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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
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 $93,673,000 based upon the closing sale price of
the Company's common stock on the NASDAQ National Market System on March 21,
1997.
As of March 21, 1997 there were outstanding 9,191,213 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 22, 1997 is
incorporated by reference into Part III of
this Form 10-K.
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<PAGE>
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 New Jersey,
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 customer premise equipment to the telephone network.
Effective January 4, 1996, the Company acquired Automatic Tool and
Connector Company, Inc. ("ATC"). ATC is a manufacturer of connecting devices for
fiber optic equipment located in Union, New Jersey. The acquisition was
accounted for as a purchase and operations of ATC have been included in
consolidated operations from January 4, 1996. Additional information on this
acquisition can be found in subparagraph (c)(1)(iii) under Item 1 herein, in
"Acquisitions and Dispositions" under Item 7, Management's Discussion and
Analysis and in Note 1 of Notes to Consolidated Financial Statements under Item
8, herein. Further information regarding the acquisition is also contained in
the Company's Form 8-K Report filed January 6, 1996, which is incorporated
herein by reference.
Until November, 1996, the Company conducted a value-added design and
contract manufacturing operation through a subsidiary located in Merrifield,
Minnesota. During 1996, the Company's Board of Directors concluded this business
was no longer a strategic fit with the Company's telephone station apparatus
business. Effective November 4, 1996, these operations were sold to Nortech
Systems, Inc. For additional information on this divestiture, see subparagraph
(c)(2) under Item 1 herein and "Acquisitions and Dispositions" under Item 7,
Management's Discussion and Analysis and Note 2 of Notes to Consolidated
Financial Statements under Item 8, herein. Further information regarding the
divestiture is also contained in the Company's Form 8-K Report filed November
18, 1996, which, as amended by a Form 8 amendment filed November 19, 1996, is
incorporated herein by reference.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's continuing operations are in one business segment - the
manufacture and sale of connecting and wiring devices for voice and data
communications. The Company conducts manufacturing in the United States
(including Puerto Rico), the United Kingdom and Costa Rica. Information
regarding operations in the various geographic areas is set forth in Note 10 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. Fiber optic connector products are manufactured and
marketed by Automatic Tool and Connector Co. in the U.S. and internationally.
Suttle Apparatus sales were $52,652,000 in 1996, or 77% of revenues from
continuing operations. Sales by Austin Taylor Communications accounted for
$11,264,000 or 16% of revenues from continuing operations. Sales by Automatic
Tool and Connector Co. were $4,789,000 or 7% of revenues from continuing
operations.
2
<PAGE>
(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 continues to develop an expanding line of products for network
systems applications. A significant portion of the Company's revenues are
derived from sales of a line of corrosion resistant connectors which utilize a
water resistant gel to offer superior performance in harsh environments. The
Company's station apparatus products generally range in price from $.70 to
$25.00 per unit. A majority of the sales volume, both in units and revenues, is
derived from products selling for under $5.00.
(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 Sprint North Supply,
Graybar Electric Company, Alltel Supply, KGP and Anixter Communications.
As a group, sales to the Big 8 telephone companies, both directly and
through distribution, were approximately $34,271,000 in 1996 and $31,577,000 in
1995, which represented about 65% and 62% of Suttle Apparatus' sales in 1996 and
1995, respectively. Sales to Sprint North Supply, a principal distributor
serving this market were approximately 10% and 15% of Suttle Apparatus' sales in
1996 and 1995, respectively.
Approximately 10% of Suttle Apparatus' 1996 revenues were derived from
sales in the retail market. The Company is a supplier of station apparatus to
Radio Shack, other retailers, office supply distributors and specialized
telephone stores. Sales to the retail market are made through a limited number
of manufacturers' representatives.
The market for business and network systems products is the fastest growing
segment of the station apparatus industry. Independent contractors (which
include businesses often referred to as "interconnect companies") are engaged in
the business of engineering, selling, installing and maintaining telephone
equipment for the business community. The Company markets its products to
independent contractors through a network of manufacturers representatives,
through distribution, and through the Company's sales staff. Sales of products
for business and network systems accounted for 13% of Suttle Apparatus' 1996
revenues.
The balance of Suttle Apparatus' sales in 1996 and 1995 were to original
equipment manufacturers and non-Big 8 telephone companies. In the communications
industry market, sales to telephone companies are made directly or through
distribution. Sales to OEM customers are made through a nationwide network of
distributors, some of which are affiliates of major telephone companies, and
through the Company's sales staff.
3
<PAGE>
(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: Lucent Technologies, Ortronics, Leviton,
Hubbell, Northern Telecom and AMP, Inc. Most of these companies have greater
financial resources than the Company. In addition, distributors of the Company's
apparatus products also market products for one or more of these competitors.
Lucent Technologies markets to telephone companies and independent contractors
directly and through telephone industry distributors that also market the
Company's products.
In retail markets, the Company experiences significant competition from
importers of low-priced modular products which market their products directly
and through a number of distributors to various retail outlets.
The Company's principal competitor for sales to the Regional Bell Operating
Companies is Lucent Technologies. To date, foreign manufacturers of apparatus
products have not presented significant competition for sales to this market.
(D) Order Book
Suttle Apparatus manufactures its station apparatus on the basis of
estimated customer requirements. Outstanding customer orders at March 1, 1997
were approximately $4,600,000 compared to approximately $4,300,000 at March 1,
1996. 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.
4
<PAGE>
(ii) Austin Taylor Operations
Austin Taylor Communications, Ltd. manufactures voice and data connectors
and related products at its plant in Bethesda, Wales, U.K. Its product line
consists of British standard line jacks, patch panels, wiring harness
assemblies, metal boxes, distribution cabinets and distribution and central
office frames.
Austin Taylor is a vertically integrated manufacturer with metal stamping,
metal bending, forming and painting, plastic injection molding and printed
circuit board assembly capabilities. Austin Taylor's major customers include
Northern Telecom Europe, AT&T Europe and NYNEX. Austin Taylor has been a primary
source of supply for some products to British Telecom ("BT"), the United
Kingdom's principal telephone company. However, in the past two years sales
contracts with BT for line jacks and modular boxes have been lost to
competitors. Sales to British Telecom accounted for 8% and 16% of Austin Taylor
sales in 1996 and 1995, respectively. 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 76% and 79% of
Austin Taylor sales were to United Kingdom customers in 1996 and 1995,
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.
Outstanding customer orders for Austin Taylor products were approximately
$1,531,000 at March 1, 1997 compared to $1,660,000 at March 1, 1996. 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.
(iii) Automatic Tool and Connector Company Operations
Effective January 4, 1996, by its acquisition of Automatic Tool and
Connector Company ("ATC"), the Company entered the rapidly growing market for
fiber optic connector products. Located in Union, New Jersey, ATC manufactures a
line of high performance fiber optic connectors, interconnect devices and
coaxial cable assemblies for the telecommunications, computer and electronics
markets. ATC's patented Quick Term TM fiber optic connector significantly
reduces installation time and costs associated with making fiber connections. By
eliminating the need for a curing oven, the product reduces field installation
time for this process from 20 minutes to 2 minutes.
ATC markets its products both in the U.S. and internationally through the
Company's sales staff and a network of distributors and manufacturers
representatives, including Graybar Electric Company, Arcade Electronics and
Primestock. Major customers include original equipment manufacturers, including
Hubbell and Panduit. Export sales of ATC products were $528,000 in 1996,
accounting for 11% of ATC's sales.
Outstanding customer orders for ATC's products were approximately $80,000
at March 1, 1997. Because ATC fills new orders on a relatively short time table,
the Company does not believe its order book is a significant indicator of future
results.
(2) Discontinued Contract Manufacturing Operations
Prior to November, 1996, the Company, through its subsidiary, Zercom
Corporation, 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 provided product engineering services, including circuit board
design, case and enclosure design and product development consulting from design
concept to finished product and manufactured electronic fishing products for the
sports fishing market. Sales by Zercom Corporation accounted for 23% of
consolidated revenues in 1995.
5
<PAGE>
During the third quarter of 1996, the Company's Board of Directors
concluded that the contract manufacturing business was no longer a strategic fit
with the Company's plans for its domestic and international telecommunications
manufacturing business. After considering various alternatives for the
disposition of Zercom, the Company agreed to sell the assets (except cash and
accounts receivable) of Zercom Corporation to Nortech Systems, Inc. . (Nasdaq
National Market System: NSYS ) effective November 4, 1996.
(3) Employment Levels
As of March 1, 1997 the Company employed 909 people. Of this number, 896
were engaged in telephone equipment manufacturing operations (including 246 in
Puerto Rico, 178 in Hector, Minnesota, 49 in Union, New Jersey, 256 in Costa
Rica and 167 in Wales) and 13 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 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) Executive Officers of Registrant
The executive officers of the Company and their ages at March 1, 1997 were
as follows:
Name Age Position (1)
Curtis A. Sampson 63 Chairman of the Board, President
and Chief Executive Officer [1970]
Jeffrey K. Berg 54 President and General Manager
Suttle Apparatus Corporation [1990]
Paul N. Hanson 50 Vice President - Finance, Treasurer
and Chief Financial Officer [1982]
John C. Hudson 52 Managing Director, Austin Taylor
Communications, Ltd. [1992]
- -----------------------------------
(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.
Messrs. Sampson and Hanson each devote approximately 60% of their working
time to the Company's business with the balance devoted to management
responsibilities at Hector Communications Corporation ("HCC"), a diversified
telecommunications holding company also headquartered in Hector, Minnesota, for
which they are separately compensated by HCC.
(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 10 of the "Notes to Consolidated
Financial Statements" under Item 8 herein.
6
<PAGE>
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 leases a 20,000 square foot facility in Union, New Jersey
where Automatic Tool and Connector Company manufactures its fiber optic
connector products.
-- The Company owns a 35,000 square foot plant in Lawrenceville, Illinois.
This facility is for sale, but is currently leased to other tenants,
pending a sale.
CSI believes these facilities will be adequate to accommodate its
administrative and manufacturing needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
No material litigation or other claims are presently pending against the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
7
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
---------------------- ------------------------
High Low High Low
<S> <C> <C> <C> <C>
First $16.25 $13.25 $15.00 $12.00
Second 16.50 12.75 18.75 13.50
Third 15.88 11.25 20.00 13.75
Fourth 16.00 12.50 16.75 12.75
</TABLE>
(b) HOLDERS
At March 1, 1997 there were approximately 830 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 1995 and 1996 were as follows:
January 1, 1995 - April, 1995 $.06
July 1, 1995 - April, 1996 .07
July 1, 1996 - Present .08
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
(in thousands except per share amounts)
Year Ended December 31
------------------------------------------------------------
1996 1995 1994 1993 1992
_______ _______ _______ _______ _______
Selected Income Statement Data
<S> <C> <C> <C> <C> <C>
Revenues From Continuing Operations $ 68,705 $ 66,004 $ 57,077 $ 47,896 $ 43,291
Costs and Expenses:
Cost of Sales 47,719 47,297 40,812 33,348 30,206
Selling, General and Administrative Expenses 10,581 8,519 8,180 7,126 6,733
_______ _______ _______ _______ _______
Total Costs and Expenses 58,300 55,816 48,992 40,474 36,940
Operating Income From Continuing Operations 10,405 10,189 8,086 7,422 6,351
Other Income, Net 799 899 341 567 228
Income From Continuing Operations Before Income Taxes 11,204 11,088 8,427 7,988 6,579
Income Tax Expense 2,250 2,164 1,616 1,308 1,261
_______ _______ _______ _______ _______
Income From Continuing Operations 8,954 8,924 6,811 6,680 5,318
Income (Loss) From Discontinued Operations, Net of Taxes (721) 160 (7) 55 161
_______ _______ _______ _______ _______
Income Before Cumulative Effect of Change in
Accounting Principle 8,233 9,084 6,804 6,735 5,479
Cumulative Effect of Change in Accounting Principle 481
_______ _______ _______ _______ _______
Net Income $ 8,233 $ 9,084 $ 6,804 $ 6,735 $ 5,960
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
Net Income (Loss) Per Common and Common
Equivalent Share:
Continuing Operations $ .96 $ .97 $ .75 $ .74 $ .60
Discontinued Operations (.08) .02 - .01 .02
Cumulative Effect of Change in Accounting Principle .05
_______ _______ _______ _______ _______
Net Income Per Share $ .88 $ .99 $ .75 $ .75 $ .67
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
Cash Dividends Per Share $ .30 $ .26 $ .22 $ .19 $ .17
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
Average Common and Common
Equivalent Shares Outstanding 9,352 9,217 9,093 9,026 8,886
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
Selected Balance Sheet Data
Total Assets $ 67,596 $ 61,945 $ 54,799 $ 46,105 $ 40,245
Property, Plant and Equipment, Net 8,965 8,658 8,132 5,883 5,513
Working Capital 35,906 29,039 22,420 20,283 24,401
Net Assets of Discontinued Operations 537 9,255 8,033 5,218 2,926
Assets of Businesses Transferred Under
Contractual Arrangements 593 1,001 1,302
Stockholders' Equity 59,015 54,076 45,566 40,365 34,751
</TABLE>
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1996 Compared to 1995
Revenues from continuing operations increased 4% to $68,705,000. Operating
income from continuing operations increased 2% to $10,405,000. Sales to
customers in the United States (U.S.) increased 11% to $54,421,000. Sales to the
Big 8 telephone companies (the seven Regional Bell Operating Companies (RBOCs)
and GTE) increased 9% and accounted for 63% of U.S. apparatus sales. Sales to
distributors, original equipment manufacturers (OEMs), and electrical
contractors increased 29%. The sales increases were generated by increased sales
of the Company's CorroShield line of corrosion resistant connectors and by sales
of the fiber optic connector products acquired in the January, 1996 purchase of
Automatic Tool and Connector Company, Inc. CorroShield sales increased 3% to
$15,123,000 in 1996, accounting for 28% of all U.S. shipments. Sales of data
products increased 9% to $6,746,000 and accounted for 12% of U.S. shipments.
Sales to retail customers decreased 8% primarily due to loss of the Company's
sales contract with Coast-to-Coast stores. Sales to international customers from
the Company's U.S. plants, including sales to Canada, decreased 1% to $3,020,000
as sales of fiber optic products offset lower station apparatus sales.
Sales by Austin Taylor, the Company's United Kingdom based subsidiary, decreased
$2,490,000, or 18%. The sales decrease was due to the loss to competitors of a
number of sales contracts with British Telecom for line jacks and modular boxes.
Shipments of new products to the U.K. cable television industry were delayed due
to slower than anticipated contract start-ups. Sales of these products did not
reach expected volumes until later in 1996. Sales to U.K. customers accounted
for 76% of Austin Taylor's 1996 sales.
Gross margins on sales were $20,986,000 in 1996, up 12% from $18,707,000 in
1995. Gross margin as a percentage of sales was 31% compared to 28% in 1995.
Gross margin in U.S. plants was 33% compared to 29% in 1995. Improvement in
gross margin was due to lower purchase costs for certain raw materials and
changes in product mix, emphasizing sales of higher margin CorroShield and fiber
optic connector products. Austin Taylor's margins declined to 19% from 24% in
1995 due to increased product development costs and unfavorable overhead costs
associated with reduced sales volumes.
Selling, general and administrative expenses increased $2,063,000 or 24%. The
increase was principally due to selling, administration and amortization costs
associated with the Company's new Automatic Tool and Connector Co. subsidiary.
U.S. apparatus selling and administrative expenses, exclusive of the effect of
the Automatic Tool acquisition, increased $561,000 or 11% due to increased
international sales expenses. General corporate expenses increased $220,000 or
23% due to increased reserves in the company group medical program.
Investment income, net of interest expense, decreased $100,000 due to decreased
marketable securities valuations.
Income from continuing operations before income taxes increased $116,000 or 1%.
The Company's effective income tax rate was 20.1% compared to 19.5% in 1995. The
increase in the tax rate was due to increased U.S. taxes on the Company's
earnings in Puerto Rico. Income from continuing operations increased $30,000.
1995 Compared to 1994
Revenues from continuing operations increased 16% to $66,004,000. Operating
income from continuing operations increased 26% to $10,189,000. Sales to
customers in the U.S. increased 18% to $49,192,000. Sales to the Big 8 telephone
companies increased 25% and accounted for 64% of U.S. customer sales. Sales to
distributors, OEMs, and electrical contractors increased 7%. Sales to retail
customers increased 1%. Sales to international customers from the Company's U.S.
plants, including sales to Canada, increased 46% to $3,059,000. 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 30% of all U.S. shipments.
10
<PAGE>
Sales by Austin Taylor 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.
Gross margins on sales were $18,707,000 in 1995, up 15% from $16,265,000 in
1994. Gross margin as a percentage of 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.
Selling, general and administrative expenses increased $339,000 or 4%. 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%. General corporate expenses declined $252,000
or 21%.
Investment income, net of interest expense, increased $558,000 due to higher
interest earnings on invested funds and increased marketable securities
valuations.
Income from continuing operations before income taxes increased $2,661,000 or
32%. The Company's effective income tax rate was 19.5% compared to 19.2% in
1994. The increase in the tax rate was due to taxes accrued on the Company's
foreign earnings. Income from continuing operations increased $2,113,000 or 31%
Acquisitions and Dispositions
Effective January 4, 1996, the Company acquired Automatic Tool and Connector
Co., Inc. ("ATC") of Union, New Jersey, in exchange for $3,191,000, consisting
of $1,473,000 of cash and 112,676 shares of the Company's common stock. 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 entry into
the market for fiber optic connectors, which is the fastest growing segment in
the telecommunications connector market. Sales of fiber optic products in 1996
were $4,789,000. ATC's operating income in 1996 was $129,000.
During the third quarter of 1996, the Company's Board of Directors concluded
that the contract manufacturing business was no longer a strategic fit with the
Company's plans for its domestic and international telecommunications
manufacturing business. After considering various alternatives for the
disposition of Zercom, the Company agreed to sell the assets (except cash and
accounts receivable) of Zercom Corporation to Nortech Systems, Inc. for
$1,500,000 of cash and a $4,867,000 five-year note. The transaction was
completed November 4, 1996.
Revenue from discontinued operations was $13,518,000 in 1996. Loss from
operations, net of income tax benefits, was $719,000. The loss was principally
due to write-downs against slow-moving electronic fishing products inventory.
Loss on disposal of the business, after income taxes, was $2,000.
The acquisitions the Company has made over the past several years have served to
expand the Company's product offerings and customer base in both U.S. and
international markets. The Company is a growth oriented manufacturer of
telecommunications connecting devices. The Company is continuing to search for
acquisition candidates with products that will enable the Company to better
serve its target markets.
Effects of Inflation
Inflation has not had a significant effect on operations. The Company does not
have long-term production or procurement contracts and has historically been
able to adjust pricing and purchasing decisions to respond to inflationary
pressures.
11
<PAGE>
Liquidity and Capital Resources
At December 31, 1996, the Company had approximately $17,799,000 of cash and cash
equivalents compared to $11,704,000 of cash and cash equivalents at December 31,
1995. The Company had working capital of approximately $35,906,000 and a current
ratio of 5.2 to 1 compared to working capital of $29,039,000 and a current ratio
of 4.7 to 1 at the end of 1995.
Cash flow provided by operations was approximately $10,572,000 in 1996 compared
to $6,913,000 in 1995. The increase was due to the Company's ability to maintain
its product sales levels while decreasing inventory stocks by $1,566,000.
Accounts receivable increased $1,484,000 due to the Company's increased levels
of business over the second half of 1996. Investing activities provided $861,000
in cash in 1996 as cash flows from discontinued Zercom operations more than
offset cash invested in new plant and equipment and the acquisition of Automatic
Tool and Connector Co. The Company expects to spend $2,500,000 on capital
additions in 1997.
Cash used in financing activities increased to $5,470,000. In August, 1996, the
Company's Board of Directors authorized the purchase and retirement, from time
to time, of up to 500,000 shares of the Company's common stock on the open
market, or in private transactions consistent with overall market and financial
conditions. At December 31, 1996, the Company had purchased and retired 255,495
common shares under this authorization, at a cost of $3,263,000. The Company
intends to purchase and retire additional shares if warranted by market
conditions and the Company's financial position.
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
(Internal Revenue Code Section 936). Under provisions of the Omnibus Budget Act
of 1993, which went into effect beginning in the 1994 tax year, the amount of
the possessions credit is limited to a percentage of the Company's Puerto Rico
payroll and depreciation. U.S. income tax expense on the Company's earnings in
Puerto Rico, after full utilization of the available tax credits, was $352,000,
$272,000 and $209,000 in 1996, 1995 and 1994, respectively.
Under provisions of the Small Business Job Protection Act of 1996, the
possessions tax credit was repealed for years after 1995. However, companies
like CSI which currently qualify for the credit, may continue to claim the
credit until 2005, subject to certain limitations. As of July 1, 1996, the
credit no longer applies to investment income earned in Puerto Rico. The credit
will continue to apply to business income earned in Puerto Rico through 2001.
For the years 2002 to 2005, the amount of Puerto Rico business income eligible
for the credit will be limited to an inflation adjusted amount based on Puerto
Rico business income earned from 1990 to 1994. The possessions tax credit has a
materially favorable effect on the Company's income tax expense. Had the Company
incurred income tax expense on Puerto Rico operations in 1996 at the full U.S.
rate, income tax expense would have increased by $1,908,000.
At December 31, 1996 approximately $30,134,000, $2,818,000, and $88,000 of
working capital were invested in the Company's subsidiaries in Puerto Rico, the
United Kingdom and Costa Rica, respectively. The Company expects to maintain
these investments to support the continued operation of the subsidiaries. The
Company uses the U.S. dollar as its functional currency in Costa Rica. The
United Kingdom is a politically and economically stable country. Accordingly,
the Company believes its risk of material loss due to adjustments in foreign
currency markets to be small.
At December 31, 1996, the Company's had no outstanding obligations for notes
payable or long-term debt. 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.
12
<PAGE>
Changes in Accounting Standards
Effective January 1, 1996, the Company has adopted 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 of
fair value less cost to sell. Adoption of this statement did not have a material
effect on the Company's results of operations or financial position.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation". This
statement requires the Company to disclose the fair value of stock-based
compensation to employees. The Company has elected to continue to apply APB
Opinion No. 25, "Accounting for Stock Issued to Employees" for measurement and
recognition of stock-based transactions with its employees, but will disclose
pro forma information in accordance with SFAS 123.
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 and
the investing public, the Company may make statements regarding the Company's
future financial performance. Such forward looking statements are subject to
risks and uncertainties, including but not limited to buying patterns of
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 the Company's subsidiary in Puerto Rico and other risks involving the
telecommunications industry generally.
13
<PAGE>
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, 1996 and
1995 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, 1996. 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, 1996 and 1995 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 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 21, 1997
Minneapolis, Minnesota
14
<PAGE>
REPORT OF MANAGEMENT
The management of Communications Systems, Inc. and its subsidiary companies is
responsible for the integrity and objectivity of the financial statements and
other financial information contained in the annual report. The financial
statements and related information were prepared in accordance with generally
accepted accounting principles and include amounts that are based on
management's informed judgments and estimates.
In fulfilling its responsibilities for the integrity of financial information,
management maintains accounting systems and related controls. These controls
provide reasonable assurance, at appropriate costs, that assets are safeguarded
against losses and that financial records are reliable for use in preparing
financial statements. Management recognizes its responsibility for conducting
the Company's affairs according to the highest standards of personal and
corporate conduct.
The Audit Committee of the Board of Directors, comprised solely of outside
directors, meets with the independent auditors and management periodically to
review accounting, auditing, financial reporting and internal control matters.
The independent auditors have free access to this committee, without management
present to discuss the results of their audit work and their opinion on the
adequacy of internal financial controls and the quality of financial reporting.
/s/ Curtis A. Sampson
-----------------------
Curtis A. Sampson
President and Chief Executive Officer
/s/ Paul N. Hanson
-----------------------
Paul N. Hanson
March 27, 1997 Chief Financial Officer
15
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
______________________________
1996 1995
____________ ____________
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 17,799,398 $ 11,703,536
Marketable securities (Note 3) 889,782 899,469
Trade accounts receivable, less allowance for
doubtful accounts of $306,000 and $288,000 respectively 10,682,546 8,501,117
Inventories (Note 4) 13,861,914 14,828,534
Prepaid expenses 460,692 345,004
Deferred income taxes (Note 9) 792,000 630,000
____________ ____________
TOTAL CURRENT ASSETS 44,486,332 36,907,660
PROPERTY, PLANT AND EQUIPMENT,net (Notes 1 and 5) 8,964,590 8,658,020
NET ASSETS OF DISCONTINUED OPERATIONS (Note 2) 536,679 9,255,016
OTHER ASSETS:
Excess of cost over net assets acquired (Note 1) 3,166,422 659,264
Investments in mortgage backed and other securities (Notes 1 and 3) 4,487,934 5,398,316
Note receivable from sale of assets of discontinued
contract manufacturing operations (Note 2) 4,866,597
Deferred income taxes (Note 9) 835,047 593,047
Other assets 252,513 473,285
____________ ____________
TOTAL OTHER ASSETS 13,608,513 7,123,912
____________ ____________
TOTAL ASSETS $ 67,596,114 $ 61,944,608
____________ ____________
____________ ____________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 66,715
Accounts payable $ 3,164,406 3,181,684
Accrued expenses 2,622,853 1,957,429
Dividends payable 728,585 642,838
Income taxes payable 2,064,792 2,020,366
____________ ____________
TOTAL CURRENT LIABILITIES 8,580,636 7,869,032
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; 9,107,309
and 9,183,401 shares issued and outstanding respectively (Notes 1 and 8) 455,365 459,170
Additional paid-in capital 21,454,353 19,706,125
Retained earnings 36,856,285 34,140,435
Cumulative translation adjustments (Note 1) 249,475 (230,154)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 59,015,478 54,075,576
____________ ____________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 67,596,114 $ 61,944,608
____________ ____________
____________ ____________
See notes to consolidated financial statements.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
_____________________________________________________
1996 1995 1994
____________ ____________ ____________
<S> <C> <C> <C>
REVENUES FROM CONTINUING OPERATIONS (Note 10): $ 68,704,940 $ 66,004,316 $ 57,077,350
COSTS AND EXPENSES:
Cost of sales 47,718,676 47,297,078 40,812,200
Selling, general and administrative expenses 10,581,557 8,518,644 8,179,492
____________ ____________ ____________
TOTAL COSTS AND EXPENSES 58,300,233 55,815,722 48,991,692
____________ ____________ ____________
OPERATING INCOME FROM CONTINUING OPERATIONS 10,404,707 10,188,594 8,085,658
OTHER INCOME AND (EXPENSES):
Investment income 808,287 917,037 448,537
Interest expense (9,139) (17,806) (107,605)
____________ ____________ ____________
OTHER INCOME, net 799,148 899,231 340,932
____________ ____________ ____________
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 11,203,855 11,087,825 8,426,590
INCOME TAX EXPENSE (Note 9) 2,250,000 2,164,000 1,616,000
____________ ____________ ____________
INCOME FROM CONTINUING OPERATIONS 8,953,855 8,923,825 6,810,590
DISCONTINUED OPERATIONS (Note 2):
Income (loss) from operations of discontinued
contract manufacturing operations,
net of income taxes (719,218) 160,328 (6,960)
Loss on disposal of assets of contract
manufactuing operations, net of income taxes (2,106)
____________ ____________ ____________
NET INCOME $ 8,232,531 $ 9,084,153 $ 6,803,630
____________ ____________ ____________
____________ ____________ ____________
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE (Note 1):
Continuing Operations $ .96 $ .97 $ .75
Discontinued Operations (.08) .02 -
____________ ____________ ____________
NET INCOME PER SHARE $ .88 $ .99 $ .75
____________ ____________ ____________
____________ ____________ ____________
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (Notes 1 and 8) 9,352,000 9,217,000 9,093,000
____________ ____________ ____________
____________ ____________ ____________
See notes to consolidated financial statements.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Advances to
Common Stock Additional Employee Cumulative
-------------------- Paid-in Retained Stock Owner- Translation
Shares Amount Capital Earnings ship Plan Adjustment Total
_________ _________ ___________ ___________ ___________ ___________ ___________
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 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 1,267,846 1,276,512
Tax benefit from non qualified employee
stock options 243,000 243,000
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
Net income 8,232,531 8,232,531
Issuance of common stock to acquire
Automatic Tool and Connector Co. 112,676 5,634 1,712,675 1,718,309
Issuance of common stock under
Employee Stock Purchase Plan 14,346 717 157,806 158,523
Issuance of common stock under Employee
Stock Option Plan 52,381 2,619 466,427 469,046
Tax benefit from non qualified employee
stock options 12,701 12,701
Shareholder dividends (2,868,154) (2,868,154)
Purchase of Communications Systems, Inc.
common stock (255,495) (12,775) (601,381) (2,648,527) (3,262,683)
Cumulative translation adjustment 479,629 479,629
_________ _________ ___________ ___________ ____________ __________ ___________
BALANCE AT DECEMBER 31, 1996 9,107,309 $ 455,365 $21,454,353 $36,856,285 $ - $ 249,475 $59,015,478
_________ _________ ___________ ___________ ____________ __________ ___________
_________ _________ ___________ ___________ ____________ __________ ___________
See notes to consolidated financial statements.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
________________________________________________
1996 1995 1994
____________ ____________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 8,232,531 $ 9,084,153 $ 6,803,630
Discontinued operations 721,324 (160,328) 6,960
____________ ____________ ____________
Income from continuing operations 8,953,855 8,923,825 6,810,590
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities:
Depreciation and amortization 2,303,303 1,995,352 1,709,011
Deferred taxes (405,880) (22,000) (270,000)
Adjustment to marketable securities reserve 9,687 (90,046) 113,297
Changes in assets and liabilities net of effects from
acquisitions and discontinued operations:
Decrease in marketable securities 81,001 165,000
Decrease (increase) in accounts receivable (1,483,853) 1,603,613 (3,223,683)
Decrease (increase) in inventory 1,565,972 (4,240,940) 474,887
Decrease (increase) in prepaid expenses (99,921) 97,456 (76,239)
Increase (decrease) in accounts payable (925,127) (503,139) 981,799
Increase (decrease) in accrued expenses 617,793 (479,097) 1,305,449
Increase (decrease) in income taxes payable 36,534 (452,939) 917,914
____________ ____________ ____________
Total adjustments 1,618,508 (2,010,739) 2,097,435
____________ ____________ ____________
Net cash provided by operating activities 10,572,363 6,913,086 8,908,025
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,989,053) (2,496,488) (3,026,073)
Sales (purchases) of mortgage backed and other
investment securities 909,598 (87,181) 30,922
Sales (purchases) of other assets 218,630 (150,475) 79,715
Collections from businesses transferred under
contractual arrangements 564,657 408,079
Cash receipts from sale of assets of discontinued operations 1,500,000
Changes in assets and liabilities of discontinued operations 1,630,416 (1,062,021) (2,779,760)
Collections from (advances to) Hector Communications Corporation 348,055
Payment for purchase of Austin Taylor Communications, Ltd.,
net of cash acquired (135,131) (280,944)
Payment for purchase of Automatic Tool and Connector Co., Inc.,
net of cash acquired (1,273,776)
____________ ____________ ____________
Net cash provided by (used in) investing activities 860,684 (3,231,508) (5,220,006)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt (65,557) (152,508) (177,962)
Dividends paid (2,782,407) (2,360,025) (1,970,830)
Proceeds from issuance of notes payable and long-term debt 213,279
Proceeds from issuance of common stock 640,270 1,934,979 343,577
Purchase of Communications Systems, Inc. common stock (3,262,683) (220,332)
Repayments from Employee Stock Ownership Plan 72,000 122,000
____________ ____________ ____________
Net cash used in financing activities (5,470,377) (725,886) (1,469,936)
____________ ____________ ____________
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 133,192 1,774 22,295
____________ ____________ ____________
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,095,862 2,957,466 2,240,378
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,703,536 8,746,070 6,505,692
____________ ____________ ____________
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,799,398 $ 11,703,536 $ 8,746,070
____________ ____________ ____________
____________ ____________ ____________
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 2,137,401 $ 2,664,962 $ 968,009
Interest paid 9,139 17,806 35,318
See notes to consolidated financial statements.
</TABLE>
19
<PAGE>
COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
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's operations are located in the United States, United
Kingdom, Puerto Rico, and Costa Rica. Discontinued operations represent the
Company's contract manufacturing operations, which were sold in November, 1996.
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.
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.
Acquisition of Automatic Tool and Connector Co., Inc.: Effective January 4,
1996, the Company purchased all the capital stock of Automatic Tool and
Connector Co., Inc. (ATC) for $3,191,000, consisting of $1,473,000 of cash and
112,676 shares of the Company's common stock. The fair value of assets acquired
in the transaction was $4,063,000 (which includes excess of cost over net assets
acquired of $2,864,000) and liabilities of $872,000 were assumed.
The Company currently leases, with option to purchase, the building housing
ATC's manufacturing and sales operations from ATC's former owners. Payments
under the lease were $129,600 in 1996, which the Company believes to be the
building's fair market rental. The lease expires December 31, 1997. If, at the
expiration of the lease, the Company does not exercise its purchase option, an
additional payment of $100,000 will be due to ATC's former owners.
Accounts receivable from Hector Communications Corporation: The Company provides
services for Hector Communications Corporation ("HCC"), a former subsidiary of
the Company. Several of the Company's officers and directors work in similar
capacities for HCC. Outstanding receivable balances from HCC were $307,000 and
$209,000 at December 31, 1996 and 1995, respectively. Accounts with HCC are
handled on an open account basis.
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 $1,927,081, $1,950,563, and
$1,672,607 for 1996, 1995 and 1994, 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 of from 10 to 15 years. Amortization included
in costs and expenses was $376,222, $44,789 and $36,404 in 1996, 1995 and 1994,
respectively.
20
<PAGE>
Line of credit: The Company has a commitment from First Bank of Minneapolis in
the form of a $2,000,000 line of credit.
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.
Changes in accounting principles: Effective January 1, 1996, the Company adopted
the disclosure provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (Note 8). 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.
Effective January 1, 1996, the Company adopted 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 of
fair value less cost to sell. Adoption of this statement did not have a material
effect on the Company's operating results or financial position.
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 3.
Change of presentation: Certain amounts in the 1995 and 1994 financial
statements have been reclassified to conform with the 1996 financial statement
presentation. These reclassifications had no effect on net income or
stockholders' equity as previously reported.
NOTE 2 - DISCONTINUED OPERATIONS
Discontinued operations represent the Company's contract manufacturing
operations. Effective November 4, 1996, the Company sold all the assets of these
operations, except cash and accounts receivable, to Nortech Systems, Inc.
(Nasdaq National Market System: NSYS) for $1,500,000 cash and a note receivable
of $4,866,597. The note bears interest at the prime rate established by First
Bank of Minneapolis and is secured by the assets sold.
The Company's consolidated financial statements and accompanying notes have been
restated to present separately the net assets and results of operations of the
discontinued operations. Operating results of the discontinued contract
operations were as follows:
21
<PAGE>
<TABLE>
<CAPTION>
Ten Months
Ended
October 31 Year Ended December 31
1996 1995 1994
____________ ____________ ____________
<S> <C> <C> <C>
Sales $ 13,517,501 $ 19,953,130 $ 17,714,022
Costs and expenses 14,684,080 19,697,551 17,689,286
Interest income, net 35,361 40,749 2,304
____________ ____________ ____________
Income (loss) before income taxes (1,131,218) 296,328 27,040
Income tax expense (benefit) (412,000) 136,000 34,000
____________ ____________ ____________
Income (loss) from operations (719,218) 160,328 (6,960)
Loss on disposal of value-added design and
electronic assembly operations, net of income
tax expense of $77,000 (2,106)
____________ ____________ ____________
Net income (loss) $ (721,324) $ 160,328 $ (6,960)
____________ ____________ ____________
____________ ____________ ____________
</TABLE>
<TABLE>
<CAPTION>
Net assets of discontinued operations consisted of the following:
Year Ended December 31
1996 1995
____________ ____________
<S> <C> <C>
Property, plant and equipment $ 2,257,288
Inventory 4,694,429
Other working capital $ 267,679 1,957,334
Deferred income taxes 269,000 107,000
Intangible assets 238,965
____________ ____________
Net assets of discontinued operations 536,679 9,255,016
____________ ____________
____________ ____________
</TABLE>
NOTE 3 - 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:
<TABLE>
<CAPTION>
December 31
1996 1995
--------------------- -------------------
<S> <C> <C>
Aggregate cost $ 963,297 $ 963,297
Valuation allowance (73,515) (63,828)
--------------------- -------------------
Aggregate market value $ 889,782 $ 899,469
==================== ==================
</TABLE>
Investment income (loss) includes ($9,687), $90,046 and ($113,297) for changes
in the unrealized holding gains and losses in 1996, 1995 and 1994, 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, 1996 the
amortized cost basis of the securities was $4,379,000. Market value of the
securities was $4,337,000 resulting in a gross unrealized holding loss of
$42,000, which is not reflected in the financial statements.
The Company has an investment in convertible bonds issued by Hector
Communications Corporation (Note 1). The bonds mature in 2002 and the Company is
holding them to maturity. Amortized cost of the bonds was $109,000 which
approximates their market value.
22
<PAGE>
NOTE 4 - INVENTORIES
Inventories are carried at the lower of cost (first-in, first out method) or
market and consist of :
<TABLE>
<CAPTION>
December 31
1996 1995
-------------------- ------------------
<S> <C> <C>
Finished goods $ 3,957,655 $ 4,231,990
Raw and processed materials 9,904,259 10,596,544
-------------------- ------------------
$ 13,861,914 $ 14,828,534
==================== ==================
</TABLE>
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and the estimated useful lives are as follows:
<TABLE>
<CAPTION>
December 31
Estimated -------------------------------------
useful life 1996 1995
--------------- ----------------- ---------------
<S> <C> <C> <C>
Land $ 292,619 $ 276,669
Buildings 7-30 years 2,905,108 2,832,593
Machinery and equipment 3-15 years 19,119,653 17,444,643
Furniture and fixtures 5-10 years 1,982,324 1,741,299
----------------- ---------------
24,299,704 22,295,204
Less accumulated depreciation 15,335,114 13,637,184
----------------- ---------------
$ 8,964,590 $ 8,658,020
================= ===============
</TABLE>
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 1996, 1995 and 1994 were $73,000, $77,000, and $71,000 respectively.
The Company does not provide post retirement benefits to its employees.
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 $603,000, $454,000
and $469,000 in 1996, 1995 and 1994 respectively.
At December 31, 1996, the Company was obligated under noncancellable operating
leases to make minimum annual future lease payments as follows:
<TABLE>
<CAPTION>
Year Ended December 31:
<S> <C> <C>
1997 $ 402,000
1998 233,000
1999 255,000
2000 266,000
2001 266,000
After 2001 620,000
--------------
$ 2,042,000
==============
</TABLE>
23
<PAGE>
NOTE 8 - COMMON STOCK AND STOCK OPTIONS
Common shares are reserved in connection with the Company's 1992 stock plan
under which 900,000 shares of common stock may be issued pursuant to stock
options, stock appreciation rights, restricted stock or deferred stock granted
to officers and key employees. Exercise prices of stock options under the plan
cannot be less than fair market value of the stock on the date of grant. Rules
and conditions governing awards of stock options, stock appreciation rights and
restricted or deferred stock are determined by the Compensation Committee of the
Board of Directors, subject to certain limitations incorporated into the plan.
At December 31, 1996, 315,417 shares remained available to be issued under the
plan. Options granted to key employees in 1995 and 1996 are subject to vesting.
One third of the options issued vest immediately, the remaining two thirds vest
equally over the next two years. All options expire five years from 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, 1996, 102,000 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, 1996 is as follows:
<TABLE>
<CAPTION>
Average
Number of exercise price
shares per share
----------------- -------------
<S> <C> <C>
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
Granted 167,000 14.75
Exercised (52,381) 8.95
Canceled (8,352) 13.95
----------------- -------------
Outstanding at December 31, 1996 541,689 $ 12.38
================ =============
</TABLE>
At December 31, 1996, 400,565 shares of outstanding options are currently
exercisable. The following table summarizes the status of Communications
Systems, Inc. stock options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Weighted Average Weighted
Remaining Average
Range of Exercise Prices Shares Option Life Exercise Price
_____________________ __________ ________________ _____________
<C> <C> <C> <C>
$ 5.31 to $ 9.99 136,117 1.8 years $ 7.87
$10.00 to $14.99 348,572 3.5 years 13.60
$15.00 to $15.95 57,000 6.3 years 15.70
</TABLE>
24
<PAGE>
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 14,346, 23,567 and 15,408
for the plan years ended August 31, 1996, 1995 and 1994, respectively. At
December 31, 1996 employees had subscribed to purchase an additional 17,800
shares in the current plan cycle ending August 31, 1997.
PRO FORMA FINANCIAL INFORMATION
The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" , but applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees" for measurement and recognition of stock-based
transactions with its employees. If the Company had elected to recognize
compensation cost for its stock based transactions using the method prescribed
by SFAS No. 123, net income and earnings per share would have been as follows:
Year Ended December 31
1996 1995
-------------- --------------
Net Income $ 7,740,304 $ 8,774,114
Net Income Per Share $ .83 $ .95
The fair value of the Company's stock options and Employee Stock Purchase Plan
transactions used to compute pro forma net income and net income per share
disclosures is the estimated present value at grant date using the Black-Scholes
option-pricing model with the following assumptions for 1996 and 1995: expected
volatility of 27%, a risk free interest rate of 6.8%, an expected holding period
of four years for key employee options and seven years for director options, and
a 1.8% dividend yield. Pro forma stock-based compensation cost was $492,000 and
$310,000 in 1996 and 1995, respectively. The fair value of all options issued in
1996 and 1995 was $714,000 and $650,000, respectively.
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 through Company contributions to the plan. All advances by the Company to
the ESOP were repaid at December 31, 1996.
At December 31, 1996, the ESOP held 339,441 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.
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 and
$122,000 of cash were made in the years ending December 31, 1995 and 1994,
respectively. The Company accrued a 1996 ESOP contribution of $300,000, for
which the Company issued 20,870 shares of common stock to the ESOP in February,
1997.
25
<PAGE>
PURCHASES OF COMMUNICATIONS SYSTEMS, INC. COMMON STOCK
In August, 1996, the Company's Board of Directors authorized the purchase and
retirement, from time to time, of up to 500,000 shares of the Company's common
stock on the open market, or in private transactions consistent with overall
market and financial conditions. At December 31, 1996, the Company had purchased
and retired 255,495 common shares under this authorization, at a cost of
$3,263,000.
AUSTIN TAYLOR COMMUNICATIONS, LTD.
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 CSI 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.
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 per share (approximately $1.71 U.S. per share at
December 31, 1996). The price per share was management's best estimate of the
fair market value of Austin Taylor common stock at the date of grant. If the
option is exercised, 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,
1996, 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 $1.36 per share.
NOTE 9 - INCOME TAXES
Income tax expense from continuing operations consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------
1996 1995 1994
----------------- ------------------ -----------------
Currently payable income taxes:
<S> <C> <C> <C>
Federal $ 1,444,000 $ 759,000 $ 966,000
State 294,000 105,000 120,000
Puerto Rico 646,000 589,000 568,000
Canada 10,000 40,000 17,000
United Kingdom 247,000 450,000 215,000
----------------- ------------------ -----------------
2,641,000 1,943,000 1,886,000
Tax effect of disqualified employee incentive
stock options 13,000 243,000
Deferred income tax benefit (404,000) (22,000) (270,000)
------------------ ------------------ -----------------
$ 2,250,000 $ 2,164,000 $ 1,616,000
================== ================== =================
</TABLE>
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
$352,000, $272,000 and $209,000 of U.S. federal income tax expense on earnings
in Puerto Rico for 1996, 1995 and 1994, respectively.
26
<PAGE>
Earnings of Suttle Caribe, Inc. are 90% exempt from Puerto Rico income taxes
through 2003, subject to satisfaction of the employment and investment
requirements of the tax exemption grant received by the Company. Distributions
by Suttle Caribe, Inc. to the parent company are subject to a tollgate tax at
rates which, depending on various factors, range from 3.5% to 10%. The Company
has provided for and prepaid toll gate taxes at a 1.75% rate on its Puerto Rico
earnings for each year since 1993. The Company has recognized tollgate tax
expense at the 3.5% rate on earnings from years prior to 1993 only to the extent
distributions were received from Suttle Caribe, Inc. The cumulative amount of
undistributed prior earnings on which no tollgate tax has been recognized was
approximately $14,766,000 at December 31, 1996.
Suttle Apparatus Canada, Ltd., is subject to Canadian rather than U.S. income
taxes. Canadian pretax income was $21,000, $80,000 and $31,000 for 1996, 1995
and 1994, 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
$791,000, $1,450,000 and $1,872,000 in 1996, 1995 and 1994, 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, 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:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------
1996 1995 1994
----------------- ------------------ ---------------
<S> <C> <C> <C>
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 (17.0) (18.3) (15.4)
State income taxes, net of federal benefit 1.7 1.0 .5
Other 1.4 2.8 .1
----------------- ------------------ ---------------
Effective tax rate 20.1% 19.5% 19.2%
================= ================== ===============
</TABLE>
Deferred tax assets and liabilities as of December 31 related to the following:
<TABLE>
<CAPTION>
1996 1995
----------------- ------------------
Current assets:
<S> <C> <C>
Marketable securities $ 26,000 $ 24,000
Bad debts 73,000 75,000
Inventory 365,000 274,000
Accrued expenses 328,000 257,000
----------------- ------------------
$ 792,000 $ 630,000
================= ==================
Long term assets and (liabilities):
Depreciation $ (232,953) $ (195,953)
Loss reserves on notes receivable 130,000 126,000
Alternative minimum tax credits 938,000 663,000
----------------- ------------------
$ 835,047 $ 593,047
================= ==================
</TABLE>
27
<PAGE>
NOTE 10 - INFORMATION CONCERNING INDUSTRY SEGMENTS AND MAJOR CUSTOMERS
The Company's continuing operations are in one business segment - manufacture of
telephone station apparatus products. The Company operates in the United States,
including Puerto Rico (U.S.), United Kingdom (U.K.), and Costa Rica. Information
concerning the Company's continuing operations in the various geographic areas
is as follows:
<TABLE>
<CAPTION>
Telephone Station Apparatus
-----------------------------------------------------------------------------------------------
U.S. U.K. Other Corporate Eliminations Consolidated
-----------------------------------------------------------------------------------------------
Year Ended December 31, 1996:
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ 56,473,963 $ 11,263,612 $ 967,365 $ 68,704,940
Transfers between geographic
areas 719,583 1,357,653 $ (2,077,236)
-----------------------------------------------------------------------------------------------
Total $ 57,193,546 $ 11,263,612 $ 2,325,018 $ (2,077,236) $ 68,704,940
===============================================================================================
Operating Income $ 10,841,084 $ 626,721 $ 118,942 $(1,182,040) $ 10,404,707
===============================================================================================
Identifiable Assets $ 41,386,485 $ 8,147,019 $ 2,083,210 $15,979,400 $ 67,596,114
===============================================================================================
Depreciation and Amortization $ 1,419,544 $ 549,512 $ 186,937 $ 147,310 $ 2,303,303
===============================================================================================
Capital Expenditures $ 1,091,214 $ 368,592 $ 485,483 $ 43,764 $ 1,989,053
===============================================================================================
Year Ended December 31, 1995:
Revenues:
Sales to unaffiliated customers $ 51,313,001 $ 13,753,235 $ 938,080 $ 66,004,316
Transfers between geographic
areas 697,155 1,636,312 $ (2,333,467)
-----------------------------------------------------------------------------------------------
Total $ 52,010,156 $ 13,753,235 $ 2,574,392 $ (2,333,467) $ 66,004,316
===============================================================================================
Operating Income $ 9,610,251 $ 1,370,675 $ 169,345 $ (961,677) $ 10,188,594
===============================================================================================
Identifiable Assets $ 36,508,774 $ 8,139,074 $ 1,679,581 $15,617,179 $ 61,944,608
===============================================================================================
Depreciation and Amortization $ 1,132,236 $ 566,814 $ 139,247 $ 157,055 $ 1,995,352
===============================================================================================
Capital Expenditures $ 1,205,477 $ 926,905 $ 101,361 $ 262,745 $ 2,496,488
===============================================================================================
Year Ended December 31, 1994:
Revenues:
Sales to unaffiliated customers $ 42,968,330 $ 13,233,582 $ 875,438 $ 57,077,350
Transfers between geographic
areas 707,835 1,661,986 $ (2,369,821)
-----------------------------------------------------------------------------------------------
Total $ 43,676,165 $ 13,233,582 $ 2,537,424 $ (2,369,821) $ 57,077,350
===============================================================================================
Operating Income $ 7,230,961 $ 1,884,504 $ 140,842 $(1,170,649) $ 8,085,658
===============================================================================================
Identifiable Assets $ 32,976,104 $ 6,892,512 $ 1,598,255 $13,332,582 $ 54,799,453
===============================================================================================
Depreciation and Amortization $ 1,120,740 $ 316,814 $ 137,223 $ 134,234 $ 1,709,011
===============================================================================================
Capital Expenditures $ 2,132,196 $ 1,325,219 $ 83,165 $ 295,493 $ 3,836,073
===============================================================================================
</TABLE>
28
<PAGE>
Export sales were less than 10% of consolidated revenues in each of the last
three years. At December 31, 1996, foreign earnings in excess of amounts
received in the United States were approximately $5,748,000.
No customer accounted for more than ten percent of the Company's consolidated
revenues in 1996. In 1995, sales to two U.S. customers amounted to 12.1% and
10.7% of consolidated revenues, respectively. In 1994, sales to one U.S.
customer amounted to 15.1% of consolidated revenues.
The Company's station apparatus products are manufactured using plastic parts,
wire sub-assemblies, fasteners, brackets, electronic circuit boards and other
components, most of which are fabricated by the Company. There are multiple
sources of supply for the materials and parts required and the Company is not
dependent upon any single supplier, except that the Company's corrosion
resistant products utilize a moisture-resistant gel-filled fig available only
from Raychem Corporation. The unavailability of the gel-filled figs from Raychem
Corporation could have a material adverse effect on the Company. The Company has
not generally experienced significant problems in obtaining its required
supplies, although from time to time spot shortages are experienced.
(b) SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Unaudited Quarterly Operating Results
(in thousands except per share amounts)
Quarter Ended
------------------------------------------------------
March 31 June 30 Sept 30 Dec 31
- ----------------------------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C>
Revenues from Continuing Operations $ 15,794 $ 16,434 $ 18,391 $ 18,086
Gross Margins 4,631 4,621 5,862 5,872
Operating income from Continuing Operations 2,313 1,925 2,992 3,175
Income from Continuing Operations 2,003 1,668 2,433 2,850
Income (Loss) from Discontinued Operations 42 (369) (421) 27
Net Income 2,045 1,299 2,012 2,877
Net Income (Loss) Per Share:
Continuing Operations $ .21 $ .18 $ .26 $ .31
Discontinued Operations .01 (.04) (.05)
----------------------------------------------------
Net Income Per Share $ .22 $ .14 $ .21 $ .31
====================================================
1995
Revenues from Continuing Operations $ 18,022 $ 16,594 $ 16,441 $ 14,947
Gross Margins 5,216 4,020 4,710 4,761
Operating income from Continuing Operations 2,799 2,427 2,625 2,338
Income from Continuing Operations 2,375 2,113 2,200 2,236
Income (Loss) from Discontinued Operations 146 184 (45) (125)
Net Income 2,521 2,297 2,155 2,111
Net Income (Loss) Per Share:
Continuing Operations $ .26 $ .23 $ .24 $ .24
Discontinued Operations .02 .02 (.01) (.01)
----------------------------------------------------
Net Income Per Share $ .28 $ .25 $ .23 $ .23
====================================================
</TABLE>
29
<PAGE>
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 22, 1997 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 22, 1997 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 22, 1997 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 22, 1997 Annual Meeting to be filed within 120 days from
the end of the Registrant's fiscal year, which information is expressly
incorporated herein by reference.
30
<PAGE>
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 29 herein:
Independent Auditors' Report for the years ended
December 31, 1996, 1995 and 1994
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidates Statements of Income for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
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, 1996, 1995 and 1994 14
Schedule II - Valuation and Qualifying Accounts and Reserves 34
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial statements or
related notes.
(a) (3) Exhibits
The exhibits which accompany or are incorporated by reference in this
report, including all exhibits required to be filed with this report, are
described on the Exhibit Index, which begins on page 37 of the sequential
numbering system used in this report.
(b) REPORTS ON FORM 8-K FILED DURING THE THREE MONTHS ENDED DECEMBER 31, 1996
The Company's filed a Form 8-K Report dated November 18, 1996, which,
as amended by a Form 8 amendment filed November 19, 1996, reported the sale of
the assets of Zercom Corporation under Item 2, "Acquisition or Disposition of
Assets" and related financial information under Item 7, "Financial Statements
and Exhibits".
31
<PAGE>
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 27, 1997 /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 27, 1997
- ------------------------- President, and Director (Principal
Curtis A. Sampson Executive Officer)
/s/ Paul N. Hanson Vice President, Treasurer and March 27, 1997
- ------------------------- Chief Financial Officer (Principal
Paul N. Hanson Financial Officer and Principal
Accounting Officer)
Director March 27, 1997
- ------------------------
Paul J. Anderson
Director March 27, 1997
- ------------------------
Edwin C. Freeman
/s/ Frederick M. Green Director March 27, 1997
- ------------------------
Frederick M. Green
/s/ John C. Ortman Director March 27, 1997
- ------------------------
John C. Ortman
/s/ Joseph W. Parris Director March 27, 1997
- ------------------------
Joseph W, Parris
/s/ Wayne E. Sampson Director March 27, 1997
- ------------------------
Wayne E. Sampson
/s/ Edward E. Strickland Director March 27, 1997
- ------------------------
Edward E. Strickland
32
<PAGE>
================================================================================
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, 1996
FINANCIAL STATEMENT SCHEDULE
================================================================================
33
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Schedule II - 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:
<S> <C> <C> <C> <C> <C>
December 31, 1996 $ 288,000 $ 91,000 $ - $ 73,000(A) $ 306,000
December 31, 1995 $ 275,000 $ 60,000 $ - $ 47,000(A) $ 288,000
December 31, 1994 $ 255,000 $ 68,000 $ - $ 48,000(A) $ 275,000
Inventory valuation reserves:
Year ended:
December 31, 1996 $ 1,262,000 $ 108,000 $ - $ - $ 1,370,000
December 31, 1995 $ 1,262,000 $ - $ - $ - $ 1,262,000
December 31, 1994 $ 1,062,000 $ 200,000 $ - $ - $ 1,262,000
Reserve for assets transferred under contractual arrangements:
Year Ended:
December 31, 1996 $ 335,000 $ - $ 23,000(B) $ - $ 358,000
December 31, 1995 $ 377,000 $ - $ 43,000(B) $ 85,000 $ 335,000
December 31, 1994 $ 288,000 $ - $ 89,000(B) $ - $ 377,000
- -----------------------------------------
(A) Accounts determined to be uncollectible and charged off against reserve.
(B) Interest on notes receivable credited to valuation reserve.
</TABLE>
34
<PAGE>
================================================================================
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, 1996
EXHIBITS
================================================================================
35
<PAGE>
COMMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Exhibit Index To
Form 10-K for the Year Ended December 31, 1996
Regulation S-K Location in Consecutive Numbering
Exhibit Table System as Filed With the
Reference Title of Document Securities and Exchange Commission
3.1 Articles of Incorporation, as Filed as Exhibit 3.1 to the Form
amended 10-K of the Company for its year
ended December 31, 1989 (the "1989
Form 10-K") and incorporated
herein by reference.
3.2 Bylaws, as amended Filed as Exhibit 3.2 to the 1989
Form 10-K and incorporated herein
by reference.
10.1 1987 Stock Plan Filed as Exhibit 10.1 to the Form
10-K Report of the Company for its
year ended December 31, 1993 (the
"1993 Form 10-K") and incorporated
herein by reference.
10.2 Employee Savings Plan Filed as Exhibit 10.2 to the 1993
Form 10-K and incorporated herein
by reference.
10.3 Employee Stock Ownership 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 38.
Per Share
21 Subsidiaries of the Registrant Filed herewith at page 39.
23 Independent Auditors' Consent Filed herewith at page 40.
24 Power of Attorney Included in signatures at page 33.
The exhibits referred to in this Exhibit Index will be supplied to a shareholder
at a charge of $.25 per page upon written request directed to CSI's Assistant
Secretary at the executive offices of the Company.
36
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CALCULATION OF EARNINGS PER SHARE
EXHIBIT 11
Year Ended December 31
__________________________________________________
Primary: 1996 1995 1994
_______ _____________ _____________ _____________
<S> <C> <C> <C>
Income from continuing operations $ 8,953,855 $ 8,923,825 $ 6,810,590
Income (loss) from discontinued operations (721,324) 160,328 (6,960)
_____________ _____________ _____________
Net income $ 8,232,531 $ 9,084,153 $ 6,803,630
============= ============= =============
Common and common equivalent shares (1):
Weighted average number of common
shares outstanding 9,272,825 9,097,771 8,962,491
Dilutive effect of stock options
outstanding after application of
treasury stock method 79,175 119,229 130,509
_____________ _____________ _____________
9,352,000 9,217,000 9,093,000
============= ============= =============
Primary net income (loss) per common
and common equivalent share (1):
Continuing operations $ .96 $ .97 $ .75
Discontinued operations (.08) .02 -
_____________ _____________ _____________
Net income per share $ .88 $ .99 $ .75
============= ============= =============
Fully Diluted:
_____________
Income from continuing operations $ 8,953,855 $ 8,923,825 $ 6,810,590
Income (loss) from discontinued operations (721,324) 160,328 (6,960)
_____________ _____________ _____________
Net income $ 8,232,531 $ 9,084,153 $ 6,803,630
============= ============= =============
Common and common equivalent shares (1):
Weighted average number of common
shares outstanding 9,272,825 9,097,771 8,962,491
Dilutive effect of stock options
outstanding after application of
treasury stock method 97,175 129,229 150,509
_____________ _____________ _____________
9,370,000 9,227,000 9,113,000
============= ============= =============
Fully diluted net income (loss) per
common and common equivalent share (1):
Continuing operations $ .96 $ .96 $ .75
Discontinued operations (.08) .02 -
_____________ _____________ _____________
Net income per share $ .88 $ .98 $ .75
============= ============= =============
______________________
(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
</TABLE>
37
<PAGE>
SUBSIDIARIES OF COMMUNICATIONS SYSTEMS, INC.
EXHIBIT 21
Subsidiaries Jurisdiction of Incorporation
Suttle Apparatus Corporation Illinois
Suttle Costa Rica, S.A. Costa Rica
Tel Products, Inc. Minnesota
Suttle Caribe, Inc. Minnesota
Austin Taylor Communications, Ltd. United Kingdom
Automatic Tool & Connector Company, Inc. New Jersey
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.
38
<PAGE>
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 21, 1997 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, 1996.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
March 27, 1997
Minneapolis, Minnesota
39
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000022701
<NAME> COMMUNICATIONS SYSTEMS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 17,799,398
<SECURITIES> 889,782
<RECEIVABLES> 10,682,546
<ALLOWANCES> 306,000
<INVENTORY> 13,861,914
<CURRENT-ASSETS> 44,486,332
<PP&E> 24,299,704
<DEPRECIATION> 15,335,114
<TOTAL-ASSETS> 67,596,114
<CURRENT-LIABILITIES> 8,580,636
<BONDS> 0
0
0
<COMMON> 455,365
<OTHER-SE> 58,560,113
<TOTAL-LIABILITY-AND-EQUITY> 67,596,114
<SALES> 68,704,940
<TOTAL-REVENUES> 68,704,940
<CGS> 47,718,676
<TOTAL-COSTS> 47,718,676
<OTHER-EXPENSES> 10,581,557
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,139
<INCOME-PRETAX> 11,203,855
<INCOME-TAX> 2,250,000
<INCOME-CONTINUING> 8,953,855
<DISCONTINUED> (721,324)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,232,531
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.88
</TABLE>
