ITEM 1. BUSINESS
Commercial National Financial Corporation (the "Corporation" or "registrant"), a bank holding company, was incorporated in Michigan on December 30, 1987. On May 31, 1988, the Corporation acquired all of the stock of Commercial National Bank, a national banking association chartered in 1962. On December 30, 1992, Commercial National Bank converted to a state-chartered bank under the name Commercial Bank (the "Bank").
The Bank's business is concentrated in a single industry segment - commercial banking. The Bank provides a full range of banking services to individuals, agricultural businesses, commercial businesses and light industries located in its service area. The Bank maintains a diversified loan portfolio, including loans to individuals for home mortgages, automobiles and personal expenditures, and loans to business enterprises for current operations and expansion. The Bank offers a variety of deposit vehicles, including checking, savings, money market and individual retirement accounts and certificates of deposit.
The principal markets for the Bank's financial services are the Michigan communities in which the Bank is located and the areas immediately surrounding these communities. The Bank serves these markets through nine offices located in and near these communities. Neither the Corporation nor the Bank has any material foreign assets or income.
The principal source of revenue for the Corporation and its subsidiary is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 78.1% of the Corporation's total revenues in 1995, 75.5% in 1994, and 74.7% in 1993. Interest on investment securities accounted for 13.9% of the Corporation's total revenues in 1995, 16.1% in 1994, and 15.6% in 1993.
At December 31, 1995, the Bank had no significant concentrations of loans to any group of borrowers engaged in similar activities that would be impacted by economic or other conditions.
The business of banking is highly competitive. In addition to competition from other commercial banks, banks face competition from nonbank financial institutions. Savings associations compete with commercial banks for deposits and loans. Credit unions and finance companies compete for consumer loans. Commercial banks compete for deposits with other investments such as mutual funds and corporate and government debt securities. Financial service providers compete for customers principally through price (interest rates paid on deposits, interest rates charged on borrowings and fees charged for services) and service (convenience and quality of services rendered to customers).
The Bank competes directly with fifteen financial institutions in the market it serves. The Bank's competitors include other commercial banks, savings associations and local credit unions. When combining the deposits of those branches, the Bank ranks second in deposit size. The Bank does not believe that its ability to compete for loans and deposits is affected by the rank among its competitors.
Banks and bank holding companies are extensively regulated. The Bank is chartered as a state bank under Michigan law and is supervised, examined and regulated by the Michigan Financial Institutions Bureau and the Federal Deposit Insurance Corporation ("FDIC"). The business activities of the registrant are limited to banking and to other activities determined by the Board of Governors of the Federal Reserve System to be closely related to banking. Deposits of the Bank are insured by the FDIC to the extent provided by law.
Commercial banks are subject to a number of federal and state laws and regulations that have a material impact on their business. These include, among others, state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, electronic funds transfer laws, redlining laws, antitrust laws, environmental laws and privacy laws. The policies of the Federal Reserve System, and other authorities, may materially affect the growth and distribution of loans, investments and deposits and interest rates on deposits and loans.
The FDIC Improvement Act of 1991 (the "FDIC Improvement Act"), revised sections of the Federal Deposit Insurance Act affecting bank regulation, deposit insurance and provisions for the funding of the bank insurance fund. The FDIC
Improvement Act also revised bank regulatory structures embodied in several other federal banking statutes, links the bank regulators' authority to intervene to the deterioration of a bank's capital level, places limits on real estate lending and increases audit requirements. Among the significant revisions that could have an impact on the Corporation is the authority granted the FDIC to impose special assessments on insured depository institutions to repay FDIC borrowings from the United States Treasury or other sources and to establish semiannual assessment rates on bank insurance fund member banks so as to maintain the bank insurance fund at the designated reserve ratio defined in the FDIC Improvement Act. The FDIC Improvement Act also required the FDIC to implement a system of risk-based premiums for deposit insurance pursuant to which the premiums paid by a depository institution are based on the perceived probability that the bank insurance fund will incur a loss in respect of such institution.
Under 1994 amendments to the Federal Bank Holding Company Act, the Corporation is authorized to acquire subsidiary banks in any state in which state laws permit such acquisitions. Out-of-state bank holding companies in any state are permitted to acquire banks located in Michigan if the laws of the state in which the out-of-state bank holding company is located authorize a bank holding company located in Michigan to acquire ownership of banks in that state on a reciprocal basis. Under amendments to the Michigan Banking Code which became effective on November 29, 1995, the Bank is authorized to merge with or acquire out-of-state banks or branches in any state in which state laws permit such acquisitions.
As of December 31, 1995, the Corporation and its subsidiary employed approximately 91 employees on a full-time equivalent basis.
The statistical information on the following pages further describes certain aspects of registrant's business.
Distribution of Assets, Liabilities, and Shareholders' Equity
The following table sets forth the average amount of each principal category of assets, liabilities, and shareholders' equity for the periods indicated:
Interest Rates and Interest Differential
The following tables present an analysis of net interest earnings for the periods indicated. All interest (including tax-exempt securities and tax-exempt loans) is presented on a fully taxable-equivalent basis.
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(1) Loan fees are included in interest income and are used to calculate average rates earned. Non-accrual loans are included in the average loan balances.
(2) Yields on tax exempt loans and investment securities are computed on a fully taxable-equivalent basis using a federal income tax rate of 34%.
The following table sets forth an analysis of interest differential, including the effect of volume and rate changes on interest income and expenses for the periods indicated. For purposes of these tables, change in interest due to volume and rate were determined as follows:
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(1) Loan fees are included in interest income and are used to calculate average rates earned. Non-accrual loans are included in the average loan balances.
(2) Yields on tax exempt loans and investment securities are computed on a fully taxable-equivalent basis using a federal income tax rate of 34%.
Investment Portfolio
The book value of investment securities as of the dates indicated are summarized as follows:
The following table shows, by class of maturities as of December 31, 1995, the amounts and weighted average yields of held-to-maturity securities (1):
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(1) The effective yields are weighted for the scheduled maturity of each security and weighted average yields are calculated on the basis of par value.
(2) Weighted average interest rates have been computed on a fully taxable-equivalent basis. The rates shown on securities issued by states and political subdivisions have been restated, assuming a 34% tax rate.
(3) As of December 31, 1995, the aggregate book value of investment securities issued by the State of Michigan and all its political subdivisions totaled $9,726 with an aggregate market value of $9,834.
Loan Portfolio
The following table presents the amount of loans outstanding at the indicated dates by loan type, based on classifications used for regulatory reporting:
The following table shows the maturity of loans (excluding real estate mortgages and installment loans) outstanding at December 31, 1995. Also provided are the amounts due after one year classified according to their sensitivity to changes in interest rates.
The following table summarizes nonaccrual, past due, and restructured loans at the dates indicated:
The Corporation estimates the following additional information with respect to nonaccrual and restructured loans for the year ended December 31, 1995:
Loan performance is reviewed regularly by loan review personnel, loan officers and senior management. Loans are placed on nonaccrual status when principal or interest is past due 90 days or more and the loan is not well-secured and in the process of collection, or when reasonable doubt exists concerning collectibility of interest or principal. Any interest previously accrued in the current period but not collected is reversed and charged against current earnings.
At December 31, 1995, the Corporation had $2,800 in domestic loans for which payments are presently current, but where the borrowers are currently experiencing financial difficulties. Those loans are subject to constant management attention and their classification is reviewed on a regular basis.
As of December 31, 1995, there were no concentrations of loans exceeding 10% of total loans.
Summary of Loan Loss Experience
The following table summarizes loan balances at the end of each period and daily averages; changes in the allowance for possible loan losses arising from loans charged off and recoveries on loans previously charged off, by loan category; and additions to the allowance which have been charged to expense.
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(1) The provision for loan losses charged to expense is based on loan loss experience and such other factors which, in management's judgment, deserve current recognition in maintaining an adequate allowance for loan losses. These other factors include, but are not limited to, a review of current economic conditions as they relate to loan collectibility and reviews of specific loans to evaluate their collectibility.
The allowance for loan losses has been allocated according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories at the dates indicated:
Deposits
The daily average amounts of deposits and rates paid on such deposits for the periods indicated are:
The time remaining until maturity of time certificates of deposits of $100,000 or more at December 31, 1995, is as follows:
Return on Equity and Assets
The following table sets forth certain financial ratios at the end of each period:
Short-Term Borrowings
Short-term borrowed funds consist of securities sold under agreements to repurchase and treasury tax and loan demand notes. The following amounts and rates applied during the last two years:
The weighted average interest rates are derived by dividing the interest expense for the period by the daily average balance during the period.
ITEM 2.

ITEM 2. PROPERTIES.
The Bank currently conducts business from nine banking offices including two branches located in supermarkets owned by a related party. The executive offices of the Corporation are located at 101 North Pine River Street, Ithaca, Michigan. The main office of the Bank is located at 301 North State Street, Alma, Michigan. The main office property of the Bank is leased for a term expiring on December 31, 2013. The branches of the Bank are located in Alma, Greenville, Midland, Middleton, Pompeii, and St. Louis, Michigan.
The Bank owns the property for five of the branch office locations. One branch office is leased pursuant to a lease that expires August 1, 1998, subject to 3 renewals of 10 years each. The Alma Supermarket Branch is leased pursuant to a five year lease beginning June 1, 1995 with two five year renewals. The Midland Supermarket Branch is leased pursuant to a five year lease beginning January 1, 1996 with two five year renewals. Aggregate rental expense represents less than 5% of the registrant's operating expenses. The Corporation considers all of its facilities to be well maintained and in generally good operating condition and suitable for the purposes for which they are intended.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
The Corporation and the Bank are parties, as plaintiff or defendant, to several legal proceedings, none of which is considered material, and all of which arose in the ordinary course of business.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The information under the captions "Common Stock Information" and "Dividend Information" of the registrant's annual report to shareholders for the year ended December 31, 1995, is here incorporated by reference to Exhibit 13.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
The information under the caption "Selected Financial Data" of the registrant's annual report to shareholders for the year ended December 31, 1995, is here incorporated by reference to Exhibit 13.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information under the heading "Management's Review and Analysis" of the registrant's annual report to shareholders for the year ended December 31, 1995, is here incorporated by reference to Exhibit 13.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements, notes and independent auditors' report of the registrant's annual report to shareholders for the year ended December 31, 1995, are here incorporated by reference to Exhibit 13.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Effective December 13, 1995, the Corporation's Board of Directors approved the dismissal of its certifying accountants, BDO Seidman, LLP, to be effective upon completion of audit services for the year ending December 31, 1995, and retained as its new certifying accountants, Crowe, Chizek, and Co. LLP, for audit services beginning in 1996. BDO Seidman LLP's report on the Corporation's financial statements during the two most recent fiscal years preceding December 13, 1995 contained no adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the last two fiscal years and the subsequent interim period to December 13, 1995, there were no disagreements between the Corporation and BDO Seidman, LLP, on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of BDO Seidman, LLP would have caused it to make a reference to the subject matter of the disagreements in connection with its reports.
None of the "reportable events" described in Item 304(a)(1)(v) of Regulation S-K occurred with respect to the Corporation within the last two fiscal years and the subsequent interim period to December 13, 1995.
Effective December 13, 1995, the Corporation engaged Crowe, Chizek, and Co. LLP, as its principal accountants for audit services for the year ending December 31, 1996. During the last two fiscal years and the subsequent interim period to December 13, 1995, the Corporation did not consult Crowe, Chizek, and Co. LLP regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the caption "Directors and Executive Officers" and "Other Matters" in the registrant's definitive Proxy Statement for its April 23, 1996, annual meeting of shareholders is here incorporated by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the captions "Compensation of Executive Officers", "Compensation of Directors", and "Employment, Termination of Employment, and Change in Control Agreement", in the registrant's definitive Proxy Statement for its April 23, 1996, annual meeting of shareholders is here incorporated by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Voting Securities" in the registrant's definitive Proxy Statement for its April 23, 1996, annual meeting of shareholders is here incorporated by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Relationships" in the registrant's definitive Proxy Statement for its April 23, 1996, annual meeting of shareholders is here incorporated by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
The following financial statements, notes to financial statements, and independent auditors' report of the Corporation and its subsidiary are filed as part of this report:
Independent Auditors' Report Consolidated Balance Sheets - December 31, 1995 and 1994 Consolidated Statements of Income for each of the three years ended December 31, 1995 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1995 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1995 Notes to Consolidated Financial Statements
The financial statements, notes to financial statements, and independent auditors' report for the years ended December 31, 1995 and 1994, listed above are incorporated by reference in Item 8 of this report from the corresponding portions of the registrant's annual report to shareholders for the year ended December 31, 1995. With the exception of the portions of the registrant's annual report to shareholders for the year ended December 31, 1995 specifically incorporated herein by reference, such report shall not be deemed filed as part of this annual report on Form 10-K.
(2) All schedules have been omitted because they are inapplicable or otherwise not required.
(3) The following exhibits are filed as part of this report:
Number Exhibit
3(a) Restated Articles of Incorporation. Previously filed as an exhibit to the registrant's Form S-4 filed January 22, 1988. Here incorporated by reference.
3(b) Bylaws. Previously filed as an exhibit to the registrant's Form S-4 filed January 22, 1988. Here incorporated by reference.
10(a) Form of Indemnity Agreement. Previously filed as an exhibit to the registrant's Form S-4 filed January 22, 1988. Here incorporated by reference.
10(b) 1989 Stock Option Plan. Previously filed as an exhibit to the registrant's Form 10-K for the year ended December 31, 1988. Here incorporated by reference.*
10(c) 1991 Stock Option Plan. Previously filed as an exhibit to the registrant's Form 10-K for the year ended December 31, 1990. Here incorporated by reference.*
10(d) Amendment to 1991 Stock Option Plan.*
10(e) Lease for Main Office. Previously filed as an exhibit to registrant's Form 10-K for the year ended December 31, 1991. Here incorporated by reference.
10(f) Branch Purchase and Assumption Agreement. Previously filed as an exhibit to registrant's Form 10-K for the year ended December 31, 1991. Here incorporated by reference.
10(g) Executive Employment, Change of Control and Severance Agreements. Previously filed as an exhibit to registrant's Form 10-K for the year ended December 31, 1991. Here incorporated by reference.*
10(h) Branch Lease for Alma Supermarket Branch.
10(i) Branch Lease for Midland Supermarket Branch.
13 Incorporated portions from 1995 Annual Report to Shareholders.
16 Letter Concerning Change in Certifying Public Accountant. Previously filed as an exhibit to registrant's Form 8-K, filed December 28, 1995. Here incorporated by reference.
21 Subsidiary of Registrant. Previously filed as an exhibit to the registrant's Form S-4 filed January 22, 1988. Here incorporated by reference.
23 Consent of Independent Certified Public Accountants.
24 Power of Attorney.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement
The registrant will furnish a copy of any exhibit listed above to any shareholder of the registrant without charge upon written request to Marlyn Artecki, Commercial National Financial Corporation, 101 North Pine River Street, Ithaca, Michigan 48847.
(b) Reports on Form 8-K.
A Form 8-K was filed by the registrant on December 28, 1995, for Item 4, "Changes in the Registrant's Certifying Accountant."
(c) Exhibits.
See Item 14(a)(3)
(d) Financial Statement Schedules.
There are no financial statement schedules required to be filed with this report.
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.
COMMERCIAL NATIONAL FINANCIAL CORPORATION (registrant)
March 20, 1996 By: /s/ Dean E. Milligan ------------------------------------- Dean E. Milligan 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 and in the capacities and on the dates indicated.
INDEX TO EXHIBITS


ITEM 1 - BUSINESS
BUSINESS
The Registrant was duly organized and incorporated under the laws of the State of New York on April 26, 1946. Its sole line of business is the design and manufacture of power conversion equipment for electronic and electrical systems. Principal markets encompass the computer, office copier, information systems, military, aerospace and communications industries and a variety of industrial, commercial and residential fields for applications that require conversion of electrical energy from one useable state to another. Products are distributed to customers through the Registrant's sales force, independent sales representatives and wholesale distributors. The business of the Registrant is not seasonal in nature.
COMPETITION
Competitive conditions within the power conversion industry are intense. The Registrant competes with many other companies, some of which have far greater resources than the Registrant. The principal methods of competition within the industry are price, service and product performance. To meet this competition, the Registrant attempts to maintain high standards of engineering, manufacturing and customer service. Due to the number and variety of competitors, reliable data relative to the Registrant's competitive position within the power conversion industry would be difficult to develop and is not known nor believed to exist.
CUSTOMERS
Two customers of the Company accounted for 13.4% and 10.6% of fiscal 1995 sales, respectively, one of which also accounted for 10.6% of June 30, 1995, accounts receivable. In comparison, there was one customer of the Company that accounted for 10.0% of fiscal 1994 sales and no customers were above the 10% threshold in 1993.
BACKLOG
The backlog of orders believed to be firm totaled approximately $20,954,498 at June 30, 1995, compared with approximately $16,697,000 at June 30, 1994. The change in backlog as of June 30, 1995, compared with the backlog as of June 30, 1994, reflects increased order volume from a major OEM customer at the Electronics Division, combined with several significant development contracts received at the Aerospace Division. Backlog orders at June 30, 1995, are generally expected to be filled during the current fiscal year.
RAW MATERIALS
The Registrant purchases materials in a semi-finished state from other manufacturers and distributors. Availability of materials is considered adequate to maintain current production levels.
PATENTS
The Registrant holds several technical patents and trademarks and is a party to certain patent applications. The extent of the effect of such patents and trademarks is, however, in the opinion of management, not material at this time.
LICENSES
The Registrant is a party to several license agreements. The only material license, providing for the sale and manufacture of a proprietary fiber nickel cadmium battery (FNC), is an agreement with Daug-Hoppecke Gesellschaft Fur Batteriesysteme mbH ("DAHO") of Brilon, Germany. The Company recorded an impairment loss write-off as of June 30, 1994, assigning zero value to the FNC license agreement. For further discussion, see attached referenced portions of the Registrant's Annual Report to Shareholders.
EMPLOYEES
As of June 30, 1995, approximately 821 persons were employed by the Regis- trant.
RESEARCH AND DEVELOPMENT
Approximately 6% of the Registrant's employees are engaged in engineering design and product development. Most new products are designed to satisfy specific customer requirements, and the cost of such development is expensed as incurred. Since satisfaction of many customers' needs requires advancing applicable technology, applied research is an integral part of engineering- design and product-development activities. The cost of such activities during the fiscal years ended June 30, 1995, 1994 and 1993, was $4,791,000, $5,666,000 and $5,757,000, respectively.
ENVIRONMENTAL MATTERS
The Company was informed by the New York State Department of Environmental Conservation (DEC) on December 5, 1994, that the Municipal Waste Landfill, Cuba, NY, has been listed in the New York State Registry of Inactive Hazardous Waste Disposal Sites as a Class "2" site requiring remediation. Acme Electric Corporation has been determined by the DEC to be a potentially responsible party (PRP) by virtue of its disposal of wastes at the site. As a PRP, the Company may be subject to liability for the cost of site investigation and remediation. At this time, there is insufficient information available from which any reasonable estimate of such cost can be made. The Company did have insurance policies in effect during the period that waste was disposed of at the site, which the Company believes would provide coverage in the event the Company is liable.
ITEM 2

ITEM 2 - PROPERTIES
The Registrant owns one plant located in Lumberton, North Carolina. The Registrant concluded the sale of its Cuba, New York, facility in September 1993
and the sale of its Salt Lake City, Utah, facility in February 1994. The Registrant, under an operating lease agreement, leases back portions of the Cuba, New York, facility. The Registrant has completed the construction of a new 91,000-square-foot facility in Cuba, New York, and moved into it during fiscal 1995. The Registrant also maintains operating leases for its Corporate facility in East Aurora, New York, and its plant located in Tempe, Arizona. The Registrant also owns an idle facility in West Jordan, Utah, vacated in conjunction with the restructuring of its Utah activities into the Tempe, Arizona, location. The Registrant believes that these facilities provide adequate capacity for its current operations.
SQUARE FOOTAGE SQUARE FOOTAGE LEASE EX- LOCATION OWNED LEASED PIRATION DATE
Cuba, NY (New Plant) - 91,000 April 2017 Cuba, NY (Old Plant) - 68,757 August 1996 East Aurora, NY - 10,000 April 1999 (Exec. Offices) Lumberton, NC 128,170 - N/A Tempe, AZ - 40,260 March 2000 West Jordan, UT 23,242 - N/A
ITEM 3

ITEM 3 - LEGAL PROCEEDINGS
The Registrant is involved in ordinary routine litigation incidental to its business, but none is expected to have a material impact upon the financial condition of the Registrant.
ITEM 4

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Information relating to the market and market prices of the Registrant's common stock, the approximate number of Registrant's shareholders and its dividend history for the past two fiscal years appears on page 32 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 1995, submitted herewith as an exhibit and such information is incorporated by reference herein.
Information relating to long-term debt for the past two fiscal years appears on page 27 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 1995, submitted herewith as an exhibit and such information is incorporated by reference. The Registrant suspended its quarterly cash dividend effective the third quarter of fiscal 1991. The loss in fiscal 1991 resulted in a deficit of retained earnings. The Registrant, therefore, does not expect to reinstate dividends in the foreseeable future.
ITEM 6

ITEM 6 - SELECTED FINANCIAL DATA
A five-year summary of certain financial information relating to the financial condition and results of operations of the Registrant appears on page 21 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 1995, submitted herewith as an exhibit and such summary is incorporated by reference herein.
ITEM 7

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of operations appears on pages 18 and 20 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 1995, submitted herewith as an exhibit and such management's discussion and anaylsis is incorporated by reference herein.
ITEM 8

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Registrant and its subsidiaries, appearing on pages 22 through 31 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 1995, submitted herewith as an exhibit, are incorporated by reference herein:
Consolidated Statements of Operations - Years Ended June 30, 1995, 1994,
Consolidated Balance Sheets - June 30, 1995 and 1994
Consolidated Statements of Cash Flows - Years Ended June 30, 1995, 1994,
Consolidated Statements of Shareholders' Equity - Years Ended June 30, 1995, 1994, 1993
Notes to Consolidated Financial Statements
ITEM 9

ITEM 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
There have been no disagreements with accountants on accounting and financial disclosure matters.
PART III
ITEM 10

ITEM 10 - DIRECTORS AND OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
Information on directors of the Registrant is contained under the caption "Election of Directors," presented in the Registrant's Definitive Proxy Statement filed pursuant to Regulation 14A and used in conjunction with the Registrant's 1995 Annual Meeting of Shareholders to be held on October 27, 1995, and is incorporated by reference herein.
IDENTIFICATION OF EXECUTIVE OFFICERS
SUMMARY OF BUSINESS EXPERIENCE NAME, AGE AND POSITION OVER THE LAST FIVE YEARS
Robert J. McKenna, 47, Chairman, Prior to assuming the position currently President and Chief Executive Officer held in October 1994, served as President and Chief Executive Officer since October 1993. Prior thereto, served as President and Chief Operating officer since September 1992. Prior thereto, served as Group Vice President of the Diversified Products Group, Aeroquip Corporation since April 1990. Prior thereto, Vice President and General Manager of the Automotive Connectors Division of Aeroquip Corporation since July 1989.
Daniel K. Corwin, 48, Prior to assuming the position currently Senior Vice President held in August 1994, served as Vice and Chief Financial Officer President of Administration and Chief Financial Officer since February 1992. Prior thereto, served as Vice President and General Manager, Electronics Division, since November 1990. Prior thereto, served as Vice President of Operations since July 1988.
David G. Anderson, 43, Prior to assuming the position currently Corporate Secretary, Treasurer, held in February 1992, served as and General Counsel Corporate Secretary, Treasurer, Controller and General Counsel since April 1988.
Donald J. Chesner, 51, Prior to assuming the position currently Vice President and General held in May 1993, served as General Manager, Acme Transformer Division Manager since February 1992. Prior thereto, served as National Sales Manager, Acme Transformer Division, since March 1987.
John E. Gleason, 48, Prior to assuming the position currently Vice President and General held in May 1993, served as General Manager, Electronics Division Manager since February 1992. Prior thereto, served as Operations Manager, Cuba Electronics Division, since October 1991, and prior thereto, served as Operations Manager, Salt Lake City Electronics Division, since January 1987.
Menahem Anderman, 42, Prior to assuming the position currently Vice President and General held in April 1994, served as Venture Manager, Advanced Energy Systems Director since May 1993. Prior thereto, served as Technical Director since May 1988.
ITEM 11

ITEM 11 - MANAGEMENT REMUNERATION AND TRANSACTIONS
Information called for in response to this item is contained under the captions "Compensation of Executive Officers," "Employment Agreement," "1981
Incentive Stock Option Plan," "1989 Stock Option Plan," and "Pension Plan," presented in the Registrant's definitive proxy statement filed pursuant to Regulation 14A and used in conjunction with the Registrant's 1995 Annual Meeting of Shareholders to be held on October 27, 1995, and is incorporated by reference herein.
ITEM 12

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners and management is contained under the captions "Voting Securities and Principal Holders Thereof" and "Nominees For Election As Directors" in the Registrant's definitive proxy statement filed pursuant to Regulation 14A and used in conjunction with the Registrant's 1995 Annual Meeting of Shareholders to be held on October 27, 1995, and is incorporated by reference herein.
ITEM 13

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain transactions have been referenced under Item 11. There are no other applicable relationships or related transactions.
PART IV
ITEM 14

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
See the accompanying Index to Financial Statements and Financial Statement Schedules on page of this report.
2. FINANCIAL STATEMENT SCHEDULES
See the accompanying Index to Financial Statements and Financial Statement Schedules on page of this report.
3. EXHIBITS PAGE NUMBER OR INCORPORATION -------- BY REFERENCE ----------------------------
3a Certificate of Incorporation, Exhibit (3a) to Report on as amended to date Form 10-K for fiscal year ended June 30, 1989.
3b Bylaws, as amended to date Exhibit (3b) to Report on Form 10-K for fiscal year ended June 30, 1990.
10 Employment Agreements See Exhibit 10 attached.
11 Statement re. computation of Note (1e) to Consolidated per share earnings Financial Statements at page 26 of 1995 Annual Report to Shareholders.
13 Acme Electric Corporation 1995 Annual Report to Shareholders See Exhibit 13 attached.
21 Subsidiaries of Registrant See Exhibit 21 attached.
22 1995 Proxy Statement Definitive Proxy Statement filed under Schedule 14A, September 18, 1995, File No. 001-08277.
23 a,b, Additional Exhibits - Pages through on c,d Undertakings Report on Form 10-K for fiscal year ended June 30, 1995.
99 Additional Exhibits - News Release, April 28 1995, announcing third quarter results. See Exhibit 99-1 attached. News Release, May 17, 1995, announcing Robert D. Batting being named to the board of directors. See Exhibit 99-2 attached. News Release, May 17, 1995, announcing Randall L. Clark being named to the board of directors. See Exhibit 99-3 attached. News Release, May 26, 1995, announcing response to recent stock activity. See Exhibit 99-4 attached. News Release, June 13, 1995, announcing response to recent stock activity. See Exhibit 99-5 attached. News Release, June 27, 1995, announcing response to recent stock activity. See Exhibit 99-6 attached. News Release, July 12, 1995, announcing an agreement with B.A.T. International. See Exhibit 99-7 attached. News Release, July 20, 1995, announcing response to news report about the Company. See Exhibit 99-8 attached. News Release, August 14, 1995, announcing fourth quarter and year-end results. See Exhibit 99-9 attached.
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the fifty-two-week period ending June 30, 1995.
SIGNATURES
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 and in the capacities and on the dates indicated.
SIGNATURE AND TITLE DATE
/s/ 09/28/95 Robert D. Batting, Director
/s/ 09/28/95 Robert T. Brady, Director
/s/ 09/28/95 Randall L. Clark, Director
____________________________________ 09/28/95 W. Bennett Conner, Director
/s/ 09/28/95 G. Wayne Hawk, Director
/s/ 09/28/95 Terry M. Manon, Director
/s/ 09/28/95 Robert J. McKenna, Director
/s/ 09/28/95 James W. McLaughlin, Director
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.
ACME ELECTRIC CORPORATION
By: /s/ Date: 09/28/95 Robert J. McKenna Chairman, President and Chief Executive Officer
By: /s/ Date: 09/28/95 Daniel K. Corwin Senior Vice President and Chief Financial Officer
ACME ELECTRIC CORPORATION
The financial statements together with the report thereon of Price Waterhouse LLP dated August 10, 1995, appearing on pages 22 through 31 of the accompanying 1995 Annual Report to Shareholders, are incorporated by reference in this Form 10-K Annual Report. With the exception of the aforementioned information and the information incorporated in Items 5, 6, 7, 8 and 14 of this Form 10-K, the 1995 Annual Report to Shareholders is not to be deemed filed as part of this report. The following financial statement schedules should be read in conjunction with the financial statements in such 1995 Annual Report to Shareholders. Financial statement schedules not included in this Form 10-K Annual Report have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
FINANCIAL STATEMENT SCHEDULES
1995 1994 AND 1993
PAGE
Report of independent accountants
Valuation and qualifying accounts and reserves (Schedule VIII)
Consents of independent accountants , and
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Acme Electric Corporation
Our audits of the consolidated financial statements referred to in our report dated August 10, 1995 appearing on page 31 of the 1995 Annual Report to Shareholders of Acme Electric Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in the Index to Financial Statements and Financial Statement Schedules which appears on page of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/
PRICE WATERHOUSE LLP
Buffalo, New York August 10, 1995
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 2-45985) of Acme Electric Corporation of our report dated August 10, 1995 appearing on page 31 of the 1995 Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page of this Form 10-K.
/s/
PRICE WATERHOUSE LLP
Buffalo, New York September 28, 1995
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 2-92825) of Acme Electric Corporation of our report dated August 10, 1995 appearing on page 31 of the 1995 Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page of this Form 10-K.
/s/
PRICE WATERHOUSE LLP
Buffalo, New York September 28, 1995
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 2-89587) of Acme Electric Corporation of our report dated August 10, 1995 appearing on page 31 of the 1995 Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page of this Form 10-K.
/s/
PRICE WATERHOUSE LLP
Buffalo, New York September 28, 1995
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-79488) of Acme Electric Corporation of our report dated August 10, 1995 appearing on page 31 of the 1995 Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page of this Form 10-K.
/s/
PRICE WATERHOUSE LLP
Buffalo, New York September 28, 1995


ITEM 1. BUSINESS
Robert Half International Inc. is the world's largest specialized provider of temporary and permanent personnel in the fields of accounting and finance. Its divisions include ACCOUNTEMPS-Registered Trademark- and ROBERT HALF-Registered Trademark-, providers of temporary and permanent personnel, respectively, in the fields of accounting and finance. The Company, utilizing its experience as a specialized provider of temporary and permanent personnel, has expanded into additional specialty fields. In 1991, the Company formed OFFICETEAM-Registered Trademark- to provide skilled temporary administrative and office personnel. In 1994, the Company established RHI CONSULTING-Registered Trademark- to concentrate on providing temporary and contract information technology professionals in positions ranging from PC support technician to chief information officer. In 1992, the Company acquired THE AFFILIATES-Registered Trademark-, which focuses on placing temporary and permanent employees in paralegal, legal administrative and other legal support positions.
The Company's business was originally founded in 1948. Prior to 1986, the Company was primarily a franchisor of ACCOUNTEMPS and ROBERT HALF offices. Beginning in 1986, the Company and its current management embarked on a strategy of acquiring franchised locations and other local or regional independent providers of specialized temporary service personnel. The Company has acquired all but five of the ACCOUNTEMPS and ROBERT HALF franchises in 45 separate transactions, and has acquired 16 other local or regional providers of specialized temporary service personnel. Since 1986, the Company has significantly expanded operations at many of the acquired locations and has opened many new locations. The Company believes that direct ownership of offices allows it to better monitor and protect the image of the ACCOUNTEMPS and ROBERT HALF names, promotes a more consistent and higher level of quality and service throughout its network of offices and improves profitability by centralizing many of its administrative functions. The Company currently has more than 185 offices in 36 states and five foreign countries and placed approximately 101,000 employees on temporary assignment with clients in 1995.
ACCOUNTEMPS
The ACCOUNTEMPS temporary services division offers customers a reliable and economical means of dealing with uneven or peak work loads for accounting, tax and finance personnel caused by such predictable events as vacations, taking inventories, tax work, month-end activities and special projects and such unpredictable events as illness and emergencies. Businesses increasingly view the use of temporary employees as a means of controlling personnel costs and converting such costs from fixed to variable. The cost and inconvenience to clients of hiring and firing permanent employees are eliminated by the use of ACCOUNTEMPS temporaries. The temporary workers are employees of ACCOUNTEMPS and are paid by ACCOUNTEMPS only when working on customer assignments. The customer pays a fixed rate only for hours worked.
ACCOUNTEMPS clients may fill their permanent employment needs by using an ACCOUNTEMPS employee on a trial basis and, if so desired, "converting" the temporary position to a permanent position. The client typically pays a one-time fee for such conversions.
OFFICETEAM
The Company's OFFICETEAM division, which commenced operations in 1991, places temporary and permanent office and administrative personnel, ranging from word processors to office managers, from over 135 locations in the United States and Canada. OFFICETEAM operates in much the same fashion as the ACCOUNTEMPS and ROBERT HALF divisions.
ROBERT HALF
The Company offers permanent placement services through its office network under the name ROBERT HALF. The Company's ROBERT HALF division specializes in placing accounting, financial, tax and banking personnel. Fees for successful permanent placements are paid only by the employer and are generally a percentage of the new employee's annual compensation. No fee for permanent placement services is charged to employment candidates.
RHI CONSULTING
The Company's RHI CONSULTING division, which commenced operations in 1994, specializes in providing information technology contract consultants in areas ranging from multiple platform systems integration to end-user support, including specialists in programming, networking, systems integration, database design and help desk support. RHI Consulting conducts its activities from 38 locations in the United States, Canada and Europe.
THE AFFILIATES
In 1992, the Company acquired THE AFFILIATES, a small operation involving only a limited number of offices, which places temporary and permanent employees in paralegal, legal administrative and legal secretarial positions. The legal profession's requirements (the need for confidentiality, accuracy and reliability, a strong drive toward cost-effectiveness, and frequent peak workload periods) are similar to the demands of the clients of the ACCOUNTEMPS division.
MARKETING AND RECRUITING
The Company markets its services to clients as well as employment candidates. Local marketing and recruiting are generally conducted by each office or related group of offices. Advertising directed to clients and employment candidates consists primarily of yellow pages advertisements, classified advertisements and radio. Direct marketing through mail and telephone solicitation also constitutes a significant portion of the Company's total advertising. National advertising conducted by the Company consists primarily of print advertisements in national newspapers, magazines and certain trade journals. Joint marketing arrangements have been entered into with Microsoft, Lotus Development Corporation, WordPerfect Corporation, Peachtree Software, Inc., and Computer Associates International, Inc. and typically provide for cooperative advertising, joint mailings and similar promotional activities. The Company also actively seeks endorsements and affiliations with professional organizations in the business management, office administration and professional secretarial fields. The Company also conducts public relations activities designed to enhance public recognition of the Company and its services. Local employees are encouraged to be active in civic organizations and industry trade groups.
The Company owns many trademarks, service marks and tradenames, including the ROBERT HALF-Registered Trademark-, ACCOUNTEMPS-Registered Trademark-, OFFICETEAM-Registered Trademark-, THE AFFILIATES-Registered Trademark- and RHI CONSULTING-Registered Trademark- marks, which are registered in the United States and in a number of foreign countries.
ORGANIZATION
Management of the Company's operations is coordinated from its headquarters in Menlo Park, California. The Company's headquarters provides support and centralized services to its offices in the administrative, marketing, accounting, training and legal areas, particularly as it relates to the standardization of the operating procedures of its offices. The Company has more than 185 offices in 36 states and five foreign countries. Office managers are responsible for most activities of their offices, including sales, local advertising and marketing and recruitment.
COMPETITION
The Company faces competition in its efforts to attract clients as well as high-quality specialized employment candidates. The temporary and permanent placement businesses are highly competitive, with a number of firms offering services similar to those provided by the Company on a national, regional or local basis. In many areas the local companies are the strongest competitors. The most significant competitive factors in the temporary and permanent placement businesses are price and the reliability of service, both of which are often a function of the availability and quality of personnel. The Company believes it derives a competitive advantage from its long experience with and commitment to the specialized employment market, its national presence, and its various marketing activities.
EMPLOYEES
The Company has approximately 2,100 full-time staff employees. The Company's offices placed approximately 101,000 employees on temporary assignments with clients during 1995. Temporary employees placed by the Company are the Company's employees for all purposes while they are working on assignments. The Company pays the related costs of employment, such as workers' compensation insurance, state and federal unemployment taxes, social security and certain fringe benefits. The Company provides voluntary health insurance coverage to interested temporary employees.
OTHER INFORMATION
The Company's current business constitutes a single business segment. (See Item 8. Financial Statements and Supplementary Data for financial information about the Company.)
The Company is not dependent upon a single customer or a limited number of customers. The Company's operations are generally more active in the first and fourth quarters of a calendar year. Order backlog is not a material aspect of the Company's business and no material portion of the Company's business is subject to government contracts. The Company does not have any material expenditures for research and development. Compliance with federal, state or local environmental protection laws has no material effect on the capital expenditures, earnings or competitive position of the Company.
Information about foreign operations is contained in Note N of Notes to Consolidated Financial Statements in Item 8. The Company does not have export sales.
ITEM 2.

ITEM 2. PROPERTIES
The Company's headquarters is located in Menlo Park, California. Placement activities are conducted through more than 185 offices located in the United States, Canada, the United Kingdom, Belgium, France and the Netherlands. All of the offices are leased.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings other than routine litigation incidental to its business.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed for trading on the New York Stock Exchange under the symbol "RHI". On March 7, 1996, there were approximately 1,487 holders of record of the Common Stock.
Following is a list by fiscal quarters of the sales prices of the stock as quoted on the New York Stock Exchange, adjusted, as appropriate, to reflect the two-for-one stock split effected in the form of a stock dividend in August 1994:
No cash dividends were paid in 1995 or 1994. The Company, as it deems appropriate, may continue to retain all earnings for use in its business or may consider paying a dividend in the future.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
Following is a table of selected financial data of the Company of the last five years:
All shares and per share amounts have been restated to retroactively reflect the two-for-one stock split effected in the form of a stock dividend in August 1994.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1995
Temporary services revenues increased 42% during 1995 and 46% during 1994, including the revenues generated from the Company's OfficeTeam and RHI Consulting divisions, which were started in 1991 and 1994, respectively. Permanent placement revenues increased 31% during the year ended December 31, 1995 and 47% during the year ended December 31, 1994. The revenue comparisons reflect continued improvement in the demand for the Company's services.
Gross margin dollars increased 41% during the year ended December 31, 1995 compared to 47% for the year ended December 31, 1994. Gross margin amounts equaled 39% of revenue in 1995, 1994 and 1993.
Selling, general and administrative expenses were approximately $171 million during 1995 compared to $122 million in 1994 and $88 million in 1993. Selling, general and administrative expenses as a percentage of revenues were 27% in 1995 and 1994 and 29% in 1993. The percentage decline from 1993 was attributable to revenue growth coupled with the Company's continued cost containment.
Amortization of intangible assets increased from 1993 to 1995 due to the acquisitions in each of those years of additional personnel services operations.
Interest income/expense for the years ended December 31, 1995 and 1994 decreased 130% and 61%, respectively, over the comparable prior periods due to an increase in interest income from an increase in cash and cash equivalents and a decrease in interest expense due to a reduction of outstanding indebtedness.
The provision for income taxes was 42% in 1995 and 1994 and 46% in 1993. The decrease in 1994 is the result of a smaller percentage of non-deductible intangible expenses.
LIQUIDITY AND CAPITAL RESOURCES
The change in the Company's liquidity during the past three years is the net effect of funds generated by operations and the funds used for the personnel services acquisitions, capital expenditures, principal payments on outstanding notes payable, and the securities repurchase program.
In November 1994, the Company issued 633,555 shares of its common stock. The net proceeds from the sale of shares were approximately $12.6 million. The Company used the proceeds for repayment of the borrowings under the Company's revolving credit agreement.
On December 10, 1993, substantially all of the Company's outstanding convertible subordinated debentures were converted into common stock of the Company. See Note F in the Notes to Consolidated Financial Statements.
The Company's working capital requirements consist primarily of the financing of accounts receivable. While there can be no assurances in this regard, the Company expects that internally generated cash plus the bank revolving line of credit will be sufficient to support the working capital needs of the Company's offices, the Company's fixed payments and other long-term obligations.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1994 and 1993 per share amounts have been restated to retroactively reflect the two-for-one stock split effected in the form of a stock dividend in August 1994.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
1994 and 1993 amounts have been restated to retroactively reflect the two-for-one stock split effected in the form of a stock dividend in August 1994.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. Robert Half International Inc. (the "Company") provides specialized staffing services through such divisions as Accountemps-Registered Trademark-, Robert Half-Registered Trademark-, OfficeTeam-Registered Trademark- and RHI Consulting-Registered Trademark-. The Company, through its Accountemps and Robert Half divisions, is the world's largest specialized provider of temporary and permanent personnel in the fields of accounting and finance. OfficeTeam specializes in skilled temporary administrative personnel and RHI Consulting provides contract information technology professionals. Revenues are predominantly from temporary services. The Company operates in the United States, Canada and Europe. The Company is a Delaware corporation.
PRINCIPLES OF CONSOLIDATION. The Consolidated Financial Statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany balances have been eliminated. Certain reclassifications have been made to the 1994 and 1993 financial statements to conform to the 1995 presentation.
REVENUE RECOGNITION. Temporary services revenues are recognized when the services are rendered by the Company's temporary employees. Permanent placement revenues are recognized when employment candidates accept offers of permanent employment. Allowances are established to estimate losses due to placed candidates not remaining in employment for the Company's guarantee period, typically 90 days.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents.
INTANGIBLE ASSETS. Intangible assets represent the cost of acquired companies in excess of the fair market value of their net tangible assets at acquisition date, and are being amortized on a straight-line basis over a period of 40 years. The carrying value of intangible assets is periodically reviewed by the Company and impairments are recognized when the expected future operating cash flows derived from such intangible assets is less than their carrying value. Based upon its most recent analysis, the Company believes that no material impairment of intangible assets exists at December 31, 1995.
INCOME TAXES. Deferred taxes are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate.
FOREIGN CURRENCY TRANSLATION. The results of operations of the Company's foreign subsidiaries are translated at the monthly average exchange rates prevailing during the period. The financial position of the Company's foreign subsidiaries are translated at the current exchange rates at the end of the period, and the related translation adjustments are recorded as part of Stockholders' Equity. Gains and losses resulting from foreign currency transactions are included in the Consolidated Statements of Income.
USE OF ESTIMATES. The preparation 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.
NOTE B -- ACQUISITIONS In July 1986, the Company acquired all of the outstanding stock of Robert Half Incorporated, the franchisor of the Accountemps and Robert Half operations. Subsequently, in 61 separate transactions the Company acquired all of the outstanding stock of certain corporations operating Accountemps and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- ACQUISITIONS (CONTINUED) Robert Half franchised offices in the United States, the United Kingdom and Canada as well as other personnel services businesses. The Company has paid approximately $196 million in cash, stock, notes and other indebtedness in these acquisitions, excluding transaction costs and cash acquired.
These acquisitions were accounted for as purchases, and the excess of cost over the fair market value of the net tangible assets acquired is being amortized over 40 years using the straight-line method. Results of operations of the acquired companies are included in the Consolidated Statements of Income from the dates of acquisition. The acquisitions made during 1995 and 1994 had no material pro forma impact on the results of operations.
NOTE C -- NOTES PAYABLE AND OTHER INDEBTEDNESS The Company issued promissory notes as well as other forms of indebtedness in connection with certain acquisitions. These are due in varying installments, carry varying interest rates and in aggregate amounted to $5,725,000 at December 31, 1995 and $4,214,000 at December 31, 1994. At December 31, 1995, $1,350,000 of the notes was secured by a standby letter of credit (see Note D). The following table shows the schedule of maturities for notes payable and other indebtedness at December 31, 1995 (in thousands):
At December 31, 1995, all of the notes carried fixed rates of interest ranging from 4.1% to 13.3%. The weighted average interest rate for the above was approximately 7.3%, 8.2% and 11.1% for the years ended December 31, 1995, 1994 and 1993, respectively.
NOTE D -- BANK LOAN (REVOLVING CREDIT) The bank loan is an unsecured credit facility which provides a line of credit of up to $80,000,000, which is available to fund the Company's general business and working capital needs, including acquisitions and the purchase of the Company's common stock, and to cover the issuance of debt support standby letters of credit up to $15,000,000.
As of December 31, 1995 and 1994, the Company had no borrowings on the line of credit outstanding and had used $3,408,000 and $3,358,000 in debt support standby letters of credit, respectively. There is a commitment fee on the unused portion of the entire credit facility of .25%. The loan is subject to certain financial covenants which also affect the interest rates charged.
The credit facility has the following scheduled reduction in availability (in thousands):
The final maturity date for the credit facility is August 31, 2001.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- CURRENT LIABILITIES Other current liabilities included in accrued payroll costs consist of the following at December 31, 1995 and 1994 (in thousands):
NOTE F -- CONVERTIBLE SUBORDINATED DEBENTURES On August 6, 1987, the Company issued $74,750,000 of 7.25% Convertible Subordinated Debentures (the "Convertible Debentures"). Prior to 1993, all but $22,745,000 of the Convertible Debentures were repurchased by the Company pursuant to its repurchase program. The Convertible Debentures were unsecured obligations of the Company with an original maturity date of August 1, 2012. Interest was payable semi-annually as of February 1 and August 1 of each year to the registered holders as of the preceding January 15 and July 15, respectively. The Convertible Debentures were redeemable at the Company's option at any time on or after August 1, 1990, at declining redemption prices.
In December 1993, the Company called for redemption all of its then outstanding Convertible Debentures. Holders of $22,440,000 in principal amount elected to convert their debentures into 2.04 million shares of common stock at the conversion price of $11.00 per share. The remaining $305,000 in principal amount of Convertible Debentures was redeemed at 102.9% of the principal amount plus accrued interest.
NOTE G -- STOCKHOLDERS' EQUITY On June 27, 1994, the stockholders of the Company voted to amend the certificate of incorporation to increase the number of authorized shares of the Company's common stock from 30,000,000 to 100,000,000 shares and the number of authorized shares of the Company's preferred stock from 500,000 to 5,000,000. The stockholders of the Company also authorized a reduction in par value from $1 per share to $.001 per share on both classes of shares.
In August 1994, the Company effected a two-for-one stock split in the form of a stock dividend. 1994 and 1993 share and per share amounts have been restated to retroactively reflect the two-for-one stock split.
In November 1994, the Company issued 633,555 shares of its common stock at a price of $21.25 per share. The net proceeds from the sale of shares (after deducting issuance costs of approximately $355,000 and a 4% underwriter's discount) were approximately $12.6 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H -- INCOME TAXES
The provisions for income taxes for the years ended December 31, 1995, 1994 and 1993 consisted of the following (in thousands):
The income taxes shown above varied from the statutory federal income tax rates for these periods as follows:
The deferred portion of the tax provisions consisted of the following (in thousands):
The net deferred income tax liability shown on the balance sheet is comprised of the following (in thousands):
No valuation allowances against deferred tax assets were required for the years ended December 31, 1995 and 1994.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H -- INCOME TAXES (CONTINUED) The components of the net deferred income tax liability at December 31, 1995 and 1994, were as follows (in thousands):
NOTE I -- COMMITMENTS Rental expense, primarily for office premises, amounted to $11,027,000, $9,183,000 and $8,457,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The approximate minimum rental commitments for 1996 and thereafter under non-cancelable leases in effect at December 31, 1995, are as follows (in thousands):
NOTE J -- STOCK PLANS Under various stock plans, officers, employees and outside directors may receive grants of restricted stock or options to purchase common stock. Grants are made at the discretion of the Compensation Committee of the Board of Directors. Grants vest between four to seven years.
Options granted under the plans have exercise prices ranging from 85% to 100% of the fair market value of the Company's common stock at the date of grant, consist of both incentive stock options and nonstatutory stock options under the Internal Revenue Code, and generally have a term of ten years.
Recipients of restricted stock do not pay any cash consideration to the Company for the shares, have the right to vote all shares subject to such grant, and receive all dividends with respect to such shares, whether or not the shares have vested.
As of December 31, 1995, the total number of available shares to grant under the plans (consisting of either restricted stock or options) was 559,714.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE J -- STOCK PLANS (CONTINUED)
The following table reflects activity under all stock plans from January 1, 1993 through December 31, 1995, and the exercise prices:
As of December 31, 1995, an aggregate of 1,208,798 options to purchase common stock were vested.
NOTE K -- PREFERRED SHARE PURCHASE RIGHTS Pursuant to the Company's stockholder rights agreement, each share of common stock carries one right to purchase one two-hundredth of a share of preferred stock. The rights become exercisable in certain limited circumstances involving a potential business combination transaction or an acquisition of shares of the Company and are exercisable at a price of $32.50 per right, subject to adjustment. Following certain other events after the rights become exercisable, each right entitles its holder to purchase for $32.50 an amount of common stock of the Company, or, in certain circumstances, securities of the acquiror, having a then-current market value of twice the exercise price of the right. The rights are redeemable and may be amended at the Company's option before they become exercisable. Until a right is exercised, the holder of a right has no rights as a stockholder of the Company. The rights expire on July 23, 2000.
NOTE L -- INCOME PER SHARE Income per fully diluted share has been computed using the weighted average number of shares of fully diluted common stock and common stock equivalents outstanding during each period (29,708,000, 28,484,000 and 25,260,000 shares for the years ending December 31, 1995, 1994 and 1993, respectively). An assumed conversion of the Convertible Debentures was not dilutive to income per share in 1993 (see Note E).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M -- QUARTERLY FINANCIAL DATA (UNAUDITED) The following tabulation shows certain quarterly financial data for 1995 and 1994 (in thousands, except per share amounts):
NOTE N -- SEGMENT REPORTING Information about the Company's operations in different geographic locations for each of the three years in the period ended December 31, 1995, is shown below. The Company's areas of operations outside of the United States include Canada, the United Kingdom, Belgium, France and the Netherlands. Revenues represent total net revenues from the respective geographic areas. Operating income is net revenues less operating costs and expenses pertaining to specific geographic areas. Foreign operating income reflects charges for U.S. management fees and amortization of intangible assets of $992,000, $956,000 and $917,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Domestic operating income reflects charges for amortization of intangibles of $4,307,000, $4,137,000 and $3,841,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Identifiable assets are those assets used in the geographic areas and are after elimination of intercompany balances.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND THE BOARD OF DIRECTORS OF ROBERT HALF INTERNATIONAL INC.:
We have audited the accompanying consolidated statements of financial position of Robert Half International Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in all material respects, the financial position of Robert Half International Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California January 26, 1996
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required by Items 10 through 13 of Part III is incorporated by reference from the registrant's Proxy Statement, under the captions "NOMINATION AND ELECTION OF DIRECTORS," "BENEFICIAL STOCK OWNERSHIP," "COMPENSATION OF DIRECTORS," "COMPENSATION OF EXECUTIVE OFFICERS" AND "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION AND CERTAIN TRANSACTIONS," which Proxy Statement will be mailed to stockholders in connection with the registrant's annual meeting of stockholders which is scheduled to be held in May 1996.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its subsidiaries are included in Item 8 of this report:
Consolidated statements of financial position at December 31, 1995 and 1994.
Consolidated statements of income for the years ended December 31, 1995, 1994 and 1993.
Consolidated statements of stockholders' equity for the years ended December 31, 1995, 1994 and 1993.
Consolidated statements of cash flows for the years ended December 31, 1995, 1994 and 1993.
Notes to consolidated financial statements.
Report of independent public accountants.
Selected quarterly financial data for the years ended December 31, 1995 and 1994 are set forth in Note M - Quarterly Financial Data (Unaudited) included in Item 8 of this report.
2. FINANCIAL STATEMENT SCHEDULES
Schedules I through V have been omitted as they are not applicable.
3. EXHIBITS
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the fiscal quarter ending December 31, 1995.
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.
ROBERT HALF INTERNATIONAL INC. (Registrant)
Date: March 25, 1996 By: /S/ M. KEITH WADDELL
----------------------------------- M. Keith Waddell Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial 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 and in the capacities and on the dates indicated.
INDEX TO EXHIBITS