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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 0-10355
COMMUNICATIONS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0957999_
(State or other jurisdiction (Federal Employer
of incorporation or organization) Identification No.)
213 South Main Street
Hector, MN 55342
Address of principal executive offices and zip code
Registrant's telephone number, including area code: (320) 848-6231
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $.05 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $101,211,000 based upon the closing sale price of
the Company's common stock on the NASDAQ National Market System on March 15,
1996.
As of March 15, 1996 there were outstanding 9,308,210 shares of the Registrant's
common stock.
Documents Incorporated by Reference:The Company's Proxy Statement for its
Annual Meeting of Shareholders to be held
on May 14, 1996 is incorporated by
reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Communications Systems, Inc. is a Minnesota corporation organized in
1969 which, operating directly and through its subsidiaries located in Puerto
Rico, Costa Rica and Bethesda, Wales (herein collectively called "CSI" or the
"Company") is principally engaged in the manufacture and sale of modular
connecting and wiring devices for voice and data communications. The Company's
product line, which is commonly referred to as "telephone station apparatus",
consists primarily of equipment which connects telephones, data terminals and
related equipment at customer premises to the telephone network. The Company
also conducts value-added design and electronic assembly for original equipment
manufacturers through a subsidiary located in Merrifield, Minnesota.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in two business segments: (i) the manufacture and
sale of connecting and wiring devices for voice and data communications; and
(ii) value-added design and electronic assembly for original equipment
manufacturers. Information regarding industry segments is set forth in Note 11
in the Financial Statements under Item 8 herein.
(c) NARRATIVE DESCRIPTION OF BUSINESS
(1) Telephone Station Apparatus Segment
Telephone station apparatus is manufactured and marketed under the
"Suttle Apparatus" brand name in the United States (U.S.) and internationally
and through Austin Taylor Communications in the United Kingdom (U.K.), Europe
and other foreign countries. Sales of telephone station apparatus were
$66,004,000 in 1995, or 77% of consolidated revenues. Suttle Apparatus
operations accounted for 79% of telephone station apparatus sales and Austin
Taylor Communications accounted for 21%.
(i) Suttle Apparatus Operations
The Company manufactures telephone station apparatus at its plants in
Hector, Minnesota (Suttle Apparatus Minnesota Division), Humacao, Puerto Rico
(Suttle Caribe, Inc.) and San Jose, Costa Rica (Suttle Costa Rica, S.A.).
Products are marketed under the "Suttle Apparatus" brand name in the U.S. and
internationally and under the "Tel Products" brand name in the U.S. retail
market.
(A) Products
Suttle Apparatus' telephone station apparatus products are used in
on-premise connection of telephones, data terminals and related equipment. The
product line consists primarily of modular connecting devices and includes
numerous types of jacks, connecting blocks and assemblies, adapters, cords and
related equipment, which are offered in a variety of colors, styles and wiring
configurations. Most of the Company's products are used in voice applications,
but the Company has developed an expanding line of products for data
applications which has enjoyed good market acceptance to date. An increasingly
significant portion of the Company's revenues are derived from sales of a line
of corrosion resistant connectors which utilize a water resistant gel to offer
superior performance in harsh environments. The Company's station apparatus
products generally range in price from $.70 to $25.00. A majority of the sales
volume, both in units and revenues, is derived from products selling for under
$5.00.
2
(B) Markets and Marketing
The Company competes in all major segments of the telephone station
apparatus market. These market segments include the "Big 8" telephone companies
(the seven Regional Bell Operating Companies, or "RBOCs" and GTE), other
telephone companies, electrical contractors, interconnect companies, original
equipment manufacturers and retailers. These markets are served directly through
the Company's sales staff and through distributors such as North Supply, Graybar
Electric Company, Alltel Supply and Anixter Communications.
As a group, sales to the Big 8 telephone companies, both directly and
through distribution, were approximately $31,577,000 in 1995 and $25,242,000 in
1994, which represented about 62% and 59% of Suttle Apparatus' sales in 1995 and
1994, respectively. Sales to North Supply, the principal distributor serving
this market were approximately 16% and 20% of Suttle Apparatus' sales in 1995
and 1994, respectively.
Approximately 11% of Suttle Apparatus' 1995 revenues were derived from
sales in the retail market. The Company is a supplier of station apparatus to
retailers such as Radio Shack, Coast-to-Coast, office supply distributors,
specialized telephone stores, various hardware stores and numerous retail
outlets. Sales to Radio Shack accounted for 8% and 10%, respectively, of Suttle
Apparatus' sales in 1995 and 1994.
The balance of Suttle Apparatus' sales in 1995 and 1994 were to
original equipment manufacturers, non-Big 8 telephone companies, independent
contractors and electrical contractors. Independent contractors (which include
businesses often referred to as "interconnect companies") are engaged in the
business of engineering, selling, installing and maintaining telephone equipment
for the business community. All major telephone operating companies have
contracting operations, as does AT&T. The Company sells its products to a number
of independent contractors through the same suppliers which serve the telephone
company market.
Marketing of the Company's station apparatus products varies depending
on whether apparatus is being sold for the retail market or the communications
industry market. In the retail market, sales are made through a limited number
of manufacturers' representatives. In the communications industry market, sales
to telephone companies are made directly or through distribution. Sales to
independent contractors are made through a nationwide network of distributors,
some of which are affiliates of major telephone companies, and through the
Company's sales staff.
(C) Competition
Suttle Apparatus encounters strong competition in all its station
apparatus product lines. The Company competes primarily on the basis of the
broad lines of products offered, product performance, quality, price and
delivery.
The Company's principal competitors for sales to telephone companies
and independent contractors include: AT&T, Ortronics, Leviton, Hubbell, Northern
Telecom and AMP, Inc. Most of these companies have greater financial resources
than the Company. In addition, distributors of the Company's apparatus products
also market products for one or more of these competitors. AT&T markets to
telephone companies and independent contractors directly and through telephone
industry distributors that also market the Company's products.
In retail markets, the Company experiences significant competition from
AT&T for sales of industry standard connection devices that meet FCC standards.
The Company also experiences significant competition from East Asian
manufacturers of low-priced modular products which market their products through
a number of distributors to various retail outlets.
The Company's principal competitor for sales to the Big 8 is AT&T. To
date, foreign manufacturers of apparatus products have not presented significant
competition for sales to this market.
3
(D) Order Book
Suttle Apparatus manufactures its station apparatus on the basis of
estimated customer requirements. Outstanding customer orders at March 1, 1996
were approximately $4,300,000 compared to approximately $6,927,000 at March 1,
1995. Because new orders are filled on a relatively short timetable, the Company
does not believe its order book is a significant indicator of future results.
(E) Manufacturing and Sources of Supply
The Company's station apparatus products are manufactured using plastic
parts, wire sub-assemblies, fasteners, brackets, electronic circuit boards and
other components, most of which are fabricated by the Company. There are
multiple sources of supply for the materials and parts required and the Company
is not dependent upon any single supplier, except that Suttle's corrosion
resistant products utilize a moisture-resistant gel-filled fig available only
from Raychem Corporation. The unavailability of the gel-filled figs from Raychem
Corporation could have a material adverse effect on the Company. The Company has
not generally experienced significant problems in obtaining its required
supplies, although from time to time spot shortages are experienced.
(F) Research and Development; Patents
The Company continually monitors industry requirements and creates new
products to improve its existing station apparatus product line. The Company's
CorroShield line of corrosion resistant products was introduced in 1993, as was
the Flex-Plate line of data products. The Company added additional products to
these product lines in 1994 and 1995. The Company's new SpeedStar line of high
speed data connectors was introduced in early 1996.
Historically, the Company has not relied on patents to protect its
competitive position in the station apparatus market. However, duplication of
Company designs by foreign apparatus manufacturers has caused the Company to
apply for design patents on a number of station apparatus products.
The Company's "Suttle Apparatus" brand name, as well as its registered
trademark "Tel" are important to its business. The Company regularly supports
these names by trade advertising and believes they are well known in the
marketplace.
(ii) Austin Taylor Operations
Austin Taylor Communications, Ltd. manufactures voice and data
connector products at its plant in Bethesda, Wales, U.K. Its product line
consists of British standard line jacks, patch panels, wiring harness
assemblies, metal boxes, distribution cabinets and distribution and central
office frames.
Austin Taylor is a vertically integrated manufacturer with metal stamping,
metal bending, forming and painting, plastic injection molding and printed
circuit board assembly capabilities. Austin Taylor is a primary source of supply
for some products to British Telecom, the United Kingdom's principal telephone
company. Sales to British Telecom accounted for 16% and 28% of Austin Taylor
sales in 1995 and 1994, respectively. Other major customers include Northern
Telecom Europe, NYNEX and AT&T Europe. Austin Taylor's products are sold
directly by its sales staff and through distributors, including Anixter
Communications, NS Supply Group, RS Components and Telcom Products.
Approximately 79% and 73% of Austin Taylor sales were to United Kingdom
customers in 1995 and 1994, respectively.
The Company believes the European telecommunications market will offer
increasing opportunities as the European Economic Community eliminates trade
barriers and standardizes on modular connector products. In addition to
continued manufacturing and marketing of its existing products, Austin Taylor
will be a base to manufacture and/or distribute existing Suttle Apparatus
products or new jointly developed products in the United Kingdom, Europe and
internationally. The Company also markets Austin Taylor products in the U.S.,
Canada, and other markets.
4
Outstanding customer orders for Austin Taylor products were
approximately $1,660,000 at March 1, 1996 compared to $2,305,000 at March 1,
1995. Because Austin Taylor fills new orders on a relatively short time table,
the Company does not believe its order book is s significant indicator of future
results.
(2) Contract Manufacturing of Electronic Assemblies and Products
The Company's Zercom Corporation subsidiary is engaged in contract
manufacturing of electronic assemblies and products, including printed circuit
board assembly, cable and harness assembly and electro-mechanical assemblies,
for original equipment manufacturers (OEMs). Zercom also provides product
engineering services, including circuit board design, case and enclosure design
and product development consulting from design concept to finished product.
Sales by Zercom Corporation accounted for 23% of consolidated revenues in 1995.
Zercom principally markets to OEM's in Minnesota and surrounding states
through a network of five manufacturers representatives. Zercom's marketing is
focused on OEMs requiring the manufacture of complex and labor intensive items
which will not be manufactured in the high volumes necessary to justify offshore
or automated production. Zercom's principal customer is Thermo-King, a
Westinghouse subsidiary. Sales to Thermo-King represented approximately 39% and
53% of Zercom's revenues in 1995 and 1994, respectively.
Contract manufacturing of assemblies and products is one of the fastest
growing and most competitive industries in the U.S. Zercom competes with both
domestic and foreign operations, many of which have substantially greater
resources than the Company. Zercom competes in the market place based on its
product design capabilities and reputation for timely delivery of high quality
products.
At March 1, 1996, Zercom's outstanding customer orders were
approximately $5,736,000 compared to $6,802,000 at March 1, 1995.
The materials used in Zercom's operations include electronic
components, sheet metal, printed circuit boards, wire and cable connectors.
There are multiple sources of supply for these materials. Zercom is not
dependent on any single supplier, and has not experienced significant problems
in obtaining required supplies.
Prior to November, 1995, Zercom manufactured and marketed a proprietary
line of electronic equipment for the sport fishing and watercraft industries.
Sales of these products, which were not profitable, accounted for 10% and 7% of
Zercom's sales in 1995 and 1994, respectively. In November, 1995, Zercom entered
into an exclusive marketing and distribution agreement with a sports
distribution company providing for an assignment of Zercom's technology rights
to marine products and giving the distribution company the exclusive sales and
marketing rights for the proprietary products. Zercom is continuing to
manufacture these products for the distribution company on a contract basis.
(3) Employment Levels
As of March 1, 1996 the Company employed 1,135 people. Of this number,
approximately 930 were engaged in telephone station apparatus operations
(including 265 in Puerto Rico, 190 in Hector, Minnesota, 35 in Union, New
Jersey, 285 in Costa Rica and 155 in Wales), 190 were employed in contract
manufacturing operations in Merrifield, Minnesota and 15 held general and
administrative positions. The Company considers its employee relations to be
good.
(4) Factors Affecting Future Performance
From time to time, in reports filed with the Securities and Exchange
Commission, in press releases, and in other communications to shareholders or
the investing public, the Company may comment on anticipated future financial
performance. Such forward looking statements are subject to risks and
uncertainties, including but not limited to buying patterns of the Regional Bell
Operating Companies, the impact of new products introduced by competitors,
higher than expected expenses related to sales and new marketing initiatives,
changes in tax laws, particularly in regard to taxation of income of its
subsidiary in Puerto Rico and other risks involving the telecommunications
industry generally.
5
(5) Executive Officers of Registrant
The executive officers of the Company and their ages at March 1, 1996
were as follows:
Name Age Position1
Curtis A. Sampson 62 Chairman of the Board, President
and Chief Executive Officer [1970]
Jeffrey K. Berg 53 President and General Manager
Suttle Apparatus Corporation [1990]
Paul N. Hanson 49 Vice President - Finance, Treasurer
and Chief Financial Officer [1982]
John C. Hudson 51 Managing Director, Austin Taylor
Communications, Ltd. [1992]2
Daniel Meyer 58 Vice President and General Manager
Zercom Corporation [1995]3
- -----------------------------------
1 Dates in brackets indicate period during which officers began serving
in such capacity. Executive officers serve at the pleasure of the Board of
Directors and are elected annually for one year terms.
2 Austin Taylor Communications, Ltd. was acquired by the Company in
1992.
3 From 1979 to 1995, Mr. Meyer served as Director of Engineering for
Suttle Apparatus Corporation.
Messrs. Sampson and Hanson each devote approximately 60% of their working
time to the Company's business with the balance devoted to management
responsibilities at Hector Communications Corporation ("HCC"), for which they
are separately compensated by HCC.
(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.
6
ITEM 2. PROPERTIES
The administrative and manufacturing functions of CSI are conducted at
the following facilities:
- -- In Hector, Minnesota the Company owns a 15,000 square foot building where
its executive and administrative offices are located.
- -- Telephone station apparatus manufacturing is conducted at four locations.
At Hector, Minnesota, the Company owns three plants totaling 68,000 feet of
manufacturing space. Austin Taylor Communications, Ltd. owns a 40,000
square foot facility and leases a 6,000 square foot facility in Bethesda,
Wales. The Company has a long-term lease from the Puerto Rico Industrial
Development Company on three facilities in Humacao, Puerto Rico aggregating
65,000 square feet. The Company also has leased 40,000 square feet of
manufacturing space in San Jose, Costa Rica.
- -- The Company owns a 50,000 square foot building in Merrifield, Minnesota and
leases a 9,400 square foot manufacturing facility in Aitkin, Minnesota
where Zercom Corporation conducts its contract manufacturing operations.
- -- The Company owns a 35,000 square foot plant in Lawrenceville, Illinois.
This facility is for sale but portions of the facility are leased out
pending a sale.
CSI believes these facilities will be adequate to accommodate its
administrative and manufacturing needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
No material litigation or other claims are presently pending against
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
7
PART II
ITEM 5. MARKET MATTERS FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's common stock is currently traded in the National Market
System of the National Association of Securities Dealers Automated Quotation
System ("NASDAQ").
The table below presents the price range of high and low trades of the
Company's common stock for each period indicated as reported by NASDAQ:
______1995______ ______1994______
High Low High Low
First $15.00 $12.00 $14.00 $11.00
Second 18.75 13.50 13.75 10.50
Third 20.00 13.75 14.00 9.50
Fourth 16.75 12.75 12.75 9.75
(b) HOLDERS
At March 1, 1996 there were approximately 850 holders of record of
Communications Systems, Inc. common stock.
(c) DIVIDENDS
The Company has paid regular quarterly dividends since October 1, 1985.
The per share quarterly dividends payable in fiscal 1994 and 1995 were as
follows:
January 1, 1994 - April, 1994 $.05
July 1, 1994 - April, 1995 .06
July 1, 1995 - Present .07
8
ITEM 6. SELECTED FINANCIAL DATA
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
(in thousands except per share amounts)
Year Ended December 31
________________________________________________
1995 1994 1993 1992 1991
_______ _______ _______ _______ _______
Selected Income Statement Data
Revenues $85,614 $74,363 $60,579 $54,764 $37,928
Costs and Expenses:
Cost of Sales 64,393 55,951 44,339 40,076 27,304
Selling, General and Administrative Expenses 10,777 10,301 8,691 8,022 6,057
_______ _______ _______ _______ _______
Total Costs and Expenses 75,170 66,252 53,030 48,098 33,361
Operating Income 10,444 8,110 7,549 6,666 4,568
Other Income, Net 940 343 561 213 799
Income Before Income Taxes 11,384 8,454 8,110 6,879 5,367
Income Tax Expense 2,300 1,650 1,375 1,400 1,100
_______ _______ _______ _______ _______
Income Before Cumulative Effect of Change in
Accounting Principle 9,084 6,804 6,735 5,479 4,267
Cumulative Effect of Change in Accounting Principle 481
_______ _______ _______ _______ _______
Net Income $9,084 $6,804 $6,735 $5,960 $4,267
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
Net Income (Loss) Per Common and
Common Equivalent Share:
Before Cumulative Effect of Change
in Accounting Principle $.99 $.75 $.75 $.62 $.48
Cumulative Effect of Change in Accounting Principle .05
_______ _______ _______ _______ _______
Net Income Per Share $.99 $.75 $.75 $.67 $.48
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
Cash Dividends Per Share $.26 $.22 $.19 $.17 $.14
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
Average Common and Common
Equivalent Shares Outstanding 9,217 9,093 9,026 8,886 8,799
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
Selected Balance Sheet Data
Total Assets $63,287 $57,753 $48,939 $41,211 $34,571
Property, Plant and Equipment, Net 10,915 10,270 7,415 6,624 5,825
Working Capital 35,929 27,928 23,570 25,910 21,464
Assets of Businesses Transferred Under
Contractual Arrangements 593 1,001 1,302 1,609
Stockholders' Equity 54,076 45,566 40,365 34,751 29,958
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1995 Compared to 1994
The Company's operations are in two business segments, manufacture of telephone
station apparatus and contract manufacturing of electronic assemblies and
products. Consolidated revenues increased 15% to $85,614,000. Consolidated
operating income increased 29% to $10,444,000. Telephone station apparatus sales
increased 16% to $66,004,000. Apparatus sales in the U.S. market increased 19%.
Sales to the Big 8 telephone companies (the seven Regional Bell Operating
Companies (RBOCs) and GTE) increased 25% and accounted for 62% of U.S. apparatus
sales. Sales to original equipment manufacturers (OEMs), electrical contractors
and other telephone companies increased 6%. Sales to retail customers increased
1%. U.S. export sales, including sales to Canada, increased 46%. The sales
increases were generated by increased sales of the Company's CorroShield line of
corrosion resistant connectors. CorroShield sales increased 123% to $14,683,000
in 1995, accounting for 29% of all U.S. apparatus sales.
Telephone apparatus sales reported by Austin Taylor, the Company's United
Kingdom based subsidiary, increased $520,000, or 4%. The sales increase was due
to increased sales of cable television products in the U.K. market, where cable
television is still a young industry. Sales of these products offset the loss to
competitors of a number of sales contracts with British Telecom for line jacks
and modular boxes. Sales to U.K. customers accounted for 79% of Austin Taylor's
1995 sales.
Contract manufacturing sales increased $2,325,000 or 13%. The sales increase was
due to increased sales of multifunction display units to a personal watercraft
manufacturer, increased sales of circuit boards to the semi-conductor and
medical technologies industries, and increased sales of video cables and fish
locating products. Sales of these products offset a 16% decline in sales to
Thermo-King, which is now manufacturing in-house a number of the products made
previously by the Company. The Company expects sales to this customer will
continue to decline in 1996.
Prior to November, 1995, Zercom manufactured and marketed a proprietary
line of electronic equipment for the sport fishing and watercraft industries.
Sales of these products, which were not profitable, accounted for 10% and 7% of
Zercom's sales in 1995 and 1994, respectively. In November, 1995, Zercom entered
into an exclusive marketing and distribution agreement with a sports
distribution company providing for an assignment of Zercom's technology rights
to marine products and giving the distribution company the exclusive sales and
marketing rights for the proprietary products. Zercom is continuing to
manufacture these products for the distribution company on a contract basis.
Consolidated gross margins on sales were $21,221,000 in 1995, up 15% from
$18,411,000 in 1994. Gross margins on apparatus sales were $18,707,000 in 1995,
up 15% from $16,265,000 in 1994. Gross margin as a percentage of apparatus sales
was 28% compared to 29% in 1994. Gross margin in U.S. plants was unchanged from
1994 levels. Austin Taylor's margins declined slightly due to increased labor
and depreciation charges. Gross margins for contract manufacturing increased
$368,000 or 17%. Gross margins as a percentage of contract manufacturing sales
was 13%, compared to 12% in 1994. The margin improvement was due to changes in
product mix, principally sales of printed circuit boards, which carried slightly
higher margins than other products.
Selling, general and administrative expenses increased $476,000 or 5%. The
increase was due to higher administration and distribution costs in the U.K.,
which increased $489,000 or 34%. U.S. apparatus selling and administrative
expenses increased $63,000 or 1%. Contract manufacturing expenses increased
$180,000 or 9%. General corporate expenses declined $252,000 or 21%.
Investment income, net of interest expense, increased $597,000 due to higher
interest earnings on invested funds and increased marketable securities
valuations.
Income before income taxes increased $2,931,000 or 35%. The Company's effective
income tax rate was 20.2% compared to 19.5% in 1994. The increase in the tax
rate was due to taxes accrued on the Company's foreign earnings. Net income
increased $2,281,000 or 34%.
10
1994 Compared to 1993
Consolidated revenues increased 23% to $74,363,000. Consolidated operating
income increased 7% to $8,110,000. Telephone station apparatus sales increased
19% to $57,077,000. Apparatus sales in the U.S. market increased 11%. Sales to
the Big 8 telephone companies increased 10% and accounted for 59% of U.S.
apparatus sales. Sales to original equipment manufacturers, electrical
contractors and other telephone companies increased 17%. Sales to retail
customers increased 4%. U.S. export sales, including sales to Canada, increased
8%. The sales increases were generated by sales of connecting block and screw
terminal products the Company acquired from AT&T in 1993, increased sales of
data products (principally category 5 data connectors), and fourth quarter sales
of CorroShield products to an additional RBOC.
Telephone apparatus sales reported by Austin Taylor increased $4,950,000, or 60%
from 1993. Sales to British Telecom, the U.K.'s principal telephone company,
increased 26%, and accounted for 28% of Austin Taylor's 1994 sales. Sales to
other telephone companies, distributors and original equipment manufacturers,
including Northern Telecom, AT&T and NYNEX, also increased substantially over
1993. Sales to U.K. customers accounted for 73% of Austin Taylor's 1994 sales.
Contract manufacturing revenues increased $4,602,000 or 36%. The increase was
due to increased sales to Thermo-King, which accounted for 53% of the segment's
1994 sales, increased sales to other original equipment manufacturers and
increased sales of fish locating products to retail markets.
Consolidated gross margins on sales were $18,411,000 in 1994, up 13% from
$16,240,000 in 1993. Gross margins on apparatus sales were $16,265,000 in 1994,
up 12% from $14,548,000 in 1993. Gross margin as a percentage of apparatus sales
was 29% compared to 30% in 1993. The decline in gross margin was due to
unfavorable overhead variances in U.S. plants during the first three quarters of
1994. These plants were prepared for higher manufacturing volumes than were
necessary in that time frame. The Company resized its manufacturing operations
in 1994 to eliminate the excess overhead, incurring a charge against earnings of
$200,000, net of income taxes. Austin Taylor's margins improved to 25% in 1994
compared to 20% in 1993 due to volume driven improvements in production
efficiency. Gross margins for the contract manufacturing segment increased 27%.
The gross margin as a percentage on contract manufacturing sales was 12%
compared to 13% in 1993.
Selling, general and administrative expenses increased $1,610,000 or 19%. U.S.
apparatus selling, general and administrative expenses increased $357,000, or
7%, due to volume driven increases in selling and delivery expenses. Austin
Taylor expenses increased $415,000 or 40%. Contract manufacturing expenses
increased $514,000 or 33% due to increased selling costs and advertising
expenses associated with its fish locating products.
General corporate expenses increased $287,000 or 31%.
Investment income, net of interest expense, declined $218,000 due to decreased
marketable securities valuations and interest charges associated with the
acquisition of Austin Taylor.
Income before income taxes increased $343,000 or 4%. The Company's effective
income tax rate was 19.5% in 1994 compared to 17% in 1993. The increase in the
tax rate was due to limits placed by Congress on the possessions tax credit
(section 936) the Company receives on earnings from its Puerto Rico operations.
Net income increased $68,000 or 1%.
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.
11
Liquidity and Capital Resources
At December 31, 1995, the Company had approximately $12,198,000 of cash and cash
equivalents compared to $8,830,000 of cash and cash equivalents at December 31,
1994. The Company had working capital of approximately $35,929,000 and a current
ratio of 4.9 to 1 compared to working capital of $27,928,000 and a current ratio
of 3.3 to 1 at the end of 1994. The improvement in the current ratio in 1995 was
due to increased cash and inventory balances on hand and reduced levels of
current liabilities.
Cash flow provided by operations was approximately $6,983,000 in 1995 compared
to $7,058,000 in 1994. The decrease was due to payments made by the Company to
increase inventories and reduce outstanding current liabilities. These payments
offset increased cash flows provided by increased net income and faster
collections of accounts receivable. Cash used in investing activities declined
$659,000 due to reduced levels of capital expenditures. The Company expects to
spend $3,500,000 on capital additions in 1996. Cash used in financing activities
declined $574,000 as cash received from common stock issues, principally
exercises of employee stock options, offset higher debt payments and increased
dividend payments to shareholders.
The bulk of the Company's U.S. apparatus manufacturing operations are located in
Puerto Rico. Until 1994, substantially all the earnings of the Puerto Rico
operations were sheltered from U.S. income tax due to the possessions tax credit
(section 936). Under provisions of the Omnibus Budget Act of 1993, which went
into effect beginning in the 1994 tax year, the amount of the possessions credit
is limited to a percentage of the Company's Puerto Rico payroll and
depreciation. U.S. income tax expense on the Company's earnings in Puerto Rico,
after full utilization of the available tax credits, was $272,000 and $209,000
in 1995 and 1994, respectively. Additional legislation proposed in Congress in
1995 would phase out the possessions credit entirely over a seven year period.
This legislation did not pass in 1995, but the Company expects similar
legislation will be proposed again in the future. Had the Company incurred
income tax expense on Puerto Rico operations in 1995 at the full U.S. rate,
income tax expense would have increased by $2,024,000.
At December 31, 1995 approximately $27,306,000, $1,890,000, $412,000 and
$251,000 of working capital were invested in the Company's subsidiaries in
Puerto Rico, the United Kingdom, Canada and Costa Rica, respectively. The
Company expects to maintain these investments to support the continued operation
of the subsidiaries. The Company uses the U.S. dollar as its functional currency
in Costa Rica. The United Kingdom and Canada are both politically and
economically stable countries. Accordingly, the Company believes its risk of
material loss due to adjustments in foreign currency markets to be small.
At December 31, 1995, the Company's obligation for notes payable totaled
$147,000, all of which is due within one year. The Company has a $2,000,000 bank
line of credit available for use. In the opinion of management, based on the
Company's current financial and operating position and projected future
expenditures, sufficient funds are available to meet the Company's anticipated
operating and capital expenditure needs.
Acquisitions
Effective January 4, 1996, the Company acquired Automatic Tool and Connector
Co., Inc. of Union, New Jersey, in exchange for $3,100,000 in cash and common
stock. Automatic Tool and Connector Co. (ATC) is a manufacturer of high
performance fiber optic connectors, interconnect devices and coaxial cable
assemblies for the telecommunications, medical electronics, computer and other
markets. The acquisition represents the Company's entrance into the market for
fiber optic connectors, which is the fastest growing segment in the
telecommunications connector market. ATC's sales for its 1995 fiscal year were
approximately $3,200,000.
In 1994, the Company finalized the 1993 acquisition of several product lines
used for standard telephone installations from AT&T. The cost of the purchase
was $2,250,000, of which a downpayment of $1,500,000 had been made at December
31, 1993.
12
These acquisitions, as well as other acquisitions and dispositions the Company
has made over the past several years (including the 1992 acquisition of Austin
Taylor Communications, Ltd.), have served to expand the Company's product
offerings and customer base in both U.S. and international markets. The Company
is seeking to position itself in the marketplace as a growth oriented
manufacturer of telecommunications connecting devices. The Company is continuing
to search for acquisition candidates which fit the Company's target markets.
Pending Accounting Changes
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". This statement requires
that assets to be held and used be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable. An impairment loss should be recognized when the estimated future
cash flows from the asset are less than the carrying value of the asset. Assets
to be disposed of should be reported at the lower of their carrying amount or
fair value less cost to sell. This statement is effective for fiscal years
beginning after December 15, 1995. The Company does not believe adoption of this
statement will have a material effect on results of operations or financial
position.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The
Company has elected to continue to follow the guidance of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" for measurement
and recognition of stock-based transactions with employees. The Company will
adopt the disclosure provisions of SFAS No. 123 in 1996.
Factors Affecting Future Performance
From time to time, in reports filed with the Securities and Exchange
Commission, in press releases, and in other communications to shareholders or
the investing public, the Company may comment on anticipated future financial
performance. Such forward looking statements are subject to risks and
uncertainties, including but not limited to buying patterns of the Regional Bell
Operating Companies, the impact of new products introduced by competitors,
higher than expected expenses related to sales and new marketing initiatives,
changes in tax laws, particularly in regard to taxation of income of its
subsidiary in Puerto Rico and other risks involving the telecommunications
industry generally.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) FINANCIAL STATEMENTS
INDEPENDENT AUDITORS REPORT
Shareholders and Board of Directors
Communications Systems, Inc.
We have audited the accompanying consolidated balance sheets of Communications
Systems, Inc. and its subsidiaries (the Company) as of December 31, 1995 and
1994 and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1995. Our audits also include the financial statement schedule listed in the
Index at Item 14. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1995 and 1994 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles. Also, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
February 23, 1996
Minneapolis, Minnesota
14
REPORT OF MANAGEMENT
The management of Communications Systems, Inc. and its subsidiary companies is
responsible for the integrity and objectivity of the financial statements and
other financial information contained in the annual report. The financial
statements and related information were prepared in accordance with generally
accepted accounting principles and include amounts that are based on
management's informed judgments and estimates.
In fulfilling its responsibilities for the integrity of financial information,
management maintains accounting systems and related controls. These controls
provide reasonable assurance, at appropriate costs, that assets are safeguarded
against losses and that financial records are reliable for use in preparing
financial statements. Management recognizes its responsibility for conducting
the Company's affairs according to the highest standards of personal and
corporate conduct.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets with the independent auditors and management periodically to
review accounting, auditing, financial reporting and internal control matters.
The independent auditors have free access to this committee, without management
present to discuss the results of their audit work and their opinion on the
adequacy of internal financial controls and the quality of financial reporting.
/s/Curtis A. Sampson
March 28, 1996 Curtis A. Sampson
President and Chief Executive Officer
/s/Paul N. Hanson
Paul N. Hanson
Chief Financial Officer
15
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
___________________________
1995 1994
____________ ____________
CURRENT ASSETS:
Cash and cash equivalents $12,198,455 $8,829,776
Marketable securities (Note 2) 899,469 890,424
Trade accounts receivable, less allowance for
doubtful accounts of $344,000 and $350,000 respectively 10,931,382 12,535,306
Inventories (Note 3) 19,522,963 16,190,879
Prepaid expenses 400,778 492,554
Deferred income taxes (Note 9) 1,188,000 1,108,000
____________ ____________
TOTAL CURRENT ASSETS 45,141,047 40,046,939
PROPERTY, PLANT AND EQUIPMENT,net (Notes 1 and 4) 10,915,308 10,270,143
OTHER ASSETS:
Excess of cost over net assets acquired (Notes 1 and 10) 839,229 785,364
Investments in mortgage backed and other securities (Notes 1 and 2) 5,398,316 5,300,841
Deferred income taxes (Note 9) 461,047 376,047
Other assets 532,285 973,663
____________ ____________
TOTAL OTHER ASSETS 7,230,877 7,435,915
____________ ____________
TOTAL ASSETS $63,287,232 $57,752,997
____________ ____________
____________ ____________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 5) $146,923 $421,273
Accounts payable 4,104,349 5,843,729
Accrued expenses 2,296,996 2,833,987
Dividends payable 642,838 539,191
Income taxes payable 2,020,550 2,481,145
____________ ____________
TOTAL CURRENT LIABILITIES 9,211,656 12,119,325
LONG-TERM DEBT 67,231
LEASE COMMITMENTS (Note 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; 9,183,401
and 8,986,523 shares issued and outstanding respectively (Notes 1 and 8) 459,170 449,326
Additional paid-in capital 19,706,125 18,001,322
Retained earnings 34,140,435 27,519,954
Advances to employee stock ownership plan (Note 8) (72,000)
Cumulative translation adjustments (Note 1) (230,154) (332,161)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 54,075,576 45,566,441
____________ ____________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $63,287,232 $57,752,997
____________ ____________
____________ ____________
See notes to consolidated financial statements.
16
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
________________________________________
1995 1994 1993
____________ ____________ ____________
REVENUES (Note 11) $85,614,365 $74,362,530 $60,578,840
COSTS AND EXPENSES:
Cost of sales 64,393,055 55,951,392 44,339,123
Selling, general and administrative expenses 10,777,137 10,300,744 8,690,687
____________ ____________ ____________
TOTAL COSTS AND EXPENSES 75,170,192 66,252,136 53,029,810
____________ ____________ ____________
OPERATING INCOME 10,444,173 8,110,394 7,549,030
OTHER INCOME AND (EXPENSES):
Investment income 975,263 459,790 610,866
Interest expense (35,283) (116,554) (49,694)
____________ ____________ ____________
OTHER INCOME, net 939,980 343,236 561,172
____________ ____________ ____________
INCOME BEFORE INCOME TAXES 11,384,153 8,453,630 8,110,202
INCOME TAX EXPENSE (Note 9) 2,300,000 1,650,000 1,375,000
____________ ____________ ____________
NET INCOME $9,084,153 $6,803,630 $6,735,202
____________ ____________ ____________
____________ ____________ ____________
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE (Note 1) $.99 $.75 $.75
____________ ____________ ____________
____________ ____________ ____________
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (Notes 1 and 8) 9,217,000 9,093,000 9,026,000
____________ ____________ ____________
____________ ____________ ____________
See notes to consolidated financial statements.
17
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Advances to
Additional Employee Cumulative
Common Stock Paid-in Retained Stock Owner- Translation
-----------------------
Shares Amount Capital Earnings ship Plan Adjustment Total
_________ _________ ___________ ___________ ___________ ___________ ___________
BALANCE AT DECEMBER 31, 1992 8,856,918 $442,846 $17,118,249 $17,781,053 ($316,000) ($275,204) $34,750,944
Net income 6,735,202 6,735,202
Issuance of common stock under
Employee Stock Purchase Plan 23,597 1,180 124,179 125,359
Issuance of common stock under
Employee Stock Option Plan 63,600 3,180 417,437 420,617
Shareholder dividend (1,737,116) (1,737,116)
Repayment of advances to Employee
Stock Ownership Plan 122,000 122,000
Cumulative translation adjustment (51,959) (51,959)
_________ _________ ___________ ___________ ___________ ___________ ___________
BALANCE AT DECEMBER 31 8,944,115 447,206 17,659,865 22,779,139 (194,000) (327,163) 40,365,047
Net income 6,803,630 6,803,630
Issuance of common stock under
Employee Stock Purchase Plan 15,408 770 130,198 130,968
Issuance of common stock under
Employee Stock Option Plan 27,000 1,350 211,259 212,609
Shareholder dividends (2,062,815) (2,062,815)
Repayment of advances to Employee
Stock Ownership Plan 122,000 122,000
Cumulative translation adjustment (4,998) (4,998)
________ _________ ___________ ___________ ___________ ___________ ___________
BALANCE AT DECEMBER 31, 1994 8,986,523 449,326 18,001,322 27,519,954 (72,000) (332,161) 45,566,441
Net income 9,084,153 9,084,153
Issuance of common stock under
Employee Stock Purchase Plan 23,567 1,178 193,957 195,135
Issuance of common stock under
Employee Stock Option Plan 173,311 8,666 1,510,846 1,519,512
Shareholder dividends (2,463,672) (2,463,672)
Repayment of advances to Employee
Stock Ownership Plan 72,000 72,000
Issuance of common stock to Welsh
Development Agency 20,142 1,007 219,325 220,332
Purchase of Communications
Systems, Inc. common stock (20,142) (1,007) (219,325) (220,332)
Cumulative translation adjustment 102,007 102,007
_________ _________ ___________ ___________ ___________ ___________ ___________
BALANCE AT DECEMBER 31, 1995 9,183,401 $459,170 $19,706,125 $34,140,435 $ - ($230,154) $54,075,576
_________ _________ ___________ ___________ ___________ ___________ ___________
_________ _________ ___________ ___________ ___________ ___________ ___________
See notes to consolidated financial statements.
18
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
_________________________________________
1995 1994 1993
____________ ____________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $9,084,153 $6,803,630 $6,735,202
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,468,820 2,060,936 1,757,939
Deferred taxes (165,000) (366,000) (98,000)
Utilization of deferred tax assets acquired
in Austin Taylor purchase 193,000
Adjustment to marketable securities reserve (90,046) 113,297 (173,332)
Changes in assets and liabilities:
Decrease in marketable securities 81,001 165,000
Decrease (increase) in accounts receivable 1,717,101 (3,831,224) (1,448,290)
Increase in inventory (3,349,006) (1,189,256) (4,870,992)
Decrease (increase) in prepaid expenses 92,065 (85,811) (120,262)
Increase (decrease) in accounts payable (1,867,938) 1,096,569 2,041,649
Increase (decrease) in accrued expenses (535,474) 1,372,562 256,657
Increase (decrease) in income taxes payable (452,939) 917,914 (36,514)
____________ ____________ ____________
Total adjustments (2,101,416) 253,987 (2,498,145)
____________ ____________ ____________
Net cash provided by operating activities 6,982,737 7,057,617 4,237,057
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,026,947) (3,923,681) (2,457,968)
Sales of marketable securities and short term investments 291,722
Sales (purchases) of mortgage backed and other
investment securities (87,181) 30,922 (5,358,651)
Sales (purchases) of other assets (150,475) 59,022 (1,834,637)
Collections from businesses transferred under
contractual arrangements 564,657 408,079 300,744
Collections from (advances to) Hector Communications Corporation 348,055 (232,535)
Payment for purchase of Austin Taylor Communications, Ltd.,
net of cash acquired (280,944) (23,400)
____________ ____________ ____________
Net cash used in investing activities (2,699,946) (3,358,547) (9,314,725)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt (342,508) (197,754) (237,615)
Dividends paid (2,360,025) (1,970,830) (1,688,471)
Proceeds from issuance of notes payable and long-term debt 213,279 128,668
Proceeds from issuance of common stock 1,934,979 343,577 545,976
Purchase of Communications Systems, Inc. common stock (220,332)
Repayments from Employee Stock Ownership Plan 72,000 122,000 122,000
____________ ____________ ____________
Net cash used in financing activities (915,886) (1,489,728) (1,129,442)
____________ ____________ ____________
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 1,774 22,295 (18,371)
____________ ____________ ____________
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,368,679 2,231,637 (6,225,481)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,829,776 6,598,139 12,823,620
____________ ____________ ____________
CASH AND CASH EQUIVALENTS AT END OF YEAR $12,198,455 $8,829,776 $6,598,139
____________ ____________ ____________
____________ ____________ ____________
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $2,671,646 $1,098,086 $1,270,820
Interest paid 35,283 44,267 61,133
See notes to consolidated financial statements.
19
COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business: The Company is principally engaged in the manufacture
and sale of modular connecting and wiring devices for voice and data
communications. The Company's product line, which is commonly referred to as
"telephone station apparatus", consists primarily of equipment which connects
telephones, data terminals and related equipment at customer premises to the
telephone network. The Company sells these products to telephone companies,
electrical contractors, interconnect companies, original equipment manufacturers
and retailers. The Company also conducts value-added design and electronic
assembly for original equipment manufacturers. The Company's operations are
located in the United States, United Kingdom, Puerto Rico, and Costa Rica.
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries. All material intercompany
transactions and accounts have been eliminated.
Use of estimates: The presentation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
Company's estimates consist principally of reserves for doubtful accounts and
inventory obsolescence.
Property, plant and equipment: Property, plant and equipment is recorded at
cost. Depreciation is computed using principally the straight-line method.
Depreciation included in costs and expenses was $2,361,686, $1,964,550, and
$1,666,946 for 1995, 1994 and 1993, respectively. Maintenance and repairs are
charged to operations and additions or betterments are capitalized. Items of
property sold, retired or otherwise disposed of are removed from the asset and
accumulated depreciation accounts and any gains or losses on disposal are
reflected in operations.
Excess of cost over net assets acquired: The excess of cost over net assets of
subsidiaries acquired in purchase transactions is being amortized on the
straight-line method over periods ranging from 10 to 40 years. Amortization
included in costs and expenses was $107,134, $96,386 and $90,993 in 1995, 1994
and 1993, respectively. In 1993, the excess cost over net assets acquired in the
purchase of Austin Taylor Communications, Ltd. was reduced by $646,000 due to
recognition of a deferred tax asset related to net operating loss carryforwards.
Foreign currency translation: Assets and liabilities denominated in foreign
currencies were translated into U.S. dollars at year-end exchange rates. Revenue
and expense transactions were translated using average exchange rates. Gains or
losses from currency exchange transactions during the periods were not material.
Net income per common and common equivalent share: Net income per common and
common equivalent share is based on the weighted average number of common and
common equivalent shares outstanding during each year. Common equivalent shares
reflect the dilutive effect of outstanding stock options. Primary and fully
diluted earnings per share are substantially the same.
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.
Changes in accounting principles: In 1994, the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). The statement did not have a material
effect on the Company's financial statements.
20
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments". The
Statement extends existing fair value disclosure practices by requiring all
entities to disclose the fair value of financial instruments, both assets and
liabilities, recognized and not recognized in the balance sheet, for which it is
practical to estimate fair value. The fair value of a financial instrument is
the amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. The
Company's cash, accounts receivable, accounts payable, accrued liabilities and
other liabilities are carried at amounts which reasonably approximate their fair
value due to their short term nature. Fair values of investments in debt and
equity securities are disclosed in Note 2.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". This statement requires
that assets to be held and used be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable. An impairment loss should be recognized when the estimated future
cash flows from the asset are less than the carrying value of the asset. Assets
to be disposed of should be reported at the lower of their carrying amount or
fair value less cost to sell. This statement is effective for fiscal years
beginning after December 15, 1995. The Company does not believe adoption of this
statement will have a material effect on results of operations or financial
position.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The
Company has elected to continue to follow the guidance of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" for measurement
and recognition of stock-based transactions with employees. The Company will
adopt the disclosure provisions of SFAS No. 123 in 1996.
Change of presentation: Certain amounts in the 1994 and 1993 financial
statements have been reclassified to conform with the 1995 financial statement
presentation. These reclassifications had no effect on net income or
stockholders' equity as previously reported.
NOTE 2 - INVESTMENT IN DEBT AND EQUITY SECURITIES
Marketable securities consist primarily of equity securities, are classified as
trading securities and are carried at market value. Aggregate cost, based on the
weighted average purchase price for each security, and market value was as
follows:
December 31
1995 1994
Aggregate cost $963,297 $1,044,298
Valuation allowance (63,828) (153,874)
--------------------- -------------------
Aggregate market value $899,469 $890,424
==================== ==================
Investment income (loss) includes $90,046, ($113,297) and $173,332 for
unrealized holding gains and losses in 1995, 1994 and 1993, respectively.
Investment income also includes gain on sales of marketable securities of
$99,800 in 1995.
The Company's Puerto Rico subsidiary owns a portfolio of AAA rated
mortgage-backed securities it is holding to maturity. At December 31, 1995 the
amortized cost basis of the securities was $4,929,000. Market value of the
securities was $4,791,000 resulting in a gross unrealized holding loss of
$138,000, which is not reflected in the financial statements.
The Company's Canadian subsidiary owns a portfolio of securities issued by the
government of Canada with maturity dates of one year or less. The subsidiary is
holding these securities to maturity. Amortized cost of the securities is
$360,000 which approximates their market value.
The Company has an investment in convertible bonds issued by Hector
Communications Corporation (HCC). The bonds mature in 2002 and the Company is
holding them to maturity. HCC was owned by the Company until July, 1990, and
several of the Company's officers and directors work in similar capacities for
HCC. Cost of the bonds was $109,000 which approximates their market value.
21
NOTE 3 - INVENTORIES
Inventories are carried at the lower of cost (first-in, first out method) or
market and consist of :
December 31
1995 1994
Finished goods $5,475,458 $3,525,693
Raw and processed materials 14,047,505 12,665,186
-------------------- ------------------
$19,522,963 $16,190,879
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and the estimated useful lives are as follows:
Estimated December 31
useful life 1995 1994
------------------ -------------------- -------------------
Land $358,129 $356,330
Buildings 7-30 years 4,025,139 3,680,284
Machinery and equipment 3-15 years 19,502,476 17,460,069
Furniture and fixtures 5-10 years 1,876,606 1,480,857
-------------------- ------------------
25,762,350 22,977,540
Less accumulated depreciation 14,847,042 12,707,397
-------------------- ------------------
$10,915,308 $10,270,143
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT
December 31
1995 1994
-------------------- -------------------
Debenture loan, Welsh Development Agency
interest rate of 11.5%, installment payments
through 1996 $10,091 $26,098
Capital leases, interest rates of 3.5% to 11.5%,
expire 1996 56,624 192,198
-------------------- ------------------
66,715 218,296
Less current portion 66,715 151,065
-------------------- ------------------
--- $67,231
==================== ==================
The Company has a commitment from the First Bank of Minneapolis in the form of a
$2,000,000 line of credit.
In July, 1992 Zercom Corporation received a $100,000 loan from Consolidated
Telephone Co. associated with rural development. The balance outstanding at
December 31, 1995 was $80,208.
NOTE 6 - EMPLOYEE BENEFIT PLANS
The Company has an Employee Savings Plan (401(k)) and matches a percentage of
employee contributions up to eight percent of compensation. Contributions to the
plan in 1995, 1994 and 1993 were $115,000, $94,000, and $51,000 respectively.
The Company does not provide post retirement benefits to its employees.
22
NOTE 7 - LEASE COMMITMENTS
The Company leases land, buildings and equipment under operating leases with
original terms from one to ten years. Certain of these leases contain renewal
and purchase options. Rent expense charged to operations was $528,000, $554,000
and $426,000 in 1995, 1994 and 1993 respectively.
At December 31, 1995, the Company was obligated under noncancellable operating
leases to make minimum annual future lease payments as follows:
Year Ended December 31:
1996 $285,000
1997 285,000
1998 285,000
1999 307,000
2000 317,000
After 2000 1,144,000
--------------------
$2,623,000
NOTE 8 - COMMON STOCK AND STOCK OPTIONS
Common shares are reserved in connection with stock plans under which 1,300,000
shares of stock options, stock appreciation rights, restricted stock or deferred
stock are authorized for issuance to officers and key employees. Exercise prices
of stock options under the plans cannot be less than fair market value of the
stock on the date of grant. Rules and conditions governing awards of stock
options, stock appreciation rights and restricted or deferred stock are
determined by the Board of Directors, subject to certain limitations
incorporated into the plans. At December 31, 1995, 460,065 shares remained
available to be issued under the plans. All options outstanding are currently
exercisable and expire five years from the date of grant.
Common shares are also reserved for issuance in connection with a nonqualified
stock option plan under which up to 200,000 shares may be issued to nonemployee
directors. The plan provides for the automatic grant of nonqualified options for
2,000 shares of common stock annually to each nonemployee director concurrent
with the annual stockholders' meeting. Exercise price will be the fair market
value of the stock at the date of grant. At December 31, 1995, 116,000 shares
are available to be issued under the plan.
A summary of changes in outstanding employee and director stock options during
the three years ended December 31, 1995 is as follows:
Average
Number of exercise price
shares per share
Outstanding at December 31, 1992 204,700 $5.28
Granted 195,600 8.58
Exercised (63,600) 5.86
----------------- -------------
Outstanding at December 31, 1993 336,700 7.08
Granted 149,600 11.93
Exercised (27,000) 7.87
Canceled (1,600) 7.53
----------------- -------------
Outstanding at December 31, 1994 457,700 8.62
Granted 153,700 14.29
Exercised (173,311) 7.37
Canceled (2,667) 14.00
----------------- -------------
Outstanding at December 31, 1995 435,422 $11.09
================ =============
In connection with refinancing debt associated with the purchase of Austin
Taylor Communications, Ltd., the Company issued an option to the Welsh
Development Agency (WDA) to purchase 20,142 shares of common stock at $7.35
share. The option was exercised by the WDA in January, 1995. Subsequent to the
exercise of the stock option, the Company purchased and retired the stock from
the WDA.
23
EMPLOYEE STOCK OWNERSHIP PLAN
During 1985, the Board of Directors adopted a leveraged employee stock ownership
plan (ESOP) and authorized the Company to advance the ESOP or guarantee debt of
up to $2,000,000 to enable the plan to purchase the Company's common stock in
the open market. Advances to the plan bear interest at 85% of prime and are
repaid over ten years through Company contributions to the plan.
Contributions to the plan are determined by the Board of Directors and can be
made in cash or shares of the Company's stock. Contributions of $72,000,
$122,000 and $122,000 were made in the years ending December 31, 1995, 1994 and
1993, respectively. At December 31, 1995, the ESOP held 342,593 shares of the
Company's common stock, all of which has been allocated to the accounts of
eligible employees. All eligible employees of the Company participate in the
plan 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. All advances by
the Company to the ESOP were repaid at December 31, 1995.
EMPLOYEE STOCK PURCHASE PLAN
The Company maintains an Employee Stock Purchase Plan for which 200,000 common
shares have been reserved. Under the terms of the plan, participating employees
may acquire shares of common stock through payroll deductions of not more than
10% of compensation. The price at which shares can be purchased is 85% of the
lower of fair market value for such shares on one of two specified dates in each
plan year. A participant is limited to the acquisition in any plan year to the
number of shares which their payroll deductions for the year would purchase
based on the market price on the first day of the year or $25,000, whichever is
less. Shares issued to employees under the plan were 23,567, 15,408 and 23,597
for the plan years ended August 31, 1995, 1994 and 1993, respectively. At
December 31, 1995 employees had subscribed to purchase an additional 15,600
shares in the current plan cycle ending August 31, 1996.
NOTE 9 - INCOME TAXES
Income tax expense consists of the following:
Year Ended December 31
--------------------------------------------------------
1995 1994 1993
----------------- ------------------ -----------------
Currently payable taxes:
Federal $985,000 $1,062,000 $523,000
State 158,000 154,000 161,000
Puerto Rico 589,000 568,000 590,000
Canada 40,000 17,000
United Kingdom 450,000 215,000 199,000
----------------- ------------------ -----------------
2,222,000 2,016,000 1,473,000
Tax effect of disqualified employee incentive
stock options 243,000
Deferred income taxes (benefit):
Inventory (105,000) (294,000) (99,000)
Bad debts 1,000 (11,000) 126,000
Marketable securities 34,000 (43,000) 68,000
Alternative minimum tax (173,000) (289,000) (102,000)
Accrued expenses (9,000) (176,000)
Net operating loss carryforward (U.K.) 28,000 403,000
Other 59,000 44,000 (91,000)
----------------- ------------------ ------------------
$2,300,000 $1,650,000 $1,375,000
================= ================== =================
A subsidiary, Suttle Caribe, Inc., operates in Puerto Rico, and is qualified
under Internal Revenue Service Code section 936 for credit against U.S. income
taxes. Under provisions of the Omnibus Budget Reconciliation Act of 1993,
Congress set limits on the section 936 credit which went into effect for the
1994 tax year. As a result of the tax credit limitation, the Company incurred
$272,000 and $209,000 of U.S. federal income tax expense on earnings in Puerto
Rico for 1995 and 1994, respectively.
24
Earnings of Suttle Caribe, Inc. are 90% exempt from Puerto Rico income taxes
through 2003, subject to satisfaction of the employment and investment
requirements of the tax exemption grant received by the Company. Distributions
by Suttle Caribe, Inc. to the parent company are subject to a tollgate tax at
rates which, depending on various factors, range from 3.5% to 10%. In December,
1993, the Puerto Rico legislature amended the toll gate rules to require
prepayment of a portion of the toll gate tax on all earnings of Suttle Caribe,
Inc. subsequent to January 1, 1993 regardless of when or if the earnings are
repatriated to the parent. The Company has provided for and prepaid toll gate
taxes at a 1.75% rate on its 1993, 1994 and 1995 earnings. The Company has
recognized toll gate tax expense at the 3.5% rate on earnings from years prior
to 1993 only to the extent distributions were received from Suttle Caribe, Inc.
The cumulative amount of undistributed prior earnings on which no tollgate tax
has been recognized was approximately $17,390,000 at December 31, 1995.
Suttle Apparatus Canada, Ltd., operates in Canada and is subject to
Canadian rather than U.S. income taxes. Canadian pretax income (loss) was
$80,000, $31,000 and ($15,000) for 1995, 1994 and 1993, respectively. Austin
Taylor Communications, Ltd. operates in the U.K. and is subject to U.K. rather
than U.S. income taxes. U.K. pretax income was $1,450,000, $1,872,000 and
$675,000 in 1995, 1994 and 1993, respectively. Suttle Costa Rica, S.A. operates
in Costa Rica and is currently exempt from Costa Rica income taxes. It is the
Company's intention to reinvest the remaining undistributed earnings of its
Puerto Rico, Canada, U.K. and Costa Rica subsidiaries to support the continued
operation of those subsidiaries.
The provision for income taxes varied from the federal statutory tax rate as
follows:
Year Ended December 31
------------------------------------------------------
1995 1994 1993
----------------- ------------------ ---------------
Tax at U.S. statutory rate 35.0% 35.0% 35.0%
Surtax exemption (1.0) (1.0) (1.0)
U.S. taxes not provided on Puerto Rico operations (17.8) (14.7) (18.4)
State income taxes, net of federal benefit 1.1 .6 1.3
Other 2.9 (.4) .1
----------------- ------------------ --------------
Effective tax rate 20.2% 19.5% 17.0%
================= ================== ===============
The Company's provisions for income taxes include expenses of $478,000, $618,000
and $199,000 in 1995, 1994 and 1993, respectively, for United Kingdom (U.K.)
income taxes on earnings of Austin Taylor Communications, Ltd. The Company has
utilized net operating loss carryforwards possessed by Austin Taylor prior to
its acquisition by the Company to offset all of the income taxes payable in 1993
and a portion of the income taxes payable in 1994 and 1995. All net operating
loss carryforwards have been utilized at December 31, 1995.
Deferred tax assets and liabilities as of December 31 related to the following:
1995 1994
----------------- ------------------
Current assets:
Marketable securities $24,000 $58,000
Bad debts 99,000 100,000
Inventory 776,000 670,000
Accrued expenses 289,000 280,000
----------------- ------------------
$1,188,000 $1,108,000
================= ==================
Long term assets and (liabilities):
Depreciation ($327,953) ($283,953)
Loss reserves on business transferred under
contractual arrangements 126,000 142,000
Alternative minimum tax credits 663,000 490,000
Purchased net operating loss carryforward 28,000
----------------- ------------------
$461,047 $376,047
================= ==================
25
NOTE 10 - ACQUISITION OF AUSTIN TAYLOR COMMUNICATIONS, LTD.
Effective February 1, 1992 the Company acquired all the outstanding common
shares of Austin Taylor Communications, Ltd., a Bethesda, Wales, United Kingdom
manufacturer of voice and data connector products. The former shareholders
received 10,000 of the Company's common stock and will receive additional cash
payments based on Austin Taylor's annual profits from 1992 through 1996. Amounts
due under this provision totaled $590,000 through December 31, 1995.
Effective February 1, 1992, the Company granted the Managing Director of Austin
Taylor an option to acquire up to 5% of Austin Taylor's outstanding common stock
at a price of one British pound (approximately $1.55 U.S. at December 31, 1995)
per share. The price per share was management's best estimate of the fair market
value of Austin Taylor common stock at the date of grant. The shares are
transferable only to the Company, and the transfer price is management's best
estimate of the fair market value of a publicly traded company in Austin
Taylor's industry (eighteen times Austin Taylor's average pretax earnings for
the preceding three years.) At December 31, 1995, there were 1,005,030 shares of
Austin Taylor common stock issued and outstanding. The average pretax earnings
of Austin Taylor over the last three years was $1.33 per share.
26
NOTE 11 - INFORMATION CONCERNING INDUSTRY SEGMENTS AND MAJOR CUSTOMERS
The Company's operations include two significant business segments: manufacture
of telephone station apparatus and contract manufacturing of electronic
assemblies and products. The Company operates in the United States, including
Puerto Rico (U.S.), United Kingdom (U.K.), Canada and Costa Rica. Information
concerning the Company's operations in the various geographic areas and business
segments is as follows:
Telephone Station Apparatus Contract
------------------------------------------
U.S. U.K. Other Manufacturing Corporate Eliminations Consolidated
---------------------------------------------------------------------------------------------------
Year Ended December 31, 1995:
Revenues:
Sales to unaffiliated customers $51,313,001 $13,753,235 $938,080 $19,610,049 $85,614,365
Transfers between geographic
areas 697,155 1,636,312 ($2,333,467)
Intersegment sales 343,081 (343,081) 0
---------------------------------------------------------------------------------------------------
Total $52,010,156 $13,753,235 $2,574,392 $19,953,130 ($2,676,548) $85,614,365
---------------------------------------------------------------------------------------------------
Operating Income $9,610,251 $1,370,675 $169,345 $255,580 ($961,678) $10,444,173
---------------------------------------------------------------------------------------------------
Identifiable Assets $36,508,774 $8,139,074 $1,679,581 $10,597,643 $6,362,160 $63,287,232
---------------------------------------------------------------------------------------------------
Depreciation and Amortization $1,132,236 $566,814 $139,247 $473,468 $157,055 $2,468,820
---------------------------------------------------------------------------------------------------
Capital Expenditures $1,205,477 $926,905 $101,361 $530,459 $262,745 $3,026,947
---------------------------------------------------------------------------------------------------
Year Ended December 31, 1994:
Revenues:
Sales to unaffiliated customers $42,968,330 $13,233,582 $875,438 $17,285,180 $74,362,530
Transfers between geographic
areas 707,835 1,661,986 ($2,369,821)
Intersegment sales 428,842 (428,842) 0
---------------------------------------------------------------------------------------------------
Total $43,676,165 $13,233,582 $2,537,424 $17,714,022 ($2,798,663) $74,362,530
---------------------------------------------------------------------------------------------------
Operating Income $7,231,609 $1,884,504 $140,842 $24,088 ($1,170,649) $8,110,394
---------------------------------------------------------------------------------------------------
Identifiable Assets $32,976,104 $6,892,512 $1,598,255 $10,763,902 $5,522,224 $57,752,997
---------------------------------------------------------------------------------------------------
Depreciation and Amortization $1,120,092 $316,814 $137,223 $309,580 $177,227 $2,060,936
---------------------------------------------------------------------------------------------------
Capital Expenditures $2,132,196 $1,325,219 $83,165 $897,608 $295,493 $4,733,681
---------------------------------------------------------------------------------------------------
Year Ended December 31, 1993:
Revenues:
Sales to unaffiliated customers $38,720,476 $8,283,087 $892,228 $12,683,049 $60,578,840
Transfers between geographic
areas 728,880 1,651,881 ($2,380,761)
Intersegment sales 689,776 (689,776) 0
---------------------------------------------------------------------------------------------------
Total $39,449,356 $8,283,087 $2,544,109 $13,372,825 ($3,070,537) $60,578,840
---------------------------------------------------------------------------------------------------
Operating Income $7,597,899 $636,083 $115,286 $126,550 ($926,788) $7,549,030
---------------------------------------------------------------------------------------------------
Identifiable Assets $30,270,805 $4,032,493 $1,932,827 $7,786,787 $4,915,831 $48,938,743
---------------------------------------------------------------------------------------------------
Depreciation and Amortization $1,069,520 $220,072 $116,624 $220,131 $131,592 $1,757,939
---------------------------------------------------------------------------------------------------
Capital Expenditures $1,085,483 $455,451 $201,122 $599,768 $116,144 $2,457,968
---------------------------------------------------------------------------------------------------
Export sales were less than 10% of consolidated revenues in each of the last
three years. At December 31, 1995 foreign earnings in excess of amounts received
in the United States were approximately $5,294,000.
No customer accounted for more than ten percent of the Company's consolidated
revenues in 1995. In 1994, sales to one customer in the telephone station
apparatus segment amounted to 11.6% of consolidated revenues and sales to one
customer in the contract manufacturing segment amounted to 12.3% of consolidated
revenues. In 1993, sales to one customer in the telephone station apparatus
segment amounted to 11.9% of consolidated revenues and sales to one customer in
the contract manufacturing segment amounted to 12.8% of consolidated revenues.
27
The Company's station apparatus products are manufactured using plastic parts,
wire sub-assemblies, fasteners, brackets, electronic circuit boards and other
components, most of which are fabricated by the Company. There are multiple
sources of supply for the materials and parts required and the Company is not
dependent upon any single supplier, except that Suttle's corrosion resistant
products utilize a moisture-resistant gel-filled fig available only from Raychem
Corporation. The unavailability of the gel-filled figs from Raychem Corporation
could have a material adverse effect on the Company. The Company has not
generally experienced significant problems in obtaining its required supplies,
although from time to time spot shortages are experienced.
(b) SUPPLEMENTAL FINANCIAL INFORMATION
Unaudited Quarterly Operating Results
(in thousands except per share amounts)
Quarter Ended
------------------------------------------------------
March 31 June 30 Sept 30 Dec 31
- ----------------------------------------------------------------------------------------------------------------
1995
Revenues $24,806 $21,866 $20,205 $18,737
Gross margins 6,049 4,862 5,156 5,154
Operating income 3,030 2,714 2,543 2,157
Net income 2,521 2,297 2,155 2,111
Net income per share $.28 $.25 $.23 $.23
1994
Revenues $18,614 $18,301 $17,550 $19,898
Gross margins 4,637 4,494 4,357 4,924
Operating income 2,038 1,807 1,779 2,486
Net income 1,710 1,527 1,488 2,079
Net income per share $.19 $.17 $.16 $.23
28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by paragraphs [a], [c], [d], [e], and [f] of Item 401
under Regulation S-K, to the extent applicable, will be set forth under the
caption "Election of Directors" in the Company's definitive proxy material for
its May 14, 1996 Annual Meeting of Shareholders to be filed within 120 days from
the end of the Registrant's fiscal year, which information is expressly
incorporated by reference herein. The information called for by paragraph [b] of
Item 401 is set forth under Item 1[c] herein. The information called for by Item
405 under Regulation S-K, to the extent applicable, will be set forth under the
caption "Certain Transactions" in the Company's above referenced definitive
proxy material.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 402 under Regulation S-K to the extent
applicable, will be set forth under the caption "Executive Compensation" in the
Company's definitive proxy materials for its May 14, 1996 Annual Meeting to be
filed within 120 days from the end of the Registrant's fiscal year, which
information is expressly incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 403 under Regulation S-K will be set forth
under the captions "Security Ownership of Certain Beneficial Owners and
Management" and "Election of Directors" in the Company's definitive proxy
materials for its May 14, 1996 Annual Meeting to be filed within 120 days from
the end of the Registrant's fiscal year, which information is expressly
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 404 under Regulation S-K will be set forth
under the caption "Certain Transactions" in the Company's definitive proxy
materials for its May 14, 1996 Annual Meeting to be filed within 120 days from
the end of the Registrant's fiscal year, which information is expressly
incorporated herein by reference.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Consolidated Financial Statements
The following Consolidated Financial Statements of Communications Systems, Inc.
and subsidiaries appear at pages 14 to 27 herein:
Independent Auditors' Report for the years ended December 31, 1995,
1994 and 1993
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidates Statements of Income for the years ended December 31,
1995, 1994 and 1993
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993
Notes to Consolidated Financial Statements
(a) (2) Consolidated Financial Statement Schedule Page Herein
----------------------------------------- -----------
The following financial statement schedule is being filed
as part of this Form 10-K Report:
Independent Auditors' Report on financial statements
and schedule for the years ended December 31, 1995,
1994 and 1993 14
Schedule VIII - Valuation and Qualifying Accounts
and Reserves 35
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial statements or
related notes.
(a) (3) Exhibits
The exhibits which accompany or are incorporated by reference in this
report, including all exhibits required to be filed with this report, are
described on the Exhibit Index, which begins on page 35 of the sequential
numbering system used in this report.
(b) REPORTS ON FORM 8-K FILED DURING THE THREE MONTHS ENDED DECEMBER 31, 1995
None.
30
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 28, 1996 /s/ Curtis A. Sampson
----------------------
Curtis A. Sampson, Chairman of the
Board of Directors, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
Each person whose signature appears below constitutes and appoints
CURTIS A. SAMPSON and PAUL N. HANSON as his true and lawful attorneys-in-fact
and agents, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10-K and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all said attorneys-in-fact
and agents, each acting alone, or his substitute or substitutes, may lawfully do
or cause to be done by virtue thereof.
Signature Title Date
/s/ Curtis A. Sampson Chairman of the Board of Directors, March 28, 1996
Curtis A. Sampson President, and Director (Principal
Executive Officer)
/s/ Paul N. Hanson Vice President, Treasurer and March 28, 1996
Paul N. Hanson Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
/S/Paul J. Anderson Director March 28, 1996
Paul J. Anderson
/s/Edwin C. Freeman Director March 28, 1996
Edwin C. Freeman
/s/ John C. Ortman Director March 28, 1996
John C. Ortman
/s/Joseph W. Parris Director March 28, 1996
Joseph W, Parris
/s/Wayne E. Sampson Director March 28, 1996
Wayne E. Sampson
/s/Edward E.Strickland Director March 28, 1996
Edward E. Strickland
31
- --------------------------------------------------------------------------------
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, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL STATEMENT SCHEDULE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
32
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Schedule VIII - Valuation and Qualifying Accounts and Reserves
Balance at Additions Additions Deductions Balance
Beginning of Charged to Cost Charged to from at End
Description Period and Expenses Other Accounts Reserves of Period
Allowance for doubtful accounts:
Year ended:
December 31, 1995 $350,000 $154,000 $0 $160,000 (A) $344,000
December 31, 1994 $324,000 $80,000 $0 $54,000 (A) $350,000
December 31, 1993 $767,000 $72,000 $0 $515,000 (A) $324,000
Inventory valuation reserves:
Year ended:
December 31, 1995 $1,562,000 $535,000 $0 $0 $2,097,000
December 31, 1994 $1,212,000 $350,000 $0 $0 $1,562,000
December 31, 1993 $1,169,000 $43,000 $0 $0 $1,212,000
Reserve for assets transferred under contractual arrangements:
Year Ended:
December 31, 1995 $377,000 $0 $43,000 (B) $85,000 $335,000
December 31, 1994 $288,000 $0 $89,000 (B) $0 $377,000
December 31, 1993 $179,000 $0 $109,000 (B) $0 $288,000
- -----------------------------------------
(A) Accounts determined to be uncollectible and charged off against reserve.
(B) Interest on notes receivable credited to valuation reserve.
33
- --------------------------------------------------------------------------------
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, 1995
EXHIBITS
- -------------------------------------------------------------------------------
34
COMMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Exhibit Index To
Form 10-K for the Year Ended December 31, 1995
Regulation S-K Location in Consecutive Numbering
Exhibit Table System as Filed With the Securities
Reference Title of Document and Exchange Commission
3.1 Articles of Incorporation, as Filed as Exhibit 3.1 to the Form
amended 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.
10.1 1987 Stock Plan Filed as Exhibit 10.1 to the Form
10-K Report of the Company for its
year ended December 31, 1993 (the
"1993 Form 10-K") and incorporated
herein by reference.
10.2 Employee Savings Plan Filed as Exhibit 10.2 to the 1993
Form 10-K and incorporated herein
by reference.
10.3 Employee Stock Ownership Plan Filed as Exhibit 10.3 to the 1993
Form 10-K and incorporated herein
by reference.
10.4 Employee Stock Purchase Plan Filed as Exhibit 10.4 to the 1993
Form 10-K and incorporated herein
by reference.
10.5 Stock Option Plan for Filed as Exhibit 10.5 to the 1993
Nonemployee Directors Form 10-K and incorporated herein
by reference.
10.6 1992 Stock Plan Filed as Exhibit 10.6 to the 1993
Form 10-K and incorporated herein
by reference.
10.7 Flexible Benefit Plan Filed as Exhibit 10.7 to the 1993
Form 10-K and incorporated herein
by reference.
10.8 Supplemental Executive Filed as Exhibit 10.8 to the 1993
Retirement Plan Form 10-K and incorporated herein
by reference.
11 Calculation of Earnings Filed herewith at page 36.
Per Share
21 Subsidiaries of the Registrant Filed herewith at page 37.
23 Independent Auditors' Consent Filed herewith at page 38.
The exhibits referred to in this Exhibit Index will be supplied to a shareholder
at a charge of $.25 per page upon written request directed to CSI's Assistant
Secretary at the executive offices of the Company.
35
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CALCULATION OF EARNINGS PER SHARE
EXHIBIT 11
Year Ended December 31
_________________________________________________
Primary: 1995 1994 1993
_______ _____________ _____________ _____________
Net income $9,084,153 $6,803,630 $6,735,202
_____________ _____________ _____________
_____________ _____________ _____________
Common and common equivalent shares (1):
Weighted average number of common
shares outstanding 9,097,771 8,962,491 8,896,286
Dilutive effect of stock options
outstanding after application of
treasury stock method 119,229 130,509 129,714
_____________ _____________ _____________
9,217,000 9,093,000 9,026,000
_____________ _____________ _____________
_____________ _____________ _____________
Primary net income (loss) per common
and common equivalent share (1): $.99 $.75 $.75
_____________ _____________ _____________
_____________ _____________ _____________
Fully Diluted:
_____________
Net income $9,084,153 $6,803,630 $6,735,202
_____________ _____________ _____________
_____________ _____________ _____________
Common and common equivalent shares (1):
Weighted average number of common
shares outstanding 9,097,771 8,962,491 8,896,286
Dilutive effect of stock options
outstanding after application of
treasury stock method 129,229 150,509 165,714
_____________ _____________ _____________
9,227,000 9,113,000 9,062,000
_____________ _____________ _____________
_____________ _____________ _____________
Fully diluted net income (loss) per
common and common equivalent share (1): $.98 $.75 $.74
_____________ _____________ _____________
_____________ _____________ _____________
(1) Primary and fully diluted earnings per share are substantially the same. The
dilutive effect of stock options under the fully diluted calculation for each
year is greater due to the end of the year closing price exceeding the average
price in those years.
36
SUBSIDIARIES OF COMMUNICATIONS SYSTEMS, INC.
EXHIBIT 21
Subsidiaries Jurisdiction of Incorporation
Suttle Apparatus Corporation Illinois
Suttle Apparatus Canada, Ltd. Canada
Suttle Costa Rica, S.A. Costa Rica
Tel Products, Inc. Minnesota
Suttle Caribe, Inc. Minnesota
Austin Taylor Communications, Ltd. United Kingdom
Automatic Tool & Connector Co., Inc. New Jersey
Zercom Corporation Minnesota
All such subsidiaries are 100%-owned directly by Communications Systems, Inc.
The financial statements of all such subsidiaries are included in the
consolidated financial statements of Communications Systems, Inc.
37
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos. 33-28486, 33-39862, 33-39864, 33-60930, 33-83662, 33-99564, and 33-99566 of
Communications Systems, Inc. of our report dated February 23, 1996 on the
consolidated financial statements and schedule of Communications Systems, Inc.
appearing in this Annual Report on Form 10-K of Communications Systems, Inc. for
the year ended December 31, 1995.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
March 26, 1996
Minneapolis, Minnesota
38