and 2000 the Company had net goodwill of $4,638,000 and
$6,729,000, respectively. Amortization expense recorded during the twelve months
ended December 31, 2001 and 2000 was $2,092,000 for each year.
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (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 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.
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, 2001 or
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.
ITEM 7a. 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 December 31, 2001 our bank line of credit carried a
variable interest rate based on our bank's average certificate of deposit rate
plus 1.5%. 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.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) FINANCIAL STATEMENTS
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 /s/ Paul N. Hanson
- ------------------------------------ -----------------------------------
Curtis A. Sampson Paul N. Hanson
Chairman and Chief Executive Officer Chief Financial Officer
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, 2001 and 2000
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, 2001. 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, 2001
and 2000 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001 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
February 28, 2002
(March 25, 2002 as to Note 9)
Minneapolis, Minnesota
16
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
----------------------------
2001 2000
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 22,239,883 $ 11,321,374
Trade accounts receivable, less allowance for
doubtful accounts of $1,064,000 and
$913,000, respectively 19,182,828 23,189,409
Inventories (Note 2) 24,931,739 27,479,839
Note receivable (Note 1) 2,765,390 2,965,390
Other current assets 556,906 626,139
Deferred income taxes (Note 7) 2,176,405 1,834,745
------------ ------------
TOTAL CURRENT ASSETS 71,853,151 67,416,896
PROPERTY, PLANT AND EQUIPMENT,net (Notes 1 and 3) 8,136,673 10,106,044
OTHER ASSETS:
Excess of cost over net assets acquired (Note 1) 4,638,068 6,728,995
Investments (Note 1) 60,019 5,916,507
Deferred income taxes (Note 7) 3,070,027 2,735,811
Other assets 253,865 293,801
------------ ------------
TOTAL OTHER ASSETS 8,021,979 15,675,114
------------ ------------
TOTAL ASSETS $ 88,011,803 $ 93,198,054
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 1) $ 9,000,000 $ 9,101,438
Accounts payable 5,567,390 5,866,627
Accrued expenses 3,890,113 4,579,202
Dividends payable 880,391
Income taxes payable 2,246,299 1,503,468
------------ ------------
TOTAL CURRENT LIABILITIES 20,703,802 21,931,126
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; 8,262,314
and 8,616,909 shares issued and outstanding,
respectively (Notes 1 and 6) 413,116 430,846
Additional paid-in capital 27,855,529 28,877,135
Retained earnings 39,463,137 42,309,918
Cumulative other comprehensive loss (423,781) (350,971)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 67,308,001 71,266,928
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 88,011,803 $ 93,198,054
============ ============
See notes to consolidated financial statements.
17
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended December 31
---------------------------------------------------
2001 2000 1999
------------ ------------ ------------
REVENUES (Note 9): $ 95,105,438 $119,720,115 $117,524,617
COSTS AND EXPENSES:
Cost of sales 69,602,302 82,354,384 77,279,741
Selling, general and administrative expenses 24,690,686 29,432,373 28,907,288
------------ ------------ ------------
TOTAL COSTS AND EXPENSES 94,292,988 111,786,757 106,187,029
------------ ------------ ------------
OPERATING INCOME 812,450 7,933,358 11,337,588
OTHER INCOME (EXPENSE):
Investment income 785,323 1,028,681 986,263
Interest expense (560,524) (689,867) (690,129)
------------ ------------ ------------
OTHER INCOME, net 224,799 338,814 296,134
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,037,249 8,272,172 11,633,722
INCOME TAX EXPENSE (Note 7) 325,000 1,600,000 2,620,000
------------ ------------ ------------
NET INCOME 712,249 6,672,172 9,013,722
------------ ------------ ------------
OTHER COMPREHENSIVE (LOSS)
Foreign currency translation adjustment (72,810) (382,435) (153,981)
Unrealized holding gain (loss) on debt securities 73,800 (79,087)
------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS)
BEFORE INCOME TAXES (72,810) (308,635) (233,068)
Income tax expense (benefit) related to unrealized
gains and losses on debt securities 25,614 (27,411)
------------ ------------ ------------
(72,810) (334,249) (205,657)
------------ ------------ ------------
COMPREHENSIVE INCOME $ 639,439 $ 6,337,923 $ 8,808,065
============ ============ ============
BASIC NET INCOME PER COMMON SHARE (Note 1) $ .09 $ .76 $ 1.04
============ ============ ============
DILUTED NET INCOME PER COMMON SHARE (Note 1) $ .09 $ .75 $ 1.03
============ ============ ============
AVERAGE BASIC SHARES OUTSTANDING 8,363,046 8,750,279 8,644,217
AVERAGE DILUTED SHARES OUTSTANDING 8,364,553 8,865,466 8,727,140
See notes to consolidated financial statements.
18
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, 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 common 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 common 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
Net income 712,249 712,249
Issuance of stock under
Employee Stock Purchase Plan 15,657 783 82,363 83,146
Issuance of stock to
Employee Stock Ownership Plan 25,000 1,250 219,075 220,325
Purchase of common 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
========= ========= =========== =========== =========== ============ ===========
See notes to consolidated financial statements.
19
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
--------------------------------------------------
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 712,249 $ 6,672,172 $ 9,013,722
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,015,807 5,098,123 4,801,290
Increase in deferred taxes (674,963) (666,985) (816,225)
Tax benefit from non-qualified stock options 397,420
Changes in assets and liabilities net of effects
from acquisitions:
Decrease (increase) in accounts receivable 3,948,522 (2,222,176) (4,744,476)
Decrease (increase) in inventory 2,491,627 (6,455,692) 693,624
Decrease (increase) in other current assets 116,531 (55,759) (99,920)
Increase (decrease) in accounts payable (256,841) (2,071,389) 2,241,620
Increase (decrease) in accrued expenses (462,842) 739,557 (581,638)
Increase (decrease) in income taxes payable 743,567 (1,272,969) 713,595
------------ ------------ ------------
Net cash provided by operating activities 11,633,657 162,302 11,221,592
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (984,369) (2,276,790) (2,226,103)
Maturities of debt securities 5,856,488 214,973 1,008,607
Purchases of debt securities (5,825,747)
Increase in other assets 19,686 309,833 219,507
Cash receipts from sale of assets of discontinued operations 200,000 400,000 400,000
Payment for purchase of subsidiaries, net of cash acquired (3,955,898)
------------ ------------ ------------
Net cash provided by (used in) investing activities 5,091,805 (1,351,984) (10,379,634)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt (101,438) (38,518) (1,131,484)
Proceeds from notes payable 96,921 1,096,921
Collection of stock option note receivable 288,225
Dividends paid (2,553,858) (3,490,761) (3,479,613)
Proceeds from issuance of stock 83,146 3,655,918 542,668
Purchase of stock (3,224,897) (2,746,281) (3,379,821)
------------ ------------ ------------
Net cash used in financing activities (5,797,047) (2,234,496) (6,351,329)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (9,906) (92,103) (58,337)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,918,509 (3,516,281) (5,567,708)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,321,374 14,837,655 20,405,363
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 22,239,883 $ 11,321,374 $ 14,837,655
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 342,335 $ 2,885,278 $ 1,850,564
Interest paid 507,014 682,679 714,871
See notes to consolidated financial statements.
20
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2001, 2000 and 1999
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
accounting principles generally accepted 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, accrued expenses 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 $154,000 and
$172,000 at December 31, 2001 and 2000, 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 $2,904,629, $2,969,253 and
$2,827,709 for 2001, 2000 and 1999, 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 $2,091,928, $2,128,870 and $1,973,581 in 2001, 2000 and
1999, 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 was November 1, 2001. The note and
accrued interest was paid in full in January 2002.
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,
2001 and 2000, no impairment loss provision is required or recorded in the
consolidated financial statements.
Investments: The Company's Puerto Rico subsidiary owns a portfolio of AAA rated
mortgage-backed securities it is holding to maturity. At December 31, 2001, the
amortized cost basis of the securities was $21,809, which approximates market
value. In addition the Company also owns marketable securities with a cost of
$34,346 and market value of $38,210.
21
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, 2001 and 2000
was $9,000,000. Interest on borrowings on the credit line is at the bank's
average CD rate plus 1.5% (4.0% at December 31, 2001). The credit line matures
June 30, 2002 and is secured by assets of the Company.
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 $424,000 and $347,000 at
December 31, 2001 and 2000, 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 the majority of products directly to its customers. The
balance of sales is through distributors. Generally, risk of loss transfers at
the point of shipment and the Company has no further obligation for performance
after such time. The Company establishes an allowance for sales returns based on
historical experience. 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 1,507 shares, 115,187
shares, and 82,923 shares in 2001, 2000 and 1999, respectively. The Company
calculates the dilutive effect of outstanding options using the treasury stock
method. Options to purchase 1,076,304 shares of common stock at a range of $8.00
to $18.91 were outstanding during 2001 but were not included in the computation
of diluted earnings per share because the options' price was greater than the
average market price of common stock.
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. Adoption of SFAS No. 133 had no effect on the Company's financial
statements.
In July 2001, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
This statement applies to intangibles and goodwill acquired after June 30, 2001,
as well as goodwill and intangibles previously acquired. Under this statement
goodwill as well as other intangibles determined to have an infinite life will
no longer be amortized; however, these assets will be reviewed for impairment on
a periodic basis. Statement No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. The Statement is effective for the Company on January
1, 2002. The Company is currently assessing but has not yet determined the
impact of the Statement on its financial position and results of operations. As
of December 31, 2001 and 2000 the Company had net goodwill of $4,638,000 and
$6,729,000, respectively. Amortization expense recorded during the twelve months
ended December 31, 2001 and 2000 was $2,092,000.
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 years ended December 31, 2001 and
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.
Basis of presentation: Certain amounts in the 2000 and 1999 financial statements
have been reclassified to conform to the 2001 financial statement presentation.
These reclassifications had no effect on net income or stockholders' equity as
previously reported.
22
NOTE 2 - INVENTORIES
Inventories are carried at the lower of cost (first-in, first out method) or
market and consist of:
December 31
-------------------------------
2001 2000
------------ ------------
Finished goods $ 15,821,487 $ 10,876,529
Raw and processed materials 9,110,252 16,603,310
------------ ------------
$ 24,931,739 $ 27,479,839
============ ============
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and the estimated useful lives are as follows:
December 31
Estimated -------------------------------
useful life 2001 2000
----------- ------------ -------------
Land $ 290,939 $ 293,299
Buildings 7-30 years 3,116,949 3,077,470
Machinery and equipment 3-15 years 26,545,446 26,746,398
Furniture and fixtures 5-10 years 3,001,702 3,349,101
------------ -------------
32,955,036 33,466,268
Less accumulated depreciation 24,818,363 23,360,224
------------ -------------
$ 8,136,673 $ 10,106,044
============ =============
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 2001, 2000 and 1999 were $263,000, $347,000, and $275,000, 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 $1,078,000,
$901,000 and $885,000 in 2001, 2000 and 1999 respectively. At December 31, 2001,
the Company was obligated under noncancellable operating leases to make minimum
annual future lease payments as follows:
Year Ending December 31:
2002 $ 560,265
2003 570,922
2004 542,938
2005 262,794
2006 245,317
------------
$ 2,182,236
============
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.
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, 2001, 272,568 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 and the remaining two-thirds vesting equally over the
next two years.
23
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, 2001,
96,000 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. No shares were issued in 2001 to
JDL employees as compensation. Compensation expense recorded was $0 in 2001,
$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 market
price at the measurement date. During the years 2000 to 2004, the balance of the
options vest at the rate of 20% per year. Compensation expense was not
recognized in 2001 or 2000 as the Company converted the original variable plan
to a fixed plan effective December 31, 1999. The impact in 2001 and 2000 of the
conversion to the fixed plan was not material. Also in 2000, two of the five
individuals representing 120,000 shares or 50% of the original 240,000 options
left the Company.
Changes in outstanding employee and director stock options during the three
years ended December 31, 2001 were as follows:
Weighted
average
Number of exercise price
shares per share
------------ -------------
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
Granted 269,520 8.03
Exercised (8,000) 5.48
Canceled (267,105) 12.98
------------
Outstanding at December 31, 2001 1,077,811 13.01
============
At December 31, 2001, 769,201 stock options are currently exercisable at a
weighted average price of $13.22. The following table summarizes the status of
Communications Systems, Inc. stock options outstanding at December 31, 2001:
Weighted Average Weighted
Remaining Average
Range of Exercise Prices Shares Option Life Exercise Price
- ------------------------ ------- ---------------- --------------
$ 5.31 to $ 9.99 265,665 4.5 years $ 8.06
$10.00 to $12.00 253,396 2.8 years 10.22
$12.01 to $14.99 133,200 3.3 years 13.82
$15.00 to $18.91 425,550 2.8 years 17.15
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.
24
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
--------------------------------------
2001 2000 1999
------------ ----------- -----------
Net Income (Loss) $ (117,855) $ 5,323,456 $ 8,035,603
Basic Net Income Per Share $ (.01) $ .61 $ .93
Diluted Net Income Per Share $ (.01) $ .60 $ .92
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
--------------------------------------
2001 2000 1999
------------ ----------- -----------
Expected volatility 33% 34% 27%
Risk free interest rate 4.7% 6.1% 5.2%
Expected holding period - employees 4 years 4 years 4 years
Expected holding period - directors 7 years 7 years 7 years
Dividend yield 3.6% 2.4% 3.9%
Pro forma stock-based compensation cost was $830,000, $1,349,000 and $978,000 in
2001, 2000 and 1999, respectively. The fair value of all options issued in 2001,
2000 and 1999 was $527,000, $1,860,000 and $1,402,000, 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 15,657,
30,515 and 27,431 for the plan years ended August 31, 2001, 2000 and 1999,
respectively. At December 31, 2001 employees had subscribed to purchase an
additional 33,600 shares in the current plan year ending August 31, 2002.
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, 2001, the ESOP
held 290,460 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 2001 ESOP contribution was $188,500 for which the
Company issued 25,000 shares of common stock to the ESOP in February 2002. The
2000 ESOP contribution was $220,325 for which the Company issued 25,000 shares
in February 2001. The 1999 ESOP contribution was $308,000 for which the Company
issued 25,000 shares in February 2000.
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
2001, the Company purchased and retired 395,252 shares at a cost of $3,228,000.
In 2000, the Company purchased and retired 286,729 shares at a cost of
$2,746,000. At December 31, 2001, 228,433 shares could be repurchased under
outstanding Board authorizations.
25
NOTE 7 - INCOME TAXES
Income tax expense from continuing operations consists of the following:
Year Ended December 31
--------------------------------------
2001 2000 1999
------------ ----------- -----------
Currently payable income taxes (benefit):
Federal $ 746,000 $ 1,109,000 $ 2,058,000
State 101,000 131,000 217,000
Puerto Rico 163,000 573,000 844,000
Foreign (10,000) 57,000 305,000
------------ ----------- -----------
1,000,000 1,870,000 3,424,000
Tax effect of disqualified employee
incentive stock options 0 397,000 14,000
Deferred income taxes (benefit) (675,000) (667,000) (818,000)
------------ ----------- -----------
$ 325,000 $ 1,600,000 $ 2,620,000
============ =========== ===========
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
$0, $82,000 and $827,000 of U.S. federal income tax expense on earnings in
Puerto Rico for 2001, 2000 and 1999, respectively.
Earnings of Suttle Caribe, Inc. are subject to Puerto Rico income taxes at a 4%
flat rate through 2016, 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 from income earned prior to
December 31, 2000 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, 2001.
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 ($706,000),
($74,000), and $878,000 in 2001, 2000 and 1999, 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 $2,582,000 at December 31, 2001. 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.
The provision for income taxes varied from the federal statutory tax rate as
follows:
Year Ended December 31
--------------------------------------
2001 2000 1999
------------ ----------- -----------
Tax at U.S. statutory rate 35.0% 35.0% 35.0%
Surtax exemption (1.0) (1.0) (.9)
U.S. taxes not provided on
Puerto Rico operations (54.4) (23.1) (17.4)
State income taxes,
net of federal benefit 6.4 1.8 1.8
Nondeductible goodwill amortization 41.4 5.2 3.2
Other 3.9 1.4 .8
------------ ----------- -----------
Effective tax rate 31.3% 19.3% 22.5%
============ =========== ===========
26
Deferred tax assets and liabilities as of December 31 related to the following:
2001 2000
------------ ------------
Current assets:
Bad debts $ 299,462 $ 253,000
Inventory 1,354,724 934,000
Accrued expenses 522,219 647,745
------------ ------------
$ 2,176,405 $ 1,834,745
============ ============
Long term assets and (liabilities):
Depreciation $ (292,130) $ (333,189)
Net operating loss carryforward 954,752 1,032,000
Loss reserves on notes receivable 148,000 148,000
Excess of cost over net assets 565,620 382,000
Other (500) (3,000)
Alternative minimum tax credits 1,694,285 1,510,000
------------ ------------
$ 3,070,027 $ 2,735,811
============ ============
As part of the LANart acquisition, the Company purchased net operating loss
carryforwards in the amount of $3,416,000. At December 31, 2001, the Company has
$2,808,000 available net operating loss carryforwards for income tax purposes,
which expire 2014. The Company also has alternative minimum tax carryforwards of
approximately $1,694,000 at December 31, 2001, which are available to reduce
future regular income taxes over an indefinite period.
NOTE 8 - ACQUISITIONS
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 - SUBSEQUENT EVENT
Effective March 25, 2002, the Company acquired substantially all the assets of
MiLAN Technology Corporation for approximately $8,300,000 in cash. MiLAN is a
manufacturer of media and rate conversion products, which permit
telecommunications networks to move information between copper-wired equipment
and fiber-optic cable.
NOTE 10- 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.
27
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. Consolidated sales to U.S. customers were approximately
75%, 78% and 76% of total consolidated revenues in 2001, 2000 and 1999
respectively. At December 31, 2001, foreign earnings in excess of amounts
received in the United States were approximately $5,800,000.
In 2001, 2000 and 1999, no customer accounted for more than 10% of consolidated
sales.
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 Tyco Electronics. The unavailability of the gel-filled figs from Tyco
Electronics 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, 2001:
Revenues $ 39,992,065 $ 9,619,676 $ 35,246,495 $ 10,247,202 $ - $ 95,105,438
Cost of sales 31,773,239 8,907,386 22,331,941 6,589,736 69,602,302
---------------------------------------------------------------------------------------
Gross profit 8,218,826 712,290 12,914,554 3,657,466 25,503,136
Selling, general and
administrative expenses 6,839,035 1,450,668 9,515,050 3,370,997 3,514,936 24,690,686
Goodwill amortization 287,047 58,338 1,281,549 444,554 (2,071,488) 0
---------------------------------------------------------------------------------------
Operating income (loss) $ 1,092,744 $ (796,716) $ 2,117,955 $ (158,085) $ (1,443,448) $ 812,450
=======================================================================================
Depreciation and amortization $ 2,064,281 $ 595,815 $ 1,638,446 $ 599,352 $ 113,913 $ 5,015,807
=======================================================================================
Assets $ 48,183,054 $ 5,359,069 $ 18,472,817 $ 7,020,893 $ 8,975,970 $ 88,011,803
=======================================================================================
Capital expenditures $ 681,841 $ 22,719 $ 117,126 $ 92,665 $ 70,018 $ 984,369
=======================================================================================
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
=======================================================================================
28
Austin Transition JDL
Suttle Taylor Networks Technologies Corporate Consolidated
---------------------------------------------------------------------------------------
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
=======================================================================================
(b) SUPPLEMENTAL FINANCIAL INFORMATION
Unaudited Quarterly Operating Results
(in thousands except per share amounts)
Quarter Ended
-------------------------------------------
March 31 June 30 Sept 30 Dec 31
- ---------------------------------------------------------------------------
2001
Revenues $ 23,094 $ 25,682 $ 23,073 $ 23,256
Gross Margins 6,642 6,948 5,610 6,303
Operating income 202 379 (491) 722
Net Income 185 314 (196) 409
Basic Net Income per Share $ .02 $ .04 $ (.02) $ .05
Diluted Net Income per Share $ .02 $ .04 $ (.02) $ .05
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
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 16, 2002 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 16, 2002 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 16, 2002 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 29 herein:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Income and Comprehensive Income for the years
ended December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999
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 17
Schedule II - Valuation and Qualifying Accounts and Reserves 36
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, 2001
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, 2002 /s/ Curtis A.Sampson
----------------------------------
Curtis A. Sampson, Chairman of the
Board of Directors 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, 2002
- ----------------------- President, and Director (Principal
Curtis A. Sampson Executive Officer)
/s/Paul N. Hanson Vice President, Treasurer and March 29, 2002
- ----------------------- Chief Financial Officer (Principal
Paul N. Hanson Financial Officer and Principal
Accounting Officer)
Director March 29, 2002
- -----------------------
Randall D. Sampson
Director March 29, 2002
- -----------------------
Edwin C. Freeman
/s/Luella G. Goldberg Director March 29, 2002
- -----------------------
Luella Gross Goldberg
/s/Frederick M. Green Director March 29, 2002
- -----------------------
Frederick M. Green
/s/Joseph W. Parris Director March 29, 2002
- -----------------------
Joseph W. Parris
/s/Gerald D. Pint Director March 29, 2002
- -----------------------
Gerald D. Pint
/s/Wayne E. Sampson Director March 29, 2002
- -----------------------
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, 2001
----------------------------
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 to Costs from at End
Description Period and Expenses Reserves of Period
Allowance for doubtful accounts:
Year ended:
December 31, 2001 $ 913,000 $ 287,000 $ 136,000 (A) $1,064,000
December 31, 2000 $ 908,000 $ 36,000 $ 31,000 (A) $ 913,000
December 31, 1999 $ 884,000 $ 126,000 $ 102,000 (A) $ 908,000
Reserve for assets transferred under contractual arrangements and notes
receivable:
Year Ended:
December 31, 2001 $ 434,000 $ - $ - $ 434,000
December 31, 2000 $ 434,000 $ - $ - $ 434,000
December 31, 1999 $ 371,000 $ 63,000 $ - $ 434,000
- -----------------------------------------
(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, 2001
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
Wells Fargo Bank Minnesota, reference.
National Association
21 Subsidiaries of the Registrant Filed herewith at page 37.
23 Independent Auditors' Consent Filed herewith at page 37.
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.
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 February 28, 2002
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, 2001.
/s/ Deloitte & Touche LLP
- --------------------------
Deloitte & Touche LLP
March 29, 2002
Minneapolis, Minnesota
37