SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
COMMUNICATIONS SYSTEMS,
INC.
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(Name of Registrant as Specified In Its Charter)
COMMUNICATIONS SYSTEMS,
INC.
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No Fee Required
$125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(4), or 14a-6(i)(2) or
/ / Items 22(a)(2) of
Schedule A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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COMMUNICATIONS SYSTEMS, INC.
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 19, 1998
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Notice is hereby given that the Annual Meeting of Shareholders of
Communications Systems, Inc. will be held at The Marquette Hotel, 50th Floor IDS
Center, 7th and Marquette, Minneapolis, Minnesota 55402, on Tuesday, May 19,
1998 at 3:00 p.m., Central Daylight Time, for the following purposes:
1. To elect three (3) directors to hold office until the 2001 Annual
Meeting of Shareholders or until their successors are elected.
2. To consider and act upon a proposal to ratify and approve an amendment
to the Company's 1992 Stock Plan to increase the number of shares
authorized to be issued under such plan by 500,000 shares to 1,400,000
shares.
3. To consider and act upon a proposal to ratify and approve an amendment
to the Company's 1990 Employee Stock Purchase Savings Plan to increase
the total number of shares authorized to be issued under such plan by
100,000 shares to 300,000 shares.
4. To transact such other business as may properly come before the meeting
or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on March 27, 1998 as
the record date for determination of shareholders entitled to notice of and to
vote at the meeting.
By Order of the Board of Directors
Richard A. Primuth,
SECRETARY
Hector, Minnesota
April 9, 1998
TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE SIGN, DATE AND RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU EXPECT TO ATTEND IN
PERSON. SHAREHOLDERS WHO ATTEND THE MEETING MAY REVOKE THEIR PROXIES AND VOTE IN
PERSON IF THEY SO DESIRE.
COMMUNICATIONS SYSTEMS, INC.
213 SOUTH MAIN STREET
HECTOR, MINNESOTA 55342
(612) 848-6231
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PROXY STATEMENT
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This Proxy Statement is furnished to the shareholders of Communications
Systems, Inc. ("CSI" or the "Company") in connection with the solicitation of
proxies by the Board of Directors of the Company to be voted at the Annual
Meeting of Shareholders to be held at The Marquette Hotel, 50th Floor IDS
Center, 7th and Marquette, Minneapolis, Minnesota 55402 on Tuesday, May 19,
1998, beginning at 3:00 p.m. or at any adjournment or adjournments thereof. The
cost of this solicitation will be paid by the Company. In addition to
solicitation by mail, officers, directors and employees of the Company may
solicit proxies by telephone, telegraph or in person. The Company may also
request banks and brokers to solicit their customers who have a beneficial
interest in the Company's Common Stock registered in the names of nominees and
will reimburse such banks and brokers for their reasonable out-of-pocket
expenses.
Any proxy may be revoked at any time before it is voted by receipt of a
proxy properly signed and dated subsequent to an earlier proxy, or by revocation
of a written proxy by request in person at the Annual Meeting. If not so
revoked, the shares represented by such proxy will be voted by the persons
designated as proxies in favor of the matters indicated. In the event any other
matters which properly come before the meeting require a vote of shareholders,
the persons named as proxies will vote in accordance with their judgment on such
matters. The Company's corporate offices are located at 213 South Main Street,
Hector, Minnesota 55342, and its telephone number is (612) 848-6231. The mailing
of this Proxy Statement to shareholders of the Company commenced on or about
April 9, 1998.
The total number of shares outstanding and entitled to vote at the meeting
as of March 27, 1998 consisted of 9,274,852 shares of $.05 par value Common
Stock. Only shareholders of record at the close of business on March 27, 1998
will be entitled to vote at the meeting. Each share of Common Stock is entitled
to one vote. Cumulative voting in the election of directors is not permitted.
The presence in person or by proxy of the holders of a majority of the shares
entitled to vote at the Annual Meeting of Shareholders constitutes a quorum for
the transaction of business.
Under Minnesota law, each item of business properly presented at a meeting
of shareholders generally must be approved by the affirmative vote of the
holders of a majority of the voting power of the shares present, in person or by
proxy, and entitled to vote on that item of business. However, if the shares
present and entitled to vote on any particular item of business would not
constitute a quorum for the transaction of business at the meeting, then that
item must be approved by holders of a majority of the minimum number of shares
that would constitute such a quorum. Votes cast by proxy or in person at the
Annual Meeting of Shareholders will be tabulated at the meeting to determine
whether or not a quorum is present. Abstentions on a particular item of business
will be treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum, but as unvoted for purposes of determining
approval of the matter. If a broker indicates on the proxy that it does not have
discretionary authority as to certain shares to vote on a particular matter,
those shares will not be considered as present and entitled to vote with respect
to that matter.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's Common
Stock owned by each person known by the Company to own of record or beneficially
five percent (5%) or more of the Company's Common Stock and all officers and
directors of the Company as a group using information available as of March 15,
1998.
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- --------------------------------------- -------------------- ------------
Curtis A. Sampson 1,641,338(1) 17.6%
213 South Main Street
Hector, MN 55342
First Bank System, Inc. 644,100 6.9%
601 Second Avenue South
Minneapolis, MN 55402
Woodland Partners LLC 662,600 7.1%
60 So. 6th St., Suite 3750
Minneapolis, MN 55402
FMR Corp. 658,500 7.0%
82 Devonshire St.
Boston, MA 02109
John C. Ortman 543,350(2) 5.8%
1506 17th Street
Lawrenceville, IL 62439
Thomson Horstmann & Bryant 502,000 5.4%
Saddle Brook, NJ 07663
All directors and executive officers as 2,833,625(3) 30.3%
a group (13 persons)
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(1) Includes 13,898 shares owned by Mr. Sampson's spouse, as to which beneficial
ownership is disclaimed, 54,500 shares which may be purchased within sixty
days from the date hereof pursuant to outstanding stock options, and 298,562
shares owned by the Communications Systems, Inc. Employee Stock Ownership
Plan ("CSI ESOP") of which Mr. Sampson is a Trustee and 19,440 shares of
Company common stock owned by the Hector Communications Corporation Employee
Stock Ownership Plan ("Hector ESOP") of which Mr. Sampson is a Trustee. Mr.
Sampson disclaims any beneficial ownership of shares owned by the CSI ESOP
and the Hector ESOP in excess of the 21,184 shares allocated to his account
as of December 31, 1997.
(2) Includes 14,000 shares which may be purchased within sixty days from the
date hereof pursuant to outstanding stock options.
(3) Includes 2,192,702 shares owned by officers and directors as a group
directly, 48,018 shares held by their respective spouses, 274,903 shares
which may be purchased by directors and officers within 60 days from the
date hereof pursuant to outstanding stock options, 298,562 shares owned by
the CSI ESOP and 19,440 shares of Company common stock owned by the Hector
ESOP. Messrs. Curtis A. Sampson, Wayne E. Sampson and Paul N. Hanson serve
as Trustees of the CSI ESOP and Mr. Curtis A. Sampson and Mr. Paul N. Hanson
serve as Trustees of the Hector ESOP; except for shares allocated to the
respective accounts of Mr. Curtis Sampson and Mr. Paul N. Hanson, Messrs.
Sampson, Sampson and Hanson disclaim beneficial ownership of the shares held
by such ESOPs.
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1. ELECTION OF DIRECTORS
The Board of Directors is presently comprised of ten director positions,
divided into three classes, each of which serve for staggered three year terms.
The Board of Directors has nominated and recommends for reelection as directors
Messrs. Curtis A. Sampson, Joseph W. Parris and Gerald D. Pint, who currently
serve as directors and are each being renominated for a three year term expiring
in 2001. The Board of Directors believes that each nominee named below will be
able to serve, but should a nominee be unable to serve as a director, the
persons named in the proxies have advised that they will vote for the election
of such substitute nominee as the Board of Directors may propose.
Information regarding the nominees and other directors filling unexpired
terms is set forth on the following page, including information regarding their
principal occupations currently and for the preceding five years. Ownership of
Common Stock of the Company is given as of March 15, 1998. To the best of the
Company's knowledge, unless otherwise indicated below, the persons indicated
possess sole voting and investment power with respect to their stock ownership.
YEAR
CURRENT AMOUNT OF PERCENT OF
PRINCIPAL OCCUPATION AND OTHER DIRECTOR TERM COMMON STOCK OUTSTANDING
NAME AND AGE DIRECTORSHIPS SINCE EXPIRES OWNERSHIP COMMON STOCK
- ------------------------- ------------------------------------------- --------- --------- -------------- ---------------
NOMINEES PROPOSED FOR ELECTION FOR TERM EXPIRING IN 2001
Curtis A. Sampson Chairman of the Board, President and Chief 1969 1998 1,641,338(1) 17.6%
(64)* Executive Officer of the Company; Chairman
of the Board of Hector Communications
Corporation (independent telephone
companies); Chairman of the Board of
Canterbury Park Holding Corporation
(thoroughbred racetrack).
Joseph W. Parris Attorney, Mediator, Arbitrator and Private 1995 1998 114,000(2) 1.2%
(78) Investor.
Gerald D. Pint Telecommunications Consultant since 1997 1998 2,000(3) **
(62) September, 1993. Prior thereto Group Vice
President, Telecom Systems Group, 3-M
Company, 1989-1993.
DIRECTORS SERVING UNEXPIRED TERMS
Edwin C. Freeman Vice President and General Manager, 1988 1999 24,100(4) .2%
(42) Bro-Tex, Inc. (paper and cloth wiper
products, and fiber product recycler).
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YEAR
CURRENT AMOUNT OF PERCENT OF
PRINCIPAL OCCUPATION AND OTHER DIRECTOR TERM COMMON STOCK OUTSTANDING
NAME AND AGE DIRECTORSHIPS SINCE EXPIRES OWNERSHIP COMMON STOCK
- ------------------------- ------------------------------------------- --------- --------- -------------- ---------------
Luella Gross Goldberg Chair, Board of Trustees, University of 1997 1999 2,000(3) **
(61) Minnesota Foundation since 1996; Trustee
since 1975. Trustee Emerita of Wellesley
College since 1996; Trustee, 1978 to 1996;
Acting President during 1993; Chair of the
Board of Trustees, 1985 to 1993. Director,
TCF Financial Corporation, Reliastar
Financial Corp, Hormel Foods Corporation,
Piper Funds Inc., Piper Global Funds Inc.,
Piper Institutional Funds Inc. and other
related closed-end investment companies.
Edward E. Strickland Business and management consultant; 1981 1999 34,000(5) .3%
(71) Director of: Green Isle Environmental
Services, Inc. (manufacturing); Bio-
Vascular, Inc. (medical devices); Hector
Communications Corporation (independent
telephone companies); and, Avecor
Cardiovascular, Inc. (medical devices).
John C. Ortman Private Investor. Vice President-Sales of 1990 1999 543,350(5) 5.8%
(76) Suttle Apparatus Corporation (CSI's
telephone station apparatus subsidiary)
from 1968 to 1986.
Paul J. Anderson Private Investor. 1975 2000 170,618(6) 1.8%
(66)
Wayne E. Sampson Management consultant; director of Hector 1981 2000 323,412(7) 3.5%
(68)* Communications Corporation.
Frederick M. Green Chairman of the Board, President and Chief 1996 2000 4,000(8) **
(55) Executive Officer of Ault Incorporated
(power supply and transformer
manufacturer).
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* Wayne E. Sampson and Curtis A. Sampson are brothers.
** Less than .1% of all outstanding shares.
(1) See footnote 1 under "Security Ownership of Certain Beneficial Owners and
Management."
(2) Includes 6,000 shares which may be purchased pursuant to currently
exercisable stock options.
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(3) Includes 1,000 shares which may be purchased pursuant to currently
exercisable stock options.
(4) Includes 2,000 shares owned by Mr. Freeman's spouse, as to which beneficial
ownership is disclaimed, and 14,000 shares which may be purchased pursuant
to outstanding and presently exercisable stock options.
(5) Includes 14,000 shares which may be purchased pursuant to currently
exercisable stock options.
(6) Includes 30,309 shares owned by Mr. Anderson's wife, as to which beneficial
ownership is disclaimed, and 14,000 shares which may be purchased pursuant
to outstanding and presently exercisable stock options.
(7) Includes 14,550 shares owned by Mr. Sampson directly, 300 shares owned by
his spouse, as to which beneficial ownership is disclaimed, 298,562 shares
owned by the CSI ESOP of which Mr. Sampson is a Trustee and 10,000 shares
which may be purchased pursuant to outstanding and presently exercisable
stock options. Mr. Sampson disclaims any beneficial ownership of the shares
owned by the CSI ESOP.
(8) Includes 4,000 shares which may be purchased pursuant to currently
exercisable stock options.
INFORMATION REGARDING BOARD AND BOARD COMMITTEES
The Board of Directors met four times during 1997. Each director nominee and
continuing director attended at least 75% of the 1997 meetings of the Board and
each committee on which such director served.
Directors P. J. Anderson, E. C. Freeman, F.M. Green, L. G. Goldberg, J. C.
Ortman, J. W. Parris, G. D. Pint, W. E. Sampson and E. E. Strickland receive a
monthly retainer of $400 plus $400 for each Board, Audit Committee or
Compensation Committee meeting attended. Messrs. Freeman, W. E. Sampson and
Strickland, in consideration for their additional services as members of the
Executive Committee, are paid an additional monthly retainer of $350. Mr. C. A.
Sampson received no additional cash compensation for service on the Board.
Each non-employee member of the Board of Directors receives at the time of
the annual meeting of the shareholders an option to purchase 2,000 shares of the
Company's Common Stock. Each director's option is at a price equal to the fair
market value of the Company's Common Stock on the date of grant exercisable over
a ten-year period beginning six months after the date the option is granted.
The Company has an Audit Committee consisting of Messrs. Paul J. Anderson,
W. E. Sampson and E. E. Strickland which met twice during the last fiscal year.
The Audit Committee recommends to the full Board of Directors the selection of
independent accountants and reviews the activities and reports of the
independent accountants, as well as the internal accounting controls of the
Company
The Company has a Compensation Committee consisting of Messrs. C. A.
Sampson, Edwin C. Freeman and W. E. Sampson. The Compensation Committee met
twice during the last fiscal year.
PROPOSAL 2
PROPOSAL TO AMEND THE COMPANY'S 1992 STOCK PLAN
INTRODUCTION
The shareholders of the Company approved the Communications Systems, Inc.
1992 Stock Plan (the "Stock Plan") on May 15, 1992 and approved an amendment to
the Stock Plan on May 15, 1995. The
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purpose of the Stock Plan is to enable the Company and subsidiaries to retain
and attract key employees who contribute to the Company's success by their
ability, ingenuity and industry and to enable such key employees to participate
in the long-term success and growth of the Company by giving them a proprietary
interest in the Company. The Stock Plan authorizes the granting of awards in the
following forms: (i) stock options, (ii) stock appreciation rights, (iii)
restricted stock, and (iv) deferred stock. On April 6, 1998, the last reported
sales price of the Company's common stock in the NASDAQ National Market was
$17.25.
AMENDMENT TO STOCK PLAN TO INCREASE AUTHORIZED SHARES
The Stock Plan originally authorized 400,000 shares of common stock (as
adjusted for a stock split in 1993) for issuance pursuant to options granted
under the Stock Plan. At the 1995 Annual Meeting of Shareholders, an amendment
to increase the number of shares available under the Stock Plan by 500,000
shares was ratified and approved. On March 31, the Board of Directors again
amended the Stock Plan, subject to ratification and approval by the Shareholders
of the Company, to increase the total number of shares available under the Stock
Plan by 500,000 shares to a total of 1,400,000. There were outstanding on March
31, 1998 options to purchase 465,772 shares under the Stock Plan (as adjusted
for a stock split in 1993) have been issued and at such date, 264,745 shares had
been purchased through exercise of options granted under the Stock Plan. The
Board of Directors has deemed it prudent to increase the shares available for
grant under the Stock Plan by 500,000 shares to enable the Board of Directors
and the Compensation Committee to continue to grant stock options to officers
and key employees consistent with past practice.
SUMMARY OF TERMS OF STOCK PLAN
The following provides a summary of certain provisions of the Stock Plan:
SHARES AVAILABLE UNDER STOCK PLAN. The maximum number of shares of common
stock reserved and available under the Stock Plan for awards is currently
900,000 shares (subject to possible adjustment in the event of stock splits or
other similar changes in the common stock). Shares of common stock covered by
expired or terminated stock options and forfeited shares of restricted stock or
deferred stock may be used for subsequent awards under the Stock Plan.
ELIGIBILITY AND ADMINISTRATION. Officers and other key employees of the
Company and its subsidiaries who are responsible for or contribute to the
management, growth and profitability of the business of the Company and its
subsidiaries are eligible to be granted awards under the Stock Plan. The Stock
Plan will be administered by the Board or, in its discretion, by a committee of
not less than three "disinterested directors," as defined in the Stock Plan (the
"Committee"), who shall be appointed by the Board of Directors. The term "Board"
used in this section refers to the Board or, if the Board has delegated its
authority, the Committee. The Board will have the power to make awards,
determine the number of shares covered by each award and other terms and
conditions of such awards, interpret the Stock Plan, and adopt rules,
regulations and procedures with respect to the administration of the Stock Plan.
The Board may delegate its authority to officers of the Company for the purpose
of selecting key employees who are not officers of the Company to be
participants in the Stock Plan.
AWARDS UNDER STOCK PLAN
STOCK OPTIONS. The Board may grant stock options that either qualify as
"incentive stock options" under the Code or are "non-qualified stock options" in
such form and upon such terms as the Board may
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approve from time to time. Stock options granted under the Stock Plan may be
exercised during their respective terms as determined by the Board. The purchase
price may be paid by tendering cash or, in the Board's discretion, by tendering
promissory notes or common stock. If the terms of an option so permits the
optionee may elect to pay all or part of the option price by having the Company
withhold upon exercise of the option a number of shares with a fair market value
equal to the aggregate option exercise price for the shares with respect to
which such election is made. No stock option shall be transferable by the
optionee or exercised by anyone else during the optionee's lifetime.
Stock options may be exercised during varying periods of time after a
participant's termination of employment, dependent upon the reason for the
termination. Following a participant's death, the participant's stock options
may be exercised to the extent they were exercisable at the time of death by the
legal representative of the estate or the optionee's legatee for a period of
three years or until the expiration of the stated term of the option, whichever
is less. The same time periods apply if the participant is terminated by reason
of disability or retirement. If the participant is involuntarily terminated
without cause, the participant's options may be exercised to the extent they
were exercisable at the time of termination for the lesser of three months or
the balance of the options' terms. If the participant's employment is terminated
for any other reason, the participant's stock options immediately terminate.
These exercise periods may be reduced by the Board for particular options. The
Board may, in its discretion, accelerate the exercisability of stock options
that would not otherwise be exercisable upon death, disability or retirement.
No incentive stock options shall be granted under the Stock Plan after March
1, 2002. The term of an incentive stock option may not exceed 10 years (or 5
years if issued to a participant who owns or is deemed to own more than 10% of
the combined voting power of all classes of stock of the Company, any subsidiary
or affiliate). The aggregate fair market value of the common stock with respect
to which an incentive stock option is exercisable for the first time by an
optionee during any calendar year shall not exceed $100,000. The exercise price
under an incentive stock option may not be less than the fair market value of
the common stock on the date the option is granted (or, in the event the
participant owns more than 10% of the combined voting power of all classes of
stock of the Company, the option price shall be not less than 110% of the fair
market value of the stock on the date the option is granted). The exercise price
for non-qualified options granted under the Stock Plan may not be less than 50%
of the fair market value of the common stock on the date of grant.
STOCK APPRECIATION RIGHTS. The Board may grant stock appreciation rights
("SARs") in connection with all or part of any stock option either at the time
of the stock option grant, or, in the case of non-qualified options, later
during the term of the stock option. SARs entitle the participant to receive
from the Company the same economic value that would have been derived from the
exercise of an underlying stock option and the immediate sale of the shares of
common stock. Such value is paid by the Company in cash, shares of common stock
or a combination of both, in the discretion of the Board. SARS are exercisable
or transferable only at such times and to the extent stock options to which they
relate are exercisable or transferable. If an SAR is exercised, the underlying
stock option is terminated as to the number of shares covered by the SAR
exercise.
RESTRICTED STOCK. The Board may grant restricted stock awards that result
in shares of common stock being issued to a participant subject to restrictions
against disposition during a restricted period established by the Board. The
Board may condition the grant of restricted stock upon the attainment of
specified performance goals or service requirements. The provisions of
restricted stock awards need not be
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the same with respect to each recipient. The restricted stock will be held in
custody by the Company until the restrictions thereon have lapsed. During the
period of the restrictions, a participant has the right to vote the shares of
restricted stock and to receive dividends and distributions unless the Board
requires such dividends and distributions to be held by the Company subject to
the same restrictions as the restricted stock. Notwithstanding the foregoing,
all restrictions with respect to restricted stock lapse 60 days (or less as
determined by the Board) prior to the occurrence of a merger or other
significant corporate change, as provided in the Stock Plan.
If a participant terminates employment during the period of the restriction,
all shares still subject to restrictions will be forfeited and returned to the
Company, subject to the right of the Board to waive such restrictions in the
event of a participant's death, total disability, retirement or under special
circumstances approved by the Board.
DEFERRED STOCK. The Board may grant deferred stock awards that result in
shares of common stock being issued to a participant or group of participants
upon the expiration of a deferral period. The Board may condition the grant of
deferred stock upon the attainment of specified performance goals. The
provisions of deferred stock awards need not be the same with respect to each
recipient.
Upon termination of employment for any reason during the deferral period for
a given award, the deferred stock in question shall be forfeited by the
participant, subject to the Board's ability to waive any remaining deferral
limitations with respect to a participant's deferred stock. During the deferral
period, deferred stock awards may not be sold, assigned, transferred, pledged or
otherwise encumbered and any dividends declared with respect to the number of
shares covered by a deferred stock award will either be immediately paid to the
participant or deferred and deemed to be reinvested in additional deferred
stock, as determined by the Board. The Board may allow a participant to elect to
further defer receipt of a deferred stock award for a specified period or until
a specified event.
GENERAL PROVISIONS. The Board may, at the time of any grant under the Stock
Plan, provide that the shares received by any participant under the Stock Plan
shall be subject to repurchase by the Company in the event of termination of
employment of the participant for any reason. Except as provided otherwise by
the Board, the repurchase price will be the fair market value of the stock or,
in the case of a termination for cause (as defined in the Stock Plan), the
amount of consideration paid for the stock. The Board may also, at the time of
grant, provide the Company with rights to repurchase, or require the forfeiture
of, shares of stock acquired under the Stock Plan by any participant who, at any
time within two years after termination of employment with the Company, directly
or indirectly competes with, or is employed by a competitor of, the Company.
FEDERAL INCOME TAX CONSEQUENCES
STOCK OPTION. An optionee will not realize taxable compensation income upon
the grant of an incentive stock option. In addition, an optionee generally will
not realize taxable compensation income upon the exercise of an incentive stock
option if he or she exercises it as an employee ir within three months after
termination of employment (or within one year after termination if the
termination results from a permanent and total disability). The amount by which
the fair market value of the shares purchased exceeds the aggregate option price
at the time of exercise (or, in the case of an executive officer, director or
10% shareholder, six months after the date the option as granted, if later)
shall be treated as alternative minimum taxable income for purposes of the
alternative minimum tax.
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If stock acquired pursuant to an incentive stock option is not disposed of
prior to the date two years from the option grant date or prior to one year from
the option exercise date, any gain or loss realized upon the sale of such shares
will be characterized as capital gain or loss. If the applicable holding periods
are not satisfied, then any gain realized in connection with the disposition of
such stock will generally be taxable as compensation income in the year in which
the disposition occurred, to the extent of the difference between the fair
market value of such stock on the date of exercise and the option exercise
price. The Company is entitled to a tax deduction to the extent, and at the
time, that the participant realizes compensation income. The balance of any gain
will be characterized as a long-tem or short-tem capital gain, depending on
whether the shares were held for more than one year.
An optionee will not realize taxable compensation income upon the grant of a
non-qualified stock option. When an optionee exercises a non-qualified stock
option, he or she will realize taxable compensation income at that time equal to
the difference between the aggregate option price and the fair market value of
the stock on the date of exercise. If, however, an optionee is subject to
Section 16(b) of the Securities Exchange Act of 1934 (i.e., is an executive
officer, director or 10% shareholder of the Company) and the optionee exercises
the option within six months after the date the option was granted, he or she
will not realize notable compensation income until six months after the grant of
the non-qualified stock option (subject to the right of the optionee to elect to
be taxed at the time of exercise). In the event realization of the income is
deferred, the amount of the optionee's compensation income will be equal to the
difference between the aggregate option price and the fair market value of the
stock on the date immediately preceding the sixth month anniversary of the date
of grant. The Company is entitled to a tax deduction to the extent and at the
time, that the participant realizes compensation income.
Upon the disposal of stock acquired pursuant to a nonqualified option, the
optionee's basis for determining taxable gain or loss will be the sum of the
option price paid for the stock plus my any related compensation income
recognized by the optionee, and such gain or loss will be long-term or
short-term capital gain or loss depending on whether the optionee has held the
shares for more than one year.
SARS. The grant of an SAR would not result in income for the participant or
in a deduction for the Company. Upon receipt of shares or cash from exercise of
an SAR, the participant would generally recognize compensation income, and the
Company would be entitled to a deduction, measured by the fair market value of
the shares plus any cash received.
RESTRICTED STOCK AND DEFERRED STOCK. The grant of restricted stock and
deferred stock should not result in immediate income for the participant or in a
deduction for the Company for federal income tax purposes, assuming the shares
are nontransferable and subject to restrictions or to a deferral period which
would result in a "substantial risk of forfeiture" as intended by the Company.
If the shares are transferable or there are no such restrictions or significant
deferral period, the participant will realize compensation income upon receipt
of the award. Otherwise, a participant will generally realize compensation
income upon any such restrictions or deferral period lapses. The amount of such
income will be the value of the common stock on that date less any amount paid
for the shares. Dividends paid on the common stock and received by the
participant during the restricted period or deferral period would also be
taxable compensation income to the participant. In any event the Company will be
entitled to a tax deduction to the extent and at the time, that the participant
realizes compensation income. A participant may elect, under Section 83(b) of
the Code, to be taxed on the value of the stock at the time of award. If this
election is made, the fair market value of the stock at the time of the award is
taxable to the participant as compensation income, and the Company is entitled
to a corresponding deduction.
9
WITHHOLDING. The Stock Plan requires each participant, no later than the
date as of which any part of the value of an award first becomes includible as
compensation in the gross income of the participant, to pay to the Company any
federal, state or local taxes required by law to be withheld with respect to the
award. The Company shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment otherwise due to the participant. With
respect to any award under the Stock Plan, if the terms of the award so permit,
a participant may elect to satisfy part or all of the withholding tax
requirements associated with the award by (i) authorizing the Company to retain
from the number of shares of stock which would otherwise be deliverable to the
participant, or (ii) delivering to the Company from shares of Company common
stock already owned by the participant, that number of shares having an
aggregate fair market value equal to part or all of the tax payable by the
participant. In this event, the Company would pay the tax liability from its own
funds.
REGISTRATION WITH SEC
The Company intends to file a Registration Statement covering the issuance
of the additional shares issuable under the Stock Plan, as amended, with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended.
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the outstanding shares of the
Company's common stock voting at the meeting in person or by proxy is required
for approval of the proposed amendment to the Company's Stock Plan.
THE BOARD OF DIRECTORS' RECOMMENDS A VOTE "FOR" APPROVAL OF THE AMENDMENT OF
THE 1992 STOCK PLAN TO INCREASE BY 500,000 SHARES THE NUMBER OF SHARES WHICH MAY
BE ISSUED UNDER OPTIONS AND AWARDS GRANTED UNDER THE 1992 STOCK PLAN.
PROPOSAL 3
PROPOSAL TO AMEND THE COMPANY'S 1990 EMPLOYEE STOCK PURCHASE PLAN
INTRODUCTION
The shareholders of the Company approved the Communications Systems, Inc.
1990 Employee Stock Purchase Plan (the "Purchase Plan") on May 15, 1990 and
approved an amendment to the Purchase Plan on May 15, 1995. The purpose of the
Purchase Plan is to encourage stock ownership by all employees of the Company
and to provide incentive to employees to remain in employment, improve
operations, increase profits and contribute more significantly to the Company's
success.
AMENDMENT TO PURCHASE PLAN TO INCREASE AUTHORIZED SHARES
The Purchase Plan originally authorized the issuance of 100,000 shares of
common stock (as adjusted for a subsequent stock split) pursuant to options
granted hereunder. At the 1995 Annual Meeting of Shareholders an amendment to
increase the number of shares available under the Purchase Plan by 100,000
shares was ratified and approved. On March 31, 1998, the Board of Directors
again amended the Purchase Plan, subject to ratification and approval of the
Shareholders, to increase the total number of shares available under the
Purchase Plan by 100,000 shares to a total of 300,000 shares. There were
outstanding on December 31, 1998, options to purchase 14,410 shares under the
Purchase Plan and, at such date 176,716 shares had been purchased through
exercise of options granted under the Purchase Plan.
10
The Board of Directors believes that the Purchase Plan has provided material
benefits to the Company and its employees and has deemed it prudent to increase
the shares available for grant under the Purchase Plan by 100,000 shares to
enable the continued grant of options and exercise of options pursuant to the
terms and conditions of the Plan. The increase would have the effect of
increasing the total number of shares available for future issuance under the
Purchase Plan to 300,000 shares.
SUMMARY OF TERMS OF STOCK PURCHASE PLAN
The Plan shall be administered by a Committee consisting of not less than
three members who shall be appointed by the Board of Directors. Each member of
such Committee shall be either a director, officer or an employee of the
Company.
The Plan commenced on September 1, 1990 and has been carried out in
successive phases of one year each with each phase commencing on or about the
first day of September in each year as determined by the Committee.
Any employee, including an officer of the Company (other than Curtis Sampson
who, as a 5% or more shareholder, is prohibited by law from participating) who
as of the first day of the month immediately preceding the Commencement Date of
a phase of the Plan, is customarily employed by the Company for more than 15
hours per week, shall be eligible to participate in the Plan.
Eligible employees elect to participate in the Plan by completing payroll
deduction authorization forms prior to the Commencement Date of any phase of the
Plan. Payroll deductions are limited to 10% of a Participant's base pay for the
term of the phase of the Plan.
As of the Commencement Date of any phase of the Plan, an eligible employee
who elects to participate in the Plan shall be granted an option for as many
full shares as he or she will be able to purchase pursuant to the payroll
deduction procedure. The option price for employees who participate on the
Commencement Date of any phase of the Plan shall be the lower of: (i) 85% of the
fair market value of the shares on the Commencement Date of that phase of the
Plan, or (ii) 85% of the fair market value of the shares on the Termination Date
of that phase of the Plan.
Exercise of the option occurs automatically on the Termination Date of the
phase of the Plan, unless a Participant gives written notice prior to such date
as to an election not to exercise. A Participant may, at any time during the
term of the Plan, give notice that he or she does not wish to continue to
participate, and all amounts withheld will be refunded with interest.
The Company believes that the Plan is a "qualified" Plan under Section 423,
Internal Revenue Code. Under the Internal Revenue Code, as amended to date, no
income will result to a grantee of an option upon the granting or exercise of an
option, and no deduction will be allowed to the Company. The gain, if any,
resulting from a disposition of the shares received by a Participant, will be
reported according to the provisions of Section 423, Internal Revenue Code of
1954, as amended, and will be taxed in part as ordinary income and in part as
capital gain.
The Board of Directors may at any time amend the Plan, except that no
amendment may make changes in options already granted which would adversely
affect the rights of any Participant.
11
REGISTRATION WITH SEC
The Company intends to file a Registration Statement covering the issuance
of the additional shares issuable under the Purchase Plan, as amended, with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended.
VOTE REQUIRED
The affirmative vote of a majority of the outstanding shares of the
Company's common stock voting at the meeting in person or by proxy is required
for approval of the proposed amendment to the Company's Purchase Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE AMENDMENT OF
THE 1990 EMPLOYEE STOCK PURCHASE PLAN TO INCREASE BY 100,000 SHARES THE NUMBER
OF SHARES WHICH MAY BE ISSUED PURSUANT TO OPTIONS GRANTED UNDER THE STOCK
PURCHASE PLAN.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following tables show, for the fiscal years ending December 31, 1997,
1996 and 1995, the cash and other compensation paid to or accrued by the Company
for each executive officer whose total cash compensation exceeded $100,000
during fiscal 1997 in all capacities served, as well as information relating to
option grants, option exercises and fiscal year end option values applicable to
such persons.
LONG-TERM
COMPENSATION
-------------
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES ALL
-------------------------------- UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- ---------------------------------------------------- --------- ---------- --------- ------------- -------------
Curtis A. Sampson, Chief Executive.................. 1997 $ 182,876 $ 30,000 19,500 (3)
Officer of the Company (1) 1996 $ 176,520 $ 25,000 15,000
1995 $ 160,666 $ 25,000 12,000
John C. Hudson, Managing Director................... 1997 $ 89,486 $ 74,903 6,600 $ 39,237
Austin Taylor Communications (2) 1996 $ 87,105 $ 46,045 6,000 $ 38,144
1995 $ 87,130 $ 74,861 6,000 $ 41,017
Jeffrey K. Berg, President.......................... 1997 $ 113,493 $ 30,000 18,000
Suttle Apparatus Corporation 1996 $ 106,979 $ 25,000 15,000 (4)
1995 $ 99,132 $ 20,000 12,000
- ------------------------
Note: Certain columns have not been included in this table because the
information called for therein is not applicable to the Company or the
individual named above for the periods indicated. See also footnotes on p.
13.
(1) Mr. Sampson devotes approximately 60% of his working time to the Company.
The balance of his working time Mr. Sampson serves as Chairman and Executive
Officer of Hector Communications Corporation, for which he is separately
compensated.
12
(2) For each of the three years, more than 60% of the amounts listed under "All
Other Compensation" represents the Company's contribution to Mr. Hudson's
pension plan.
(3) In February 1998, pursuant to a Board of Director approval, the Company
loaned to Curtis A. Sampson $93,881 pursuant to a two-year promissory note
bearing interest at 6.5% to enable the exercise of stock options granted by
the Company. The loan to Mr. Sampson is secured by the pledge of 10,600
shares of the Company's common stock.
(4) In July, 1994 the Company loaned Mr. Berg $100,000 at 8% per annum under a
promissory note due in July, 1998. The current balance of the loan is
$61,000. Also, in February 1998, the Company loaned $83,375 to Mr. Berg
under a two-year promissory note bearing interest at 6.5% to enable the
exercise of stock options granted by the Company. The loans are secured by
10,000 shares of Company common stock and options to acquire 12,000 shares
of Company common stock which were granted to Mr. Berg, which stock and
options have an aggregate, in-the-money value of approximately $246,500 as
of date hereof.
OPTION GRANTS IN 1997
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION ---------------------
NAME GRANTED 1997 SHARE DATE 5% 10%
- --------------------------------------------- ----------- ----------------- ----------- ----------- --------- ----------
Curtis A. Sampson............................ 19,500 10.9% $ 14.99 2/27/02 $ 46,836 $ 135,636
John C. Hudson............................... 6,600 3.7% 13.63 2/27/02 24,845 54,900
Jeffrey K. Berg.............................. 18,000 10.0% 13.63 2/27/02 67,758 149,728
AGGREGATED OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
VALUE REALIZED IN-THE-MONEY OPTIONS AT
(MARKET PRICE NUMBER OF UNEXERCISED FY-END (BASED ON FY-END
SHARES AT EXERCISE OPTIONS AT FY-END PRICE OF $17.75)
ACQUIRED ON LESS -------------------------- --------------------------
NAME EXERCISE EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------- ----------- --------------- ----------- ------------- ----------- -------------
Curtis A. Sampson..................... 13,400 91,455 47,100 18,000 $ 194,874 $ 45,050
John C. Hudson........................ 3,317 31,179 18,200 6,400 79,075 24,650
Jeffrey K. Berg....................... -- -- 50,000 17,000 236,375 65,750
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997 Curtis A. Sampson and Wayne E. Sampson served as members
of the Company's Compensation Committee. Mr. C. A. Sampson is the President and
Chief Executive Officer of the Company and Mr. W. E. Sampson, a director, is his
brother.
13
COMPENSATION COMMITTEE REPORT
The Compensation Committee appointed by the Company's Board of Directors has
primary responsibility in regard to determinations relating to executive
compensation and administration of the Company's stock option plans. All
decisions by the Compensation Committee pertaining to the compensation of the
Company's executive officers are reviewed and approved by the full Board. Mr.
Curtis A. Sampson, the Company's Chairman and Chief Executive Officer, did not
participate in any discussions or decisions of either the Compensation Committee
or the Board of Directors relating to any aspect of his compensation.
COMPENSATION POLICIES
It is the objective of the Compensation Committee to pay compensation at
levels which will attract, retain and motivate executives with superior
leadership and management abilities and to structure the forms of compensation
paid such that their interests will be closely aligned with achievement of
superior financial performance by the Company. With these objectives in mind,
the compensation currently paid to the Company's executive officers principally
consists of three elements: base salary, bonus and periodic stock option awards.
COMPENSATION ELEMENTS
Base salaries of the Company's executive officers are generally established
by reference to base salaries paid to executives in similar positions with
similar responsibilities based upon publicly available compensation surveys and
limited informal surveys by Compensation Committee members. Base salaries are
reviewed annually. Adjustments to base salaries are determined by reference to
individual and company per-formance having in mind both measurable financial
factors, as well as subjective judgments by the Compensation Committee in regard
to factors such as development and execution of strategic plans, changes in
areas of responsibility and the development and management of employees. The
Compensation Committee does not, however, assign specific weights to these
various factors in reaching its decisions.
Bonuses are intended to provide executives with an opportunity to receive
additional cash com-pensation, but only if they earn it through Company and
individual performance. After year end results are available, the Committee
determines each officer's bonus based on the Company's performance, as measured
by such factors as growth in earnings per share, as well as the Compensation
Committee's subjective assessment of individual performance in the executive's
area of responsibility, but without assigning specific weight to the various
factors considered.
Stock options are awarded to the Company's executives under the Company's
1992 Stock Plan. Stock options represent an additional vehicle for aligning
management's and stockholders' interests, specifically motivating executives to
remain focused on factors which will enhance the market value of the Company's
common stock. If there is no price appreciation in the common stock, the option
holders receive no benefit from the stock options, because options are granted
with an option exercise price at least equal to the fair market value of the
common stock on the date of grant.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Curtis A. Sampson participates in the same executive compensation plans
provided to other senior executives and is evaluated by the same factors
applicable to the other executives as described above. Mr. Sampson's total cash
compensation for 1997 was $212,876, an increase of 5.6% over total cash
compensation in 1996. In addition, Mr Sampson was granted options to purchase
19,500 shares in 1997, as compared to options covering 15,000 shares granted to
Mr. Sampson in 1996. Because of his significant
14
holdings of Company common stock, under applicable IRS rules, Mr. Sampson's
options are priced at 110% of the market price on the date of grant. The two
other members of the Compensation Committee believe that the increase in Mr. C.
A. Sampson's cash compensation for 1997 is reasonable in relation to the 10%
increase from sales from continuing operations in 1997 as compared to 1996 and
the 22% increase in net income from continuing operations as compared to 1996.
In addition, the two other members of the Compensation Committee believe, based
upon their general knowledge of compensation paid to other chief executives and
published regional salary data (but without conducting a formal survey), that
Mr. Sampson's total compensation is below that which could be reasonably
justified in relation to the scope of his responsibilities, as well as the
financial performance of the Company and total shareholder return during the
past several years.
SUBMITTED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Edwin C. Freeman Curtis A. Sampson Wayne E. Sampson
PERFORMANCE GRAPH
The following graph presents, at the end of each of the Company's last five
fiscal years, the cumulative total return on the common stock of the Company as
compared to the cumulative total return of the NASDAQ Stock Market Total Return
Index (U.S. Companies), and NASDAQ Telecommunications Stock Total Return Index,
assuming, in each case, the investment of $100 on December 31, 1992 and the
reinvestment of all dividends.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
SYSTEMS, INC. STOCK MARKET TELECOMMUNICATIONS STOCK
1992 $100 $100 $100
1993 175 115 154
1994 168 112 128
1995 216 159 169
1996 210 195 172
15
CERTAIN TRANSACTIONS
TRANSACTIONS AND SHARED MANAGEMENT WITH HECTOR COMMUNICATIONS CORPORATION
The Company makes available to Hector Communications Corporation ("HCC")
which prior to 1990 was a subsidiary of the Company certain staff services and
administrative systems, such as payroll and pension plan administration, with
the related costs and expenses being paid by HCC. In 1997 and 1996 HCC paid the
Company $264,000 and $258,000, respectively, for such services, amounts which
management believes are no less than the cost the Company incurred in connection
with providing such services.
Two of the Company's executive officers, Curtis A. Sampson and Paul N.
Hanson, each devote approximately 60% of their working time to the Company.
Messrs. Sampson and Hanson devote the remainder of their working time to HCC, of
which Mr. Sampson serves as Chairman and Chief Executive Officer and Mr. Hanson
serves as a director and Treasurer. These officers are separately compensated by
HCC for their services to HCC.
REPORTS TO THE SECURITIES AND EXCHANGE COMMISSION
The Company's officers, directors and beneficial holders of 10% or more of
the Company's securities are required to file reports of their beneficial
ownership with the Securities and Exchange Commission on SEC Forms 3, 4 and 5.
According to the Company's records, during the period from January 1, 1997 to
December 31, 1997, officers, directors and ten percent beneficial holders of the
Company filed all reports with the Securities and Exchange Commission required
under Section 16(a) related to their beneficial ownership. To the best of the
Company's knowledge, all such reports have been filed in a timely manner.
THE COMPANY'S AUDITORS
Deloitte & Touche have been the auditors for the Company since 1982 and have
been selected by the Board of Directors, upon recommendation of the Audit
Committee, to serve as such for the current fiscal year. A representative of
Deloitte & Touche is expected to be present at the Annual Meeting of
Shareholders and will have an opportunity to make a statement and will be
available to respond to appropriate questions.
SHAREHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
The proxy rules of the Securities and Exchange Commission permit
shareholders of a company, after timely notice to the Company, to present
proposals for shareholder action in the Company's proxy statement where such
proposals are consistent with applicable law, pertain to matters appropriate for
shareholder action and are not properly omitted by Company action in accordance
with the Commission's proxy rules. The next annual meeting of the shareholders
of Communications Systems, Inc. is expected to be held on or about May 15, 1999
and proxy materials in connection with that meeting are expected to be mailed on
or about March 31, 1999. Shareholder proposals prepared in accordance with the
Commission's proxy rules to be included in the Company's Proxy Statement must be
received at the Company's corporate office, 213 South Main Street, Hector,
Minnesota 55342, Attention: President, by December 15, 1998, in order to be
considered for inclusion in the Board of Directors' Proxy Statement and proxy
card for the 1998 Annual Meeting of Shareholders. Any such proposals must be in
writing and signed by the shareholder.
16
The Bylaws of the Company establish an advance notice procedure with regard
to (i) certain business to be brought before an annual meeting of shareholders
of the Company and (ii) the nomination by shareholders of candidates for
election as directors.
PROPERLY BROUGHT BUSINESS. The Bylaws provide that at the annual meeting
only such business may be conducted as is of a nature that is appropriate for
consideration at an annual meeting and has been either specified in the notice
of the meeting, otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or otherwise properly brought before the
meeting by a shareholder who has given timely written notice to the Secretary of
the Company of such shareholder's intention to bring such business before the
meeting. To be timely, the notice must be given by such shareholder to the
Secretary of the Company not less than 45 days nor more than 75 days prior to a
meeting date corresponding to the previous year's annual meeting. Notice
relating to the conduct of such business at an annual meeting must contain
certain information as described in Section 2.9 of the Company's Bylaws, which
are available for inspection by shareholders at the Company's principal
executive offices pursuant to Section 302A.461, subd. 4 of the Minnesota
Statutes. Nothing in the Bylaws precludes discussion by any shareholder of any
business properly brought before the annual meeting in accordance with the
Company's Bylaws.
SHAREHOLDER NOMINATIONS. The Bylaws provide that a notice of proposed
shareholder nominations for the election of directors must be timely given in
writing to the Secretary of the Company prior to the meeting at which directors
are to be elected. To be timely, the notice must be given by such shareholder to
the Secretary of the Company not less than 45 days nor more than 75 days prior
to a meeting date corresponding to the previous year's annual meeting. The
notice to the Company from a shareholder who intends to nominate a person at the
meeting for election as a director must contain certain information as described
in Section 3.7 of the Company's Bylaws, which are available for inspection by
shareholders as described above. If the presiding officer of a meeting of
shareholders determines that a person was not nominated in accordance with the
foregoing procedure, such person will not be eligible for election as a
director.
OTHER MATTERS
Management knows of no other matters that will be presented at the meeting.
If any other matters arise at the meeting, it is intended that the shares
represented by the proxies in the accompanying form will be voted in accordance
with the judgment of the persons named in the proxy.
The Company is transmitting with this Proxy Statement its Annual Report for
the year ended December 31, 1997. SHAREHOLDERS MAY RECEIVE, WITHOUT CHARGE, A
COPY OF THE COMPANY'S 1997 FORM 10-K REPORT AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION BY WRITING TO ASSISTANT SECRETARY, COMMUNICATIONS SYSTEMS,
INC., 213 SOUTH MAIN STREET, HECTOR, MINNESOTA 55342.
By Order of the Board of Directors,
Richard A. Primuth,
SECRETARY
17