(ii)
Transition
Networks
Transition
Networks, Inc. (Transition or Transition Networks) is based in Minnetonka,
Minnesota and also maintains operations in China and the U.K. Transition
designs, assembles and markets network interface devices (NIDs), media
converters, network interface cards (NICs), Ethernet switches, Small Form
factor Pluggable modules (SFP), and other connectivity products under the
Transition Networks and MILAN brand names. Transition sells its product
through distributors, resellers, integrators, and OEMs. These NIDs, media
converter and Ethernet Switch products permit voice and data networks to move
information between copper-wired equipment and fiber-optic cable. Sales by
Transition Networks were $91,450,000 (64% of consolidated sales) in 2011 compared
to $67,782,000 (56% of consolidated sales) in 2010. International sales
accounted for 15% of Transitions sales, or $14,002,000 in 2011, compared to
$11,358,000, or 17% of Transitions sales in 2010.
Products
Transition
Networks designs, assembles and sells media converter devices, NIDs, Ethernet
switches and other connectivity products 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 enable
customers to integrate fiber optics into their existing network infrastructure
as their networks grow, and extend data services to customers or remote
locations. Protocols supported include Gigabit Ethernet, Fast Ethernet,
Ethernet, T1/E1, DS3, RS232, RS485, OC3, OC12, and more. The Company uses
proprietary Application Specific Integrated Circuits (ASIC) for development of
some products, as well as ASICs from integrated circuit manufacturers such as
Marvell® and Broadcomm® for the development of new products. Transition
Networks develops product hardware and software internally, and expenses the
related costs as they are incurred. In connection with the sale of its hardware
products, Transition Networks provides its customers with free operating
software. Transition Networks focuses its product development on hardware, with
software developed to support hardware sales. The Company has been developing
and marketing Ethernet-based networking products for approximately 23 years.
Transition Networks continues to develop products that address the enterprise,
service provider, industrial, and security markets and, in addition, targets
the specific vertical markets of government and education.
Manufacturing and
Sources of Supply
Transition
Networks outsources most of its manufacturing. In 2011, approximately 67% of
its products were manufactured offshore, principally in Asia. Offshore sources
of supply are subject to certain risks, including political risk. The balance
of its products are manufactured in the United States. The Company has
alternate sources of supply for its products and to date has not had problems
obtaining necessary product.
Markets and Marketing
Transition
Networks products are used in a broad array of markets, including enterprise
networks, service providers networks, security and industrial environments
such as in manufacturing processes. Transition Networks has a broad customer
base and its products are used in a variety of applications.
The media
conversion product line addresses and is used in a variety of applications. The
ION and Point System chassis-based modular systems are used primarily in
telecommunications 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. The line of Ethernet
switches is used in both the central closet and at the end user station.
Marketing
primarily consists of direct marketing using a sales force, tradeshows, trade
magazine advertising, on-line advertising, web site, social media and public
relations activities. Transition Networks also provides and participates in
advertising and cooperative marketing campaigns with distribution partners.
The Companys
Transition Networks and MILAN brand names are important to its business.
The Company regularly supports these names by trade advertising and believes
them to be well known in the marketplace.
Research and
Development
Transition
Networks continues to develop products that address the enterprise, service
provider, security and industrial markets. This includes developing converters
for emerging protocols and existing protocols in new markets, as well as new
industry standards. Some of these products include remote management devices
built on the IEEE® 802.3AH and 802.3AG standards, Metro Ethernet Forum (MEF)®
standards and Power Over Ethernet based on the IEEE® 802.3AF standard. Some
design efforts are paced by the development of critical components such as
integrated circuits and optical transceivers.
5
Research and
development consists primarily of testing, equipment and supplies associated
with enhancing existing products and developing new products. Research and
development costs are expensed when incurred and were $1,937,000 in 2011
compared to $1,966,000 in 2010.
Transition
Networks research and development operations are conducted in the United
States and China. Transition opened an office in China (Transition Networks
China) in the third quarter of 2007. The China operation focuses primarily on
engineering, including hardware and software development as well as testing.
Additional China operations include marketing, purchasing, and sales support.
Competition
Transition
Networks faces strong competition across its entire product line. A large
number of competitors exist for the highest volume products in the Fast
Ethernet and Gigabit Ethernet families as well as the Network Interface Devices
(NIDs). Low cost competitors from China and Taiwan are strongest in Asian,
Europe, Middle East, and African (EMEA) and South American markets, but have
had limited success in the North American market for the media converter
products. Transition Networks also faces new competitors as it enters new
markets for industrial products, security market, and higher performance
devices for the service provider market.
Order Book
Outstanding
customer orders for Transition Networks products were approximately $4,418,000
at March 1, 2012 and $6,193,000 at March 1, 2011. Transition Networks orders
are fulfilled on a relatively short-term basis and therefore the Company does
not consider the order book as a significant indicator of longer term future
results.
(
iii)
JDL Technologies, Inc.
JDL
Technologies, Inc. (JDL), located in Fort Lauderdale, Florida, provides
information technology (IT) solutions focused on network design and integration
IT service management, network security, desktop virtualization, and managed
network operation center services. JDLs 2011 sales were $12,401,000 (9% of
consolidated sales) compared to 2010 sales of $12,712,000 (11% of consolidated
sales). Project revenue totaled $11,310,000 in 2011 or 91% of JDL sales
compared to $11,612,000 in 2010 or 91% of JDL sales. Managed services revenues
were $1,091,000 and $1,100,000 in 2011 and 2010, respectively.
Products, Services
and Solutions
With over 15 years of
success in Florida, JDLs portfolio of technology solutions includes
virtualization, managed services, wired and wireless network design and
implementation services, and converged infrastructure configuration and
deployment. With a team of highly skilled engineers, JDL develops best of
class IT solutions that address the true pain points of its clients. JDL works
with the newest and most advanced IT to implement effective business solutions
specifically catered to each business needs.
JDLs
expertise is in developing, deploying and maintaining solutions that enable and
enhance IT landscapes specific to these core competencies:
Virtualization:
By leveraging industry
knowledge and strategic partnerships such as Citrix, VMware and Microsoft,
JDLs team of virtualization engineers assess, design, deploy, and manage a
customized virtualization plan for clients ensuring access to any workload,
anytime, anywhere, and on any device. An ideal virtualization environment
designed by JDL can be comprised of just one, all, or a combination of server,
desktop and application virtualization. As a result of JDLs tailored
solutions, businesses benefit from reduced costs with increased performance,
heightened workplace flexibility and agility, magnified adaptation to business
change, and an upgraded level of security and disaster recovery protection.
6
Managed Services:
JDLs suite of
managed services includes patch and asset management, automation, availability
assurance, IT help desk, event alerting, remote and on-site support, endpoint
security and desktop migration. JDLs implementation of managed services complements
our clients current IT resources and personnel in businesses of all sizes and
across all industries. Having JDLs engineers take on the daily management and
availability assurance of a business infrastructure frees the current IT team
to focus on the projects that are critical to the core business.
Network Services:
Having designed,
deployed, and managed one of the largest wireless infrastructures in the
country, JDLs team can advise businesses on the design and implementation of
corporate networks from wired to wireless and beyond. Through partnerships with
HP, Cisco Systems, Ruckus, Meru and others, JDL aligns with business needs to
optimize its IT landscape.
Converged Infrastructure:
In recognizing
that businesses grow and gain competitive advantage through the rapid adoption
of IT innovation and responsiveness, JDL has built a converged infrastructure
practice. By aligning with each business needs and helping overcoming IT
obstacles, JDLs clients experience accelerated ROI and sustainability, reduced
costs by combining infrastructure and enhanced security and disaster recovery.
Markets and
Competition
Over the past 15 years, JDL
Technologies has provided scalable and effective IT planning, implementation,
and support services in K-12 education. Although having educational clients
nationwide, its strongest base has been in Central and South Florida, a market
that includes a number of other small and large IT value added resellers (VAR)
and managed service providers (MSP). In order to differentiate itself from
competitors, in 2010, JDL made a strategic decision to market position itself
as a high-quality provider of design, implementation and management of
information technology solutions enabling its clients to become more
competitive in their business operations. This strategy has succeeded by using
a vendor diagnostic approach while providing cost reduction, increased revenue
generation, ease of use, greater availability and secure IT resources. With its
repositioning, JDL also expanded its market focus from K-12 Education to
include K-20 Education, Healthcare, Enterprise and Government markets.
Moving
forward, JDL plans to continue working with clients to develop unique IT
solutions that address specific business and IT requirements. As technology is
constantly evolving with new solutions and methodologies, JDLs mission is to
keep its growing portfolio of clients and their IT environments current with
these changes. It is through JDLs relationship as a trusted advisor that its
clients remain up to date with these technology changes and in turn rely on JDL
to help determine if and when to adopt new technologies based on business
goals. JDL Technologies believes in enabling business through technology.
Order Book
Outstanding
customer orders and contracts for JDL products and services were approximately
$750,000 at March 1, 2012 and $6,243,000 at March 1, 2011. The outstanding
orders and contracts at March 1, 2011, reflected JDLs significant on-going
contract with a South Florida school district that was completed in November
2011. Although JDL is pursuing a number of opportunities at the current time,
it does not have current orders and contracts that are comparable to those in
place in 2011. The Company does not consider current outstanding orders and
contracts as a significant indicator of longer term future results.
(iv)
Austin Taylor
Austin Taylor
Communications, Ltd. is located in Bethesda, North Wales, U.K. Austin Taylor is
a provider of telephony and data networking products to telecommunications
companies, distributors and installers throughout the U.K., Europe and the
Middle East. Austin Taylor sales were $3,288,000 (2% of consolidated revenues)
in 2011 and $3,016,000 (3% of consolidated revenues) in 2010.
7
At its plant
in Bethesda, the Company designs and manufactures external metal cabinets and
internal metal boxes to industry standards and to customer specifications and
procures other products from offshore sources. All manufacturing and supply
line products are supported to ISO: 9001:2000 approved standards to guarantee
customer quality, consistency
and reliability. Approximately 59% and 62% of Austin Taylor sales were to U.K.
customers in 2011 and 2010.
Outstanding
customer orders for Austin Taylor products were approximately $158,000 at March
1, 2012 compared to $260,000 at March 1, 2011. Because Austin Taylor fills new
orders on a relatively short timetable, the Company does not believe its order
book is a significant indicator of longer term future results.
(2)
Employment
Levels
As
of March 1, 2012 the Company employed 410 people. Of this number, 189 were
employed by Suttle (including 79 in Hector, Minnesota and 110 in Costa Rica),
166 by Transition Networks, Inc. (137 in Minnetonka, MN, 20 in China, and 9 in
the U.K.), 25 by JDL Technologies, Inc., 7 by Austin Taylor Communications,
Ltd and 23 corporate general and administrative positions.
(3)
Executive
Officers of Registrant
The executive
officers of the Company and their ages at March 1, 2012 are set forth below.
See Item 9B of this Form 10-K for additional information on the Companys
management.
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Name
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Age
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Position
1
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William G.
Schultz
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43
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President
and Chief Executive Officer [2011]
2
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David T.
McGraw
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60
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Vice
President, Treasurer and Chief Financial Officer [2008]
3
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Bruce
Blackwood
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49
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Vice President
and General Manager, Suttle [2007]
4
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Seweryn
Sadura
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41
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Vice
President and General Manager, Transition Networks [2011]
5
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Michael J.
Skucius
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58
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Vice
President, Information Technology [2010]
6
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Karen
Nesburg Bleick
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47
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Vice
President, Human Resources [2009]
7
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Scott
Fluegge
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42
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Vice
President and General Manager, JDL Technologies, Inc [2011]
8
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Kristin A.
Hlavka
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30
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Corporate
Controller [2011]
9
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1
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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.
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2
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Mr. Schultz
was appointed Chief Executive Officer of the Company in May 2011. From May
2010 to May 2011 he served as the Companys Executive Vice President of
Operations. From October 2007 to April 2010 he served as the Vice President
and General Manager of Transition Networks, Inc. From May 2000 to September
2007, he served as Transition Networks Vice President of Marketing. Prior to
May 2000, he was Distribution Business Manager for AMP Division of Tyco
International, Ltd.
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3
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Mr. McGraw
was appointed Chief Financial Officer in January 2008. From September 2002 to
December 2007 he served as President of Suttle. From May 2001 to August 2002,
he served as Chief Operating Officer of JDL Technologies, Inc. Prior to May
2001, he was Vice President-General Manager of Precision Diversified
Industries in Plymouth, MN.
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8
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4
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Mr.
Blackwood was appointed Vice President and General Manager of Suttle in
December 2007. From July 2001 to November 2007 he served as Suttles Vice
President of Sales. Prior to July 2001 he was Vice President of Sales for
Americable.
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5
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Mr. Sadura
was appointed Vice President and General Manager of Transition Networks in
February 2011. From June 2007 to January 2011 he served as the Director of
China Operations for Transition Networks. Prior to June 2007, he was a
Product Manager at Transition Networks.
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6
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Mr. Skucius
was appointed Vice President of Information Technology in January 2010. From
July 2007 to December 2009 he served as Vice President and General Manager of
JDL. From 1980 to 2007 he was the Companys Director of Management
Information Services.
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7
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Ms. Nesburg
Bleick was appointed Vice President, Human Resources in January 2009. From
October 2002 to December 2008, she served as Director of Human Resources.
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8
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Mr. Fluegge
was appointed Vice President and General Manager of JDL Technologies in
December 2011. Prior to this, he was the Vice President of Workload
Automation at GSS AMERICA / GSS INFOTECH / INFOSPECTRUM CONSULTING.
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9
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Ms. Hlavka
was appointed Corporate Controller in May 2011. From July 2008 to April 2011,
she served as the Assistant Corporate Controller. Prior to July 2008, she was
an auditor for Deloitte and Touche, LLP.
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(d) FINANCIAL
INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Financial
information about domestic and foreign operations and export sales may be
obtained by reference to Note 11 of the Notes to Consolidated Financial
Statements under Item 8 herein.
Forward Looking Statements
Certain
statements contained in this Annual Report on Form 10-K are
forward-looking statements within the meaning of and in reliance on the
Private Securities Litigation Reform Act of 1995, which provides a safe
harbor for forward-looking statements. Actual events and results may differ
materially from those expressed or forecasted in forward-looking statements due
to a number of factors. The principal important risk factors that could cause
our actual performance and future events and actions to differ materially from
these forward-looking statements include, but are not limited to, the risk factors
discussed below.
Risks Related to Our Business
The primary markets
we serve are highly competitive, and our ability to compete requires continual
focus on delivering high quality, competitively priced products and the regular
introduction of new products that meet evolving customer requirements.
Competition
in the markets for voice and data communications products is intense. Our
ability to compete with other manufacturers of these products depends primarily
on our engineering, manufacturing and marketing skills; the price, quality and
reliability of our products; our delivery and service capabilities; and our
control of operating expenses. We have experienced, and anticipate continuing
to experience, pricing pressures from our customers as well as our competitors.
The markets we serve are characterized by rapid technological advances and
evolving industry standards. These markets can be significantly affected by new
product introductions and marketing activities of industry participants. Certain
of our competitors and potential competitors may have greater financial,
technological, manufacturing, marketing, and personnel resources than we.
Present and future competitors may be able to identify new markets and develop
new products that are superior to those developed by us. They may also adapt
new technologies faster, devote greater resources to research and development,
promote products more aggressively, and price products more competitively than
us. We cannot ensure that competition will not intensify or that we will be
able to compete effectively in the markets in which we compete.
9
We face many
challenges in maintaining acceptable margins, and our level of gross margin may
not be sustainable.
Gross
margins among our products vary and are subject to fluctuation from quarter to
quarter. The factors that may impact our gross margins adversely are numerous
and include:
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Changes in
customer, geographic, or product mix;
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Our ability
to reduce product costs;
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Increases in
material or labor costs;
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Expediting
costs incurred to meet customer delivery requirements;
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Excess
inventory and inventory carrying charges;
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Obsolescence
charges;
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Changes in
shipment volume;
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Changes in
component pricing;
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Increased
price competition;
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Changes in
distribution channels;
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Increased
warranty cost; and
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Our ability
to manage the impact of foreign currency exchange rate fluctuations.
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Consolidation among
our customers has occurred and further consolidation may occur and result in
the loss of some customers and may reduce revenue during the pendency of
business combinations and related integration activities.
We
believe future consolidation may occur among our customers in order for them to
increase market share and achieve greater economies of scale. Consolidation has
affected our business as our customers focus on completing business
combinations and integrating their operations. In certain instances, customers
integrating large-scale acquisitions have reduced their purchases of our
products during the integration period.
The
business impact to us of significant customer mergers is likely to be unclear
until sometime after these transactions are completed. After a consolidation
occurs, a customer may choose to reduce the number of vendors from which it
purchases equipment and may choose one of our competitors as its preferred
vendor. We cannot ensure that we will continue to supply equipment to the
surviving communications service provider after a business combination is
completed.
Our profitability
could be affected negatively if one or more of our key customers substantially
reduces orders for our products or transitions their purchases towards lower
gross margin products.
Our
customer base is somewhat concentrated, with our top ten customers accounting
for 76%, 70% and 72% of net sales for fiscal 2011, 2010 and 2009, respectively.
One of our largest customers, Verizon, accounted for 6%, 6% and 9% of our net
sales for the fiscal years 2011, 2010 and 2009. The merger of AT&T and
BellSouth in our fiscal 2007 created another large customer for us. In fiscal
2011, 2010 and 2009, this combined company accounted for approximately 9%, 9%
and 12% of our sales, respectively. If we lose a significant customer for any
reason, our sales and gross profit will be negatively affected.
10
Our record 2011
sales and profitability resulted in part from sales to one customer. We do not
have any long-term commitment from this customer and do not expect 2012 sales
from that customer to exceed 5% of our overall revenues.
Our
2011 sales included $32.8 million, or 22.8% of our overall revenue, from a
one-time large network upgrade project with a Fortune 500 company that we
completed in 2011. Although we expect to continue to sell to this customer in
the future, we do not expect ongoing orders in 2012 or future years to exceed
five percent of our revenues. If we unable to replace this business, it may
have an adverse effect on our overall 2012 revenue and profitability.
Our JDL
Technologies, Inc. segment has recently been dependent on a single customer.
Although JDLs business plan is focused on providing a range of products and
services to a broad range of customers in the education, healthcare, enterprise
and government markets, we cannot ensure that JDL will be successful in its
efforts.
Substantially
all the sales of the Companys IT services business unit JDL Technologies, Inc.
in 2011 and 2010 were to a single South Florida school district and accounted
for 8.1% and 10.3% respectively of overall Company revenues. Although JDL began
in 2011 to market a broad range of products and services to a number of
potential customers, we cannot ensure that JDL will be able to achieve
significant revenue in 2012 from either this customer or from new customers. If
JDL is unable to achieve significant revenues, it may have an adverse effect on
our overall 2012 revenue and profitability.
Our market is
subject to rapid technological change and, to compete effectively, we must
continually introduce new products that achieve market acceptance.
The
communications equipment industry is characterized by rapid technological
changes, evolving industry standards, changing market conditions, short product
life cycles and rapidly changing customer requirements and frequent new product
and service introductions and enhancements. The introduction of products using
new technologies or the adoption of new industry standards can make our
existing products, or products under development, obsolete or unmarketable. Our
future success will depend on our ability to enhance our existing products, to
introduce new products to meet changing customer requirements and emerging
technologies, and to demonstrate the performance advantages and
cost-effectiveness of our products over competing products. Failure by us to
modify our products to support new alternative technologies or failure to
achieve widespread customer acceptance of these modified products could cause
us to lose market share and cause our revenues to decline.
We
may not predict technological trends or the success of new products in the
communications equipment market accurately. New product development often
requires forecasting of market trends, development and implementation of new
technologies and processes and substantial capital commitments. We do not know
whether other new products we develop will gain market acceptance or result in
profitable sales.
Certain
of our competitors have greater engineering and product development resources
than we have. Although we expect to continue to invest significant resources in
product development activities, our efforts to achieve and maintain
profitability will require us to be selective and focused with our research and
development expenditures. If we fail to anticipate or respond in a cost-effective
and timely manner to technological developments, changes in industry standards
or customer requirements, or if we experience any significant delays in product
development or introduction, our business, operating results and financial
condition could be affected adversely.
We
may experience delays in developing and marketing product enhancements or new
products that respond to technological change, evolving industry standards and
changing customer requirements. There can be no assurance that we will not
experience difficulties that could delay or prevent the successful development,
introduction, and marketing of these products or product enhancements, or that
our new products and product enhancements will adequately meet the requirements
of the marketplace and achieve any significant or sustainable degree of market
acceptance in existing or additional markets. In addition, the future
introductions or announcements of products by us or one of our competitors
embodying new technologies or changes in industry standards or customer
requirements could render our then-existing products obsolete or unmarketable.
We cannot ensure that the introduction or announcement of new product offerings
by us or one or more of our competitors will not cause customers to defer their
purchase of our existing products, which could cause our revenues to decline.
11
We evaluate and
frequently pursue acquisitions, but we may not successfully close these
acquisitions and, if these acquisitions are completed, we may have difficulty
integrating the acquired businesses with our existing operations.
We
regularly consider the acquisition of complementary companies and product
lines. We cannot, however, ensure that we will be able to find appropriate
candidates for acquisitions, reach agreement to acquire them, or obtain
requisite shareholder or regulatory approvals needed to close strategic
acquisitions, despite the effort and management attention invested.
The
impact of future acquisitions on our business, operating results and financial
condition is uncertain. In the case of businesses we may acquire in the future,
we may have difficulty assimilating these businesses and their products,
services, technologies and personnel into our operations. These difficulties
could disrupt our ongoing business, distract our management and workforce,
increase our expenses and materially adversely affect our operating results and
financial condition. Also, we may not be able to retain key management and
other critical employees after an acquisition. We may also acquire
unanticipated liabilities. In addition to these risks, we may not realize all
of the anticipated benefits of these acquisitions.
Our operating
results fluctuate from quarter to quarter.
Our
operating results are difficult to predict and may fluctuate significantly from
quarter to quarter. Fluctuations in our quarterly operating results may be
caused by many factors, including the following:
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the volume
of customer orders and our ability to fulfill those orders in a timely
manner;
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the overall
level of capital expenditures by our customers;
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work
stoppages and other developments affecting the operations of our customers;
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the timing
of and our ability to obtain new customer contracts;
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the timing
of revenue recognition;
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the timing
of new product and service introductions;
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the
availability of products and services;
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market
acceptance of new and enhanced versions of our products and services;
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variations
in the mix of products and services we sell;
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the location
and utilization of our production capacity and employees; and
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the
availability and cost of key components of our products.
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Our
expense levels are based in part on expectations of future revenues. If revenue
levels in a particular quarter are lower than expected, our operating results
will be affected adversely.
We depend on
manufacturing relationships and on limited-source suppliers and any disruptions
in these relationships may cause damage to our customer relationships.
We
procure all parts and certain services involved in the production of our
products from, and subcontract much of our product manufacturing, to outside
firms that specialize in these services. Although most of the components of our
products are available from multiple vendors, we have several single-source
supplier relationships, either because alternative sources are not available or
because the relationship is advantageous to us. We cannot ensure that our
suppliers will be able to meet our future requirements for products and
components in a timely fashion. In addition, the availability of many of these
components to us is dependent in part on our ability to provide our suppliers
with accurate forecasts of our future requirements. Delays or lost sales could
be caused by other factors beyond our control, including defects in the quality
of components or products supplied by others.
12
We are dependent
upon our senior management and other critical employees.
Like
all communications technology companies, our success is dependent on the
efforts and abilities of our senior management personnel and other critical
employees, including those in sales, marketing and product development
functions. Our ability to attract, retain and motivate these employees is
critical to our success. In addition, because we may acquire one or more
businesses in the future, our success will depend, in part, upon our ability to
retain and integrate our own personnel with personnel from acquired entities
that are necessary to the continued success or the successful integration of
the acquired businesses.
Managing our
inventory is complex and may include write-downs of excess or obsolete
inventory.
Managing
our inventory of components and finished products is complicated by a number of
factors, including the need to maintain a significant inventory of finished
goods for orders we anticipate but may not be received. These issues may cause
us to purchase and maintain significant amounts of inventory. If this inventory
is not used as expected based on anticipated requirements, it may become excess
or obsolete. The existence of excess or obsolete inventory can result in sales
price reductions or inventory write-downs, which could adversely affect our
business and results of operations.
We face risks
associated with expanding our sales outside of the United States.
We
believe that our future growth depends in part upon our ability to increase
sales in international markets. These sales are subject to a variety of risks,
including fluctuations in currency exchange rates, tariffs, import restrictions
and other trade barriers, unexpected changes in regulatory requirements, longer
accounts receivable payment cycles and potentially adverse tax consequences,
and export license requirements. In addition, we are subject to the risks
inherent in conducting business internationally, including political and
economic instability and unexpected changes in diplomatic and trade
relationships. We cannot ensure that one or more of these factors will not have
a material adverse effect on our business strategy and financial condition.
Compliance with
internal control requirements is expensive and poses certain risks.
We
expect to incur significant continuing costs, including accounting fees and
staffing costs, in order to maintain compliance with the internal control
requirements of the Sarbanes-Oxley Act of 2002. Expansion of our business,
particularly internationally, will necessitate ongoing changes to our internal
control systems, processes and information systems. In addition, if we complete
acquisitions in the future, our ability to integrate operations of the acquired
company could impact our compliance with Section 404 of the Sarbanes-Oxley Act.
We cannot be certain that as our business changes, our current design for
internal control over financial reporting will be sufficient to enable
management to determine that our internal controls are effective for any
period, or on an ongoing basis.
In
the future, if we fail to complete the annual Section 404 evaluation in a
timely manner, we could be subject to regulatory scrutiny and a loss of public
confidence in our internal controls. In addition, any failure to implement
required new or improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to fail to meet
our reporting obligations.
Product defects or
the failure of our products to meet specifications could cause us to lose
customers and revenue or to incur unexpected expenses.
If
our products do not meet our customers performance requirements, our customer
relationships may suffer. Also, our products may contain defects or fail to
meet product specifications. Any failure or poor performance of our products
could result in:
|
|
|
|
|
delayed
market acceptance of our products;
|
|
|
|
|
|
delayed
product shipments;
|
|
|
|
|
|
unexpected
expenses and diversion of resources to replace defective products or identify
and correct the source of errors;
|
|
|
|
|
|
damage to
our reputation and our customer relationships;
|
|
|
|
|
|
delayed
recognition of sales or reduced sales; and
|
13
|
|
|
|
|
product
liability claims or other claims for damages that may be caused by any
product defects or performance failures.
|
Our sales and
operations may continue to be impacted adversely by current global economic
conditions.
For
the past several years, financial markets globally have experienced extreme
disruption. This includes, among other things, extreme volatility in security
prices, severely diminished liquidity and credit availability, ratings
downgrades of certain investments and declining valuations of others. The
severity and length of the present disruptions in the financial markets and the
global economy are unknown. We cannot ensure that there will not be a further
deterioration in financial markets and in business conditions generally. These
economic developments have adversely affected our business in a number of ways
and will likely continue to adversely affect our business during the
foreseeable future.
Risks Related to Our Common Stock
Our stock price has
been volatile historically and the price of our common stock may fluctuate significantly
in the future.
The
trading price of our common stock has been and may continue to be subject to
wide fluctuations. Our stock price may fluctuate in response to a number of
events and factors, such as quarterly variations in operating results,
announcements of technological innovations or new products by us or our
competitors, the operating and stock price performance of other companies that
investors may deem comparable to us, and new reports relating to trends in our
markets or general economic conditions.
In
addition, the stock market in general, and prices for companies in our industry
in particular, have experienced extreme volatility that often has been
unrelated to the operating performance of these companies. These broad market
and industry fluctuations may adversely affect the price of our common stock,
regardless of our operating performance.
Anti-takeover
provisions in our charter documents, our shareholder rights agreement and
Minnesota law could prevent or delay a change in control of our company.
Provisions
of our articles of incorporation and bylaws, our shareholder rights agreement
(also known as a poison pill) and Minnesota law may discourage, delay or
prevent a merger or acquisition that a shareholder may consider favorable, and
could limit the price that investors are willing to pay for our common stock.
These provisions include the following:
|
|
|
|
|
advance
notice requirements for shareholder proposals;
|
|
|
|
|
|
authorization
for our board of directors to issue preferred stock without shareholder
approval;
|
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|
|
|
|
authorization
for our board of directors to issue preferred stock purchase rights upon a
third partys acquisition of 16.5% or more of our outstanding shares of
common stock;
|
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|
|
|
|
limitations
on business combinations with interested shareholders;
|
|
|
|
|
|
classification
of Board of Directors that serve staggered, three year terms; and
|
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|
|
|
|
a super
majority vote by shareholders is required to approve certain corporate
actions, including merger transactions.
|
Some
of these provisions may discourage a future acquisition of our company even
though our shareholders would receive an attractive value for their shares, or
a significant number of our shareholders believe such a proposed transaction
would be in their best interest.
|
|
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
None.
|
|
14
CSI conducts
administrative, manufacturing and engineering functions at the following
facilities:
|
|
|
|
-
|
In
Minnetonka, Minnesota the Company owns a 105,000 square foot building where
its executive and administrative offices are located. In addition, Transition
Networks uses this facility for its warehouse, assembly, engineering and
administrative operations, JDL Technologies, Inc. uses this facility for some
administrative operations, and Suttle uses this facility for its sales,
marketing and product development.
|
|
|
|
|
-
|
Suttles
manufacturing is conducted at two locations. At Hector, Minnesota, the
Company owns three plants totaling 88,000 square feet of manufacturing space.
The Company leases 40,000 square feet of manufacturing space in San Jose,
Costa Rica.
|
|
|
|
|
-
|
Austin
Taylor Communications, Ltd. owns a 40,000 square foot facility in Bethesda,
Wales, U.K.
|
|
|
|
|
-
|
Transition
Networks leases 10,000 square feet of office space for engineering,
procurement and marketing activities in Shanghai, China. The Company also
leases 7,000 square feet of office space in the U.K. for its Patapsco
operations.
|
CSI believes
these facilities will be adequate to accommodate its administrative,
manufacturing and distribution needs for the foreseeable future.
|
|
ITEM 3.
|
LEGAL PROCEEDINGS
|
The Company is
subject to claims and lawsuits that have been filed in the ordinary course of
business. From time to time, the Company brings suit against others to enforce
contract rights or property rights, or to collect debts in the ordinary course
of business. Management believes that the resolution or settlement of currently
pending litigation will not have a material adverse effect on the results of
operations or liquidity of the Company.
|
|
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not
applicable.
PART II
|
|
ITEM 5.
|
MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
|
The Companys
common stock trades on the NASDAQ under the trading symbol JCS.
The table
below presents the price range of high and low trades of the Companys common
stock for each quarterly period indicated as reported by NASDAQ for 2011 and
2010.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
$
|
16.49
|
|
$
|
13.33
|
|
$
|
13.60
|
|
$
|
11.27
|
|
Second
|
|
|
20.82
|
|
|
15.01
|
|
|
13.31
|
|
|
10.15
|
|
Third
|
|
|
20.93
|
|
|
12.60
|
|
|
11.57
|
|
|
10.00
|
|
Fourth
|
|
|
17.19
|
|
|
12.50
|
|
|
14.82
|
|
|
11.02
|
|
At March 1,
2012 there were approximately 579 registered holders of record of
Communications Systems, Inc. common stock.
15
Communications
Systems, Inc. paid regular quarterly dividends to its shareholders on the dates
and at the rates indicated below:
|
|
|
|
|
Payment Date
|
|
Dividend
per Share
|
|
|
|
|
|
January 1,
2012
|
|
$
|
.15
|
|
October 1,
2011
|
|
|
.15
|
|
July 1, 2011
|
|
|
.15
|
|
April 1,
2011
|
|
|
.15
|
|
January 1,
2011
|
|
|
.15
|
|
October 1,
2010
|
|
|
.15
|
|
July 1, 2010
|
|
|
.15
|
|
April 1,
2010
|
|
|
.14
|
|
January 1,
2010
|
|
|
.14
|
|
The payment of
future dividends will be determined at the discretion of the Board of
Directors.
|
|
(d)
|
INFORMATION REGARDING EQUITY COMPENSATION PLANS
|
The following
table presents information about the Companys equity compensation plans, under
which equity securities of the Company are authorized for issuance, as of
December 31, 2011:
Securities Authorized for Issuance Under
Equity Compensation Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Category (1)
|
|
Number of shares of
common stock to be
issued upon exercise
of outstanding
options, warrants and
rights
|
|
Weighted-average
exercise price of
outstanding options
warrants and rights
|
|
Number
of shares of
common
stock remaining
available for future
issuance
under equity
compensation plans
(excluding shares in
column (a))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1992 Stock
Plan-Employee Plan
|
|
|
162,243
|
|
|
$
|
14.60
|
|
|
|
|
|
1992 Stock
Plan-Nonemployee Director Plan
|
|
|
147,000
|
|
|
$
|
9.63
|
|
|
|
|
|
1990 Employee
Stock Purchase Plan
|
|
|
3,241
|
|
|
$
|
12.65
|
|
|
|
66,413
|
|
2011
Executive Incentive Compensation Plan
|
|
|
15,582
|
|
|
$
|
17.97
|
|
|
|
984,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
(1)
|
The Company does not have individual compensation arrangements involving the grant
of options, warrants and rights.
|
|
|
(e)
|
FIVE YEAR PERFORMANCE GRAPH
|
The following
graph presents, at the end of each of the Companys last five fiscal years, the
cumulative total return on the common stock of the Company as compared to the
cumulative total return reported for the NASDAQ (U.S.), and the NASDAQ
Telecommunications Index. Company information and each index assume the
investment of $100 on the last business day before January 1, 2006 and the reinvestment
of all dividends.
16
Comparison of Five-Year Cumulative Total Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company or Index
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications Systems, Inc.
|
|
$
|
100.000
|
|
$
|
120.127
|
|
$
|
83.889
|
|
$
|
141.012
|
|
$
|
167.035
|
|
$
|
173.852
|
|
NASDAQ US
|
|
|
100.000
|
|
|
108.469
|
|
|
66.352
|
|
|
95.375
|
|
|
113.194
|
|
|
113.805
|
|
NASDAQ TELCOM
|
|
|
100.000
|
|
|
88.948
|
|
|
51.107
|
|
|
76.636
|
|
|
98.951
|
|
|
104.634
|
|
|
|
(f)
|
RECENT SALES OF UNREGISTERED SECURITIES
|
Not
applicable.
|
|
(g)
|
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
|
The Company
did not repurchase any shares of common stock during the three months ending
December 31, 2011:
|
|
|
|
|
|
|
|
|
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
Period
|
|
(a) Total
Number of
Shares (or
Units)
Purchased
|
|
(b)
Average
Price Paid
per Share
(or Unit)
|
|
(c) Total Number
of Shares (or
Units) Purchased
as Part of Publicly
Announced Plans
or Programs
|
|
(d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs
(1)
|
|
|
|
|
|
|
|
|
|
October 2011
|
|
none
|
|
|
|
|
|
481,938
|
November 2011
|
|
none
|
|
|
|
|
|
481,938
|
December 2011
|
|
none
|
|
|
|
|
|
481,938
|
Total
|
|
none
|
|
|
|
|
|
481,938
|
|
|
(1)
|
Shares represent remaining
amount of a 500,000 share repurchase authorization approved by the Companys
Board in October 2008 and publicly announced in November 2008.
|
17
|
|
ITEM 6.
|
SELECTED FINANCIAL DATA
|
The following selected
financial data has been derived from our consolidated financial statements and
should be read in conjunction with the Consolidated Financial Statements and
related notes thereto set forth in Item 8 and with Managements Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7
of this Annual Report on Form 10-K.
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
(in thousands except
per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales from Continuing
Operations
|
|
$
|
143,775
|
|
$
|
120,072
|
|
$
|
109,792
|
|
$
|
122,700
|
|
$
|
121,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
84,880
|
|
|
68,872
|
|
|
67,944
|
|
|
76,008
|
|
|
78,357
|
|
Selling, General and Administrative Expenses
|
|
|
40,108
|
|
|
35,586
|
|
|
31,433
|
|
|
33,109
|
|
|
32,623
|
|
Impairment Loss
|
|
|
1,272
|
|
|
|
|
|
196
|
|
|
2,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses
|
|
|
126,260
|
|
|
104,458
|
|
|
99,573
|
|
|
112,116
|
|
|
110,980
|
|
Operating
Income
|
|
|
17,515
|
|
|
15,614
|
|
|
10,219
|
|
|
10,584
|
|
|
10,263
|
|
Other
Income (Expense), Net
|
|
|
105
|
|
|
20
|
|
|
581
|
|
|
597
|
|
|
1,760
|
|
Income
Before Income Taxes
|
|
|
17,620
|
|
|
15,634
|
|
|
10,800
|
|
|
11,181
|
|
|
12,023
|
|
Income
Tax Expense
|
|
|
7,822
|
|
|
5,919
|
|
|
4,756
|
|
|
4,570
|
|
|
4,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
9,798
|
|
$
|
9,715
|
|
$
|
6,044
|
|
$
|
6,611
|
|
$
|
7,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Net Income Per Share
|
|
$
|
1.16
|
|
$
|
1.16
|
|
$
|
.72
|
|
$
|
.77
|
|
$
|
.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Net Income Per Share
|
|
$
|
1.15
|
|
$
|
1.15
|
|
$
|
.72
|
|
$
|
.77
|
|
$
|
.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Dividends Declared Per Share
|
|
$
|
.60
|
|
$
|
.59
|
|
$
|
.52
|
|
$
|
.48
|
|
$
|
.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Dilutive Shares Outstanding
|
|
|
8,496
|
|
|
8,415
|
|
|
8,352
|
|
|
8,563
|
|
|
8,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
116,659
|
|
$
|
109,070
|
|
$
|
102,914
|
|
$
|
98,738
|
|
$
|
100,760
|
|
Property, Plant and
Equipment, Net
|
|
|
14,019
|
|
|
13,214
|
|
|
13,322
|
|
|
12,015
|
|
|
13,945
|
|
Long-term Liabilities
|
|
|
3,741
|
|
|
5,004
|
|
|
4,220
|
|
|
4,919
|
|
|
4,045
|
|
Stockholders Equity
|
|
|
97,531
|
|
|
91,397
|
|
|
85,939
|
|
|
83,728
|
|
|
84,931
|
|
18
|
|
ITEM 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
Overview
Communications Systems, Inc.
is a global company with sales
in over 90 countries and facilities supporting design, manufacturing and
distribution in the United States, Costa Rica, China and the United Kingdom.
CSI provides physical connectivity infrastructure and services for global
deployments of broadband networks. Focusing on innovative, cost-effective
solutions, CSI provides customers the ability to deliver, manage, and optimize
their broadband network services and architecture. From the integration of
fiber optics in any application and environment to efficient home voice and
data deployments to optimization of data and application access, CSI provides
the tools for maximum utilization of the network from the edge to the user.
Along with our broad range of technology offered, CSI has built a reputation as
a reliable global innovator focusing on quality and customer service.
The voice, video and data
markets in which we sell products provide services that are vital to the modern
world. Therefore, we expect the size of these markets will, generally, continue
to expand, although the pace of growth will be affected by economic conditions
in the United States and around the world. This growth, along with inevitable
technological change, will generate challenges and opportunities for the type
of products we sell.
From our customers
perspective, our goal is to become a market leader delivering high quality,
competitively priced products and services. From our shareholders perspective,
our goal is to steadily and consistently increase our revenues and profits.
Achieving these goals will require success in the following areas:
|
|
|
|
|
We must apply our
financial resources to support increased sales, maintain brand loyalty,
improve product quality and develop new products.
|
|
|
|
|
|
At the same time, we must
maintain price levels and control expenses to provide adequate margins and
superior bottom line results.
|
|
|
|
|
|
Finally, to accelerate our
growth we must continue to expand our sales outside of the US and prudently
acquire complementary businesses and product lines.
|
While we face the many
challenges and risks that we discussed earlier in this report, we believe our
greatest challenges will be responding to intense market competition and successfully
introducing new products. Some of our competitors are larger and better
capitalized, and some are based outside the US. These firms often have greater
capacity to both (i) absorb lower margins that are inconsistent with our
financial goals and (ii) support a higher level of new product development
using their greater resources or lower cost structure. In order to achieve
profitable growth in the face of these challenges, we must constantly validate
the value of our products to new and existing customers and select and pursue
new product development opportunities and product line acquisitions that best
fit our capabilities, resources and competitive position.
We are currently pursuing
these objectives through the following four business units:
JDL Technologies
JDL Technologies is an IT
services company that provides outsourced technical services to the education,
healthcare, government and enterprise market segments. JDLs portfolio of
technology solutions includes virtualization, managed services, wired and
wireless network design and implementation services, and converged
infrastructure configuration and deployment. JDLs largest customer has been
the School Board of Broward County, Florida (SBBC). JDL runs SBBCs Network
Operation Center that monitors all network elements (servers, switches,
routers) and over 60,000 computers in 265 buildings for the nations 6th
largest school district.
Suttle
Founded in 1910, Suttle is
one of the worlds largest suppliers of high-volume copper and fiber connectivity
products used by North Americas largest telcos. Suttle also designs,
manufactures and markets a full line of structured wiring components for small
office, home office (SOHO) for voice, video and high-speed data communications
convergent solutions. Suttles products are used throughout the telco,
multi-service cable operators (MSOs), and installer/contractor markets.
19
Transition Networks
Transition Networks offers a
full suite of networking connectivity solutions including media converters,
network interface cards, switches, and coarse-wave division multiplexing
(CWDM). Utilizing engineering resources in the U.S. and its Product Design and
Development Facility in Shanghai, China, Transition Networks designs and
markets products for a broad spectrum of protocols including Ethernet, Fast
Ethernet, Gigabit Ethernet, T1/E1, DS3, and serial. Transition Networks
distributes these hardware-based connectivity solutions through a network of
resellers in 90 countries and is the preferred choice among industry IT
professionals for high-end media conversion devices, Network Interface Devices,
and Ethernet switches. In 2011, the Company acquired Patapsco Design Limited as
part of Transition Networks expansion outside the North American market.
Austin Taylor
Located in Bethesda, Wales,
United Kingdom, Austin Taylor manufactures cabling installation and connection
products for copper and fiber optic media. Austin Taylor serves the government
and commercial markets throughout Europe and the Middle East with British
standard products. Austin Taylors broad catalog of products ranges from
telephony linejacks to structured cabling and from plastic connection boxes to
metal cabinets. At the end of 2011, we discontinued the metal cabinet
manufacturing portion of the business due to limited profitability
opportunities for that business.
Forward Looking Statements
In this report and 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,
we may make forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. We may make these forward looking
statements concerning possible or anticipated future financial performance,
business activities, plans, pending claims, investigations or litigation, which
are typically preceded by the words believes, expects, anticipates,
intends or similar expressions. For these 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 these forward looking statements are subject to risks
and uncertainties that could cause actual performance, activities, anticipated
results, outcomes or plans to differ significantly from those indicated in the
forward-looking statements. For a detailed discussion of a number of such risk
factors, please see Item 1A above.
Critical Accounting Policies
Inventory Valuation:
We value inventories at the lower of cost or market. Reserves for
overstock and obsolescence are estimated and recorded to reduce the carrying
value to estimated net realizable value. The amount of the reserve is
determined based on projected sales information, plans for discontinued
products and other factors. Though management considers these reserves adequate
and proper, changes in sales volumes due to unexpected economic or competitive
conditions are among the factors that could materially affect the adequacy of
this reserve.
Income Taxes:
In the preparation of the Companys consolidated financial statements,
management calculates income taxes. This includes estimating the Companys
current tax liability as well as assessing temporary differences resulting from
different treatment of items for tax and book accounting purposes. These
differences result in deferred tax assets and liabilities, which are recorded
on the balance sheet. These assets and liabilities are analyzed regularly and
management assesses the likelihood it will realize these deferred assets from
future taxable income. We determine the valuation allowance for deferred income
tax benefits based upon the expectation of whether the benefits are more likely
than not to be realized. The Company records interest and penalties related to
income taxes as income tax expense in the Consolidated Statements of Income.
Goodwill Impairment
: We are required to evaluate goodwill for impairment on an annual
basis and between annual tests upon the occurrence of certain events or
circumstances. We perform a two-step process to analyze whether or not goodwill
has been impaired. Step one is to test for potential impairment, and requires
that the fair value of the reporting unit be compared to its book value
including goodwill. If the fair value is higher than the book value, no
impairment is recognized. The Company estimates the fair value of each
reporting unit based on a discounted cash flow analysis. If the fair value is
lower than the book value, a second step must be performed. The second step is
to measure the amount of impairment loss, if any, and requires that a
hypothetical purchase price allocation be done to determine the implied fair
value of goodwill. This fair value is then compared to the carrying value of
goodwill. If the implied fair value is lower than the carrying value, an
impairment adjustment must be recorded.
20
The Company believes that
accounting estimates related to goodwill impairment are critical because the underlying
assumptions used for the discounted cash flow can change from period to period
and could potentially cause a material impact to the income statement.
Managements assumptions about inflation rates and other internal and external
economic conditions, such as earnings growth rate, require significant judgment
based on fluctuating rates and expected revenues.
Revenue Recognition
: The Company recognizes revenue when the earnings process is complete,
evidenced by persuasive evidence of an agreement, delivery has occurred or
services have been rendered, the price is fixed or determinable, and
collectability is reasonably assured. In the Suttle, Transition Networks and
Austin Taylor segments, the earning process completion is evidenced through the
shipment of goods, based on the sales terms of these segments, the risk of loss
is transferred upon shipment or delivery to customers and there are no
significant obligations subsequent to that point. There are not significant
estimates related to revenue recognition for these segments.
JDL Technologies records
revenue on hardware, software and related equipment sales and installation
contracts when the revenue recognition criteria are met and the products are
installed and accepted by the customer. JDL records revenue on service
contracts on a straight-line basis over the contract period, unless evidence
suggests that the revenue is earned in a different pattern. Each contract is
individually reviewed to determine when the earnings process is complete.
Results of Operations
2011 Compared to 2010
Sales were $143,775,000 in
2011, a 20% increase from sales of $120,072,000 in 2010. Operating income
increased 12% to $17,515,000 in 2011 as compared to $15,614,000 in 2010. Income
before income taxes increased 13% to $17,620,000 from $15,635,000 in 2010. Net
income increased 1% to $9,798,000 in 2011 compared to $9,715,000 in 2010.
Suttle
Suttle sales increased
slightly to $36,637,000 in 2011 compared to $36,562,000 in 2010. Sales by
product groups in 2011 and 2010 were:
|
|
|
|
|
|
|
|
|
|
Suttle
Sales by Product Group
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Modular connecting
products
|
|
$
|
12,662,000
|
|
$
|
14,318,000
|
|
DSL products
|
|
|
10,146,000
|
|
|
11,884,000
|
|
Structured cabling
products
|
|
|
12,302,000
|
|
|
9,956,000
|
|
Other products
|
|
|
1,527,000
|
|
|
404,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,637,000
|
|
$
|
36,562,000
|
|
|
|
|
|
|
|
|
|
Suttles sales by customer
groups in 2011 and 2010 were:
|
|
|
|
|
|
|
|
|
|
Suttle
Sales by Customer Group
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Telephone companies
|
|
$
|
27,124,000
|
|
$
|
25,581,000
|
|
Distributors
|
|
|
4,461,000
|
|
|
5,227,000
|
|
International
|
|
|
4,587,000
|
|
|
5,620,000
|
|
Other
|
|
|
465,000
|
|
|
134,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,637,000
|
|
$
|
36,562,000
|
|
|
|
|
|
|
|
|
|
21
The increase in sales is due
primarily to increased sales to Suttles domestic telecommunication customers.
Sales to the telephone companies increased 6% to $27,124,000 in 2011 compared
to $25,581,000 in 2010 due to fulfillment of new product contracts and
increased sales tied to enhanced network deployments. Sales to these customers
accounted for 74% of Suttles sales in 2011 compared to 70% of sales in 2010.
Sales to distributors, OEMs, and electrical contractors decreased 15% and
accounted for 12% of sales in 2011 compared to 14% in 2010. The decline in this
segment is a direct result of reduced opportunities in the domestic market for
new SFU and MDU construction. International sales accounted for 13% of Suttles
2011 sales but declined 18% compared to 2010. The decrease in sales in this
segment is due primarily to volatility in fulfillment of DSL business, and decreased
sales of voice products due to land-line loss.
Suttles gross margin
decreased 4% to $9,271,000 in 2011 compared to $9,681,000 in 2010. The gross
margin percentage was 25% in 2011 compared to 26% in 2010. This decrease is a
result of shifting product mix, as sales from modular connecting blocks
decreased. Suttle realizes its highest selling margins on modular connecting
products.
Selling, general and
administrative expenses increased 4% to $6,898,000 in 2011 compared to
$6,638,000 in 2010 due to increases in spending on technology development.
Suttles operating income
declined 64% to $1,102,000 in 2011 from $3,043,000 in 2010 due in part to the
margin erosion mentioned above and a goodwill impairment charge of $1,272,000
in the second quarter of 2011.
Transition Networks
Transition Networks is a
provider of active networking hardware devices. Characteristics of the business
include a rapid pace of change in technologies and alternative solutions to our
products. Transition Networks derives the majority of its business from
one-time network upgrade projects. The core markets for these products are
enterprise, service providers, and industrial users. Roughly 85% of Transition
Networks revenue comes from North America, but we continue to see opportunity
for long-term growth outside of North America and we will invest resources in
sales, marketing, and infrastructure to grow that business.
Transition Networks sales
increased 35% to $91,450,000 in 2011 compared to $67,782,000 in 2010.
Transition Networks organizes its sales force and segments its customers
geographically. Sales by customer groups in 2011 and 2010 were:
|
|
|
|
|
|
|
|
|
|
Transition
Networks Sales by Region
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
North America
|
|
$
|
77,448,000
|
|
$
|
56,424,000
|
|
EMEA
|
|
|
7,178,000
|
|
|
4,708,000
|
|
Rest of world
|
|
|
6,824,000
|
|
|
6,650,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91,450,000
|
|
$
|
67,782,000
|
|
|
|
|
|
|
|
|
|
The following table
summarizes Transition Networks 2011 and 2010 sales by product group:
|
|
|
|
|
|
|
|
|
|
Transition
Networks Sales by Product Group
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Media converters
|
|
$
|
72,781,000
|
|
$
|
50,360,000
|
|
Ethernet switches
|
|
|
4,523,000
|
|
|
4,275,000
|
|
Ethernet adapters
|
|
|
6,422,000
|
|
|
7,494,000
|
|
Other products
|
|
|
7,724,000
|
|
|
5,653,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91,450,000
|
|
$
|
67,782,000
|
|
|
|
|
|
|
|
|
|
Sales in North America
increased 37% or $21,024,000 compared to 2010 due to $32,836,000 in revenue
from a one-time large network upgrade project with a Fortune 500 company. Sales
to this customer also resulted in the increase in media converter revenue. The
increase in revenue from this customer was partially offset by a decrease in
sales to some of Transition Networks traditional customers. Other vertical
markets, especially the Federal Government market in the United States,
recorded lower revenue due to the slow down in government purchases resulting
in project delays. International sales increased $2,644,000, or 23%, due to a
strong rebound in the Asia Latin America and EMEA markets. The increase was due
to an increase in activity in projects for Telco customers in deploying data
services as well as security and surveillance installations (IP video
surveillance). The increase is also partially attributed to the acquisition of
Patapsco, which contributed approximately $740,000 in additional revenue,
primarily related to the EMEA region.
22
Gross margin increased 24%
to $44,625,000 in 2011 compared to $35,956,000 in 2010 due to an increase in
revenues. Gross margin as a percentage of sales decreased to 49% in 2011
compared to 53% in 2010 due to volume discounts given for the large network
upgrade project with the Fortune 500 company described above.
Selling, general and
administrative expenses increased 11% to $23,731,000 in 2011 from $21,459,000
in 2010 due primarily to an increase in selling expense and adding staff to
both the U.S. and China facilities. Operating income increased 44% to
$20,894,000 in 2011 compared to $14,497,000 in 2010 due to an increase in gross
margin dollars of 24% and a smaller increase of SG&A of only 11%.
Transition Networks will
continue to develop products based on market needs as well as by following
industry standards set by such organizations as the Institute of Electrical and
Electronics Engineers (IEEE) and the Metro Ethernet Forum (MEF). We will also
continue to invest in sales and marketing to grow revenues in our target
markets and expand sales outside of North America.
JDL Technologies, Inc.
Sales by JDL Technologies,
Inc. (the Companys IT services business unit) decreased 2% to $12,401,000 in
2011 compared to $12,712,000 in 2010. The following table summarizes JDLs
revenues by customer group in 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
JDL
Revenue by Customer Group
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Broward County FL schools
|
|
$
|
11,621,000
|
|
$
|
12,391,000
|
|
All other
|
|
|
780,000
|
|
|
321,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,401,000
|
|
$
|
12,712,000
|
|
|
|
|
|
|
|
|
|
Revenues earned in Broward
County FL decreased $770,000 or 6% in 2011. The decrease was the result of
increased IT infrastructure contract funding from the federal government during
2010 that concluded in September 2011.
JDL gross margin decreased
8% to $5,139,000 in 2011 compared to $5,580,000 in 2010. Gross margin as a percentage of sales
decreased to 41% in 2011 from 44% in 2010 due to purchasing discounts and
rebates the Company was able to take advantage of during the prior year.
Selling, general and
administrative expenses increased 35% in 2011 to $1,982,000 compared to
$1,470,000 in 2010. This is primarily due to an increase in sales and marketing
expenses, related to the addition of sales personnel. Operating income
decreased to $3,156,000 in 2011 compared to $4,110,000 in 2010.
Austin Taylor
Austin Taylors revenues
increased 9% to $3,288,000 in 2011, compared to $3,016,000 in 2010. This
increase is due to continued sales penetration into the UK and Ireland
distribution network and OEM market. Gross margin decreased to a loss of
$140,000 in 2011 from a loss of $17,000 in 2010. Gross margin as a percentage
of sales was -4% in 2011 compared to -1% in 2010. This decrease was due to
greatly increased material and finished goods costs compounded by the margin
effects of fixed term contracts. Austin Taylor reported an operating loss in
2011 of $1,460,000 compared to $1,101,000 in 2010. Management is currently
implementing measures to improve Austin Taylors performance.
Other
Income before income taxes
increased 13% to $17,620,000 in 2011 compared to $15,635,000 in 2010. The
Companys effective income tax rate was 44% in 2011 compared to 38% in 2010.
This effective rate was higher than the standard rate of 35% due to state
income taxes, foreign losses not deductible for U.S. income tax purposes,
provisions for interest charges, goodwill impairment, and acquisition costs not
deductible for income tax purposes as explained in Note 10 to the consolidated
financial statements.
23
2010 Compared to 2009
Sales were $120,072,000 in
2010, a 9% increase from sales of $109,792,000 in 2009. Operating income
increased 53% to $15,614,000 in 2010 as compared to $10,219,000 in 2009. Income
before income taxes increased 45% to $15,635,000 from $10,799,000 in 2009. Net
income increased 61% to $9,715,000 in 2010 compared to $6,044,000 in 2009.
Suttle
Suttle sales decreased 15%
to $36,562,000 in 2010 compared to $42,867,000 in 2009. Sales by product groups
in 2010 and 2009 were:
|
|
|
|
|
|
|
|
|
|
Suttle
Sales by Product Group
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Modular connecting
products
|
|
$
|
14,318,000
|
|
$
|
16,120,000
|
|
DSL products
|
|
|
11,884,000
|
|
|
13,310,000
|
|
Structured cabling
products
|
|
|
9,956,000
|
|
|
12,821,000
|
|
Other products
|
|
|
404,000
|
|
|
616,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,562,000
|
|
$
|
42,867,000
|
|
|
|
|
|
|
|
|
|
Suttles sales by customer groups in 2010 and
2009 were:
|
|
|
|
|
|
|
|
|
|
Suttle
Sales by Customer Group
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Telephone companies
|
|
$
|
25,726,000
|
|
$
|
30,309,000
|
|
Distributors
|
|
|
5,227,000
|
|
|
6,840,000
|
|
International
|
|
|
5,475,000
|
|
|
5,547,000
|
|
Other
|
|
|
134,000
|
|
|
171,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,562,000
|
|
$
|
42,867,000
|
|
|
|
|
|
|
|
|
|
The decrease in sales was
due primarily to the erosion in the number of land-line customers served by the
major telephone customers, volatility in the large DSL contracts, and the
continued severe downturn in the domestic housing market. Sales to the
telephone companies decreased 15% to $25,726,000 in 2010 compared to $30,309,000
in 2009 due to decreased DSL deployment and continued contraction of the
domestic housing market. Sales to these customers accounted for 70% of Suttles
sales in 2010 compared to 71% of sales in 2009. Sales to distributors, OEMs,
and electrical contractors decreased 24% and accounted for 14% of sales in 2010
compared to 16% in 2009. The decline in this segment is a direct result of
reduced opportunities in the domestic market for new SFU construction and MDU
construction. International sales accounted for 15% of Suttles 2010 sales but
declined 1% compared to 2009. International telephone customers also faced
land-line loss causing decreased sales of voice products. DSL product sales
into this segment did increase as customers increased investments in broadband.
Suttles gross margin
decreased 1% to $9,681,000 in 2010 compared to $9,771,000 in 2009. The gross
margin percentage was 26% in 2010 compared to 23% in 2009. This increase in
gross margin as a percentage of sales was due to favorable product mix changes.
Suttle realizes its highest selling margins on modular connecting products. DSL
products are the least profitable.
Selling, general and
administrative expenses increased 10% to $6,638,000 in 2010 compared to
$6,054,000 in 2009 due to increases in spending on technology development.
Suttles operating income
declined 18% to $3,043,000 in 2010 from $3,717,000 in 2009 due to the decreased
revenues noted above.
24
Transition Networks
Transition
Networks sales increased 23% to $67,782,000 in 2010 compared to $55,098,000 in
2009. Transition Networks organizes its sales force and segments its customers
geographically. Sales by customer groups in 2010 and 2009 were:
|
|
|
|
|
|
|
|
|
|
Transition Networks Sales by Region
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
North
America
|
|
$
|
56,424,000
|
|
$
|
45,213,000
|
|
EMEA
|
|
|
4,708,000
|
|
|
4,818,000
|
|
Rest of
world
|
|
|
6,650,000
|
|
|
5,067,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67,782,000
|
|
$
|
55,098,000
|
|
|
|
|
|
|
|
|
|
The following
table summarizes Transition Networks 2010 and 2009 sales by product group:
|
|
|
|
|
|
|
|
|
|
Transition Networks Sales by Product Group
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Media
converters
|
|
$
|
50,360,000
|
|
$
|
39,251,000
|
|
Ethernet
switches
|
|
|
4,275,000
|
|
|
3,786,000
|
|
Ethernet
adapters
|
|
|
7,494,000
|
|
|
8,903,000
|
|
Other
products
|
|
|
5,653,000
|
|
|
3,158,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67,782,000
|
|
$
|
55,098,000
|
|
|
|
|
|
|
|
|
|
Sales in North
America increased 25% compared to 2009. The increase in sales largely came from
an increase in two of Transition Networks focus vertical markets: Federal
Government and Telco. The increase in the Federal Government sales were due in
part to some Voice over IP (VoIP) projects while the increase in Telco came
from wireless backhaul projects and last mile data delivery services for
businesses. International sales increased $1,473,000, or 15%, due to a strong
rebound in the Asia and Latin America markets. The increase was due to an
increase in activity in projects for Telco customers in deploying data
services. Sales in EMEA lagged due to a sluggish world economy, increased price
competition, and currency fluctuations.
Gross margin
increased 23% to $35,956,000 in 2010 compared to $29,329,000 in 2009 due to an
increase in revenues. Gross margin as a percentage of sales remained stable at
53% in 2010 compared to 53% in 2009.
Selling,
general and administrative expenses increased 11% to $21,459,000 in 2010 from
$19,371,000 in 2009 due primarily to an increase in selling expense and adding
engineering staff to the China facility. Operating income increased 46% to
$14,497,000 in 2010 compared to $9,958,000 in 2009 due to an increase in gross
margin dollars of 23% and a smaller increase of SG&A of only 11%.
JDL Technologies, Inc.
Sales by JDL
Technologies, Inc. (the Companys IT services business unit) increased 45% to
$12,712,000 in 2010 compared to $8,765,000 in 2009. The following table
summarizes JDLs revenues by customer group in 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
JDL Revenue by Customer Group
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Broward
County FL schools
|
|
$
|
12,391,000
|
|
$
|
8,594,000
|
|
All other
|
|
|
321,000
|
|
|
171,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,712,000
|
|
$
|
8,765,000
|
|
|
|
|
|
|
|
|
|
Revenues
earned in Broward County FL increased $3,797,000 or 44% in 2010. The increase
was the result of increased IT infrastructure contract funding from the federal
government.
JDL made a
strategic decision in 2010 to position itself as a high-quality provider of
design, implementation and management of information technology solutions and
is expanding its market focus from K-12 Education to include K-20 Education,
Healthcare, Enterprise and Government markets.
25
JDL gross
margin increased 103% to $5,580,000 in 2010 compared to $2,753,000 in 2009.
Gross margin as a percentage of sales increased to 44% in 2010 from 31% in 2009
due to purchasing discounts and rebates the Company was able to take advantage
of during the year.
Selling,
general and administrative expenses increased 13% in 2010 to $1,470,000
compared to $1,299,000 in 2009, but has decreased as a percentage of sales from
14.8% in 2009 to 11.6% in 2010. This is primarily due to an increase in
compensation expenses and sales activities. Operating income increased to
$4,110,000 in 2010 compared to $1,455,000 in 2009.
Austin Taylor
Austin
Taylors revenues decreased 1% to $3,016,000 in 2010, compared to $3,061,000 in
2009. This decrease is primarily due to difficulties in securing connector
products from Far East contract manufacturers and the general European economic
slowdown. Gross margin decreased to a loss of $17,000 in 2010 from a loss of
$6,000 in 2009. Gross margin as a percentage of sales was -1% in 2010 compared
to 0% in 2009. This decrease was due to greatly increased material and finished
goods costs compounded by the margin effects of fixed term contracts.
Additionally, Austin Taylor was burdened with the financial impact of product
quality issues from two of its major vendors. Austin Taylor reported an
operating loss in 2010 of $1,101,000 compared to $1,214,000 in 2009. Included
in the 2009 operating loss is a $196,000 impairment charge related to Austin
Taylors machinery and equipment assets. Management is currently implementing
measures to improve Austin Taylors performance.
Other
Income before
income taxes increased 45% to $15,635,000 in 2010 compared to $10,799,000 in
2009. The Companys effective income tax rate was 38% in 2010 compared to 44%
in 2009. This effective rate was higher than the standard rate of 35% due to
state income taxes, foreign losses not deductible for U.S. income tax purposes,
and provisions for interest charges
Acquisitions and Dispositions
The Company is
a growth-oriented manufacturer of telecommunications connecting and networking
devices. The Company continually searches 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.
Liquidity and Capital Resources
As of December
31, 2011, the Company had approximately $46,035,000 in cash, cash equivalents
and investments. Of this amount, $830,000 was invested in short-term money
market funds that are not considered to be bank deposits and are not insured or
guaranteed by the federal deposit insurance company (FDIC) or other government
agency. These money market funds seek to preserve the value of the investment
at $1.00 per share; however, it is possible to lose money investing in these
funds. The remainder in cash and cash equivalents is operating cash and
certificates of deposit, which are fully insured through the FDIC. The Company
has not experienced any losses on its deposits of cash and cash equivalents.
The Company also had $23,519,000 in investments consisting of certificates of
deposit that are traded on the open market and are classified as
available-for-sale at December 31, 2011.
The Company
had current assets of approximately $89,946,000 and current liabilities of
$15,388,000 at December 31, 2011 compared to current assets of $86,204,000 and
current liabilities of $12,669,000 at the end of 2010.
26
Cash flow
provided by operating activities was approximately $14,067,000 in 2011 compared
to $9,726,000 provided by operations in 2010. Significant working capital
changes from 2010 to 2011 included a decrease in accounts receivable of
$3,274,000 related to an overall decrease in sales in the fourth quarter of
2011 as compared to 2010 as well as an increase in prepaid income taxes due to
the timing of federal income tax payments during the year.
Investing
activities used $3,120,000 of cash in 2011 compared to cash used of $9,298,000
in 2010. This decrease in cash used in investing activities is primarily due to
the decrease in additional purchases of investments as compared to the prior
year. The Company made net purchases of $7,531,000 in the prior year and had
net proceeds of $2,751,000 in the current year. Additionally, the Company
acquired Patapsco Designs Limited during 2011 and paid $3,138,000 in
consideration, with an estimated $1,003,000 to be paid out in deferred and
contingent consideration.
Net cash used
by financing activities was $5,185,000 in 2011 compared to $4,889,000 in 2010.
Cash dividends paid on common stock increased to $5,065,000 in 2011 ($0.60 per
common share) from $4,858,000 in 2010 ($0.59 per common share). Proceeds from
common stock issuances, principally shares sold to the Companys Employee Stock
Ownership Plan and under the Companys Employee Stock Purchase Plan, totaled
approximately $257,000 in 2011 and $308,000 in 2010. The Company purchased and
retired no shares in 2011 and 2010. At December 31, 2011, Board of Director
authority to purchase approximately 481,938 additional shares remained in
effect.
As part of the
acquisition of the new Minnetonka headquarters building in July 2007, the
Company assumed an outstanding mortgage of $4,380,000. The mortgage is payable
in monthly installments and carries an interest rate of 6.83%. The mortgage
matures on March 1, 2016. Mortgage payments on principal totaled $399,000
during 2011. The outstanding balance on the mortgage was $2,002,000 at December
31, 2011.
The Company expects
that the effective income tax rate for fiscal 2012 will be approximately 40%.
The Company
had no outstanding obligations under its line of credit at December 31, 2011
and 2010, and the Companys entire credit line ($10,000,000 at March 1, 2012)
is available for use. Interest on borrowings on the credit line is at the LIBOR
rate plus 1.1% (1.7% at December 31, 2011). The prior credit agreement expired
October 31, 2011. As noted within the notes to the financial statements, the
Company entered into a new $10,000,000 line of credit agreement effective
October 28, 2011, expiring on October 31, 2013. In the opinion of management,
based on the Companys current financial and operating position and projected
future expenditures, sufficient funds are available to meet the Companys
anticipated operating and capital expenditure needs.
Contractual Obligation Summary
The following
table summarizes our contractual obligations at December 31, 2011 and the
effect these obligations are expected to have on our liquidity and cash flow in
future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
One Year
|
|
1 3 Years
|
|
3 5 Years
|
|
More Than
5 Years
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
427,000
|
|
$
|
947,000
|
|
$
|
628,000
|
|
$
|
0
|
|
Interest on
long-term debt
|
|
|
124,000
|
|
|
155,000
|
|
|
28,000
|
|
|
|
|
Pensions
|
|
|
351,000
|
|
|
751,000
|
|
|
479,000
|
|
|
2,043,000
|
|
Operating
leases
|
|
|
175,000
|
|
|
7,000
|
|
|
|
|
|
|
|
ERP purchasing obligations
|
|
|
532,000
|
|
|
207,000
|
|
|
|
|
|
|
|
Compensation
plans
|
|
|
1,741,000
|
|
|
283,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,350,000
|
|
$
|
2,350,000
|
|
$
|
1,135,000
|
|
$
|
2,043,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December
31, 2011, the Company had no other material commitments (either cancelable or
non-cancelable) for capital expenditures, short or long term debt, capital
leases or other purchase commitments related to ongoing operations.
Recently Issued Accounting Pronouncements
We do not
believe there are any recently issued accounting standards that have not yet
been adopted that will have a material impact on the Companys financial
statements.
27
Off Balance Sheet Arrangements
None.
|
|
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
|
The Company
has no freestanding or embedded derivatives. The Companys 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, 2011 our bank line of credit carried a
LIBOR rate plus 1.1%. The Companys investments are money market and
certificates of deposit types of investments that earn interest at prevailing
market rates and as such do not have material risk exposure.
Based on the
Companys operations, in the opinion of management, the Company is not exposed
to material future losses due to market risk.
The Company
uses the U.S. dollar as its functional currency in Costa Rica and China.
Accordingly, the Company believes its risk of material loss due to fluctuations
in foreign currency markets to be small.
28
|
|
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 accounting principles
generally accepted in the United States of America and include amounts that are
based on managements 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
Companys 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/ William
G. Schultz
|
|
/s/ David T.
McGraw
|
|
|
|
|
|
William G.
Schultz
|
|
David T.
McGraw
|
|
Chief
Executive Officer
|
|
Chief
Financial Officer
|
|
29
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board
of Directors and Shareholders of
Communications Systems, Inc.:
We have
audited the accompanying consolidated balance sheets of Communications Systems,
Inc. and subsidiaries (the Company), as of December 31, 2011 and 2010, 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, 2011. Our audits also included the financial
statement schedule listed in the index at Item 15. These consolidated financial
statements and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement schedule based on our
audits.
We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 consolidated financial position of the Company as of December 31,
2011 and 2010, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2011, in
conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedule, 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.
We have also
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Companys internal control over financial
reporting as of December 31, 2011, based on the criteria established in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
and our report dated March 15, 2012, expressed an unqualified opinion on the
Companys internal control over financial reporting.
|
|
/s/ Deloitte
& Touche LLP
|
|
|
|
Minneapolis,
Minnesota
|
|
March 15,
2012
|
|
30
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board
of Directors and Shareholders of
Communications Systems, Inc.:
We have
audited the internal control over financial reporting of Communications
Systems, Inc., and subsidiaries (the Company) as of December 31, 2011, based
on criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As described in Managements Report
on Internal Control over Financial Reporting
,
management excluded from its assessment the internal control over financial
reporting at Patapsco Designs Limited of the UK, which was acquired on July 27,
2011, and whose financial statements constitute 2.7 percent of total assets,
less than one percent of total revenues, and less than one percent of net
income from continuing operations of the consolidated financial statement
amounts as of and for the year ended December 31, 2011. Accordingly, our audit
did not include the internal control over financial reporting at Patapsco
Designs Limited of the UK. The Companys management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based on our audit.
We conducted
our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A companys internal
control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial
officers, or persons performing similar functions, and effected by the
companys board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial
statements.
Because of the
inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls,
material misstatements due to error or fraud may not be prevented or detected
on a timely basis. Also, projections of any evaluation of the effectiveness of
the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures
may deteriorate. In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December
31, 2011, based on the criteria established in
Internal
Control Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule as of and for the year ended December 31, 2011, of
the Company, and our report dated March 15, 2012, expressed an unqualified
opinion on those consolidated financial statements and financial statement
schedule.
|
|
/s/ Deloitte
& Touche LLP
|
|
|
|
Minneapolis,
Minnesota
|
|
March 15,
2012
|
|
31
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
December 31
2011
|
|
December 31
2010
|
|
|
|
|
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
22,515,710
|
|
$
|
16,787,558
|
|
Investments
|
|
|
18,635,601
|
|
|
21,698,905
|
|
Trade accounts receivable, less allowance for doubtful accounts of $175,000 and $500,000, respectively
|
|
|
14,461,168
|
|
|
17,544,136
|
|
Inventories
|
|
|
25,986,003
|
|
|
24,498,935
|
|
Prepaid income taxes
|
|
|
3,893,003
|
|
|
296,586
|
|
Other current assets
|
|
|
999,863
|
|
|
908,102
|
|
Deferred income taxes
|
|
|
3,455,047
|
|
|
4,469,941
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
89,946,395
|
|
|
86,204,163
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
14,019,019
|
|
|
13,214,067
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
Investments
|
|
|
4,883,510
|
|
|
4,588,267
|
|
Goodwill
|
|
|
5,990,571
|
|
|
4,560,217
|
|
Funded pension assets
|
|
|
905,552
|
|
|
349,575
|
|
Other assets
|
|
|
913,869
|
|
|
153,938
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER ASSETS
|
|
|
12,693,502
|
|
|
9,651,997
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
116,658,916
|
|
$
|
109,070,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
427,345
|
|
$
|
399,209
|
|
Accounts payable
|
|
|
4,398,848
|
|
|
5,385,558
|
|
Accrued compensation and benefits
|
|
|
5,870,000
|
|
|
3,951,401
|
|
Accrued consideration
|
|
|
1,002,623
|
|
|
|
|
Other accrued liabilities
|
|
|
2,388,867
|
|
|
1,669,776
|
|
Dividends payable
|
|
|
1,299,963
|
|
|
1,263,434
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
15,387,646
|
|
|
12,669,378
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
|
Long-term compensation plans
|
|
|
283,075
|
|
|
1,738,105
|
|
Uncertain tax positions
|
|
|
405,673
|
|
|
678,395
|
|
Deferred income taxes
|
|
|
1,476,969
|
|
|
585,317
|
|
Long-term debt - mortgage payable
|
|
|
1,574,993
|
|
|
2,002,339
|
|
|
|
|
|
|
|
|
|
TOTAL LONG-TERM LIABILITIES
|
|
|
3,740,710
|
|
|
5,004,156
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Footnote 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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; 8,466,774 and 8,422,890 shares issued and
outstanding, respectively
|
|
|
423,339
|
|
|
421,144
|
|
Additional paid-in capital
|
|
|
35,533,273
|
|
|
34,491,370
|
|
Retained earnings
|
|
|
61,466,342
|
|
|
56,769,816
|
|
Accumulated other comprehensive income
|
|
|
107,606
|
|
|
(285,637
|
)
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY
|
|
|
97,530,560
|
|
|
91,396,693
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
116,658,916
|
|
$
|
109,070,227
|
|
|
|
|
|
|
|
|
|
32
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
143,775,051
|
|
$
|
120,072,310
|
|
$
|
109,792,207
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
84,879,924
|
|
|
68,871,678
|
|
|
67,943,557
|
|
Selling, general and administrative
expenses
|
|
|
40,108,221
|
|
|
35,586,248
|
|
|
31,434,097
|
|
Impairment
loss
|
|
|
1,271,986
|
|
|
|
|
|
196,020
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs
and expenses
|
|
|
126,260,131
|
|
|
104,457,926
|
|
|
99,573,674
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
17,514,920
|
|
|
15,614,384
|
|
|
10,218,533
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and (expenses):
|
|
|
|
|
|
|
|
|
|
|
Investment and other income
|
|
|
313,544
|
|
|
251,002
|
|
|
810,039
|
|
(Loss)/gain on sale of assets
|
|
|
(27,081
|
)
|
|
(9,238
|
)
|
|
39,919
|
|
Interest and
other expense
|
|
|
(181,393
|
)
|
|
(221,611
|
)
|
|
(269,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
105,070
|
|
|
20,153
|
|
|
580,807
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
17,619,990
|
|
|
15,634,537
|
|
|
10,799,340
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
expense
|
|
|
7,822,124
|
|
|
5,919,104
|
|
|
4,755,695
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
9,797,866
|
|
|
9,715,433
|
|
|
6,043,645
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Additional minimum pension liability
adjustments
|
|
|
(525,000
|
)
|
|
43,999
|
|
|
285,000
|
|
Unrealized (losses)/gains on
available-for-sale securities
|
|
|
(16,691
|
)
|
|
(19,744
|
)
|
|
33,802
|
|
Foreign
currency translation adjustment
|
|
|
934,934
|
|
|
(182,770
|
)
|
|
(237,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total other
comprehensive income (loss)
|
|
|
393,243
|
|
|
(158,515
|
)
|
|
81,416
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
10,191,109
|
|
$
|
9,556,918
|
|
$
|
6,125,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share:
|
|
$
|
1.16
|
|
$
|
1.16
|
|
$
|
.72
|
|
Diluted net income per share:
|
|
$
|
1.15
|
|
$
|
1.15
|
|
$
|
.72
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Basic Shares Outstanding
|
|
|
8,448,612
|
|
|
8,384,242
|
|
|
8,339,566
|
|
Weighted Average Dilutive Shares
Outstanding
|
|
|
8,495,873
|
|
|
8,414,566
|
|
|
8,352,084
|
|
Dividends declared per share
|
|
$
|
.60
|
|
$
|
.59
|
|
$
|
.52
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
33
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Cumulative
Other
Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2008
|
|
|
8,282,349
|
|
$
|
414,117
|
|
$
|
33,019,154
|
|
$
|
50,503,410
|
|
$
|
(208,538
|
)
|
$
|
83,728,143
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
6,043,645
|
|
|
|
|
|
6,043,645
|
|
Issuance of common stock under Employee Stock Purchase Plan
|
|
|
12,327
|
|
|
616
|
|
|
101,450
|
|
|
|
|
|
|
|
|
102,066
|
|
Issuance of common stock to Employee Stock Ownership Plan
|
|
|
56,933
|
|
|
2,847
|
|
|
441,231
|
|
|
|
|
|
|
|
|
444,078
|
|
Issuance of common stock under Employee Stock Option Plan
|
|
|
6,400
|
|
|
320
|
|
|
68,240
|
|
|
|
|
|
|
|
|
68,560
|
|
Tax benefit from non-qualified employee stock options
|
|
|
|
|
|
|
|
|
467
|
|
|
|
|
|
|
|
|
467
|
|
Share based compensation
|
|
|
|
|
|
|
|
|
31,571
|
|
|
|
|
|
|
|
|
31,571
|
|
Purchase of common stock
|
|
|
(5,126
|
)
|
|
(256
|
)
|
|
(20,603
|
)
|
|
(32,258
|
)
|
|
|
|
|
(53,117
|
)
|
Shareholder dividends
|
|
|
|
|
|
|
|
|
|
|
|
(4,507,536
|
)
|
|
|
|
|
(4,507,536
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,416
|
|
|
81,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2009
|
|
|
8,352,883
|
|
$
|
417,644
|
|
$
|
33,641,510
|
|
$
|
52,007,261
|
|
$
|
(127,122
|
)
|
$
|
85,939,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
9,715,433
|
|
|
|
|
|
9,715,433
|
|
Issuance of common stock under Employee Stock Purchase Plan
|
|
|
11,107
|
|
|
555
|
|
|
124,579
|
|
|
|
|
|
|
|
|
125,134
|
|
Issuance of common stock to Employee Stock Ownership Plan
|
|
|
37,900
|
|
|
1,895
|
|
|
469,581
|
|
|
|
|
|
|
|
|
471,476
|
|
Issuance of common stock under Non-Employee Stock Option Plan
|
|
|
21,000
|
|
|
1,050
|
|
|
181,626
|
|
|
|
|
|
|
|
|
182,676
|
|
Tax benefit from non-qualified stock options
|
|
|
|
|
|
|
|
|
34,981
|
|
|
|
|
|
|
|
|
34,981
|
|
Share based compensation
|
|
|
|
|
|
|
|
|
39,093
|
|
|
|
|
|
|
|
|
39,093
|
|
Shareholder dividends
|
|
|
|
|
|
|
|
|
|
|
|
(4,952,878
|
)
|
|
|
|
|
(4,952,878
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(158,515
|
)
|
|
(158,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2010
|
|
|
8,422,890
|
|
$
|
421,144
|
|
$
|
34,491,370
|
|
$
|
56,769,816
|
|
$
|
(285,637
|
)
|
$
|
91,396,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
9,797,866
|
|
|
|
|
|
9,797,866
|
|
Issuance of common stock under Employee Stock Purchase Plan
|
|
|
10,308
|
|
|
515
|
|
|
151,761
|
|
|
|
|
|
|
|
|
152,276
|
|
Issuance of common stock to Employee Stock Ownership Plan
|
|
|
22,493
|
|
|
1,125
|
|
|
314,902
|
|
|
|
|
|
|
|
|
316,027
|
|
Issuance of common stock under Non-Employee Stock Option Plan
|
|
|
9,000
|
|
|
450
|
|
|
72,450
|
|
|
|
|
|
|
|
|
72,900
|
|
Issuance of common stock under Executive Stock Plan
|
|
|
2,083
|
|
|
105
|
|
|
31,974
|
|
|
|
|
|
|
|
|
32,079
|
|
Tax benefit from non-qualified stock options
|
|
|
|
|
|
|
|
|
21,920
|
|
|
|
|
|
|
|
|
21,920
|
|
Share based compensation
|
|
|
|
|
|
|
|
|
448,896
|
|
|
|
|
|
|
|
|
448,896
|
|
Shareholder dividends
|
|
|
|
|
|
|
|
|
|
|
|
(5,101,340
|
)
|
|
|
|
|
(5,101,340
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
393,243
|
|
|
393,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2011
|
|
|
8,466,774
|
|
$
|
423,339
|
|
$
|
35,533,273
|
|
$
|
61,466,342
|
|
$
|
107,606
|
|
$
|
97,530,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
34
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,797,866
|
|
$
|
9,715,433
|
|
$
|
6,043,645
|
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,100,735
|
|
|
1,858,881
|
|
|
1,698,321
|
|
Share based compensation
|
|
|
448,896
|
|
|
39,093
|
|
|
31,571
|
|
Deferred taxes
|
|
|
1,695,595
|
|
|
(518,234
|
)
|
|
641,574
|
|
Impairment loss
|
|
|
1,271,986
|
|
|
|
|
|
196,020
|
|
Loss/(gain) on sale of assets
|
|
|
27,081
|
|
|
9,238
|
|
|
(39,919
|
)
|
Excess tax benefit from share based payments
|
|
|
(21,920
|
)
|
|
(34,981
|
)
|
|
(467
|
)
|
Changes in assets and liabilities net of effects from acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
3,273,730
|
|
|
(2,521,012
|
)
|
|
2,287,237
|
|
Inventories
|
|
|
(602,414
|
)
|
|
69,693
|
|
|
4,908,760
|
|
Prepaid income taxes
|
|
|
(3,600,652
|
)
|
|
40,688
|
|
|
(337,274
|
)
|
Other assets
|
|
|
(78,349
|
)
|
|
(52,913
|
)
|
|
(10,116
|
)
|
Accounts payable
|
|
|
(1,025,703
|
)
|
|
407,757
|
|
|
827,562
|
|
Accrued compensation and benefits
|
|
|
751,925
|
|
|
417,873
|
|
|
1,791,395
|
|
Other accrued expenses
|
|
|
395,133
|
|
|
301,376
|
|
|
(263,369
|
)
|
Income taxes payable
|
|
|
(335,374
|
)
|
|
(10,158
|
)
|
|
(21,112
|
)
|
Other
|
|
|
(32,022
|
)
|
|
3,092
|
|
|
(116,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
14,066,513
|
|
|
9,725,826
|
|
|
17,637,121
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(2,755,991
|
)
|
|
(1,794,422
|
)
|
|
(3,237,558
|
)
|
Purchases of investments
|
|
|
(20,884,014
|
)
|
|
(20,339,715
|
)
|
|
(34,841,042
|
)
|
Acquisition of business
|
|
|
(3,138,367
|
)
|
|
|
|
|
|
|
Proceeds from the sale of fixed assets
|
|
|
22,555
|
|
|
27,783
|
|
|
106,672
|
|
Proceeds from the sale of investments
|
|
|
23,635,385
|
|
|
12,808,642
|
|
|
16,099,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,120,432
|
)
|
|
(9,297,712
|
)
|
|
(21,872,928
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid
|
|
|
(5,064,811
|
)
|
|
(4,858,484
|
)
|
|
(4,332,666
|
)
|
Mortgage principal payments
|
|
|
(399,209
|
)
|
|
(372,926
|
)
|
|
(348,373
|
)
|
Proceeds from issuance of common stock
|
|
|
257,255
|
|
|
307,810
|
|
|
170,626
|
|
Excess tax benefit from stock based payments
|
|
|
21,920
|
|
|
34,981
|
|
|
467
|
|
Purchase of common stock
|
|
|
|
|
|
|
|
|
(53,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(5,184,845
|
)
|
|
(4,888,619
|
)
|
|
(4,563,063
|
)
|
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH
|
|
|
(33,084
|
)
|
|
(45,385
|
)
|
|
140,757
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
5,728,152
|
|
|
(4,505,890
|
)
|
|
(8,658,113
|
)
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
|
|
16,787,558
|
|
|
21,293,448
|
|
|
29,951,561
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
22,515,710
|
|
$
|
16,787,558
|
|
$
|
21,293,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
10,037,938
|
|
$
|
6,315,827
|
|
$
|
4,472,507
|
|
Interest paid
|
|
|
165,514
|
|
|
201,191
|
|
|
225,883
|
|
Dividends declared not paid
|
|
|
1,270,016
|
|
|
1,263,434
|
|
|
1,169,040
|
|
Acquisition costs in accrued expenses
|
|
|
1,002,623
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
35
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended
December 31, 2011, 2010 and 2009
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business:
Communications Systems, Inc. (herein collectively
called CSI, our or the Company) is a Minnesota corporation organized in
1969 that operates directly and through its subsidiaries located in the United
States, Costa Rica, the United Kingdom and China. CSI is principally engaged
through its Suttle and Austin Taylor business units in the manufacture and sale
of modular connecting and wiring devices for voice and data communications,
digital subscriber line filters, and structured wiring systems and through its
Transition Networks business unit in the manufacture of media and rate
conversion products for telecommunications networks. CSI also provides through
its JDL Technologies business unit IT solutions including network design,
computer infrastructure installations, IT service management, change
management, network security and network operations services.
The Company classifies its
businesses into four segments:
Suttle
,
which manufactures U.S. standard modular connecting and wiring devices for
voice and data communications;
Transition
Networks,
which designs and markets media conversion products,
ethernet switches, and other connectivity and data transmission products;
Austin Taylor,
which manufactures British
standard line jacks, patch panels, metal boxes, distribution and central office
frames; and
JDL Technologies, (JDL
), which provides IT
services; non-allocated general and administrative expenses are separately
accounted for as Other in the Companys segment reporting. There are no
material intersegment revenues.
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. The Company uses estimates based on
the best information available in recording transactions and balances resulting
from operations. Actual results could differ from those estimates. The
Companys estimates consist principally of reserves for doubtful accounts,
sales returns, warranty costs, asset impairment evaluations, accruals for
compensation plans, self-insured medical and dental accruals, pension liabilities,
lower of cost or market inventory adjustments, provisions for income taxes and
deferred taxes and depreciable lives of fixed assets.
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. As of December 31, 2011, the
Company had $22.5 million in cash and cash equivalents. Of this amount, $0.8
million was invested in short-term money market funds that are not considered
to be bank deposits and are not insured or guaranteed by the federal deposit
insurance company (FDIC) or other government agency. These money market funds
seek to preserve the value of the investment at $1.00 per share; however, it is
possible to lose money investing in these funds. The remainder is operating
cash and certificates of deposit which are fully insured through the FDIC.
Investments:
Investments consist of certificates of deposit that are traded on the
open market and are classified as available-for-sale at December 31, 2011.
Available-for-sale investments are reported at fair value with unrealized gains
and losses excluded from operations and reported as a separate component of
stockholders equity, net of tax (see Accumulated Comprehensive income below).
Inventories:
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method. Provision to reduce inventories
to the lower of cost or market is made based on a review of excess and obsolete
inventories, estimates of future sales, examination of historical consumption
rates and the related value of component parts.
Property, plant and equipment:
Property, plant and equipment are recorded at
cost. Depreciation is computed using the straight-line method. Depreciation
included in cost of sales and selling, general and administrative expenses for
continuing operations was $2,058,000, $1,859,000 and $1,698,000 for 2011, 2010
and 2009, 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.
36
Goodwill and Other Intangible Assets:
Goodwill represents the amount by which the
purchase prices (including liabilities assumed) of acquired businesses exceed
the estimated fair value of the net tangible assets and separately identifiable
assets of these businesses. Goodwill and intangible assets with indefinite
useful lives are not amortized, but are tested at least annually for
impairment. The Company reassesses the value of our reporting units and related
goodwill balances at the end of each fiscal year and at other times if events
have occurred or circumstances exist that indicate the carrying amount of
goodwill may not be recoverable.
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. If the sum of the expected
future net cash flows is less than the carrying value, an impairment loss would
be measured by comparing the amount by which the carrying value exceeds the
fair value of the asset.
Warranty:
The Company reserves for the estimated cost of product warranties at the
time revenue is recognized. We estimate the costs of our warranty obligations
based on our warranty policy or applicable contractual warranty, historical
experience of known product failure rates, and use of materials and service
delivery costs incurred in correcting product failures. Management reviews the
estimated warranty liability on a quarterly basis to determine its adequacy.
The following table presents
the changes in the Companys warranty liability for the years ended December
31, 2011 and 2010, which relate to normal product warranties and a five-year
obligation to provide for potential future liabilities for certain network
equipment sales:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
616,000
|
|
$
|
648,000
|
|
Amounts charged to expense
|
|
|
258,000
|
|
|
162,000
|
|
Actual warranty costs paid
|
|
|
(240,000
|
)
|
|
(194,000
|
)
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
634,000
|
|
$
|
616,000
|
|
|
|
|
|
|
|
|
|
Accumulated Comprehensive income:
The components of accumulated other
comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
$
|
(337,597
|
)
|
$
|
(1,272,530
|
)
|
Unrealized gain on available-for-sale investments
|
|
|
(2,633
|
)
|
|
14,058
|
|
Minimum pension liability
|
|
|
447,836
|
|
|
972,836
|
|
|
|
|
|
|
|
|
|
|
|
$
|
107,606
|
|
$
|
(285,636
|
)
|
|
|
|
|
|
|
|
|
The functional currency of
Austin Taylor and Patapsco is the British pound. Assets and liabilities denominated in this foreign currency
were translated into U.S. dollars at year-end exchange rates. Revenue and
expense transactions were translated using average exchange rates. Suttle Costa
Rica and Transition China use the U.S. dollar as its functional currency.
Revenue recognition
: The Companys manufacturing operations (Suttle, Transition Networks
and Austin Taylor) recognize revenue when the earnings process is complete,
evidenced by persuasive evidence of an agreement, delivery has occurred or
services have been rendered, the price is fixed or determinable, and
collectability is reasonably assured. Revenue is recognized for domestic and
international sales at the shipping point or delivery to customers, based on
the related shipping terms. Risk of loss transfers at the point of shipment or
delivery to customers, and the Company has no further obligation after such
time. Sales are made directly to customers and through distributors. Payment
terms for distributors are consistent with the terms of the Companys direct
customers. The Company records a provision for sales returns, sales incentives
and warranty costs at the time of the sale based on historical experience and
current trends.
JDL Technologies generally
records revenue on hardware, software and related equipment sales and
installation contracts when the revenue recognition criteria are met and
products are installed and accepted by the customer. JDL records revenue on
service contracts on a straight-line basis over the contract period, unless
evidence suggests the revenue is earned in a different pattern. Each contract
is individually reviewed to determine when the earnings process is complete.
Research and development:
Research and development costs consist of
outside testing services, equipment and supplies associated with enhancing
existing products and developing new products. Research and development costs
are expensed when incurred and totaled $2,045,000 in 2011, $2,127,000 in 2010
and $1,707,000 in 2009.
37
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 adjusts for the dilutive effect of
potential common shares outstanding. The Companys only potential common shares
outstanding are stock options and unvested shares, which resulted in a dilutive
effect of 47,261 shares, 30,324 shares and 12,519 shares in 2011, 2010 and
2009, respectively. The Company calculates the dilutive effect of outstanding
options and unvested shares using the treasury stock method. The number of
shares not included in the computation of diluted earnings per share because
the options exercise price was greater than the average market price of common
stock during the year for 2011, 2010, and 2009 was 0, 0 and 81,000,
respectively.
Share based compensation:
The Company accounts for share based
compensation awards on a fair value basis. The estimated grant date fair value
of each stock-based award is recognized in income over the requisite service
period (generally the vesting period). The estimated fair value of each option
is calculated using the Black-Scholes option-pricing model.
NOTE 2 - INVENTORIES
Inventories consist of:
|
|
|
|
|
|
|
|
|
|
December
31
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
14,010,071
|
|
$
|
13,684,884
|
|
Raw and processed materials
|
|
|
11,975,932
|
|
|
10,814,051
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,986,003
|
|
$
|
24,498,935
|
|
|
|
|
|
|
|
|
|
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment
and the estimated useful lives are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31
|
|
|
|
Estimated
useful life
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
$
|
3,114,330
|
|
$
|
3,099,988
|
|
Buildings and improvements
|
|
|
7-40
years
|
|
|
8,779,969
|
|
|
8,449,395
|
|
Machinery and equipment
|
|
|
3-15
years
|
|
|
23,266,325
|
|
|
21,889,116
|
|
Furniture and fixtures
|
|
|
5-10
years
|
|
|
3,966,579
|
|
|
3,569,720
|
|
Construction in progress
|
|
|
|
|
|
515,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,642,298
|
|
|
37,008,219
|
|
Less accumulated depreciation
|
|
|
|
|
|
(25,623,279
|
)
|
|
(23,794,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,019,019
|
|
$
|
13,214,067
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 ACQUISITION
On July 27, 2011, the Company
acquired Patapsco Designs Limited of the UK (Patapsco). The purchase price
totals $5,094,000, with cash acquired totaling $862,000. The purchase price
includes initial consideration of $3,271,000, deferred consideration of
$466,000 to be paid out no later than 18 months from the acquisition date,
$656,000 in working capital adjustments, and $701,000 in contingent
consideration. The Company has agreed to pay consideration up to $818,000
contingent upon the Patapsco business meeting gross margin and other
non-financial targets, with the consideration to paid out no later than two
years from the acquisition date. Although the maximum contingent consideration
is $818,000, the Company has recognized $701,000 as the estimated fair value of
the contingent consideration at the date of acquisition. This contingent consideration
has been calculated based on the exchange rate at the date of acquisition and
actual payments may differ based on fluctuations in the exchange rate between
the dollar and the pound. At December 31, 2011, the Company had estimated
liabilities of $1,003,000 related to outstanding consideration payments.
38
The assets and liabilities of
Patapsco were recorded in the consolidated balance sheet within the Transition
Networks segment as of the acquisition date, at their respective fair values.
The purchase price allocation is based on the estimated fair value of assets
acquired and liabilities assumed and has been allocated as follows:
|
|
|
|
|
|
|
July 27, 2011
|
|
Current assets
|
|
$
|
2,052,149
|
|
Property, plant, and equipment
|
|
|
163,671
|
|
Intangible assets
|
|
|
801,488
|
|
Goodwill
|
|
|
2,702,340
|
|
|
|
|
|
|
Total assets
|
|
|
5,719,648
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
414,735
|
|
Long-term deferred tax liabilities
|
|
|
210,952
|
|
|
|
|
|
|
Total liabilities
|
|
|
625,687
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
5,093,961
|
|
Identifiable intangible
assets are definite-lived assets. These assets include customer relationships,
trademarks, and technology intangible assets, and have a weighted average
amortization period of 8 years, which matches the weighted average useful life
of the assets. Goodwill recorded as part of the purchase price allocation is
not tax deductible.
NOTE 5 GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying
amount of goodwill for the years ended December 31, 2011 and 2010 by segment
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Suttle
|
|
Transition
Networks
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2010
|
|
$
|
1,271,986
|
|
$
|
3,288,231
|
|
$
|
4,560,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
1,271,986
|
|
|
3,288,231
|
|
|
4,560,217
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment loss
|
|
|
(1,271,986
|
)
|
|
|
|
|
(1,271,986
|
)
|
Acquisition
|
|
|
|
|
|
2,702,340
|
|
|
2,702,340
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
$
|
|
|
$
|
5,990,571
|
|
$
|
5,990,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
|
$
|
1,271,986
|
|
$
|
5,990,571
|
|
$
|
7,262,557
|
|
Accumulated impairment loss
|
|
$
|
(1,271,986
|
)
|
|
0
|
|
|
(1,271,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2011
|
|
$
|
|
|
$
|
5,990,571
|
|
$
|
5,990,571
|
|
|
|
|
|
|
|
|
|
|
|
|
During our fiscal quarter
ended June 30, 2011, based on greater than expected decline in actual and
forecasted profitability of legacy products in our Suttle business unit, as
well as, significant project delays that occurred related to Suttles new
technologies, we concluded that that these events and circumstances were
indicators to require us to perform an interim goodwill impairment analysis of
our Suttle business unit. This analysis included the determination of the
reporting units fair value primarily using discounted cash flows modeling.
Based on the step one and step two analysis, considering Suttles reduced
earnings and cash flow forecasts, the Company determined that Suttles goodwill
was fully impaired and recorded a goodwill impairment for the Suttle segment of
$1,272,000. This non-recurring fair value measurement is a Level 3
measurement under the fair value hierarchy described in Note 12.
39
The Companys identifiable
intangible assets with finite lives are being amortized over their estimated
useful lives and were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Foreign Currency
Translation
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
81,785
|
|
|
(4,599
|
)
|
|
(4,520
|
)
|
|
72,666
|
|
Customer relationships
|
|
|
490,707
|
|
|
(19,316
|
)
|
|
(27,114
|
)
|
|
444,277
|
|
Technology
|
|
|
228,996
|
|
|
(18,029
|
)
|
|
(12,652
|
)
|
|
198,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
801,488
|
|
|
(41,944
|
)
|
|
(44,286
|
)
|
|
715,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense on these
identifiable intangible assets was $42,000 in 2011. The amortization expense is
included in selling, general and administrative expenses.
NOTE 6 - EMPLOYEE RETIREMENT BENEFITS
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 2011, 2010 and 2009
were $479,000, $456,000, and $420,000, respectively.
The Companys U.K.-based
subsidiary Austin Taylor maintains defined benefit pension plans that cover
approximately seven active employees. The Company does not provide any other
post-retirement benefits to its employees. The following table summarizes the balance
sheet impact, including benefit obligations, assets and funded status of Austin
Taylors pension plans at December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
Benefit obligation at the beginning of the year
|
|
$
|
4,919,000
|
|
$
|
4,623,000
|
|
Service cost
|
|
|
36,000
|
|
|
46,000
|
|
Interest cost
|
|
|
239,000
|
|
|
257,000
|
|
Participant contributions
|
|
|
15,000
|
|
|
19,000
|
|
Augmentations
|
|
|
46,000
|
|
|
|
|
Actuarial (gains)/losses
|
|
|
62,000
|
|
|
254,000
|
|
Benefits paid
|
|
|
(162,000
|
)
|
|
(147,000
|
)
|
Foreign currency gains
|
|
|
(5,000
|
)
|
|
(133,000
|
)
|
|
|
|
|
|
|
|
|
Benefit obligation at the end of the year
|
|
|
5,150,000
|
|
|
4,919,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
5,269,000
|
|
|
5,023,000
|
|
Actual return on plan assets
|
|
|
892,000
|
|
|
464,000
|
|
Employer contributions
|
|
|
48,000
|
|
|
54,000
|
|
Participant contributions
|
|
|
15,000
|
|
|
19,000
|
|
Benefits paid
|
|
|
(162,000
|
)
|
|
(147,000
|
)
|
Foreign currency losses
|
|
|
(6,000
|
)
|
|
(144,000
|
)
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
6,056,000
|
|
|
5,269,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year net asset /(liability)
|
|
$
|
906,000
|
|
$
|
350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
assumptions used to determine net periodic pension costs:
|
|
|
|
|
Discount rate
|
4.7
|
%
|
5.5
|
%
|
Expected return on assets
|
4.2
|
%
|
5.1
|
%
|
The plans are funded through
UK government gilts and an insurance contract both recorded in the financial
statements at fair value. The related amounts for each of these investments
were $3,193,000 and $2,864,000 as of December 31, 2011 and were determined to
be level 2 and level 3 investments, respectively. Level 2 investments are
valued based on observable inputs such as quoted prices for similar instruments
and quoted prices in markets that are not active. Level 3 investments are
valued based on significant unobservable inputs.
40
The Company does not expect
any plan assets to be returned to the Company during the twelve months
subsequent to December 31, 2011.
The Company expects to make
contributions of $48,000 to the plan in 2012.
The Company estimates its
future pension benefit payments will be as follows:
|
|
|
|
|
2012
|
|
$
|
351,000
|
|
2013
|
|
|
280,000
|
|
2014
|
|
|
471,000
|
|
2015
|
|
|
252,000
|
|
2016
|
|
|
227,000
|
|
2017 thru 2021
|
|
|
2,043,000
|
|
Components of the Companys net periodic
pension costs are:
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
36,000
|
|
$
|
46,000
|
|
$
|
37,000
|
|
Interest cost
|
|
|
240,000
|
|
|
258,000
|
|
|
261,000
|
|
Expected return on assets
|
|
|
(267,000
|
)
|
|
(244,000
|
)
|
|
(226,000
|
)
|
Amortization of prior
service cost
|
|
|
46,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
55,000
|
|
$
|
60,000
|
|
$
|
72,000
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 COMMITMENTS AND CONTINGENCIES
Operating leases:
The Company leases land, buildings and equipment under operating leases
with original terms from 1 to 5 years. Total rent expense was $421,000,
$402,000 and $440,000 in 2011, 2010 and 2009 respectively. Sublease income
received was $0, $8,000 and $12,000 in 2011, 2010 and 2009 respectively. At December
31, 2011, the Company was obligated under noncancelable operating leases to
make minimum annual future lease payments as follows:
|
|
|
|
|
Year Ending December 31:
|
|
|
|
|
2012
|
|
$
|
175,000
|
|
2013
|
|
|
7,000
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
182,000
|
|
|
|
|
|
|
Long-term debt:
The mortgage on the Companys headquarters building is payable in
monthly installments and carries an interest rate of 6.83%. The mortgage
matures on March 1, 2016. The outstanding balance on the mortgage was
$2,002,000 at December 31, 2011. The mortgage is secured by the building.
The annual requirements for
principal payments on the mortgage are as follows:
|
|
2012
|
427,000
|
2013
|
457,000
|
2014
|
490,000
|
2015
|
524,000
|
2016
|
104,000
|
Purchasing obligations:
On September 30, 2011, the Company entered
into a contract with IFS to implement a new Enterprise Resource Planning (ERP) system. The remaining contract balance at December
31, 2011 was $739,000. The contract includes annual future obligations for the years ending December 31, as follows:
|
|
|
|
|
2012
|
|
$
|
532,000
|
|
2013
|
|
|
207,000
|
|
Line of credit:
The Company has a $10,000,000 line of credit from Wells Fargo Bank. The
Company had no outstanding borrowings against the line of credit at December
31, 2011 and 2010 and the entire credit line is available for use. Interest on
borrowings on the credit line is at LIBOR plus 1.1% (1.7% at December 31, 2011).
The credit agreement expires October 31, 2013 and is secured by assets of the
Company. Our credit agreement contains financial covenants including current
ratio, net income, and tangible net worth minimums. The Company was in
compliance with all financial covenants as of December 31, 2011.
As of December 31, 2011, the
Company had no other material commitments (either cancelable or non-cancelable)
for capital expenditures or other purchase commitments related to ongoing
operations.
41
Long-term compensation plans:
The Company has a long term incentive plan.
The plan provides long-term competitive compensation to enable the Company to
attract and retain qualified executive talent and to reward employees for
achieving goals and improving company performance. The plan provides grants of
performance units made at the beginning of performance periods and paid at
the end of the period if performance goals are met. Awards were previously made
every other year and are paid following the end of the cycle with annual
vesting. Payment in the case of retirement, disability or death will be on a
pro rata basis. The Company accrued expense of $286,000, $926,000 and $734,000
in 2011, 2010 and 2009, respectively. Accrual balances for long-term
compensation plans at December 31, 2011 and 2010 were $2,024,000 and
$1,738,000, respectively. Awards paid were $0 in 2011, $1,332,000 in 2010 and
$0 in 2009. Awards for the 2008 to 2011 cycle will be paid out in 2012 in cash,
awards for the 2010 to 2013 and the 2011 to 2013 cycles will be paid out 50% in
cash and 50% in stock. The stock portion of these awards are treated as equity
plans and included within the Stock Compensation footnote below.
Other contingencies:
In the ordinary course of business, the
Company is exposed to legal actions and claims and incurs costs to defend
against such actions and claims. Company management is not aware of any
outstanding or pending legal actions or claims that would materially affect the
Companys financial position or results of operations.
NOTE 8 STOCK COMPENSATION
2011
Executive Incentive Compensation Plan
On March 28, 2011 the Board
adopted and on May 19, 2011 the Companys shareholders approved the Companys
2011 Executive Incentive Compensation Plan (2011 Incentive Plan). The 2011
Incentive Plan authorizes incentive awards to officers, key employees and
non-employee directors in the form of options (incentive and non-qualified),
stock appreciation rights, restricted stock, restricted stock units,
performance stock units (deferred stock), performance cash units, and other
awards in stock, cash, or a combination of stock and cash. Up to 1,000,000
shares of our common stock may be issued pursuant to awards under the 2011
Incentive Plan. The 2011 Incentive Plan is administered by the Compensation
Committee of the Board of Directors. Through December 31, 2011, the only awards
that have been made under the 2011 Incentive Plan are those described in
following paragraphs.
The 2011 Incentive Plan
permits equity awards to non-employee directors either in the form of
restricted stock grants or non-qualified stock option awards, or both. On March
28, 2011, the Compensation Committee and the Board determined that, subject to
receiving shareholder approval of the 2011 Incentive Plan, each non-employee
director elected or re-elected at the May 19, 2011 Annual Shareholders Meeting
(the 2011 Shareholders Meeting) would be issued shares of restricted stock
having a value of $40,000 based on the closing price of the Companys common
stock on May 19, 2011 and also determined this restricted stock would vest
after one year and be subject to restrictions on resale for one additional
year. At the 2011 Shareholders Meeting, the Companys shareholders approved the
2011 Incentive Plan and, effective as of that date, the Company awarded 2,226
shares of restricted stock to each of the Companys six non-employee directors
for a total of 13,356 shares. In addition, on August 11, 2011, the Companys
Board awarded a 2,226 share restricted stock grant to the Companys former
chief executive officer, who began service as a non-employee director after
retiring as chief executive officer on May 19, 2011.
At December 31, 2011, 984,418
shares remained available to be issued under the 2011 Incentive Plan.
Stock
Option Plan for Directors
Shares of common stock are
reserved for issuance to non-employee directors under options granted by the
Company prior to 2011 under its Stock Option Plan for Non-Employee Directors
(the Director Plan). Under the Director Plan nonqualified stock options to
acquire 3,000 shares of common stock were automatically granted to each
non-employee director concurrent with annual meetings of shareholders in 2010
and earlier years and vested immediately. The exercise price of options granted
was the fair market value of the common stock on the date of the respective
shareholder meetings. Options granted under the Director Plan expire 10 years
from date of grant.
The Director Plan was
suspended as of May 19, 2011 to prohibit automatic option grants in 2011 in
connection with seeking and receiving shareholder approval of the 2011
Incentive Plan, at the 2011 Annual Meeting of Shareholders. As shareholder
approval was received, the Board amended the Director Plan to prohibit any
future option awards under that plan on August 11, 2011. Stock options were
granted to non-employee directors for 0, 18,000, and 18,000 shares in 2011,
2010 and 2009, respectively.
42
Stock
Plan
Under the Companys 1992
Stock Plan (the Stock Plan), shares of common stock may be issued pursuant to
stock options, restricted stock or deferred stock grants to officers and key
employees. Exercise prices of stock options under the Stock Plan cannot be less
than fair market value of the stock on the date of grant. Rules and conditions
governing awards of stock options, restricted stock and deferred stock are
determined by the Compensation Committee of the Board of Directors, subject to
certain limitations in the Stock Plan. When seeking approval of the 2011
Incentive Plan at the 2011 Shareholders Meeting, the Company committed to
amending the Stock Plan to prohibit the issuance of future equity awards if
such approval was given. Effective August 11, 2011, the amendment to prohibit
future stock options or other equity awards was approved.
During 2011, prior to
amending the Stock Plan to prohibit future awards, stock options were awarded
covering 96,250 shares to key executive employees, which options expire seven
years from the date of award and vest 25% each year beginning one year after
the date of award.
During 2011, prior to
amending the Stock Plan to prohibit future awards, key employees were granted
deferred stock awards covering 16,092 shares tied to achievement against
performance goals in 2010 under the Companys long term incentive plan. To the
extent earned, the deferred stock will be paid out in the first quarter of 2014
to key employees still employed by the Company at that time. The Company also
granted deferred stock awards covering 77,588 shares to key employees under the
Companys long term incentive plan tied to achievement against performance over
the 2011 to 2013 period. The actual number of shares of deferred stock earned
by the respective employees, if any, will be determined based on achievement
against cumulative performance goals for the three years ending December 31,
2013 and the number of shares earned will be paid in the first quarter of 2014
to those key employees still employed by the Company at that time. During 2011,
the Company also granted deferred stock awards of up to 12,156 shares to
executive employees that could be earned under the Companys short-term
incentive plan if actual revenue equaled or exceeded 150% of 2011 quarterly or
annual revenue targets. The number of shares earned by the respective executive
employees will be paid out no later than the first quarter of 2012.
At December 31, 2011 after
reserving for stock options and deferred stock awards described in the two
preceding paragraphs and adjusting for forfeitures and issuances during the
year, there were 162,243 shares reserved for issuance under the Stock Plan. The
Company did not award stock options or deferred stock under this plan in 2010
or 2009.
Stock
Options Outstanding
The following table
summarizes changes in the number of outstanding stock options under the
Director Plan and Stock Plan during the three years ended December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
average
exercise price
per share
|
|
Weighted
average
remaining
contractual term
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008
|
|
|
351,350
|
|
$
|
9.99
|
|
|
2.78
years
|
|
Awarded
|
|
|
18,000
|
|
|
9.73
|
|
|
|
|
Exercised
|
|
|
(6,400
|
)
|
|
10.71
|
|
|
|
|
Forfeited
|
|
|
(173,950
|
)
|
|
10.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2009
|
|
|
189,000
|
|
$
|
9.77
|
|
|
4.75
years
|
|
Awarded
|
|
|
18,000
|
|
|
11.82
|
|
|
|
|
Exercised
|
|
|
(21,000
|
)
|
|
8.70
|
|
|
|
|
Forfeited
|
|
|
(24,000
|
)
|
|
14.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2010
|
|
|
162,000
|
|
$
|
9.49
|
|
|
5.33
years
|
|
Awarded
|
|
|
96,250
|
|
|
14.16
|
|
|
|
|
Exercised
|
|
|
(9,000
|
)
|
|
8.10
|
|
|
|
|
Forfeited
|
|
|
(12,430
|
)
|
|
11.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2011
|
|
|
236,820
|
|
|
11.35
|
|
|
5.18
years
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2011
|
|
|
164,635
|
|
$
|
10.12
|
|
|
4.73
years
|
|
Expected to vest at December 31, 2011
|
|
|
235,801
|
|
|
11.34
|
|
|
5.17
years
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of awards issued
under the Companys stock option plan is estimated at grant date using the
Black-Scholes option-pricing model. The following table displays the
assumptions used in the model.
43
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
27.7
|
%
|
|
27.3
|
%
|
|
28.3
|
%
|
Risk free interest rate
|
|
|
3.4
|
%
|
|
3.7
|
%
|
|
3.4
|
%
|
Expected holding period
|
|
|
6
years
|
|
|
7
years
|
|
|
7
years
|
|
Dividend yield
|
|
|
4.2
|
%
|
|
4.7
|
%
|
|
4.9
|
%
|
Total
unrecognized compensation expense was $102,000, $0, and $0 for the years ending
December 31, 2011, 2010 and 2009, respectively, which is expected to be
recognized over the next 3.2 years. The aggregate intrinsic value of all
outstanding options, exercisable options, and options expected to vest (the
amount by which the market price of the stock on the last day of the period
exceeded the market price of the stock on the date of grant) was $651,000 based
on the Companys stock price at December 31, 2011. The intrinsic value of
options exercised during the year was $61,000, $183,000 and $30,000 in 2011,
2010 and 2009, respectively. Net cash proceeds from the exercise of all stock
options were $73,000, $0 and $30,000 for 2011, 2010 and 2009, respectively. The
following table summarizes the status of stock options outstanding at December
31, 2011:
|
|
|
|
|
|
|
|
|
|
|
Range of
Exercise Prices
|
|
Shares
|
|
Weighted Average
Remaining
Option Life
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
$7.13 to $8.64
|
|
|
45,000
|
|
|
1.4
years
|
|
$
|
7.59
|
|
$8.65 to $9.99
|
|
|
33,000
|
|
|
6.0
years
|
|
|
9.67
|
|
$10.00 to $12.00
|
|
|
69,000
|
|
|
5.9
years
|
|
|
10.95
|
|
$12.01 to $14.50
|
|
|
89,820
|
|
|
6.2
years
|
|
|
14.16
|
|
The Company
receives an income tax benefit related to the gains received by officers and key
employees who make disqualifying dispositions of stock received on exercise of
qualified incentive stock options and on non-qualified options. The amount of
tax benefit received by the Company was $22,000, $35,000 and $0 in 2011, 2010
and 2009 respectively. The tax benefit amounts have been credited to additional
paid-in capital.
Deferred Stock Outstanding
The following
table summarizes the changes in the number of deferred stock shares under the
Stock Plan and 2011 Incentive Plan over the period December 31, 2010 to
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
Outstanding December 31,
2010
|
|
|
|
|
$
|
|
|
Granted
|
|
|
105,836
|
|
|
15.15
|
|
Vested
|
|
|
(2,657
|
)
|
|
15.40
|
|
Forfeited
|
|
|
(31,330
|
)
|
|
15.27
|
|
|
|
|
|
|
|
|
|
Outstanding December 31,
2011
|
|
|
71,849
|
|
|
15.14
|
|
The grant date
fair value is calculated based on the Companys closing stock price as of the
grant date. As of December 31, 2011, the total unrecognized compensation
expense related to the deferred stock shares was $302,000 and is expected to be
recognized over a weighted-average period of 2 years.
Compensation Expense
Share-based
compensation expense is recognized based on the fair value of awards granted
over the vesting period of the award. Share-based compensation expense
recognized for 2011, 2010 and 2009 was $449,000, $39,000 and $32,000 before
income taxes and $292,000, $25,000 and $20,000 after income taxes,
respectively. Share-based compensation expense is recorded as a part of
selling, general and administrative expenses.
44
Employee Stock Purchase Plan
Under the
Companys Employee Stock Purchase Plan (ESPP) employees are able to acquire
shares of common stock at 90% of the price at the end of each current quarterly
plan term. The most recent term ended December 31, 2011. The ESPP is considered
compensatory under current rules. At December 31, 2011, after giving effect to
the shares issued as of that date, 66,413 shares remain available for purchase
under the ESPP.
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, 2011, the ESOP held 531,137
shares of the Companys common stock, all of which have 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 Companys stock.
The 2011 ESOP contribution was $508,199 for which the Company issued 36,145
shares in March 2012. The 2010 ESOP contribution was $316,027 for which the
Company issued 22,493 shares in 2011. The Companys 2009 ESOP contribution was
$471,563 for which the Company issued 37,907 shares of common stock to the ESOP
in 2010.
NOTE 9 COMMON STOCK
PURCHASES OF
COMMUNICATIONS SYSTEMS, INC. COMMON STOCK
In October
2008, the Companys Board of Directors authorized the repurchase of shares of
the Companys stock pursuant to Exchange Act Rule 10b-18 on the open market, in
block trades or in private transactions. At December 31, 2011, 481,938
additional shares could be repurchased under outstanding Board authorizations.
SHAREHOLDER
RIGHTS PLAN
On December
23, 2009 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 1/100
th
of
a share of a new series of Junior Participating Preferred Stock of the Company
at an initial exercise price of $41. The rights expire on December 23, 2019.
The rights will become exercisable only following the acquisition by a person
or group, without the prior consent of the Board of Directors, of 16.5% or more
of the Companys voting stock, or following the announcement of a tender offer
or exchange offer to acquire an interest of 16.5% 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.
NOTE 10 - INCOME
TAXES
Income tax
expense from continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Currently payable income
taxes:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,609,000
|
|
$
|
5,906,000
|
|
$
|
3,766,000
|
|
State
|
|
|
414,000
|
|
|
581,000
|
|
|
362,000
|
|
Foreign
|
|
|
103,000
|
|
|
(50,000
|
)
|
|
(14,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,126,000
|
|
|
6,437,000
|
|
|
4,114,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
(benefit):
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,204,000
|
|
$
|
(522,000
|
)
|
$
|
551,000
|
|
State
|
|
|
72,000
|
|
|
(10,000
|
)
|
|
37,000
|
|
Foreign
|
|
|
420,000
|
|
|
14,000
|
|
|
54,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,696,000
|
|
|
(518,000
|
)
|
|
642,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,822,000
|
|
$
|
5,919,000
|
|
$
|
4,756,000
|
|
|
|
|
|
|
|
|
|
|
|
|
45
Austin Taylor
Communications, Ltd. operates in the United Kingdom (U.K.) and is subject to
U.K. rather than U.S. income taxes. Austin Taylor had pretax losses of
$1,474,000, $1,119,000 and $1,252,000 in 2011, 2010 and 2009 respectively. At
the end of 2011, Austin Taylors net operating loss carry-forward was
$6,986,000. $56,000 of the 2011 pretax loss will provide group relief to
Patapsco, a U.K. company acquired by Communications Systems, Inc. during 2011. The
Company remains uncertain that it will be able to generate the future income
needed to realize the tax benefit of the carry-forward. Accordingly, the
Company has continued to maintain its deferred tax valuation allowance against
the potential carry-forward benefit.
In 2007,
Transition Networks China began operations in China and is subject to Chinese
taxes rather than U.S. income taxes. Transition Networks China had pretax
income of $24,000 in 2011 and pretax losses of $115,000 and $190,000 in 2010
and 2009 respectively. At the end of 2011, Transition Networks Chinas net
operating loss carry-forward was $1,730,000. Due to the history of losses in
China the Company remains uncertain that it will be able to generate the future
income needed to realize the tax benefit of the carry-forward. Accordingly, the
Company has continued to maintain its deferred tax valuation allowance against
the potential carry-forward benefit.
Suttle Costa
Rica, S.A. operates in Costa Rica and is subject to Costa Rica income taxes. In
2005, the Board of Directors of Suttle Costa Rica S. A. declared a dividend in
the amount of $3,500,000 payable to the Company. The dividend and related
dividend reinvestment plan qualify under Internal Revenue Code Sec. 965,
which allows the Company to receive an 85% dividend received deduction if the
amount of the dividend is reinvested in the United States pursuant to a
domestic reinvestment plan. The Company made the required qualified capital
expenditures in 2006. It is the Companys intention to maintain the remaining
undistributed earnings in its Costa Rica subsidiary to support continued
operations there. No deferred taxes have been provided for the undistributed
earnings.
Suttle Costa
Rica had pretax income of $155,000 and $80,000 in 2011 and 2010 respectively
and pretax loss of $519,000 in 2009. At the end of 2011, Suttle Costa Ricas
net operating loss carry-forward was $519,000. The Costa Rican tax authorities
may allow losses to be carried forward to future periods at their discretion. The
Company believes that it is unlikely that the Costa Rican tax authorities would
grant the request to defer the prior years net operating losses to future
periods. Therefore, the Company has placed a deferred tax valuation allowance
against the potential carry-forward benefit.
The provision
for income taxes for continuing operations varied from the federal statutory
tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Tax at U.S. statutory rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Surtax exemption
|
|
|
(0.3
|
)
|
|
(0.6
|
)
|
|
(0.9
|
)
|
State income taxes, net of
federal benefit
|
|
|
1.9
|
|
|
2.4
|
|
|
2.5
|
|
Foreign income taxes, net
of foreign tax credits
|
|
|
4.7
|
|
|
2.7
|
|
|
4.9
|
|
Impairment of goodwill
|
|
|
2.5
|
|
|
|
|
|
|
|
Other
|
|
|
.6
|
|
|
(1.6
|
)
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
44.4
|
%
|
|
37.9
|
%
|
|
44.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax
assets and liabilities as of December 31 related to the following:
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
58,000
|
|
$
|
184,000
|
|
Inventory
|
|
|
2,611,000
|
|
|
3,347,000
|
|
Accrued and prepaid expenses
|
|
|
762,000
|
|
|
939,000
|
|
Domestic net operating loss carry-forward
|
|
|
186,000
|
|
|
265,000
|
|
Long-term compensation plans
|
|
|
298,000
|
|
|
338,000
|
|
Nonemployee director stock compensation
|
|
|
128,000
|
|
|
71,000
|
|
Other stock compensation
|
|
|
122,000
|
|
|
|
|
State income taxes
|
|
|
63,000
|
|
|
58,000
|
|
Foreign net operating loss carry-forwards and credits
|
|
|
2,625,000
|
|
|
2,660,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
6,853,000
|
|
|
7,862,000
|
|
Valuation allowance
|
|
|
(2,624,000
|
)
|
|
(2,216,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
4,229,000
|
|
|
5,646,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(1,577,000
|
)
|
|
(1,373,000
|
)
|
Intangible assets
|
|
|
(674,000
|
)
|
|
(388,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax
liability
|
|
|
(2,251,000
|
)
|
|
(1,761,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax
asset
|
|
$
|
1,978,000
|
|
$
|
3,885,000
|
|
|
|
|
|
|
|
|
|
46
As part of
previous acquisitions, the Company purchased net operating loss carry-forwards
in the amount of $3,790,000. At December 31, 2011, the Company had $531,000
remaining net operating loss carry-forwards for income tax purposes which
expire in 2014. Utilization of net operating loss carry-forwards is limited to
$228,000 per year in future years.
The Company
assesses uncertain tax positions in accordance with ASC 740. Under this method,
the Company must recognize the tax benefit from an uncertain tax position only
if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such
uncertain tax positions are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
resolution. The Companys practice is to recognize interest and penalties
related to income tax matters in income tax expense.
Changes in the
Companys unrecognized tax benefits are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits
January 1
|
|
$
|
270,000
|
|
$
|
349,000
|
|
$
|
380,000
|
|
Gross increases - tax
positions in prior period
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Gross decreases - tax
positions in prior period
|
|
|
|
|
|
|
|
|
|
|
Gross increases - current
period tax positions
|
|
|
7,000
|
|
|
7,000
|
|
|
66,000
|
|
Expiration of statute of
limitations
|
|
|
(43,000
|
)
|
|
(86,000
|
)
|
|
(97,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits
December 31, 2011
|
|
$
|
234,000
|
|
$
|
270,000
|
|
$
|
349,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
the balance of unrecognized tax benefits at December 31, 2011 are $342,000 of
tax benefits that if recognized would affect the tax rate. The Companys
unrecognized tax benefits could be reduced by $81,000 in the next twelve months
due to statute of limitations expirations. The Companys income tax liability
accounts included accruals for interest and penalties of $172,000 at December
31, 2011. The Companys 2011 income tax expense was decreased by $236,000 due
to net decreases for accrued interest and penalties.
The Companys
federal and state tax returns and tax returns it has filed in Costa Rica and
the United Kingdom are open for review going back to the 2008 tax year. Puerto
Rico has no statute of limitations on tax returns.
NOTE 11- 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; Transition Networks, which designs and markets data
transmission, computer network and media conversion products and print servers;
JDL Technologies, (JDL), which provides IT services; and Austin Taylor which
manufactures British standard telephone equipment and equipment enclosures for
the U.K and international markets. Non-allocated corporate general and
administrative expenses are categorized as Other in the Companys segment
reporting. Management has chosen to organize the enterprise and disclose
reportable segments based on products and services. There are no material
intersegment revenues.
Suttle
products are sold principally to U.S. customers. Suttle operates manufacturing
facilities in the U.S. and Costa Rica. Net long-lived assets held in foreign
countries were approximately $831,000 and $506,000 at December 31, 2011 and
2010, respectively. Transition Networks manufactures its products in the United
States and makes sales in both the U.S. and international markets. JDL
Technologies operates in the U.S. and makes sales in the U.S. Austin Taylor
operates a manufacturing facility in the U.K. and makes sales in the U.K. and
internationally. Consolidated sales to U.S.
customers were approximately 85%, 81% and 82% of sales from continuing
operations in 2011, 2010 and 2009 respectively. In 2011, sales to one of
Transition Networks customers accounted for 22.8% of consolidated sales. In
2010, sales to two of Transition Networks customers accounted for 15.1% and
12.0% of consolidated sales and one of JDL Technologies customers accounted
for 10.3% of consolidated sales. In 2009, sales to one of Transition Networks
customers accounted for 16.7% of consolidated sales and one of Suttles
customers accounted for 12.2% of consolidated sales.
47
Information
concerning the Companys operations in the various segments for the
twelve-month periods ended December 31, 2011, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Suttle
|
|
Transition
Networks
|
|
JDL
Technologies
|
|
Austin
Taylor
|
|
|
Other
|
|
|
Total
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
36,636,915
|
|
$
|
91,450,014
|
|
$
|
12,400,553
|
|
$
|
3,287,569
|
|
$
|
|
|
$
|
143,775,051
|
|
Cost of sales
|
|
|
27,365,489
|
|
|
46,825,149
|
|
|
7,262,006
|
|
|
3,427,280
|
|
|
|
|
|
84,879,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,271,426
|
|
|
44,624,865
|
|
|
5,138,547
|
|
|
(139,711
|
)
|
|
|
|
|
58,895,127
|
|
Selling, general and administrative expenses
|
|
|
6,897,672
|
|
|
23,730,729
|
|
|
1,982,353
|
|
|
1,320,094
|
|
|
6,177,373
|
|
|
40,108,221
|
|
Impairment
|
|
|
1,271,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,271,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
1,101,768
|
|
$
|
20,894,136
|
|
$
|
3,156,194
|
|
$
|
(1,459,805
|
)
|
$
|
(6,177,373
|
)
|
$
|
17,514,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
906,004
|
|
$
|
755,789
|
|
$
|
106,622
|
|
$
|
40,252
|
|
$
|
292,068
|
|
$
|
2,100,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
935,030
|
|
$
|
1,028,941
|
|
$
|
51,789
|
|
$
|
|
|
$
|
740,231
|
|
$
|
2,755,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
25,512,978
|
|
$
|
33,589,083
|
|
$
|
1,844,572
|
|
$
|
2,401,323
|
|
$
|
53,310,960
|
|
$
|
116,658,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Suttle
|
|
Transition
Networks
|
|
JDL
Technologies
|
|
Austin
Taylor
|
|
|
Other
|
|
|
Total
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
36,561,669
|
|
$
|
67,782,482
|
|
$
|
12,712,244
|
|
$
|
3,015,915
|
|
$
|
|
|
$
|
120,072,310
|
|
Cost of sales
|
|
|
26,880,667
|
|
|
31,826,169
|
|
|
7,132,263
|
|
|
3,032,579
|
|
|
|
|
|
68,871,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,681,002
|
|
|
35,956,313
|
|
|
5,579,981
|
|
|
(16,664
|
)
|
|
|
|
|
51,200,632
|
|
Selling, general and administrative expenses
|
|
|
6,638,163
|
|
|
21,459,214
|
|
|
1,470,086
|
|
|
1,084,345
|
|
|
4,934,440
|
|
|
35,586,248
|
|
Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
3,042,839
|
|
$
|
14,497,099
|
|
$
|
4,109,895
|
|
$
|
(1,101,009
|
)
|
$
|
(4,934,440
|
)
|
$
|
15,614,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
830,986
|
|
$
|
604,873
|
|
$
|
102,850
|
|
$
|
25,194
|
|
$
|
294,978
|
|
$
|
1,858,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
741,820
|
|
$
|
680,819
|
|
$
|
197,784
|
|
$
|
9,854
|
|
$
|
164,145
|
|
$
|
1,794,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
19,357,569
|
|
$
|
32,383,709
|
|
$
|
3,493,717
|
|
$
|
2,406,939
|
|
$
|
51,428,293
|
|
$
|
109,070,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Suttle
|
|
Transition
Networks
|
|
JDL
Technologies
|
|
Austin
Taylor
|
|
|
Other
|
|
|
Total
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
42,866,947
|
|
$
|
55,098,346
|
|
$
|
8,765,415
|
|
$
|
3,061,499
|
|
$
|
|
|
$
|
109,792,207
|
|
Cost of sales
|
|
|
33,095,673
|
|
|
25,768,865
|
|
|
6,011,918
|
|
|
3,067,101
|
|
|
|
|
|
67,943,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,771,274
|
|
|
29,329,481
|
|
|
2,753,497
|
|
|
(5,602
|
)
|
|
|
|
|
41,848,650
|
|
Selling, general and
administrative expenses
|
|
|
6,054,170
|
|
|
19,371,120
|
|
|
1,298,790
|
|
|
1,012,194
|
|
|
3,697,823
|
|
|
31,434,097
|
|
Impairment
|
|
|
|
|
|
|
|
|
|
|
|
196,020
|
|
|
|
|
|
196,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
3,717,104
|
|
$
|
9,958,361
|
|
$
|
1,454,707
|
|
$
|
(1,213,816
|
)
|
$
|
(3,697,823
|
)
|
$
|
10,218,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
$
|
651,407
|
|
$
|
579,816
|
|
$
|
155,744
|
|
$
|
76,495
|
|
$
|
234,859
|
|
$
|
1,698,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
2,667,916
|
|
$
|
355,129
|
|
$
|
37,026
|
|
$
|
114,153
|
|
$
|
63,334
|
|
$
|
3,237,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
21,110,624
|
|
$
|
29,640,360
|
|
$
|
1,548,930
|
|
$
|
4,044,746
|
|
$
|
46,569,034
|
|
$
|
102,913,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 12 FAIR VALUE
MEASUREMENTS
Fair value is
defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. Assets and liabilities measured at fair value are
classified using the following hierarchy, which is based upon the transparency
of inputs to the valuation as of the measurement date:
Level 1
Observable inputs that reflect unadjusted quoted prices for identical assets or
liabilities in active markets that the Company has the ability to access at the
measurement date.
Level 2
Observable inputs such as quoted prices for similar instruments and quoted
prices in markets that are not active, and inputs that are directly observable
or can be corroborated by observable market data. The types of assets and
liabilities included in Level 2 are typically either comparable to actively
traded securities or contracts, such as treasury securities with pricing
interpolated from recent trades of similar securities, or priced with models
using highly observable inputs, such as commodity options priced using
observable forward prices and volatilities.
Level 3
Significant inputs to pricing that have little or no observability as of the
reporting date. The types of assets and liabilities included in Level 3 are
those with inputs requiring significant management judgment or estimation, such
as the complex and subjective models and forecasts used to determine the fair
value of financial instruments.
The Companys
assets and liabilities that are measured at fair value on a recurring basis as
of December 31, 2011 and December 31, 2010, respectively, include money market
funds within cash equivalents of $830,000 and $9,624,000 classified as level
one within the hierarchy and certificate of deposits within investments of
$23,519,000 and $26,287,000 classified as level two. The Company does not have
any assets or liabilities classified as level three within the hierarchy, other
than the pension assets already discussed in Note 6.
NOTE 13 SUBSEQUENT
EVENTS
The Company
has evaluated subsequent events through the date of this filing. We do not
believe there are any material subsequent events which would require further
disclosure.
49
(b) SUPPLEMENTAL
FINANCIAL INFORMATION
Quarterly
Operating Results
(in thousands except per share amounts)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
March 31
|
|
June 30
|
|
Sept 30
|
|
Dec 31
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
31,023
|
|
$
|
45,430
|
|
$
|
41,985
|
|
$
|
25,337
|
|
Gross margins
|
|
|
13,328
|
|
|
18,456
|
|
|
16,555
|
|
|
10,556
|
|
Operating income
|
|
|
4,141
|
|
|
7,253
|
|
|
6,484
|
|
|
(363
|
)
|
Net income
|
|
|
2,558
|
|
|
4,085
|
|
|
3,730
|
|
|
(575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.30
|
|
$
|
0.48
|
|
$
|
0.44
|
|
$
|
(0.07
|
)
|
Diluted net income per
share
|
|
$
|
0.30
|
|
$
|
0.48
|
|
$
|
0.44
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
25,882
|
|
$
|
30,659
|
|
$
|
33,324
|
|
$
|
30,207
|
|
Gross margins
|
|
|
10,515
|
|
|
13,284
|
|
|
15,310
|
|
|
12,092
|
|
Operating income
|
|
|
2,120
|
|
|
4,192
|
|
|
6,304
|
|
|
2,998
|
|
Net income
|
|
|
1,331
|
|
|
2,415
|
|
|
3,999
|
|
|
1,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.16
|
|
$
|
0.29
|
|
$
|
0.48
|
|
$
|
0.23
|
|
Diluted net income per
share
|
|
$
|
0.16
|
|
$
|
0.29
|
|
$
|
0.48
|
|
$
|
0.22
|
|
|
|
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A (T):
|
CONTROLS AND PROCEDURES
|
Evaluation of
Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act)).
Our Chief
Executive Officer and Chief Financial Officer have concluded that, as of the
end of the period covered by this report, our disclosure controls and
procedures were effective to ensure that information required to be disclosed
by us in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
applicable rule and forms.
Managements Report
on Internal Control over Financial Reporting
Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial
reporting based on the framework in
Internal
control -- Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Operating Effectiveness of Accounting and Control Procedures
. As a result of our evaluation, our
management concluded that as of December 31, 2011, our internal control over
financial reporting is effective.
50
Changes in Internal Control over Financial
Reporting
There was no
change in the Companys internal control over financial reporting that occurred
during the Companys most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.
Management has
excluded from its assessment the internal control over financial reporting at
Patapsco Designs Limited of the UK, which was acquired on July 27, 2011, and whose
financial statements constitute 2.7 percent of total assets, less than one
percent of total revenues, and less than one percent of net income from
continuing operations on the consolidated financial statement amounts as of and
for the year ended December 31, 2011.
The Companys independent registered
public accounting firm, Deloitte & Touche LLP, has issued a report on the
effectiveness of the Companys internal control over financial reporting as of
December 31, 2011. That report is set forth immediately following the report of
Deloitte & Touche LLP on the consolidated financial statements included
herein.
|
|
ITEM 9B.
|
OTHER INFORMATION
|
None
PART III
|
|
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The
information required by Item 401 under Regulation S-K, to the extent applicable
to the Companys directors, will be set forth under the caption Election of
Directors in the Companys definitive proxy material for its May 22, 2012
Annual Meeting of Shareholders (2012 Proxy Materials) and is incorporated
herein by reference. The information required with respect to the Companys
officers by paragraph (b) of Item 401 is set forth under Item 1(c) (3) of this
Form 10-K.
The
information required by Item 405 regarding compliance with Section 16 (a) will
be set forth under the caption Section 16(a) Beneficial Ownership Reporting
Compliance in the Companys 2012 Proxy Materials, and is incorporated herein
by reference.
Code of Ethics
The Company
has adopted a Code of Ethics applicable to all officers of the Company as well
as certain other key accounting personnel. A copy of the Code of Ethics can be
obtained free of charge upon written request directed to the Companys
Assistant Secretary at the executive offices of the Company.
The information
required called for by Item 407 regarding corporate governance will be set
forth under the caption Corporate Governance and Board Matters in the 2012
Proxy Materials and is incorporated herein by reference.
|
|
ITEM 11.
|
EXECUTIVE COMPENSATION
|
The
information called for by Item 402 under Regulation S-K, will be set forth
under the caption Executive Compensation in the Companys 2012 Proxy
Materials, and is expressly incorporated herein by reference.
|
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
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 Companys 2012 Proxy Materials, and is
incorporated herein by reference.
|
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
information required by Item 404 under Regulation S-K will be set forth under
the caption Certain Relationship and Related Transaction in the Companys
2012 Proxy Materials, and is incorporated herein by reference.
51
The
information required by Item 407(a) will be set forth in the Companys 2012
Proxy Materials caption Corporate Governance and Board Matters and is
incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL ACCOUNTING FEES AND SERVICES
|
The
information required by Item 14 of Form 10K and 9(e) of Schedule 14A will be
set forth under the caption Principal Accountant Fees and Services in the
Companys 2012 Proxy Materials, and is incorporated herein by reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
(a) (1)
Consolidated
Financial Statements
The following
Consolidated Financial Statements of Communications Systems, Inc. and
subsidiaries appear at pages 29 to 49 herein:
|
|
|
|
|
Report of
Independent Registered Public Accounting Firm
|
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2011 and 2010
|
|
|
|
|
|
Consolidated
Statements of Income and Comprehensive Income for the years ended December
31, 2011, 2010 and 2009
|
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders Equity for the years ended December
31, 2011, 2010 and 2009
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
|
|
|
|
|
|
Notes to
Consolidated Financial Statements
|
(a) (2)
Consolidated Financial Statement Schedule
The following
financial statement schedule is being filed as part of this Form 10-K Report:
Schedule
II - Valuation and Qualifying Accounts and Reserves
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 pursuant to Item 601 of
Regulation S-K, including each management or compensatory plan or arrangement
are described on the Exhibit Index, which is at pages 56 through 59 of this
report.
52
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
15, 2012
|
/s/ William
G. Schultz
|
|
|
|
William G. Schultz, President, Chief
Executive
Office and Director
|
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 WILLIAM G. SCHULTZ and
DAVID T. MCGRAW 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/William
G. Schultz
|
|
President,
Chief Executive Officer
|
|
March 15,
2012
|
|
|
and Director
|
|
|
William G.
Schultz
|
|
|
|
|
|
|
|
|
|
/s/David T.
McGraw
|
|
Vice
President, Treasurer and
|
|
March 15,
2012
|
|
|
Chief
Financial Officer (Principal
|
|
|
David T.
McGraw
|
|
Financial
Officer and Principal
|
|
|
|
|
Accounting
Officer)
|
|
|
|
|
|
|
|
/s/Kristin
A. Hlavka
|
|
Corporate
Controller
|
|
March 15,
2012
|
|
|
|
|
|
Kristin A.
Hlavka
|
|
|
|
|
|
|
|
|
|
/s/Curtis A.
Sampson
|
|
Chairman of
the Board of Directors,
|
|
March 15,
2012
|
|
|
and Director
|
|
|
Curtis A.
Sampson
|
|
|
|
|
|
|
|
|
|
/s/Randall
D. Sampson
|
|
Director
|
|
March 15,
2012
|
|
|
|
|
|
Randall D.
Sampson
|
|
|
|
|
|
|
|
|
|
/s/Edwin C.
Freeman
|
|
Director
|
|
March 15,
2012
|
|
|
|
|
|
Edwin C.
Freeman
|
|
|
|
|
|
|
|
|
|
/s/Luella G.
Goldberg
|
|
Director
|
|
March 15,
2012
|
|
|
|
|
|
Luella Gross
Goldberg
|
|
|
|
|
|
|
|
|
|
/s/Gerald D.
Pint
|
|
Director
|
|
March 15,
2012
|
|
|
|
|
|
Gerald D.
Pint
|
|
|
|
|
|
|
|
|
|
/s/Roger
H.D. Lacey
|
|
Director
|
|
March 15,
2012
|
|
|
|
|
|
Roger H.D.
Lacey
|
|
|
|
|
|
|
|
|
|
/s/Jeffrey
K. Berg
|
|
Director
|
|
March 15,
2012
|
|
|
|
|
|
Jeffrey K.
Berg
|
|
|
|
|
|
|
|
|
|
53
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, 2011
FINANCIAL STATEMENT SCHEDULE
54
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts and Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
Beginning of
Period
|
|
Additions
Charged to Cost
and Expenses
|
|
Deductions
from
Reserves
|
|
Other
Changes
Add (Deduct)
|
|
Balance
at End
of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
$
|
500,000
|
|
$
|
91,000
|
|
$
|
(416,000
|
) (A)
|
|
|
|
$
|
175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
$
|
505,000
|
|
$
|
105,000
|
|
$
|
(110,000
|
) (A)
|
|
|
|
$
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
219,000
|
|
$
|
310,000
|
|
$
|
(24,000
|
) (A)
|
|
|
|
$
|
505,000
|
|
|
|
|
|
|
(A)
|
Accounts determined to be
uncollectible and charged off against reserve.
|
55
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, 2011
EXHIBITS
56
COMMMUNICATIONS SYSTEMS, INC. AND
SUBSIDIARIES
Exhibit Index To
Form 10-K for the Year Ended December 31, 2011
|
|
|
|
|
|
Regulation S-K
Exhibit Table
Reference
|
|
Title of
Document
|
|
Location
in Consecutive Numbering
System as Filed With the Securities
and Exchange Commission
|
|
|
|
|
|
3.1
|
|
|
Articles of
Incorporation, as amended
|
|
Filed as
Exhibit 3.1 to the Form 10-K Report 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.
|
|
|
|
|
|
|
3.3
|
|
|
Amended and
Restated Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock
|
|
Filed as
Exhibit 4(a) to Form 8-A dated December 28, 2009 and incorporated herein by
reference.
|
|
|
|
|
|
|
10.1
|
|
|
Credit
Agreement dated as of October 28, 2011 between Communications Systems, Inc.,
JDL Technologies, Inc., Transition Networks, Inc. and Wells Fargo Bank,
National Association
|
|
Filed as
Exhibit 10.1 to the Form 10-Q for the quarter ended September 30, 2011 and
incorporated herein by reference.
|
|
|
|
|
|
|
10.2
|
|
|
Revolving
Line of Credit Note dated as of October 28, 2011 between Communications
Systems, Inc., JDL Technologies, Inc., Transition Networks, Inc. and Wells
Fargo Bank, National Association
|
|
Filed as
Exhibit 10.1 to the Form 10-Q for the quarter ended September 30, 2011 and
incorporated herein by reference.
|
|
|
|
|
|
|
10.3
|
|
*
|
Communications Systems, Inc. Employee
Stock Ownership Plan and Trust, effective as of January 1, 2009
|
|
Filed
herewith.
|
|
|
|
|
|
|
10.3.1
|
|
*
|
First
Amendment of the Communications Systems, Inc., Employee Stock Ownership Plan
and Trust, entered into on October 21, 2011
|
|
Filed
herewith.
|
|
|
|
|
|
|
10.4
|
|
*
|
1990
Employee Stock Purchase Plan, as amended and restated May 19, 2011
|
|
Filed as
Exhibit 99.4 to the Form 8-K dated May 19, 2011 and incorporated herein by
reference.
|
|
|
|
|
|
|
10.5
|
|
*
|
1990 Stock
Option Plan for Nonemployee Directors, as amended May 19, 2011
|
|
Filed as
Exhibit 10.4 to the Form 10-Q for the quarter ended September 30, 2011 and
incorporated herein by reference.
|
|
|
|
|
|
|
10.6
|
|
*
|
1992 Stock
Plan, as amended August 11, 2011
|
|
Filed as
Exhibit 10.3 to the Form 10-Q for the quarter ended September 30, 2011 and
incorporated herein by reference.
|
57
|
|
|
|
|
|
10.7
|
|
*
|
Supplemental
Executive Retirement Plan
|
|
Filed as
Exhibit 10.8 to the 1993 Form 10-K and incorporated herein by reference.
|
|
|
|
|
|
|
10.8
|
|
*
|
Communications
Systems, Inc. Long Term Incentive Plan, as amended through March 1, 2012
|
|
Filed as
Exhibit 99.2 to the Companys Form 8-K dated March 9, 2012 and incorporated
herein by reference.
|
|
|
|
|
|
|
10.9
|
|
*
|
Consulting
Agreement between the Company and Jeffrey K. Berg dated as of May 19, 2011
|
|
Filed as
Exhibit 99.1 to the Companys Form 8-K dated May 19, 2011 and incorporated
herein by reference.
|
|
|
|
|
|
|
10.10
|
|
*
|
Communications
Systems, Inc. 2011 Executive Compensation Plan
|
|
Filed as
Exhibit 99.3 to the Form 8-K dated May 19, 2011, and incorporated herein by
reference.
|
|
|
|
|
|
|
10.11
|
|
*
|
Communications
Systems, Inc. Annual Bonus Plan
|
|
Filed as
Exhibit 99.1 to the Companys Form 8-K dated March 9, 2012 and incorporated
herein by reference.
|
|
|
|
|
|
|
10.12
|
|
|
Form of
Rights Agreement, dated as of December 23, 2009 between Communications
Systems, Inc. and Wells Fargo Bank National Association
|
|
Filed as
Exhibit 4(b) to Form 8-A on December 28, 2009 and incorporated herein by
reference.
|
|
|
|
|
|
|
* Indicates
compensatory plans
58
COMMMUNICATIONS SYSTEMS, INC. AND
SUBSIDIARIES
Exhibit Index To
Form 10-K for the Year Ended December 31, 2011
|
|
|
|
|
|
Regulation S-K
Exhibit Table
Reference
|
|
Title of Document
|
|
Location in Consecutive Numbering
System as Filed With the Securities
and Exchange Commission
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
Subsidiaries
of the Registrant
|
|
Filed
herewith.
|
|
23
|
|
Consent of
Independent Registered Public Accounting Firm
|
|
Filed
herewith.
|
|
24
|
|
Power of
Attorney
|
|
Included in
signatures at page 53.
|
|
31.1
|
|
Certification
of Chief Executive Officer
|
|
Filed
herewith.
|
|
31.2
|
|
Certification
of Chief Financial Officer
|
|
Filed
herewith.
|
|
32
|
|
Certification
under USC § 1350
|
|
§ 1350 Filed
herewith.
|
|
99.1
|
|
Press
Release dated March 12, 2012
|
|
Filed
herewith.
|
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 CSIs Assistant Secretary at
the executive offices of the Company.
59
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